20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

OR

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

For the Fiscal year ended December 31, 2007

OR

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

COMMISSION FILE NUMBER

VIRYANET LTD.

(Exact Name of Registrant as specified in its charter)

STATE OF ISRAEL

(Jurisdiction of incorporation or organization)

8 HaMarpe St.

Har Hotzvim

P.O. Box 45041

Jerusalem 91450

Israel

(Address of principal executive offices)

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

Title of each class	Name of each exchange on which registered
NONE	N/A

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

Ordinary Shares, par value NIS 5.0 per share

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

N/A

(Title of Class)

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

As of December 31, 2007, the Registrant had 2,897,037 shares outstanding comprised of 2,570,240 Ordinary Shares and 326,797 Preferred A Shares.

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

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

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

Large accelerated filer:  ¨            Accelerated filer:   ¨            Non-accelerated filer:   x

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

Indicate by check mark which financial statement item the Registrant has elected to follow:    Item 17  ¨    Item 18  x

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

TABLE OF CONTENTS

	Page No.
ITEM
PART I
Item 1. Identity of Directors, Senior Management and Advisors	3
Item 2. Offer Statistics and Expected Timetable	3
Item 3. Key Information	3
Selected Consolidated Financial Data	3
Capitalization and Indebtedness	4
Reasons for the Offer and Use of Proceeds	4
Risk Factors	5
Item 4. Information on our Company	12
History and Development	12
Business Overview	14
Organizational Structure	18
Property, Plants and Equipment	19
Item 5. Operating and Financial Review and Prospects	19
Overview	19
Operating Results	23
Liquidity and Capital Resources	26
Research and Development	29
Trend Information	30
Off-balance Sheet Arrangements	30
Tabular Disclosure of Contractual Obligations	30
Item 6. Directors, Senior Management and Employees	31
Directors and Senior Management	31
Compensation	32
Board Practices	32
External Directors; Independent Directors	33
Employees	34
Share Ownership	34
Item 7. Major Shareholders and Related Party Transactions	35
Major Shareholders	35
Related Party Transactions	37
Interests of Experts and Counsel	38
Item 8. Financial Information	38
Consolidated Statements and Other Financial Information	38
Significant Changes	38
Item 9. The Offer and Listing	38
Market Price Information	38
Markets on Which our Ordinary Shares Trade	40
Item 10. Additional Information	40
Share Capital	40
Memorandum and Articles of Association	40
Material Contracts	41
Exchange Controls	41
Taxation	42
Item 11. Quantitative and Qualitative Disclosures about Market Risk	47
Item 12. Description of Securities other than Equity Securities	47
PART II	47
Item 13. Defaults, Dividend Arrearages and Delinquencies	47
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds	47
Item 15. Controls and Procedures	48
Item 16. Audit Committee Financial Expert	48
Code of Ethics	48
Principal Accountant Fees and Services	48
Exemptions from the Listing Standards for the Audit Committee	49
Purchases of Equity Securities by the Issuer and Affiliated Purchasers	49
PART III	49
Item 17. Financial Statements	49
Item 18. Financial Statements	49
Item 19. Exhibits	49

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Unless the context otherwise requires, all reference in this annual report 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. All references to NIS are to New Israeli Shekels.

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

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.

PART I

Item 1. Identity Of Directors, Senior Management and Advisors

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Consolidated Financial Data

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

We derived the selected consolidated statements of operations data below for the years ended December 31, 2005, 2006 and 2007, and the selected consolidated balance sheet data as of December 31, 2006 and 2007, from our audited consolidated financial statements, which are included elsewhere in this annual report. These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). We derived the consolidated statements of operations data for the years ended December 31, 2003 and 2004 and the selected consolidated balance sheet data as of December 31, 2003, 2004 and 2005 from audited consolidated financial statements that are not included in this annual report.

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Summary Consolidated Financial Information

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

	Year Ended December 31,
	2003			2004			2005			2006			2007
Statement of Operations Data:
Revenues:
Software licenses	$	4,102		$	3,114		$	1,720		$	1,520		$	1769
Maintenance and services		7,857			8,806			12,487			12,340			9,390
Total revenues		11,959			11,920			14,207			13,860			11,159
Cost of revenues:
Software licenses		482			288			358			356			358
Maintenance and services		4,996			6,743			7,855			6,831			5,633
Total cost of revenues		5,478			7,031			8,213			7,187			5,991
Gross profit		6,481			4,889			5,994			6,673			5,168
Operating expenses:
Research and development, net		2,098			2,069			2,504			2,121			2,290
Sales and marketing		4,109			4,398			5,214			3,692			3,429
General and administrative		1,927			2,214			3,004			2,735			2,485
Provision for doubtful accounts and write-off of bad debts		40			—			—			—			—
Total operating expenses		8,174			8,681			10,722			8,548			8,204
Operating loss		(1,693	)		(3,792	)		(4,728	)		(1,875	)		(3,036	)
Financial expenses, net		(311	)		(363	)		(1,330	)		(44	)		(535	)
Other income (loss)		350			—			—			—			(239	)
Net loss	$	(1,654	)	$	(4,155	)	$	(6,058	)	$	(1,919	)	$	(3,810	)
Basic and diluted net loss per share	$	(2.71	)	$	(4.25	)	$	(4.68	)	$	(1.03	)	$	(1.66	)
Weighted average number of shares used in computing basic and diluted net loss per Ordinary Share		609,664			977,612			1,294,834			1,857,217			2,292,190
Balance Sheet Data:
Cash and cash equivalents	$	5,087		$	2,943		$	2,040		$	736		$	413
Working capital (deficit)		1,060			(3,461	)		(4,004	)		(4,520	)		(6,098	)
Total assets		12,230			14,398			14,456			11,919			11,190
Long-term loan, including current maturities		2,343			1,306			1,991			1,292			738
Long-term convertible debt		—			2,500			3,592			568			556
Shareholders’ equity		2,786			1,678			183			2,534			50

Capitalization and Indebtedness

Not applicable.

Reasons for the Offer and Use of Proceeds

Not applicable.

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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.

Statements included or incorporated by reference in this prospectus that are not historical facts are forward-looking statements within the meaning of the federal securities laws. These statements may contain works such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” or other wording indicating future results or expectations. Forward-looking statements are subject to risks and uncertainties. Our actual results may differ materially from the results discussed in forward-looking statements. Factors that could cause our results to differ materially include, but are not limited to, those discussed below, elsewhere in this prospectus and in the documents we have incorporated by reference. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise or develop after the date of this prospectus.

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 five fiscal years and may not achieve profitability in 2008 or in future years. As of December 31, 2007, we had an accumulated deficit of approximately $119.6 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 2007, 2006, and 2005 were $11.2 million, $13.9 million, and $14.2 million, respectively, we incurred net losses of $3.8 million, $1.9 million, and $6.1 million, respectively, during these years. 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;

• changes in selling and marketing expenses, as well as other operating expenses;

• technological changes;

• our ability to expand our workforce with qualified personnel, as may be needed;

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

• consolidation of our customers;

• fluctuations in the economic factors impacting LIBOR which is the rate benchmark used to determine the interest expenses incurred by us on our bank borrowings per our bank arrangement;

• 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 delisted our shares from The Nasdaq Capital Market, which could adversely affect the market price and trading market of our Ordinary Shares.

Our Ordinary Shares had been listed on The Nasdaq Capital Market (formerly known as The Nasdaq SmallCap 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.

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On June 4, 2007, we voluntarily requested from The NASDAQ Stock Market that our Ordinary Shares be delisted from The NASDAQ Capital Market on June 11, 2007. We were subsequently advised by Nasdaq that our Ordinary Shares would be delisted from The NASDAQ Capital Market on June 12, 2007 and our Ordinary Shares became immediately eligible for quotation and trading on the Pink Sheets. On December 14, 2007, our Ordinary Shares became eligible for trading on the Over-The-Counter Bulletin Board (“OTCBB”) under the ticker symbol VRYAF.OB. On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the period ended December 31, 2007, our Ordinary shares ceased to be eligible for quotation on the OTC Bulletin Board (“OTCBB”) and have been removed from OTCBB. Following the removal from OTCBB, our Ordinary shares became immediately eligible for quotation and trading on the Pink Sheets. After the filing of this Form 20-F we will review our alternatives for the reinstatement of our quotation on the OTC Bulletin Board.

The delisting of our Ordinary Shares from The Nasdaq Capital Market and the OTCBB may materially impair the ability of our shareholders to buy and sell our Ordinary Shares, , 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 from The Nasdaq Capital Market and OTCBB 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.

We may not be able to make our debt payments in the future.

We have $480,000 face value of convertible debt outstanding with LibertyView Special Opportunities Fund, L.P. (“LibertyView”), which LibertyView has the option to request payment in full at any time during the months of July 2009 or July 2011. Our ability to meet our obligations under the convertible debt and our other debt obligations will depend on whether we can successfully implement our strategy, as well as on financial, competitive, and other factors, including some factors that are beyond our control. If we are unable to generate sufficient cash from operations to meet principal and interest payments on our debt, we may have to refinance all or part of our indebtedness. In addition, cash flows from our operations may be insufficient to repay in full at maturity the convertible debts, in which case the convertible debts may need to be refinanced. Our ability to refinance our indebtedness, including the convertible debts, will depend on, among other things: our financial condition at the time; restrictions in agreements governing our debt; and, other factors including market conditions.

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

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

We had negative cash flow from operations for each of the past few years. In the past five years, we had an aggregate negative operating cash flow in the amount of $11.5 million. Over the past five years, we raised gross proceeds of approximately $5.0 million from private equity financing transactions during 2003, $2.5 million in a convertible debt financing in July 2004, approximately $3.5 million in a combination of convertible debt and equity financings during 2005, approximately $1.4 million from private equity financing transactions during 2006, and approximately $1.0 million in a combination of equity and convertible debt financing during 2007. However, we expect that we will need additional financing to fund our business operations. Any additional financing that is structured as a secured debt financing may require the consent of our main creditors, Bank Hapoalim and LibertyView. Our ability to raise additional financing from third parties may be impacted by the delisting of our Ordinary Shares from The Nasdaq Capital Market and the OTCBB. We cannot assure you that additional financing will be available on terms favorable to us, or at all. In the event that the market price of our Ordinary Shares 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, 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 of 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 June 30, 2008, our aggregate outstanding borrowings with Bank Hapoalim was approximately $2.2 million, which consisted of (i) short-term borrowings of approximately $1.7 million of which $1.6 million is drawn in dollars with interest payable quarterly at a rate of LIBOR plus 2.25% and $0.1 million is drawn in NIS with interest payable quarterly at a rate of approximately 9% in NIS, and (ii) the outstanding balance on our long-term loan arrangement with Bank Hapoalim of approximately $0.5 million with interest payable quarterly at a rate of LIBOR plus 2.25%.

Our overall bank financing arrangement with Bank Hapoalim was subject to the following covenants: (i) our shareholders equity, on a quarterly basis, shall be at least the higher of (a) 17% of our total assets, or (b) $3.0 million, and (ii) our cash balance, on a quarterly basis, shall not be less than $1.0 million. With the exception of the second quarter of 2006 in which we were in compliance with these covenants, we were not in compliance with these covenants for each quarterly period during 2006 and through the second quarter of 2007. However, we received a waiver from Bank Hapoalim for each period in which we were not in compliance with these bank covenants.

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

We were not in compliance with these covenants for each quarterly period during the first half of 2008. However, on September 28 we received a waiver of these covenants from Bank Hapoalim for each quarterly period during the first half of 2008. Bank Hapoalim also provided us with a waiver of these covenants for the remainder of 2008 and for the first quarter of 2009. In addition, on September 29, 2008, Bank Hapoalim agreed to convert the $1.6 million of short term loan that was due on January 2, 2009 to a long-term loan, such that $0.1 million will be paid on July 2, 2009 an additional $0.1 million will be paid on August 15, 2009 and the balance of $1.4 million will be paid over 14 quarterly payments starting October 2, 2009. The interest will be paid quarterly at a rate of LIBOR plus 3.25%. In connection with these waivers and the conversion of the short-term loan to a long-term loan, we agreed to pay fees of $30,000 to the bank.

We may need to obtain funding from third parties to meet the payment obligations under the 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. Our ability to raise capital using convertible debt or equity financing instruments from third parties for the re-payment of our loans with Bank Hapoalim may be impacted by the delisting of our Ordinary Shares from The Nasdaq Capital Market and the OTCBB. 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 any repayment of loans to Bank Hapoalim or to meet these covenants, the bank may demand immediate repayment of the outstanding debts and all interest thereon and shall be entitled to exercise the remedies available to it. This would have a material adverse effect on our business.

6

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

During 2004, we substantially increased our overall headcount from 86 at the beginning of 2004 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 22 employees with the acquisition of e-Wise Solutions, raising our headcount to 148. After the acquisition of e-Wise, we determined that we had an excess of resources resulting from these acquisitions and took action to reduce headcount. These actions resulted in a reduction of our headcount to 120 at the end of December 2005, 98 at the end of December 2006, and 88 at the end of December 2007. Although we believe we currently have sufficient resources available to meet and support our current obligations in relation to our current staff, we may not be able to maintain this headcount. If we are forced to reduce headcount further, our ability to meet our growth goals and our business and operations may be negatively impacted.

We may need to 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.

If we are unable to attract, train and retain qualified personnel, we may not be able to achieve our objectives and our business could be harmed.

Our future success depends on our ability to absorb and retain senior employees and to attract, motivate and retain highly qualified professional employees. Competition for these employees can be intense, especially in a number of our key markets and locations, including Israel. The process of locating, training and successfully integrating qualified personnel into our operations can be lengthy and expensive. The market for the qualified personnel we require is very competitive because of the limited number of people available with the necessary technical and sales skills and understanding of our products and technology. This is particularly true in Israel where competition for qualified personnel is intense. We may not be able to compete effectively for the personnel we need. The delisting of our Ordinary Shares from The Nasdaq Capital Market and OTCBB may impact our ability to retain and attract personnel as the delisting may impact the amount and liquidity of compensation in the form of share options and restricted shares granted to employees. Any loss of members of senior management or key technical personnel, or any failure to attract or retain highly qualified employees as needed, could materially adversely affect our ability to achieve our research and development and sales objectives.

If we fail to maintain effective system of internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, 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. For the fiscal year ended December 31, 2003, we determined that a material weakness in our internal control over financial reporting existed as of December 31, 2003 consisting of 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 2000, 2001, 2002, and 2003 financial statements. 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:

• the delisting of our Ordinary Shares from The Nasdaq Capital Market and OTCBB and subsequent availability for trading on the Pink Sheets;

• 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 use of our Ordinary Shares for the acquisition of the outstanding shares or certain assets of companies;

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

• changes in the political conditions in Israel.

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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.

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

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

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

Since August 4, 2003, commensurate with the timing of our initial need to raise additional capital, the amount of our outstanding shares has increased substantially. The increase in the amount of outstanding shares is due primarily to (i) private equity and convertible debt financings which raised approximately $13.4 million since 2003 to the date hereof (See Liquidity and Capital Resources section under Item 5 – How We Have Financed Our Business; Source of Cash), excluding transaction related expenses, in exchange for our Ordinary Shares and debts convertible to Ordinary Shares, (ii) the acquisition of Utility Partners, Inc. which resulted in the issuance of 179,697 Ordinary Shares in July 2004, and (iii) the acquisition of e-Wise Solutions which resulted in the issuance of an aggregate of 111,156 Ordinary Shares in June and August of 2005.

As of July 15, 2008, we also had outstanding warrants to purchase 673,199 Ordinary Shares at exercise prices ranging from $1.25 to $10.50 per share, and we have reserved up to 528,000 Ordinary Shares for issuance under our share option plans, of which 36,531 options have been exercised and the restrictions on 107,353 restricted shares have lapsed as of July 15, 2008. In addition, we have the balance of the convertible debt with LibertyView with a face value of $480,000 which may be converted by LibertyView at any time into Ordinary Shares at an exercise price of $11.025 per share. 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 may continue to issue equity or convertible securities and the issuance of these securities could be dilutive to our shareholders. Certain 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. We have provided registration rights in the past to certain shareholders and may continue to do so in the future.

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 2005, three customers each accounted for approximately 8% or more of revenues, and represented an aggregate of 31% of our total revenues. In 2006, three customers each accounted for approximately 7% or more of revenues, and represented an aggregate of 23% of our total revenues. In 2007, three customers each accounted for approximately 6% or more of revenues, and represented an aggregate of 19% of our total revenues. We do not expect that these three customers accounting for 19% of our revenue during 2007 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.

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

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

Our revenues from the sale of software licenses have fluctuated over the past three years, increasing to approximately $1.8 million in 2007 from approximately $1.5 million in 2006 and approximately $1.7 million in 2005. Our revenues from services have also fluctuated over the past three years, decreasing to approximately $9.4 million in 2007 from approximately $12.3 million in 2006 and from approximately $12.5 million in 2005. Both of these trends have a direct impact on our gross margins and profitability. Our gross margin from software licenses is substantially higher than our gross margin from services, since our cost of services, which includes expenses of salaries and related benefits of the employees engaged in providing the services, is substantially higher than our cost of software licenses. However, a decline in the volume of services revenues we generate also has a direct impact on our overall gross margins and profitability if not accompanied by a similar increase in the amount of revenue from software licenses. If the trend of decreases in software license revenues should reoccur or decreases in services revenues continues, our gross margins and profitability may be adversely affected.

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

Our margins on service revenues have not been consistent. In 2007, our margins on services revenues were 40% compared to 45% in 2006 and 37% in 2005. In order to stabilize or improve our margins on services revenues, we will need to maintain or increase the efficiency and utilization of our services personnel, consistently control our costs, and increase the volume of our services revenues. There is no assurance that we will be able to maintain or improve our services margins, or, that they will not decline further in the future.

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

We are becoming more dependent upon resellers and channel partners to generate a substantial portion of our revenues. We expect this dependence to continue and potentially increase due to our limited internal sales and marketing resources in existing markets and to increase due to our desire to penetrate new vertical markets for our products in North America, and expand into new geographic markets for our products outside of North America. As a result of the limited resources and capacities of many resellers and channel partners, even if we manage to maintain and expand our relationship with such resellers and channel partners, we may be unable to attain sufficient focus and resources from 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.

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

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

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

To focus more effectively on our core business of developing and licensing software solutions, we need to establish and maintain additional relationships with third parties that can provide implementation and consulting services to our customers. Third-party implementation and consulting firms can also be influential in the choice of mobile workforce management solutions by new customers. If we cannot establish and maintain effective, long-term relationships with implementation and consulting providers, or if these providers do not meet the needs or expectations of our customers, we may be unable to increase our revenues and our business could be seriously harmed. As a result of the limited resources and capacities of many third-party implementation providers, we may be unable to attain sufficient focus and resources from the third-party providers to meet all of our customers’ needs, even if we establish relationships with these third parties. If sufficient resources are unavailable, we will be required to provide these services internally, which could limit our ability to expand our base of customers. 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 Service Power Technologies, plc., Vista Equity Partners (via its acquisition of our competitors MDSI and Indus International), ClickSoftware, Ltd., Telcordia, and Intergraph Corporation. Our primary competitors in commercial and other general field service markets include enterprise application solution providers such as Astea International Inc. and Metrix Inc., along with traditional ERP and CRM software application vendors such as Oracle Corporation, and SAP A.G.

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

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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.

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, Asia and Australia. We received 21% of our total revenue in 2005, 28% of our total revenue in 2006, and 21% of our total revenue in 2007 from sales to customers located outside of the United States. In addition to our operations in the United States, we have sales and support facilities and offices in Israel and Australia. These operations require, and the expansion of our existing operations and entry into additional international markets will require, significant management attention and financial resources. In addition, since our financial results are reported in dollars, decreases in the rate of exchange of non-dollar currencies in which we make sales relative to the dollar will decrease the dollar-based reported value of those sales. To the extent that decreases in exchange rates are not offset by a reduction in our costs, they may materially adversely affect our results of operation. Historically, we have not hedged our foreign currency-denominated account receivables and 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;

• 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.

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

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 July 15, 2008, our executive officers and directors serving as of such date, and entities affiliated with them, in the aggregate, beneficially owned approximately 27.1% of our outstanding Ordinary Shares, including options and warrants to purchase Ordinary Shares which are exercisable or will become exercisable within 60 days of July 15, 2008 and all Ordinary Shares which may be issued upon conversion of Preferred A Shares .The above % does not take into effect restricted Ordinary shares, that were granted to executive officers and directors, which will be released from restriction within more than 60 days of July 15, 2008. 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.

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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.

Our operations outside the United States have grown in recent years. Our facilities are located in North America, Israel, and Australia. This geographic dispersion 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 Our Location in Israel

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

We are organized under the laws of the State of Israel. Several of our executives, directors, certain research and development employees, and some of the experts 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 and although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2008. The recent election of representatives of the Hamas movement to a majority of seats in the Palestinian Legislative Council may create additional unrest and uncertainty. In addition, during 2006 an outbreak of open hostilities occurred along Israel’s northern border with Lebanon, and more recently extensive hostilities along Israel’s border with the Gaza Strip since June 2007 when the Hamas effectively took control of the Gaza Strip, which have intensified since February 2008. To date, these matters have not had any material effect on our business and results of operations, but there can be no assurance that they will not do so in the future.

Generally, all male adult citizens and permanent residents of Israel, under the age of 45 in some cases, are, unless exempt, obligated to perform up to 36 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 U.S. dollar, while a portion of our expenses, principally salaries and the related expenses for our Israeli operations, are incurred in NIS. We do not utilize hedging to manage currency risk and, therefore, are exposed to the risk that the 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. During 2007, the NIS appreciated considerably against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our operations in Israel. Such trend has continued during the first six months of 2008 with further substantial appreciation of the NIS against the U.S. dollar. NIS linked balance sheet items may create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share. We cannot predict any future trends in the rate of inflation in Israel or the rate of 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.

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

We receive tax benefits under Israeli law for capital investments that are designated as approved enterprises. To maintain our eligibility for these tax benefits, we must continue to meet conditions stipulated in applicable law and in our specific approvals, including making specified investments in fixed assets and employing minimum number of skilled employees. If we fail to comply with these conditions, in whole or in part, with respect to any approved enterprise program we establish, we may be required to pay additional taxes for the period in which we benefited from the tax exemption or reduced tax rates and we would likely be denied these benefits in the future. We may submit requests for new programs to be designated as approved enterprises. These requests might not be approved, particularly in light of 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”).OCS grants was last received during 2003. 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 2007, we cannot assure the shareholders that we will not be treated as a passive foreign investment company in 2008 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.

Item 4. Information On Our Company

History and Development

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

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

Over the past 20 years, we have developed, marketed, and supported field service software applications that have provided companies with solutions that improve the quality and efficiency of complex service business processes. During this period of time, numerous customers around the world have deployed our solutions.

On September 19, 2000, we completed our IPO and our Ordinary Shares began trading on The Nasdaq National Market. As part of the IPO, we issued 80,000 Ordinary Shares in consideration of net proceeds of approximately $25.6 million.

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

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

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

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

On August 4, 2003, we completed a private placement of our Ordinary Shares with Telvent, GIT S.A. (“Telvent”), the information technology subsidiary of Abengoa, S.A. of Spain. In exchange for $1.0 million, we issued 107,852 Ordinary Shares at a price of $9.27 per share. Subsequent to the date of this transaction, Telvent requested that the shares held in the name of Telvent GIT S.A. be assigned to its investment arm, Telvent Investments, S.L.

On November 10, 2003, we completed a private placement of our Ordinary Shares with a large U.S. financial institution and a group of private investors. In exchange for approximately $1.8 million, we issued 103,465 Ordinary Shares at a price of $17.03 per share. In addition, the investors also received warrants to purchase 18,745 of our Ordinary Shares at an exercise price of $23.50 per share.

On December 5, 2003, we completed a follow-on private placement of our Ordinary Shares with Vertex Venture Capital Israel Funds and FBR Infinity Venture Funds, as well as a group of private investors. In exchange for approximately $2.2 million, we issued 110,902 Ordinary Shares at a price of $20.18 per share. In addition, the investors also received warrants to purchase 16,929 of our Ordinary Shares at an exercise price of $33.05 per share.

On July 28, 2004, we issued to LibertyView Special Opportunities Fund, L.P. $2.5 million aggregate principal amount of 7.5% Convertible Debt due July 28, 2014. We are obligated to pay interest on this Debt on a quarterly basis commencing October 15, 2004, with interest to be paid either in cash or registered Ordinary Shares, at our discretion.

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

In February 2005, we completed a private placement of our Ordinary Shares to Telvent Investments, S.L., a current shareholder. In exchange for approximately $1.3 million, we issued 116,332 Ordinary Shares at a price of $11.435 per Ordinary Share.

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

On August 8, 2005, we consummated with LibertyView a private placement that involved (i) the issuance of 66,667 of our Ordinary Shares for cash consideration of $700,000, (ii) the issuance of a warrant to purchase 23,334 Ordinary Shares at an exercise price of $10.50 per Ordinary Share, and (iii) the replacement of the loan under the Debt with a $2.98 million loan under a new debt, which is convertible at a fixed conversion price of $11.025 per Ordinary Shares into 270,295 Ordinary Shares.

On September 28, 2005, we consummated with the September 2005 Investor Group a private placement that involved (i) the issuance of 47,620 of our Ordinary Shares for cash consideration of $500,000 at an exercise price of $10.50 per Ordinary Share, (ii) the issuance of a warrant to purchase 32,540 Ordinary Shares at an exercise price of $10.50 per share, (iii) a debt for $500,000 which is convertible at a fixed conversion price of $11.025 per Ordinary Share into 45,352 Ordinary Shares, and (iv) the issuance of 6,508 Ordinary Shares to one of the investors as a finder’s fee for this transaction.

On June 2, 2006, we converted $2.0 million of a convertible debt held by LibertyView to 261,438 Preferred A Shares at an exercise price of $7.65 per Preferred A Share. These Preferred A Shares can be converted to Ordinary Shares by LibertyView in its discretion on a one-to-one basis at any time. The Preferred A Shares issued to LibertyView have all rights and privileges as our Ordinary Shares including, without limitation, voting rights on an as-converted basis, and will have preference over the Ordinary Shares in any distribution to our shareholders. The remaining $980,000 balance of LibertyView’s convertible debt remained in effect under the existing terms of the debt.

On June 6, 2006, we completed a private placement of our Ordinary Shares with three existing shareholders and one new institutional investor that involved (i) the issuance of 287,540 of our Ordinary Shares for cash consideration of $1,350,000, and (ii) warrants to purchase 57,508 Ordinary Shares at an exercise price of $5.634 per Ordinary Share.

On September 28, 2006, we converted the $0.5 million convertible debt held by the September 2005 Investor Group and all accrued interest thereon into 114,301 Ordinary Shares of the Company at a conversion price of $ 4.7025 per Ordinary Share per the terms of the convertible debt.

On November 30, 2006, LibertyView sold $0.5 million of its Convertible Debt to Jerusalem High-tech Founders, Ltd. (“JHTF”), a company controlled by Samuel HaCohen, the Company’s Chairman of the Board of Directors, and in which Vladimir Morgenstern, a member of the Company’s Board of Directors, has an economic interest. Upon the sale of the debt, we signed an agreement with JHTF, which was approved by our shareholders and consummated on December 29, 2006, to convert the $500,000 Convertible Debt to Preferred A Shares at $7.65 per Preferred A Share, which may be converted at the discretion of JHTF on a one-to-one basis to Ordinary Shares at any time. The remaining $480,000 balance of LibertyView’s convertible debt remains in effect under the existing terms of the debt.

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

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

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On June 4, 2007, we voluntarily requested from The NASDAQ Stock Market that our Ordinary Shares be delisted from The NASDAQ Capital Market on June 11, 2007. We were subsequently advised by Nasdaq that our Ordinary Shares would be delisted from The NASDAQ Capital Market on June 12, 2007 and on December 14, 2007 our Ordinary Shares began to be quoted and traded on the Over-The-Counter Bulleting Board (“OTCBB”) under the trading symbol VRYAF.OB.

On December 19, 2007, we completed a private placement of our Ordinary Shares with a group of new financial investors that included (i) the issuance of 363,636 Ordinary Shares at a price of $1.65 per Ordinary Share for the consideration of $600,000, (ii) a non-interest bearing convertible note in the amount of $161,000 with a conversion price of $1.65 per Ordinary Share, (iii) a non-interest bearing convertible note in the amount of $439,000 with a conversion price of $1.65 per Ordinary Share, subject to the Company’s shareholders’ approval and (iii) warrants to purchase an aggregate of 600,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share, subject to the Company’s shareholders’ approval. The convertible note has no maturity date and can only be converted into Ordinary Shares. The warrants have a callable feature whereby we can force the exercise of up to 50% of the amounts covered under the warrants when all Ordinary Shares issued in connection with this new investment are registered with the SEC.

On January 31, 2008 the Company’s shareholders approved the issuance of the $439,000 convertible note and the warrants mentioned above.

On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the period ended December 31, 2007, our Ordinary shares ceased to be eligible for quotation on the OTC Bulletin Board (“OTCBB”) and have been removed from OTCBB. Following the removal from OTCBB, our Ordinary shares became immediately eligible for quotation and trading on the Pink Sheets. After the filing of this Form 20-F we will review our alternatives for the reinstatement of our quotation on the OTC Bulletin Board.

Business Overview

ViryaNet is a provider of packaged software applications that automate business processes for mobile workforce management and field service delivery. Optimizing both simple and complex field service work, ViryaNet’s solutions schedule and dispatch resources, enable mobile field communication, and provide visibility and operational guidance. Our mission is to provide companies with solutions that improve the quality and efficiency of their service business processes. We also provide professional services required to implement and support our software solutions. We have approximately 60 customers worldwide with operations and support offices in the United States, Israel, and Australia.

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

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

Business Strategy

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

Markets

We deliver state-of-the-art solutions specific to the needs of key markets, including utilities, telecommunications and cable/broadband companies, retail/grocery companies, insurance companies, and general service providers. We reach prospects within each of these markets through our direct sales force, supported by marketing campaigns, as well as through our partner network, including, among others, GE Energy, Mitchell International, Telvent, and Vodafone, which acquired Aspective in 2007.

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

Telecommunications and Cable/Broadband. We target companies within these segments of the telecommunications sector: cable and satellite, data services, fixed line services, and wireless communications services providers. Over the past 12 months, we have seen a resurgence in the level of interest on the part of prospects in this industry for solutions such as ours.

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

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

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

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

	Year Ended December 31,
	2005		2006		2007
Revenues:
Software licenses	12.1		11.0		15.9
Maintenance and services	87.9		89.0		84.1
Total revenues	100	%	100	%	100	%

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

	Year Ended December 31,
Country	2005		2006		2007
United States	79.3		71.6		78.9
Europe	7.4		7.4		9.0
Asia Pacific	13.3		21.0		12.1
Total	100.0	%	100.0	%	100.0	%

The majority of our sales personnel operates through our United States subsidiary and cover North America, Europe and portions of Asia Pacific, and the rest operate through our subsidiary in Australia. Our sales and marketing staff consists of professionals in a variety of fields, including marketing and media relations, direct sales, technical sales consultants, product management, and business development. As of December 31, 2007, we employed 13 sales, marketing and business development personnel.

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

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

In Europe, we continue to utilize our global partners GE Energy and Telvent along with our partner Vodafone (which acquired Aspective in 2007) which has developed a specialized practice dedicated to the implementation of ViryaNet’s solutions and providing post-contract maintenance and support. All of our partners, and their customers are supported by our business development, customer care, and professional services organizations in the United States, Israel, and Australia.

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

ViryaNet Service Hub and Applications

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. 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). We typically issue one major version release of ViryaNet Service Hub every one to two years.

We currently package our applications for specific industries by seeking to capture best business practices and embedding those processes into our application, incorporating processes, workflows, reports, and screens appropriate for companies in our target industries. These best practices, coupled with powerful functionality capabilities, allow us to package ViryaNet Service Hub and applications into industry bundles, including:

• ViryaNet Service Hub for Utilities

• ViryaNet WorkUP™ for Utilities

• ViryaNet Service Hub for Telecommunications

• ViryaNet Service Hub for Retail

• ViryaNet Service Hub for General Service

ViryaNet Service Hub is built using open standards (Java, XML), common to Internet, wireless, and workflow technologies, allowing customers to adapt and easily integrate ViryaNet Service Hub to their continuously changing conditions. ViryaNet Service Hub includes an information service portal that provides community access and collaboration;

business intelligence for real-time reporting, analysis, and responsive action; workflow-driven business processes; a powerful integration server and application program interface (API) set that interfaces to other applications, including enterprise resource planning (ERP) applications, customer relationship management (CRM) applications, data warehouses and other commonly used service applications; and a mobile gateway that allows mobile users to access and communicate service information using a wide variety of devices over popular wire-line and wireless networks.

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

ViryaNet Service Hub Internet Platform Components

The infrastructure of ViryaNet Service Hub includes these important platform components:

ViryaNet Service Portal

Offers a singular, personalized gateway that allows internal users as well as customers, field employees and external partners, suppliers, and vendors to interface with Service Hub through the Web. The ViryaNet Service Portal allows users to access service information in real-time, share documents, collaborate with other users and obtain service.

Mobile Computing Platform (MCP)

Provides mobile users with access to the data and applications they require, allowing them to stay productive, regardless of location. ViryaNet MCP enables mobile users to work in both on-line and off-line mode utilizing both thin clients and fat clients.

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ViryaNet Service Intelligence & Data Mart

Aggregates a pool of key performance indicators (KPIs) that track data based on criteria, such as: financial trends, service performance, service rates, revenue, and cost-per-product.

ViryaNet Service Workflow Engine/ Editor

Defines and applies rules to automate movement of documents, work orders and information, between users. The ViryaNet Service Workflow Engine/Editor also includes a tool for monitoring active processes and auditing completed processes. The Service Workflow Engine provides a working environment that guarantees maximum flexibility.

ViryaNet Integration Server

Enables organizations to integrate with its other systems, databases, applications, including external web applications.

ViryaNet Service Hub Application Components

ViryaNet Service Hub is a mobile workforce management solution, providing beginning-to-end management of work orders and the real-time capture of field workforce activity, tasks and events with wireless devices. Application components include the following:

ViryaNet Schedule

Optimizes the assignment of work across the client’s available workforce. ViryaNet Schedule automatically assigns field resources by using intelligent scheduling algorithm that verifies availability, and then applies selection criteria (skills, proximity, available parts, and more) weighted in importance by the client. ViryaNet Schedule comes with an appointment booking function that identifies a timeslot for completion of the order that is agreeable to the customer, meets service level agreements, and matches available resources.

ViryaNet Dispatch

Provides multiple, user configurable views, giving the dispatcher real-time visibility to the situation in the field and tools to automatically or manually balance the workload. ViryaNet Dispatch includes functions and views that enable the dispatcher to manage exceptions and monitor the business process while allowing normal operations to proceed automatically and with no human intervention.

ViryaNet Field

Gathers the right information so that the client can embrace change, evolve processes, and achieve a level of excellence. ViryaNet Field enables technicians in the field to update status and detailed work information associated with work orders, working in online or offline mode. On their mobile devices, technicians receive service orders (job details, maps, driving directions, and attachments), acknowledge or reject orders, report activities such as en-route, arrived on site, left site, completed, on break; and report work-related activities, such as time, labor, parts usage, travel and expenses.

ViryaNet Visibility

ViryaNet Visibility enables the client to quickly gather the right information so that you can embrace change, evolve processes, and achieve service excellence. ViryaNet Visibility includes two tools: Executive Dashboard and Operational Dashboard. The ViryaNet Executive Dashboard provides immediate, on-demand access to a wealth of historical and near real-time business information. The ViryaNet Operational Dashboard is a business activity monitoring application that provides a real-time, “as it’s happening” view of relevant business information.

ViryaNet Parts

Tracks consumption and usage of the various tools, parts, and equipment used during the work process. ViryaNet Parts automatically captures information from the field workers, and summarizes appropriate data for various interfaced systems.

ViryaNet Contract

Manages the total contract lifecycle, from the initial quote to the production of invoice data for services purchased. ViryaNet Contract provides comprehensive and flexible management of service portfolios and customer contracts. It enables you to outline your relationship with customers and to establish customers’ expectations of the services that they will receive, including the response time, method of delivery, and cost of delivery.

ViryaNet’s Customers

Over 700 person-years of technical and business experience have been invested in the ViryaNet products. ViryaNet Service Hub and the ViryaNet service applications have been licensed to and implemented at numerous customers. Descriptions of product usage and resulting benefits of improved service delivery and enhanced customer satisfaction from some of our customers include:

Black Hills Corporation—this leading utility, serving electric and natural gas customers in seven US states, has acquired Aquila, a WorkUP™ customer since 1996, in 2008. ViryaNet WorkUP™ allows Black Hills to manage its entire field workforce.

Citizens (Frontier) Communications—the largest independent local exchange carrier in the United States. Citizens uses the ViryaNet Service Hub to automate the dispatching of service orders, trouble tickets, and work requests to its 2,500 technicians. Citizens uses ViryaNet Service Hub to manage the critical issues facing customer service organizations, such as deploying the right technician, diminishing travel times, satisfying customer requests, reacting responsively to increased volumes, assimilating acquisitions, and managing costs. Citizens’ technicians carry hand-held CE devices or laptops that route them through their daily responsibilities via ViryaNet Service Hub’s mobile gateway. Dispatchers monitor and assist these technicians through ViryaNet Service Hub, while senior management and supervisors receive immediate visibility into the operation’s performance.

ConEd—this leading utility, and one of the largest investor-owned energy companies in the United States, has utilized WorkUP™ for its natural gas emergency operations since early 2002 and plans a further roll-out this year within its Orange & Rockland subsidiary.

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Las Vegas Valley Water District—a not-for-profit agency that provides water to The Las Vegas Valley, and one of the fastest growing water districts in the Southwest United States, uses ViryaNet Service Hub for Utilities to optimize the scheduling and management of approximately 200 field service technicians across a vast service territory and within multiple divisions, including meter services, customer service, distribution, fleet services, and facilities maintenance.

Leslie’s PoolMart—the world’s largest swimming pool equipment and supplies retail chain with headquarters in Phoenix, AZ and offices across the United States, uses ViryaNet Service Hub to manage the installation, replacement, and onsite maintenance (and preventive maintenance) of pumps, filters, heaters and other devices and equipment for public and private swimming pools. ViryaNet Service Hub and applications optimize the scheduling, dispatch, appointment booking, and field reporting of Leslie’s PoolMart’s seasonal field resources and support staff.

LoJack—this recognized world leader in stolen vehicle tracking and recovery, licensed ViryaNet Service Hub to streamline the installation of its recovery systems, and support its rapidly expanding sales and installation channel strategy. ViryaNet Service Hub and applications optimize LoJack’s 300 field technicians and 100 support staff who manage the functions of appointment booking, dispatch, and scheduling.

Louisville Water Company—a publicly owned and privately operated for-profit utility serving more than 800,000 people in and around Greater Louisville, Kentucky, selected ViryaNet Service Hub for Utilities suite of applications to improve the efficiency of its technicians and field service processes who perform activities such as meter exchanges, emergency responses, services connects and disconnects, and preventive maintenance on assets.

Publix Super Markets—the largest employee-owned supermarket chain and one of the 10 largest volume supermarket chains in the United States, uses ViryaNet Service Hub to automate its maintenance and facilities operations, including the activities associated with workforce management and asset and repair management. Publix uses ViryaNet Service Hub (Mobile Workforce Management, Service Scheduler, Service Supply Chain, and eRepair modules) to manage and automate a variety of short-duration tasks, such as preventive maintenance activities on equipment, to more complicated projects. In addition, ViryaNet Service Hub enables Publix to optimize the use of its internal workforce and to better manage its large subcontractor base.

The Building Commission—located in Melbourne, this statutory authority that oversees the building control system in Victoria and regulates building practices, uses the ViryaNet product for its Compliance and Conciliation and its Technical Services Group to better utilize its existing workforce, cut response times to customers, and lower operations costs through improved communications, better customer service, and optimize workforce productivity.

City West Water (CWW) – one of three retail water businesses located in metropolitan Melbourne and owned by the Victorian Government, CWW provides drinking water, sewerage, trade waste, and recycled water services to approximately 276,000 residential and 31,300 non-residential customers in the Melbourne area. CWW uses ViryaNet mobile workforce management automating approximately 100 CWW technicians who respond to reactive, scheduled, and SCADA jobs over a vast geographical area. The ViryaNet product was integrated with asset management, GIS, and SCADA systems. Using the ViryaNet product CWW has improved the operational performance of its crews, expedited work orders, and has provided real-time updates of job progress in the office and field, thus, improving organizational efficiency, customer satisfaction, and job morale.

Sheetz—the fastest-growing convenience store chain in the United States with 344 locations across six states and, in 2007, ranked as one of the best companies to work for in Pennsylvania, uses ViryaNet Service Hub for comprehensive field service management of its retail operations. Sheetz deployed ViryaNet Service Hub for Retail to manage customer interactions, schedules appropriate field resources, dispatches work orders via wireless technologies, return updated data from the field to the external systems, and give technicians insight into inventory information. Sheetz will use Service Hub as the foundation for improving the availability of products and services to customers and increase field productivity, reduce maintenance costs, and enhance the overall customer experience.

Singapore Power Services—this wholly-owned subsidiary of Singapore Power, an Asian utility and energy group based in Singapore, uses ViryaNet Service Hub for Utilities in conjunction with GE to automate its field workforce activities.

Spencer Technologies—this provider of cabling, systems integration, installation and maintenance services to the most advanced retail environments, selected ViryaNet Service Hub and Workforce Management, eStock, and eContract applications to manage its installation and service business. ViryaNet Service Hub schedules and dispatches Spencer’s field engineers, capture logistics and labor activity at its source, report and measure field activity using key performance indicators, and integrate with several existing Spencer systems to improve billing activities and customer satisfaction.

Symbol—this provider of wireless and Internet-based mobile data management systems offers a combination of priority phone and on-site hardware repair services to the retail, transportation, healthcare, and manufacturing markets. Symbol uses ViryaNet Service Hub to migrate its traditional service processes to the Internet, allowing users to access information from various locations throughout the organization, such as call centers, financial systems and data warehouses, and make that information available to any member within the service community who requires it.

T-Mobile International AG & Co. K.G.—the mobile communications subsidiary of Deutsche Telekom AG, T-Mobile is a major international telecommunications company based in Europe. T-Mobile utilizes ViryaNet Service Hub for Telecommunications to improve the effectiveness of its field engineers using scheduling and dispatching, capture logistics and labor activity, monitor, report and measure field activity, and unite the many constituents of the company’s service community through web browsers, cellphones, personal digital assistants, and other wireless devices.

UGI—this leading provider of natural gas to distribution residential and commercial customers in Pennsylvania is ranked highest in Customer Satisfaction by J.D. Power and Associates for two years in a row, and has been a production WorkUP™ customer since 1996. UGI fully embraces WorkUP’s™ latest map-based dispatch functionality with embedded GPS/AVL capabilities for its service technicians.

XO Communications—a leading broadband communications service provider for small/medium business, large enterprises and carriers in North America, XO Communications uses the ViryaNet Service Hub for Telecommunications suite of applications comprised of Workforce Management, Advanced Scheduling Optimization, Mapping, Contract Entitlement, Field Parts Logistics, and automated work flow processing to automate its technicians and field service business processes.

ViryaNet Partnerships

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

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

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

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• GE Energy—a business unit of GE Power Systems and leading global supplier of strategic network solutions to the utilities industry. GE has integrated ViryaNet Service Hub and mobile workforce management application into its existing portfolio, and positions the ViryaNet offering to the utilities and telecommunications industry.

• Alliance Data Systems (“ADS”)—a provider of business process outsourcing services for companies across a number of vertical markets, including utilities. ADS offers, through its technologically advanced and highly secure data centers, the ViryaNet products to its’ customers who contract with ADS to manage their applications and/or run their business processes in an outsourced capacity

• Mitchell International—a high technology provider operates primarily within the United States, incorporates ViryaNet Service Hub and application technology within its product offering intended exclusively for use in the insurance vertical market.

• Telvent—the information technology subsidiary for Abengoa, S.A. of Spain and an affiliate of ViryaNet’s shareholder, Telvent markets, sells, and services ViryaNet solutions in the utilities, oil and gas, and telecommunications markets in Spain, Portugal and Latin America.

Competition

The 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 Service Power Technologies, plc., Vista Equity Partners (via its acquisition of our competitors MDSI and Indus International), ClickSoftware Ltd., Telcordia, and Intergraph Corporation. Our primary competitors in commercial and other general field service markets include enterprise application solution providers such as Astea International Inc. and Metrix Inc., along with traditional ERP and CRM software application vendors such as Oracle Corporation, and SAP A.G.

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

Intellectual Property Rights

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

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

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

Organizational Structure

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

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

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

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

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Property, Plants and Equipment

We do not own any real property. We lease approximately 7,900 square feet of space in Jerusalem, Israel, used primarily for research and development, with an annual rent of approximately $123,000. The lease agreement for these premises expires on October 31, 2008. Currently, we intend to seek to renew this lease agreement on similar terms or to seek similar office space at approximately the same annual cost, if available.

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

Utility Partners, the subsidiary of ViryaNet, Inc. located in Tampa, Florida, leased approximately 4,300 square feet of office space used primarily for engineering, sales, services and technical support purposes. The premises were leased under a lease agreement that expired on October 16, 2007, with a total annual rent of approximately $127,000, including certain communication costs. We agreed to extend the term of this lease agreement on a quarterly basis at the same monthly cost until we found lower cost space in a suitable location. On July 17, 2008, we have moved to another location in the Tampa area under a renewable six months lease term with an annual rent of approximately $20,000.

ViryaNet Pty Ltd., our subsidiary in Australia, leases approximately 1,700 square feet of office space in Melbourne, Australia on monthly basis with a total annual rent of approximately $23,000.

Item 5. Operating and Financial Review and Prospects

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

Overview

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

Revenues

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

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

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

The majority of our revenues are derived from customers in the United States, with the balance generated by customers in Europe, and the Asia Pacific regions. The percentage of revenue derived from the Asia Pacific region decreased from 21% of total revenue in 2006 to 12% of total revenue in 2007. This decline is attributed primarily to the dissolution of our Japanese subsidiary in April 2007 and the completion in 2007 of several projects in Asia-Pacific region which were initiated prior to 2007. The percentage of revenue derived from Europe was 7% in 2006 and increased to 9% in 2007. The increase in the percentage of revenue derived from Europe is attributable to a substantial license transaction with a customer in the utilities market based in Germany. Further growth in the percentage of revenue derived from Europe will depend upon the success of our partners, principally GE Energy and Vodafone to successfully close license sales with new customers.

We price our products based on market conditions in each jurisdiction where we operate. Historically, a significant portion of our revenues has been derived from a small number of relatively large companies and we expect this trend to continue. See “Risk Factors—Historically, our revenues have been concentrated in a few large orders and a small number of customers. Our business could be adversely affected if we lose a key customer.”

Cost of Revenues

The cost of revenues consists of the cost of software license revenues and cost of maintenance and services. The cost of software license revenues consists of costs of third-party software that is either embedded in our software or licensed for resale from third-party software providers to enhance the functionality of our software, amortization of acquired technology, and to a lesser extent royalty payments to the OCS. The cost of acquired technology is established as part of the purchase price allocation related to the acquisitions of Utility Partners, Inc. and e-Wise Solutions and is amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with SFAS No. 142, . Cost of maintenance and services consists of salaries and related expenses of our professional services organization employees, third-party consultants and contractors, amortization of stock-based compensation and other administrative expenses incurred in support of these personnel. We expect the annual increase in the cost of services to approximate the growth of professional services revenue on an annual basis.

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Operating Expenses

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

Research and development expenses include costs relating to the development of our products. These costs consist primarily of salaries and benefits for research and development employees, facilities and other administrative expenses, the cost of consulting development resources that supplement our internal development team and amortization of stock-based compensation. These expenses are presented net of any governmental grants. Due to the relatively short time between the date our products achieve technological feasibility and the date they generally become available to customers, costs subject to capitalization under SFAS No. 86 have been immaterial and have been expensed as incurred.

Sales and marketing expenses consist of salaries and commissions for sales and marketing employees and consultants, amortization of acquired customer relationship, office expenses, travel, printing and distribution, market research, advertising and promotional expenses, other administrative expenses and amortization of stock-based compensation. The cost of customer relationship is established as part of the purchase price allocation related to the acquisitions of Utility Partners, Inc. and e-Wise Solutions, and amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with SFAS No. 142.

General and administrative expenses consist of salaries for administrative, executive and finance personnel, information system costs, insurance, accounting, legal, professional fees, other administrative expenses and amortization of stock-based compensation.

Amortization of stock-based compensation includes the amortization of employee stock-based compensation and expenses for stock -based awards granted to employees, directors and consultants in exchange for services. Stock-based compensation expense is amortized over the vesting schedule of the stock options or restricted shares using the straight-line approach, or, over the term of the services provided. These expenses are reported in the statement of operations under the applicable operating expense categories (i.e., cost of services, sales and marketing, research and development, and general and administrative) and no longer reported as a separate line item.

Our Reporting Currency

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

Adoption of New Accounting Standard

On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 ,” or FIN 48. See discussion below under “Critical Accounting Policies” and Note 14 to our financial statements, “Taxes on Income”.

Our Location in Israel

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

Impact of Currency Fluctuation and of Inflation

A significant portion of the cost of our Israeli operations, mainly personnel costs, is incurred in NIS. Therefore, our NIS related costs, as expressed in U.S. dollars, are influenced by the exchange rate between the U.S. dollar and the NIS. During 2007, the NIS appreciated against the U.S. dollar, which resulted in a significant increase in the U.S. dollar cost of our operations in Israel. Such trend continued during the first six months of 2008 with the NIS further appreciated against the U.S. dollar. Also, NIS linked balance sheet items may create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share. Although we may use hedging techniques we cannot eliminate the effects of currency fluctuations. Thus, exchange rate fluctuations resulting in a devaluation of the U.S. dollar compared to the NIS could have a material adverse impact on our operating results and share price. The caption “Financial and other income (expenses), net” in our consolidated financial statements includes the impact of these factors as well as traditional interest income or expense.

Seasonality

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

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements ,” or SFAS 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis, and should be applied prospectively. The adoption of the provisions of SFAS 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis is not anticipated to materially impact our consolidated financial position and results of operations. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. We are currently evaluating the impact of adopting the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed on a non-recurring basis.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, ” or SFAS No. 159. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for financial statement issued for fiscal years beginning on January 1, 2008. We have determined that the adoption of SFAS 159 will not have an impact on our consolidated financial statements.

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In December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business Combinations,” or SFAS 141R. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. SFAS 141R will have an impact on accounting for future business combinations once adopted and not on prior acquisitions. As such the nature and magnitude of the specific effects will dependent upon the nature, terms and size of the acquisitions we consummate after the effective date.

In December 2007, the FASB issued SFAS No. 160, “ Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ,” or SFAS No. 160. SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of the provisions of SFAS No. 160 is not anticipated to materially impact our consolidated financial position and results of operations.

On December 21, 2007 the staff of the Securities and Exchange Commission issued SAB No. 110, which, effective January 1, 2008, amends and replaces SAB 107, Share-Based Payment. SAB 110 expresses the views of the Staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with SFAS No. 123(R), Share-Based Payment. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option. The use of the “simplified” method, which was first described in SAB 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The Staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available. As a result, we do not expect that the adoption of SAB No. 110 will have a significant impact on our consolidated financial statement.

Critical Accounting Policies

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

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

Revenue Recognition

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

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

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

Revenues from software product license agreements that do not involve significant customization and modification of the software product are recognized, under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP No. 97-2”), as amended by Statement of Position 98-9, “Modifications of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions”. SOP No. 98-9 generally requires revenues earned from software arrangements involving multiple elements that typically consist of license, professional services, and post-contract maintenance and support, be recognized under the residual method and allocated to each element. Under the residual method, revenue is recognized for the delivered elements when (1) there is vendor-specific objective evidence (“VSOE”) of the fair values of all the undelivered elements, (2) VSOE of fair value does not exist for one or more of the delivered elements in the arrangement, and (3) all revenue recognition criteria of the amended SOP 97-2 are satisfied. Under the residual method, any discount in the arrangement is allocated to the delivered element. Our VSOE used to allocate the sales price to professional services and maintenance is based on the price charged when the undelivered elements are sold separately. In the event that VSOE of fair value does not exist for all undelivered elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue would be deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever occurs earlier.

Revenue from software license fees is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed and determinable and collectability is probable. We do not grant a right of return to our customers. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer, assuming all other revenue recognition criteria have been met.

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

Arrangement that include services are evaluated to determine if those services are considered essential to the functionality of the other elements of the arrangement, Services that are considered essential consist primarily of significant production, customization or modification of the software product. When such services are provided revenues under the arrangement are recognized using contract accounting in accordance with Statement of Position No. 81-1 “Accounting for Performance of Construction—Type and Certain Production—Type Contracts” (“SOP No. 81-1”), using the percentage-of-completion method, based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the contract, provided that the revenues are fixed or can be reasonably estimated, collection is probable, costs related to performing the work are determinable or can be reasonably determined, and there is no substantial uncertainty regarding our ability to complete the contract and to meet the contractual terms. When services are not considered essential, the revenues from the services are recognized as the services are performed.

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In recognizing revenues based on the percentage-of-completion method, we estimate time to completion with revisions to estimates made in the period in which the basis of such revisions becomes known. If we do not accurately estimate the resources required or scope of work to be performed, manage our projects properly within the planned periods of time or satisfy our obligations under the contracts, then future services margins may be significantly and negatively affected or a provision for estimated contract losses on existing contracts may need to be recognized in the period in which the loss becomes probable and can be reasonably estimated.

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

Allowance for Doubtful Accounts

We evaluate the collectibility of accounts receivable based on a combination of factors related to our customers. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us (e.g. bankruptcy filings, substantial down-grading of credit ratings), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize reserves for bad debts based on the length of time the receivables are past due and on our historical experience in collecting such receivables.

Goodwill and Other Intangible Assets

Under Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) goodwill is not amortized but is subject to an annual impairment test. Goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. Fair value is determined using market multiples and comparative analysis. Significant estimates used in the methodologies include estimates of market multiples for the reportable unit. We have recorded goodwill of approximately $2.8 million related to our acquisition of iMedeon on February 25, 2002, $3.7 million related to our acquisition of Utility Partners, Inc. on July 29, 2004, and $0.6 million related to our acquisition of substantially all of the assets of e-Wise Solutions on June 15, 2005. We have performed impairment tests and determined that our goodwill of approximately $7.2 million is not subject to an impairment charge as of year-end 2007.

In addition, we test for impairment periodically whenever events or circumstances occur subsequent to our annual impairment tests that indicate that the asset may be impaired. Indicators we consider important which could trigger an impairment include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or a significant decline in our stock price for a sustained period.

Long-lived Assets other than Goodwill

We are required to assess the impairment of long-lived assets, other than goodwill, tangible and intangible under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS No. 144) on a periodic basis, when events or changes in circumstances indicate that the carrying value may not be recoverable. Where events and circumstances are present which indicate that the carrying value may not be recoverable, we recognize an impairment loss. Such impairment loss is measured by comparing the recoverable amount of the asset with its carrying value. The determination of the value of such intangible assets requires management to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, we could be required to record impairment charges. We have performed impairment tests and determined that the unamortized portion of our long-lived assets other than goodwill of approximately $1.3 million is not subject to an impairment charge as of year-end 2007.

Contingencies

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

Equity-based Compensation Expense

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

Prior to the adoption of SFAS No. 123(R), we accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123. Pursuant to these accounting standards, we recorded deferred compensation for stock options granted to employees at the date of grant equal to the excess of the market value of the underlying shares at that date over the exercise price of the options. Furthermore, when terms of options granted were modified, we accounted for the modifications as an exchange of the original award, resulting in additional compensation expenses based on the differences between the fair value of the new award and the original award immediately before modification and in accordance with SFAS No 123.

We adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2006, included: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). As required by the modified prospective method, results for prior periods have not been restated.

We did not grant any stock options during 2006 and 2007. During 2005, 2006 and 2007 we granted restricted shares to employees, directors and consultants. All restricted shares were granted for no consideration. In accordance with SFAS 123(R), restricted shares are measured at their fair value as if they were vested and issued on the grant date; therefore, their fair value was equal to the share price at the date of grant.

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Accounting for Income Tax

On January 1, 2007, we adopted the Financial Accounting Standards Board, or FASB, Interpretation No. 48, “Accounting for Uncertainty in Income Taxes , an Interpretation of FASB Statement No. 109, ” or FIN 48, which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, “ Accounting for Income Taxes .” The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax obligations in accordance with SFAS No. 109 and SFAS No. 5 “Accounting for Contingencies ”, or SFAS No. 5. As a result of the adoption of the FIN 48 and our evaluation of our tax position taken or expected to be taken with respect to uncertain tax obligations, we have recorded a liability for unrecognized tax benefits, of approximately $55,000 which was accounted for as an increase to the January 1, 2007 balance of the accumulated deficit and an amount of $13,000 related to interest and penalties on tax positions for the year ended December 31, 2007 which was recorded in financial expenses.

Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards, for which the benefits have not been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2007 and 2006 are appropriately accounted for in accordance with FIN 48, SFAS No. 5 and SFAS No. 109 as applicable, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See note 14 to consolidated financial statements for further information regarding income taxes. We are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. Our tax returns are subject to ongoing audits by the tax authorities, which often result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.

The Company and its subsidiaries file federal and state income tax returns in the U.S., Israel, Australia and the UK. ViryaNet Ltd. may be subject to examination by the Israel tax authorities for fiscal years 2003 through 2007. ViryaNet Inc.'s (the U.S. subsidiary) tax returns through 2006 were audited by the U.S. Internal Revenue Service (“IRS”) which resulted with no incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal year 2007. ViryaNet PTY (the Australian subsidiary) may be subject to examination by the Australian tax authorities for fiscal years 2005 through 2007.

Operating Results

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

	Year Ended December 31,
	2005		2006		2007
Revenues:
Software license	12.1	%	11.0	%	15.9	%
Maintenance and services	87.9		89.0		84.1
Total revenues:	100.0		100.0		100.0
Cost of revenues:
Software licenses	2.5		2.6		3.2
Maintenance and services	55.3		49.3		50.5
Total costs of revenues	57.8		51.9		53.7
Gross profit	42.2		48.1		46.3
Operating expenses:
Research and development	17.6		15.3		20.5
Sales and marketing	36.7		26.6		30.7
General and administrative	21.1		19.7		22.3
Total operating expenses	75.5		61.7		73.5
Operating loss	(33.3	)	(13.5	)	(27.2	)
Financial expenses, net	(9.3	)	0		(4.8	)
Loss from liquidation of a subsidiary	0		0		(2.1	)
Net loss	(42.6	)	(13.8	)	(34.1	)

Geographic Distribution

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

	Year Ended December 31,
Country/Region	2005		2006		2007
United States	79.3		71.6		78.9
Europe	7.4		7.4		9.0
Asia Pacific	13.3		21.0		12.1
Total	100.0	%	100.0	%	100.0	%

Comparison of Fiscal Years Ended December 31, 2006 and 2007

Revenues

Our total revenues decreased by $2.7 million or 19.5% from $13.9 million in 2006 to $11.2 million in 2007. Revenues from maintenance and services revenues declined by approximately $3.0 million from $12.3 million to $9.4 million, off set by an increase in revenues from software licenses of $0.3 million from $1.5 million to $1.8 million. From a geographic perspective, our revenues in North America declined by $1.1 million, from $9.9 million to $8.8 million and our revenues from Asia Pacific, including Japan, declined by $1.6 million from $2.9 million to $1.3 million, while revenues in Europe were flat at approximately $1.0 million. From a channels perspective, the contribution of revenue from direct sales and indirect sales was the same in 2007 as 2006 at 71% and 29%, respectively, however, the volume of direct sales declined by $1.9 million and the volume of indirect sales fell by $0.8 million.

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In 2007, we were successful at increasing our revenues from software licenses compared with 2006 and acquired several new customers which contributed to this growth. However, we completed several large services arrangements that were initiated prior to 2007 and contributed substantially less revenue during 2007, and, we were not successful in closing services revenue opportunities suitable to replace these projects, particularly in the Asia Pacific region.

In 2008, we believe that we can grow our total revenue with expectations for a continued increase in new license sales with new customers, and an increase in the sale of licenses and professional services into our installed base of existing customers. We expect to receive more contributions to revenue in 2008 from our investments in sales and marketing efforts in support of our existing channel partners in Europe, and the introduction of new software product offerings to markets which extend our ability to assist customers with the operations of their business.

Software Licenses

Software license revenues increased by 16.4%, from $1.5 million in 2006 to $1.8 million in 2007. This increase of $0.3 million is attributable to higher revenue derived from the sale of our software to new customers in the retail market.

As a percentage of total revenue, software licenses increased from 11.0% of revenue in 2006 to 15.9% of revenue in 2007. The increase in the percentage of revenue provided by software licenses is attributable to the 16% increase in the volume of our software licenses, as mentioned above, and the 24% decline in maintenance and services revenues from new and existing customers which fell from $12.3 million in 2006 to $9.4 million in 2007. There were no rate changes in our license fees that had a material impact on our revenues.

Maintenance and Services

Our maintenance and services revenues decreased by 24%, from $12.3 million in 2006 to $9.4 million in 2007. During 2007, our maintenance and services revenues declined by $3.0 million worldwide as several services projects which began prior to 2007 were successfully completed but contributed substantially less revenue during 2007, and we were not successful replacing these projects with new implementation efforts in a timely manner to avoid the reduction in annual maintenance and services revenue. In North America, our maintenance and services revenues declined by approximately $1.2 million. In Asia Pacific, our maintenance and services revenues declined by approximately $1.6.

As a percentage of total revenue, maintenance and services revenue decreased from 89.0% of revenue in 2006 to 84.1% of revenue in 2007 as a result of the 16% growth in sales of software licenses and 24% decline in maintenance and services revenues. There were no rate changes in our maintenance and services fees that had a material impact on our revenues.

Cost of Revenues

Total cost of revenues decreased by 17% from $7.2 million in 2006 to $6.0 million in 2007, as further explained below.

Cost of Software Licenses

The cost of software licenses was $0.4 million in 2006 and in 2007, while the cost of software licenses as a percent of software license revenue decreased from 23.4% in 2006 to 20.2% in 2007. The decrease in the cost of software licenses as a percent of software license revenue is attributable to the expiration of amortization costs related to acquired technology assets from the acquisition of Utility Partners in July 2004.

Cost of Maintenance and Services

The cost of maintenance and services decreased by 18%, from $6.8 million in 2006 to $5.6 million in 2007. The decrease in the cost of maintenance and services of $1.2 million is attributable to (i) a decrease of $1.1 million in compensation costs related to the reduction of 10 maintenance and service personnel on a full-year weighted average basis, and (ii) a reduction of $0.1 million related to the discontinuation of maintenance services provided by a third party to one of our end-users. Maintenance and services costs as a percentage of maintenance and services revenues increased from 55% in 2006 to 60% in 2007. The increase in the cost of maintenance and services as a percentage of maintenance and services revenues resulted primarily from the 24% decrease in maintenance and services revenues and our inability to lower costs proportionally with the substantial decline in revenues.

Operating Expenses

Research and Development

Our net research and development expenses increased by 8% from $2.1 million in 2006 to $2.3 million in 2007, and increased as a percent of revenue from 15.3% of revenue in 2006 to 20.5% in 2007. The increase in the amount of research and development expenses in 2007 of approximately $0.2 million was primarily attributable to the exchange rate impact of the U.S. dollar against the NIS as the majority of our research and development activity occurs at our development facility in Israel.

We expect that we will continue to devote a substantial portion of our revenues to research and development to enhance our existing products, merge certain features and functionality of WorkUP ^™ and FOCUS with ViryaNet Service Hub, enhancements to improve the quality and configurability of our software, and develop new features and functionality that will benefit all of our customers. In 2008, we expect the amount of expenses for research and development to increase slightly in comparison to the amount of those expenses in 2007, and we expect that research and development as a percentage of revenue should remain flat or slightly decline if revenue growth occurs as expected. See “Cautionary Statement Regarding Forward-Looking Statements”.

Sales and Marketing

Our sales and marketing expenses were $3.4 million, or 30.7% of revenue in 2007 compared to $3.7 million or 26.6% of revenue in 2006, a year over year decrease of $0.3 million or 7.1%. This decrease was primarily attributable to a reduction in base and variable compensation costs of approximately $0.3 million related to a decrease of 3 sales personnel on a full-year weighted average basis. We expect sales and marketing expenses to increase in 2008 compared to 2007 and we expect that sales and marketing as a percentage of revenue should remain flat or decline slightly to the extent that revenue growth occurs as expected. See “Cautionary Statement Regarding Forward-Looking Statements”.

General and Administrative

Our general and administrative expenses were $2.5 million, or 22.3% of revenue in 2007 compared to $2.7 million, or 19.7% of revenue in 2006, a year over year decrease of $0.2 million or 9.1%. This decrease was attributable to a reduction in compensation costs of $0.2 million related to a decrease of 2 administrative personnel on a full-year weighted average basis. We expect general and administrative expenses to remain flat or slightly increase in 2008 compared to 2007 and we expect that these expenses as a percentage of revenue should decline to the extent that revenue growth occurs as expected. See “Cautionary Statement Regarding Forward-Looking Statements”.

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Financial Income and Expenses, net

Financial income and expenses, net, changed from $44,000 of expenses in 2006 to approximately $0.5 million of expenses in 2007. The year to year change in the amount of financial income and expense, net, of approximately $0.5 million was attributable to (i) a one-time non-cash benefit of approximately $1.0 million in 2006 related to the conversion of $2.5 million of the convertible debts held by LibertyView and JHTF, offset by (ii) lower interest expenses in 2007 of approximately $0.3 million, resulting from repayment of long-term bank loan in 2007 and conversion of convertible debts mentioned above and (iii) financial expenses of approximately $0.2 million in 2006, related to certain fundraising activities. We expect that financial expenses, net, to increase in 2008 resulting from foreign currency translation adjustment caused by the weakening of the US dollar relative to the NIS. See “Cautionary Statement Regarding Forward-Looking Statements”.

Loss from Liquidation of a Subsidiary

Our loss from the liquidation of our Japanese subsidiary in April 2007 was $0.2 million in 2007. The amount of the loss recorded is related to the accumulation of currency translation adjustments since the inception of the subsidiary that is removed from the separate component of equity upon the dissolution of our Company’s Japanese subsidiary.

Comparison of Fiscal Years Ended December 31, 2005 and 2006

Revenues

Our total revenues decreased by 2% from $14.2 million in 2005 to $13.9 million in 2006. While overall revenues declined by approximately $0.3 million, our revenues in North America and Japan declined by $1.3 million and $0.3 million, respectively, in 2006 compared to 2005, offset by an increase in revenue contributed by Asia Pacific, excluding Japan, of $1.3 million as we received the full-year benefit of revenue contributed by our new Australia subsidiary established in June 2005 and the successful expansion of our focus into the Asia Pacific market. In North America, most of the reduction occurred in maintenance and services revenues as several projects that began in 2005 were successfully completed in the first half of 2006. In Japan, the revenue decline indicated a weakening demand for our products and services and we concluded this market could be more profitably supported utilizing a local reseller. Consequently, in 2007 we dissolved our Japanese subsidiary and replaced our direct presence in Japan with a reseller based in Tokyo, Japan that provide sales and support activities for our products.

Software Licenses

Software license revenues decreased by 12%, from $1.7 million in 2005 to $1.5 million in 2006. This decrease of $0.2 million is primarily attributable to lower revenue derived from the sale of our software in the North America market as we experienced delays later in the year in closing certain new deals before the end of the year. In 2006, we became more dependent on our channel partners to sell our software as the percentage of software licenses sold through partners increased to 54% compared to 9% in 2005. With the increased reliance on partners, we became less able to control the timing of the closing for transactions involving partners.

As a percentage of total revenue, software licenses decreased from 12.1% of revenue in 2005 to 11.0% of revenue in 2006. The reduction in the percentage of revenue provided by software licenses is attributable to the decline in software license revenue due to the reduction in the sales of licenses in our North America market, as mentioned above. Maintenance and services revenues from new and existing customers from 2005 to 2006 declined slightly but had no material impact on the decline in software license revenue as a percentage of total revenue. There were no rate changes in our license fees that had a material impact on our revenues.

Maintenance and Services

Our maintenance and services revenues decreased slightly by 1%, from $12.5 million in 2005 to $12.3 million in 2006. The decrease of $0.1 million reflects a shift in the contribution of professional services revenue from North America and our Japanese subsidiary in 2006 compared to 2005. During 2006, North America revenues declined by approximately $1.0 million as several projects which began in 2005 were successfully completed in the first half of 2006 and we were not able to replace these projects with new implementation efforts in a timely manner to avoid the reduction in annual maintenance and services revenue. In Japan, our services revenues declined by approximately $0.2 million. We were not as successful in 2006 in selling new services to our installed base of customers that could adequately justify the continuation of a subsidiary operation in Japan. We concluded that this market could be more profitably supported utilizing a local reseller familiar with our products and services capabilities, our installed base of customers, and the Japanese market demand for mobile workforce management solutions. In Asia Pacific, our services revenues increased by $1.1 million, primarily as a result of the full-year contribution of our new subsidiary in Australia which was established in June 2005. There were no rate changes in our maintenance and services fees that had a material impact on our revenues.

Cost of Revenues

Total cost of revenues decreased by 12% from $8.2 million in 2005 to $7.2 million in 2006, as further explained below.

Cost of Software Licenses

The cost of software licenses was $0.4 million in 2005 and in 2006, while the cost of software licenses as a percent of software license revenue increased from 20.8% in 2005 to 23.4% in 2006. The increase in the cost of software licenses as a percent of software license revenue is attributable to the full-year effect of expenses related to the amortization costs of acquired technology arising from the acquisition of e-Wise Solutions in June 2005, and the effect of the lower volume of software licenses sold in 2006 compared with 2005.

Cost of Maintenance and Services

The cost of maintenance and services decreased by 13%, from $7.9 million in 2005 to $6.8 million in 2006. The decrease in the cost of maintenance and services of $1.0 million is primarily attributable to a reduction in compensation costs related to the reduction of 14 maintenance and service personnel on a weighted average basis, offset by an increase of $0.1 million related to the cost of resources utilized from the development organization in the delivery of maintenance and services to customers. Maintenance and services costs as a percentage of maintenance and services revenues decreased from 63% in 2005 to 55% in 2006. The decrease in maintenance and services costs as a percentage of maintenance and services revenues resulted primarily from the decrease in personnel noted above along with an increase in the efficiency and utilization of our services personnel needed to deliver maintenance and services revenue.

Operating Expenses

Research and Development, Net

Our net research and development expenses decreased by 15% from $2.5 million in 2005 to $2.1 million in 2006, and declined as a percent of revenue from 17.6% of revenue in 2005 to 15.3% in 2006. We did not receive any government grants from the OCS during 2005 and 2006. The decrease in the amount of research and development expenses in 2006 of approximately $0.4 million is attributable to (i) a reduction in compensation costs of approximately $0.3 million related to a reduction of 3 development personnel on a weighted average basis, and (ii) an allocation of development resources to professional services of approximately $0.1 million.

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Sales and Marketing

Our sales and marketing expenses were $3.7 million, or 26.6% of revenue in 2006 compared to $5.2 million or 36.7% of revenue in 2005, a year over year decrease of $1.5 million or 29.2%. This decrease was attributable to (i) a reduction in base and variable compensation costs of approximately $1.4 million related to a decrease of 9 sales personnel on a weighted average basis, and (ii) a decrease of approximately $0.1 million in travel expenses.

General and Administrative

Our general and administrative expenses were $2.7 million, or 19.7% of revenue in 2006 compared to $3.0 million, or 21.1% of revenue in 2005, a year over year decrease of $0.3 million or 9.0%. This decrease was attributable to (i) a reduction in compensation costs of approximately $0.2 million related to a decrease of 2 administrative personnel on a weighted average basis, and (ii) a decrease of approximately $0.1 million related to professional fees.

Financial Income and Expenses, net

Financial income and expenses, net, changed from approximately $1.3 million of expenses in 2005 to approximately $0.04 million of expenses in 2006. The year to year change in the amount of financial income and expense, net, of approximately $1.3 million is primarily attributable to (i) a one-time non-cash charge of approximately $0.8 million in 2005 related to the accounting for a modification to the terms of the LibertyView convertible debt, (ii) a one-time non-cash benefit of approximately $1.0 million in 2006 related to the conversion of $2.5 million of the convertible debts held by LibertyView and JHTF, offset by (iii) unfavorable foreign currency translation adjustment of approximately $0.3 million caused by the weakening of the US dollar relative to the NIS and (iv)  financial expenses of approximately $0.2 million related to certain fundraising activities.

Liquidity and Capital Resources

How We Have Financed Our Business

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

Sources of Cash

Equity or Convertible Debt Financings

During 2003, we raised approximately $5.0 million in cash, excluding transaction related expenses, from the sale of our Ordinary Shares from private equity financings. These transactions consisted of the following:

• On August 4, 2003, we completed a private placement of our Ordinary Shares with Telvent, the information technology subsidiary of Abengoa, S.A. of Spain. In exchange for gross proceeds of $1.0 million, we issued 107,852 Ordinary Shares at a price of $9.27 per share.

• On November 10, 2003, we completed a private placement of our Ordinary Shares with a large U.S. financial institution and a group of private investors. In exchange for gross proceeds of approximately $1.8 million, we issued 103,465 Ordinary Shares at a price of $17.03 per share. In addition, the investors also received warrants to purchase 18,745 Ordinary Shares at an exercise price of $23.50 per share exercisable until the earlier of November 10, 2006, or, an M&A transaction as defined in such warrants. These warrants expired and were not exercised.

• On December 5, 2003, we completed a follow-on private placement of our Ordinary Shares with Vertex Venture Capital Israel Funds and FBR Infinity Venture Funds, as well as a group of private investors. In exchange for gross proceeds of approximately $2.2 million, we issued 110,902 Ordinary Shares at a price of $20.18 per share. In addition, the investors also received warrants to purchase 16,929 Ordinary Shares at an exercise price of $33.05 per share exercisable until the earlier of December 5, 2006, or, an M&A transaction as defined in such warrants. These warrants expired and were not exercised.

26

During 2004, we raised approximately $2.5 million of cash, excluding transaction related expenses, in a convertible debt financing transaction. The transaction consisted of the following:

• On July 28, 2004, we issued to LibertyView a 7.5% Convertible Debt in the aggregate principal amount of $2.5 million due July 28, 2014. We are obligated to pay interest on the Debt on a quarterly basis commencing October 15, 2004, either in cash or our Ordinary Shares, at our discretion. The Debt is convertible, at the option of LibertyView, at any time before its maturity date into our Ordinary Shares at a fixed conversion price of $21.50 per Ordinary Share. LibertyView also has an option to require us to purchase the Debt in an amount equal to 100% of the principal amount plus accrued and unpaid interest, on July 15, 2008, July 15, 2009, and July 15, 2011. If LibertyView elects to require us to purchase the Debt, we can elect to pay the repurchase price in cash, Ordinary Shares, or a combination thereof. The Debt is also subject to repurchase for cash, at LibertyView’s option and at a repurchase price equal to 100% of the principal amount plus accrued and unpaid interest, on the occurrence of certain events, including the following: (i) an acquisition of our company for cash only, (ii) an acquisition of our company by another company whose market value is less than $25.0 million, (iii) if our Ordinary Shares are neither listed for trading on a U.S. national securities exchange nor approved for trading on The Nasdaq Stock Market or any similar system of automated dissemination of quotations of securities prices, and (iv) if we become subject to bankruptcy or similar proceedings (regarding changes in the terms of the Debt, see also the August 8, 2005, transaction with LibertyView below). In connection with the Debt, we agreed to file an F-3 Registration Statement covering the Ordinary Shares which may be issued upon conversion of the Debt within the earlier of (i) 60 days from the date of the Debt, and (ii) 5 business days after the registration statement that was filed with the SEC prior to the date the Debt is declared effective by the SEC. In that respect, we have also agreed that in the event the F-3 is not filed on time or not declared effective by the SEC within 90 days after it is filed, we will pay LibertyView cash compensation equal to 1% of the loan under the Debt for each month of delay (on a pro rated basis). On May 27, 2005, we entered into a letter agreement with LibertyView under which we agreed to issue to LibertyView 10,000 of our Ordinary Shares and pay a cash amount of $40,000 as the sole and complete remedy for our inability to meet such registration deadlines. 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 debt if our Ordinary Shares are neither listed for trading on a U.S. national securities exchange nor approved for trading on The Nasdaq Stock Market or any similar system of automated dissemination of quotations of securities prices. In connection with such waiver, we issued 2,000 of our Ordinary Shares to LibertyView.

During 2005, we raised approximately $3.5 million of cash, excluding transaction related expenses, in a combination of convertible debt financing and private placement transactions for our Ordinary Shares. The transactions consisted of the following:

• In February 2005, we completed a private placement of our Ordinary Shares to Telvent Investments, S.L., a current shareholder. In exchange for approximately $1.3 million, we issued 116,332 Ordinary Shares at a price of $11.435 per Ordinary Share.

• On August 8, 2005, we completed with LibertyView a private placement of our Ordinary Shares that involved (i) the issuance of 66,667 of our Ordinary Shares for cash consideration of $700,000 at a price of $10.50 per Ordinary Share, (ii) the issuance of a warrant to purchase 23,333 Ordinary Shares at an exercise price of $10.50 per share, and (iii) cash of $480,000 in consideration for an increase in the value of the Debt from $2.5 million to $2.98 million and a replacement of the loan under the Debt with a new debt, which is convertible at a fixed conversion price of $11.025 per Ordinary Shares into 270,295 Ordinary Shares. Liberty View also has an option to require us to purchase the Debt in an amount equal to 100% of the principal amount plus accrued and unpaid interest, on July 15, 2008, July 15, 2009, and July 15, 2011.

• On September 28, 2005, we completed with the September 2005 Investor Group a private placement that involved (i) the issuance of 47,619 of our Ordinary Shares for cash consideration of $500,000 at a price of $10.50 per Ordinary Share, (ii) the issuance of a warrant to purchase 32,540 Ordinary Shares at an exercise price of $10.50 per share, (iii) a debt for $500,000 which is convertible at a fixed conversion price of $11.025 per Ordinary Share into 45,352 Ordinary Shares, and (iv) the issuance of 6,508 Ordinary Shares to one of the investors as a finder’s fee for this transaction. Under the terms of the convertible debt, the Company may compel conversion of the debt prior to its maturity date.

During 2006, we raised $1.35 million of cash, excluding transaction related expenses, in private placement transactions for our Ordinary Shares, and we also converted $3.0 million of convertible debts to equity in the form of Ordinary Shares and Preferred A Shares. The transactions consisted of the following:

• On June 2, 2006, we converted $2.0 million of a convertible debt held by LibertyView to Preferred A Shares at an exercise price of $7.65 per Preferred A Share.

• On June 6, 2006, we completed a private placement of our Ordinary Shares with three existing shareholders and one new institutional investor. In exchange for $1.35 million, we issued (i) 287,540 Ordinary Shares at a price of $4.695 per Ordinary Share and (ii) warrants to purchase 57,510 Ordinary Shares at an exercise price of $5.634 per Ordinary Share.

• On September 28, 2006, we converted the $0.5 million convertible debt held by the September 2005 Investor Group and all accrued interest thereon into 114,301 Ordinary Shares of the Company at a conversion price equal to the average closing price for the Company’s shares for the twenty (20) day period prior to the maturity date of the Convertible Loan of $ 4.7025 per Ordinary Share per the terms of the convertible debt.

• On November 30, 2006, LibertyView sold $0.5 million of its convertible debt to Jerusalem High-tech Founders, Ltd. (“JHTF”), a company controlled by Samuel HaCohen, the Company’s Chairman of the Board of Directors, and in which Vladimir Morgenstern, a member of the Company’s Board of Directors, has an economic interest. Upon the sale of the debt, we signed an agreement with JHTF, which was approved by our shareholders and consummated on December 29, 2006, to convert the $500,000 Convertible Debt to Preferred A Shares at an exercise price of $7.65 per Preferred A Share.

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

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

On January 31, 2008 the Company’s shareholders approved the issuance of the $439,000 convertible note and the warrants mentioned above.

On July 31, 2008 the Lewis Opportunity Fund Group signed an exercise letter in which they exercise warrants to purchase 300,000 Ordinary Shares at an exercise price of $2.00 per Ordinary Share and further undertook to transfer the exercise price no later than October 30, 2008.

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Bank Financing

In February 2002, our line of credit with Bank Hapoalim, under which we were able to borrow up to $6.0 million, was extended until January 31, 2003. On January 21, 2003, that line of credit was terminated and the $3.45 million outstanding on that date was converted to a loan subject to re-payment by July 21, 2003. On July 14, 2003, Bank Hapoalim restructured this loan by converting $2.4 million of the $3.45 million short-term loan into a long-term loan. The balance of $1.05 million was paid back by the end of November 2003. The $2.4 million long-term loan was payable quarterly in equal installments of $267,000 beginning on January 1, 2004, with interest payable quarterly at a rate of LIBOR plus 2.75%. This debt arrangement was subject to certain conditions, which were replaced in connection with our March 2005 arrangement with Bank Hapoalim described below.

During March 2005, Bank Hapoalim agreed to provide us with an additional credit line in the amount of $1.0 million in addition to our existing overdraft facility with Bank Hapoalim. The credit line can be drawn in either dollars or NIS with interest payable quarterly at rates ranging between LIBOR plus 2.25% in dollars or 8% in NIS. In addition, the bank agreed to cancel the existing covenants for the long-term loan arrangement and replaced them with covenants that applied to our overall bank financing arrangement as follows: (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, on January 1, 2006 and on a quarterly basis thereafter, shall not be less than $2.0 million.

As consideration for the additional credit line, we issued to Bank Hapoalim a warrant to purchase 10,000 of our Ordinary Shares at an exercise price of $10.30 per Ordinary Share.

On December 22, 2005, we refinanced our debt arrangement with Bank Hapoalim by converting $1.8 million of the outstanding short-term borrowings at that time to long-term debt payable over three years in equal quarterly installments of $150,000, with the first payment due on April 1, 2006 and with interest payable quarterly at a rate of LIBOR plus 2.25%. In conjunction with the restructuring of our long-term debt, our overall bank financing arrangement with Bank Hapoalim became subject to the following covenants: (i) our shareholders equity, on a quarterly basis, shall be at least the higher of (a) 17% of our total assets, or (b) $3.0 million, and (ii) our cash balance (a) shall not be less than $1.0 million, and (b) on a quarterly basis, shall not be less than $1.0 million. In connection with this refinancing, we issued 6,000 Ordinary Shares at par value NIS 5.0 per share to Bank Hapoalim Limited and agreed to register these 6,000 Ordinary Shares as part of our commitment to the bank for this issuance.

During 2006 and through the second quarter of 2007, we received a waiver from Bank Hapoalim for each period in which we were not in compliance with these bank covenants.

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

As of June 30, 2008, our aggregate outstanding borrowings with Bank Hapoalim was approximately $2.2 million, which consisted of (i) short-term borrowings of approximately $1.7 million, of which $1.6 million is drawn in dollars with interest payable quarterly at a rate of LIBOR plus 2.25% and $0.1 million is drawn in NIS with interest payable quarterly at a rate of approximately 9%, and (ii) the outstanding balance on our long-term loan arrangement with Bank Hapoalim of approximately $0.5 million with interest payable quarterly at a rate of LIBOR plus 2.25%.

We were not in compliance with these covenants for each quarterly period during the first half of 2008. However, on September 28 we received a waiver of these covenants from Bank Hapoalim for each quarterly period during the first half of 2008. Bank Hapoalim also provided us with a waiver of these covenants for the remainder of 2008 and for the first quarter of 2009. In addition, on September 29, 2008, Bank Hapoalim agreed to convert the $1.6 million of short term loan that was due on January 2, 2009 to long-term loan, such that $0.1 million will be paid on July 2, 2009, an additional $0.1 million will be paid on August 15, 2009 and the balance of $1.4 million will be paid over 14 quarterly payments starting October 2, 2009. The interest will be paid quarterly at a rate of LIBOR plus 3.25%. In connection with these waivers and the conversion of the short-term loan to a long-term loan, we agreed to pay fees of $30,000 to the bank.

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

Sale of Receivables

From time to time, we sell receivables to Bank Hapoalim and Phoenix Platinum Ltd. under arrangements in which each financial institution pays us the amount of the accounts receivable less an agreed upon commission, and we irrevocably assign to the bank the accounts receivable sold without recourse to us. Our ability to sell such receivables in the future to these or other institutions on current terms and conditions is uncertain and is dependent on the creditworthiness of the customers involved, the credit risks in the specific countries concerned and the institutions’ policies from time to time.

Cash

As of December 31, 2007, we had cash and cash equivalents of $0.4 million, compared to $0.7 million as of December 31, 2006. In summary, the $0.3 million decrease in cash and cash equivalents is attributable to $1.1 million of net cash used in operating activities, $0.2 million of net cash used in investing activities, offset by $1.0 million of net cash provided by financing activities.

In 2007, net cash used in operating activities was $1.1 million resulting from our net loss from operations of $3.8 million less (i) depreciation and amortization of $0.7 million, (ii) an increase in deferred revenues of $0.9 million, (iii) a loss from the liquidation of our Japanese subsidiary of $0.2 million, (iv) stock based compensation of $0.3 million, (v) a decrease in other receivables and prepaid expenses of $0.3 million, (vi) an increase in trade payables and accrued expenses of $0.2 million and (vii) an increase in accrued severance pay of $0.1 million. For 2006, net cash used in operating activities was $2.7 million, resulting primarily from our loss from operations net of depreciation and amortization of $1.1 million, from income of $1.0 million from the extinguishment of convertible debts, and from the decrease in current liabilities such as deferred revenues of $0.9 million, trade payables and other payables of $0.7 million, offset by decreases in current assets such as receivables and prepaid expenses of $0.5 million. Net cash used in operating activities was $3.7 million in 2005, primarily resulting from our loss from operations net of depreciation and amortization of $5.4 million.

Net cash used in investing activities during 2007 was $0.2 million, resulting from purchase of property and equipment. For 2006, net cash used in investing activities was $30,000, resulting from purchase of property and equipment. Net cash used in investing activities was $0.2 million in 2005, primarily attributable to $0.1 million of cash used in connection with the acquisition of e-Wise Solutions and approximately $0.1 million of capital equipment purchases.

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Net cash provided by financing activities during 2007 was approximately $1.0 million, which included $0.6 million of net proceeds raised in equity financing, $0.4 million of net proceeds raised from convertible note financings, and $0.6 million related to an increase in short-term bank credit, offset by $0.6 million of repayments against long-term bank loans. Net cash provided by financing activities was $1.3 million in 2006, which included $1.3 million of net proceeds received in the sale of our Ordinary Shares, an increase in short-term bank credit with Bank Hapoalim of approximately $0.9 million, offset by the re-payment of short-term and long-term loans with Bank Hapoalim and a related party of approximately $0.9 million. Net cash provided by financing activities was $3.0 million in 2005, which included $2.7 million of cash raised in the sale of our Ordinary Shares, $0.9 million of net proceeds raised in convertible note financings, and an increase in short-term bank credit with Bank Hapoalim of $0.6 million, offset by the re-payment of long-term debt with Bank Hapoalim of approximately $1.1 million.

Future Cash Needs

In addition to our need to continue to meet our payment obligations to Bank Hapoalim under the terms of our debt arrangement, our capital requirements depend on numerous factors, including market demand and acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, and the timing and extent of establishing additional international operations. We intend to continue investing significant resources in our selling and marketing and research and development operations in the future. We believe that our cash and cash equivalents and funds generated from operations will be sufficient to finance our operations for at least until the end of 2008. Our ability to achieve profitability using our currently available cash and cash equivalents will depend on our ability to increase our revenues while continuing to control our expenses. We cannot assure you that we will be able to achieve profitability, particularly given the risk factors outlined earlier in this Form 20-F. If we are not successful doing so, we will be required to seek new sources of financing. If additional funds are raised through issuance of equity or debt securities, these securities could have rights, preferences and privileges senior to those of holders of Ordinary Shares, and the terms of these securities could impose restrictions on our operations, and will result in additional dilution to our shareholders. Our ability to raise additional secured debt may require the consent of Bank Hapoalim and LibertyView. The delisting of our Ordinary Shares from The Nasdaq Capital Market and the OTCBB could significantly impair our ability to raise capital should we desire to do so in the future, as it may materially impair the market price and trading market for the Ordinary Shares received by investors in a financing transaction, even when quoted on the Pink Sheets.

Research and Development

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

Our research and development net expenditures for 2005, 2006 and 2007 were $2.5 million, $2.1 million and $2.3 million, respectively (see the paragraph headed “We may be unable to maintain or expand our sales, marketing, research and development and support organizations which may hinder our ability to grow and meet customer demands” in the Risk Factors set forth in Item 3 above).

Research and Development Grants

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

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

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

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

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

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

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

In 2001 and 2002, we received approvals for grants from the OCS in the amount of $372,000, which were received by us through December 31, 2003. During 2005, 2006, and 2007 we made royalty payments of $2,000, $0, and $6,000 respectively, to the OCS related to these grants. As of December 31, 2007, we have an outstanding contingent liability to pay royalties in the amount of approximately $387,000, including interest.

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Impact of Inflation

Since our revenues are generated in United States dollars and currencies other than New Israeli Shekels (NIS), and a portion of our expenses is incurred and will continue to be incurred in NIS, we are exposed to risk by the amount that the rate of inflation in Israel exceeds the rate of devaluation of the NIS in relation to the dollar and other currencies. We are also exposed to risk if the timing of the devaluation lags behind inflation in Israel. In 1994, 1995 and 1996, the inflation rate in Israel exceeded the rate of devaluation of the NIS against the dollar and other currencies. This trend was reversed during 1997 and 1998. 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 and 2004, the NIS gained in value against the dollar while the rate of inflation was negative. In 2004, the NIS gained 2% in value against the dollar while the rate of inflation was 1%. In 2005, the NIS lost 6.7% in value against the dollar while the rate of inflation was 2.4%. In 2006, the NIS gained 8.2% in value against the dollar while the rate of inflation was -0.1%. In 2007, the NIS gained 9% in value against the dollar while the rate of inflation was - 0.4%. We generally do not engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. We also do not own any market risk sensitive instruments. However, we may in the future undertake hedging or other transactions or invest in market risk sensitive instruments if we determine that it is necessary to offset these risks.

Effective Corporate Tax Rate

Our effective corporate tax rate will reflect a mix of the United States, United Kingdom, Australian and Israeli statutory tax rates on our United States, United Kingdom , Australian and Israeli income. The Israeli corporate tax rate has been gradually reduced as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, It is currently 27% in 2008, and will be reduced over the coming the years as follows: 2009 – 26% and 2010 and thereafter – 25%. The majority of our income, however, is derived from our two investment programs with approved enterprise status under the Law for the Encouragement of Capital Investments and is eligible for some tax benefits, subject to certain conditions and restrictions. However, the benefits status of one of the programs expires in 2008.

Under our investment programs we will enjoy a tax exemption on income derived during the first ten years in which these investment programs produce taxable income after the commencement of production, provided that we do not distribute the income as dividends. All of these tax benefits are subject to various conditions and restrictions.

See the discussion in the Tax section in Item 10.

As of December 31, 2007, we had net operating loss carryforwards for tax reporting purposes of approximately $7.2 million in the United States, $30.3million in Israel, $18.2 million in the United Kingdom, and $0.2 million in Australia. In the United States, the internal revenue code limits the use in any future period of net operating loss carryforwards following a significant change in ownership interests. Since we have incurred tax losses through December 31, 2007, we have not used these net operating losses. In April 2007, we dissolved our Japanese subsidiary, ViryaNet Japan KK, and the net operating loss carryforward of approximately $1.2 million was extinguished as part of the dissolution.

Trend Information

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

As a percentage of our total revenue, our software license revenue decreased from 12.1% in 2005 to 11.0% in 2006. This decline is attributable to reduced sales of new licenses to customers while recurring revenues from existing customers related to professional services and post-contract maintenance and support which are not dependent on the sales of new licenses, were essentially flat year to year. During 2007, our total revenues declined by 19.5% compared to 2006 while our software license revenue grew 16.4% from $1.5 million in 2006 to $1.7 million in 2007 and increased from 11.0% of total revenue in 2006 to 15.9% of total revenue in 2007. While growth of our software license revenues is a good indicator of buying interest in our products and adds favorably to our gross margins and profitability, a portion of the increase in mix from 11.0% to 15.9% was also due to a 23.9% reduction in the amount of revenues from services which declined from $12.3 million in 2006 to $9.4 million in 2007. The decline in our services revenues is not directly related to any changes in the amount of our software license sales but more related to the completion of some large professional services engagements that began in 2006 and did not contribute as much revenue in 2007.

In general, we do not believe that declines in revenue from software as a percentage of total revenue will have an impact on our future maintenance and services revenue or our business as a whole since we expect to sell licenses in the future which will generate more professional services and maintenance and support revenue in addition to recurring services revenue with existing customers, assuming that our existing customers continue to purchase additional services and renew post-contract support from us.

For information about our expectations regarding our future cost of revenues, future operating expenses and liquidity and capital resources, please see the discussion under the “Risk Factors” section of Item 3 and the “Operating Results” section and the “Liquidity and Capital Resources” section of Item 5.

Off-balance Sheet Arrangements

Other than potential royalty payments to the OCS, we are not party to any material off-balance sheet arrangements.

Tabular Disclosure of Contractual Obligations

Contractual Obligations as of December 31, 2007 (1)	Payments due by Period (US$ in thousands)
	Total		One Year or –Less		1 – 3 Years		4 – 5 Years
Short-term bank debt	$	1,815	$	1,815	$	—	$	—
Long-term bank debt (1)	$	738	$	589	$	149	$	—
Long-term convertible debt (1)	$	480	$	480	$	—	$	—
Operating leases (2)	$	1,353	$	647	$	706	$	—
Accrued severance pay, net (3)	$	573	$	—	$	—	$	573
Uncertain income tax position (4)	$	68	$	—	$	—	$	—
Total Contractual Cash Obligations:	$	5,027	$	3,531	$	855	$	573

(1) See “Liquidity and Capital Resources Bank Financing.”

(2) Includes leases for facilities and automobiles.

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

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(4) Uncertain income tax position under FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) are due upon settlement and we are unable to reasonably estimate the ultimate amount or timing of settlement. See Note 14 of the Notes to Consolidated Financial Statements for further information regarding the Company’s liability under FIN 48.

Operating Leases

Payments under non-cancelable operating lease agreements for facilities expire on various dates through 2011. As of the date hereof, our annual aggregate lease obligations for facilities for the period 2008 through 2011 are $395,000, $188,000, $190,000, and $95,000, respectively.

Item 6. Directors, Senior Management and Employees

Directors and Senior Management

Name	Age	Position
Samuel I. HaCohen	51	Executive Chairman of the Board of Directors
Memy Ish-Shalom	48	President and Chief Executive Officer
Jeffrey J. Oskin	38	Chief Operating Officer
Nir Diskin	41	Vice President, Development
Mark Hosking	44	Manager, ViryaNet Australia
Vladimir Morgenstern	50	Director
Arie Ovadia	59	Director
Manuel Sanchez Ortega	44	Director
Nati Perry	54	Director
Ronit Lerner	38	Director

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

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

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

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

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

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

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

Manuel Sanchez Ortega has served as a director of ViryaNet since October 2003. Mr. Sanchez currently serves as the chairman and chief executive officer of Telvent GIT, S.A. (Nasdaq: TLVT), a global information technology company based in Madrid, Spain. From 2000 to 2001, Mr. Sanchez was the general manager of Telvent Energia Y Medio Ambiente, a subsidiary of Telvent focused on the energy and environmental markets. From 1995 to 1999, Mr. Sanchez was the general manager for Telvent Mexico. Prior to his employment with Telvent Mexico, Mr. Sanchez served as a manager in Telvent Energia y Medio Ambiente. Mr. Sanchez received a Bachelor of Science degree in electrical engineering from the Universidad Pontificia Comillas (ICAI) of Madrid, and a Masters degree in Business Administration from the IPADE of Mexico.

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

Ronit Lerner has served as a director of ViryaNet since November 2003. Earlier this year, Ms. Lerner joined Compugen Ltd, a research company that commercializes drug and diagnostics discovery based in Israel, as the chief financial officer. Prior to joining Compugen, Ms. Lerner served as the chief financial officer of Shunra Ltd., a privately held software company based in Israel. Before joining Shunra in March 2006, Ms. Lerner was the chief financial officer of BMC Software Israel Ltd., a subsidiary of BMC Software, Inc. from July 2002 to March 2006. Prior to BMC, Ms. Lerner served as the director of mergers, acquisitions and accounting for ECI Telecom from 2000 until July 2002. Ms. Lerner joined the Israel accounting standards board, an affiliate of the Israel Securities Authority, at its inception in 1997 and served as a manager and senior research supervisor. During the period of 1996 to 2004, Ms. Lerner taught accounting at the Tel Aviv University. From 1994 to 1997, Ms. Lerner served as a senior manager at KPMG. Ms. Lerner received a Bachelor of Arts degree in Business Administration and Accounting from Tel Aviv Management College and received a Master in Business Administration in Finance, with honors, from Bar Ilan University. Ms. Lerner is a certified public accountant in Israel.

Compensation

The aggregate remuneration we paid for the year ended December 31, 2007 to our directors and executive officers as a group was approximately $1.47 million in salaries, fees, commissions and bonuses. Included in this amount is remuneration of approximately $0.28 million to one of our former executive officers and to one of our former directors. The aggregate amount set aside or accrued during 2007 to provide pension, retirement or similar benefits for directors and officers of our company, pursuant to any existing plan provided or contributed to by us, was approximately $13,000.

On November 26, 2003, our shareholders approved a compensation plan for our directors who are not executive officers. For each calendar year, any non-executive director attending any of the five (5) scheduled meetings of the Board of Directors is entitled to receive $1,000 for each meeting attended in person, or $500 for each meeting attended by phone only. On November 29, 2005, a revised compensation plan for our directors who are not executive officers was approved by shareholders and became effective on January 1, 2006. The revised compensation plan includes (i) an annual fixed retainer of $3,000 for each member of the Board of Directors, (ii) an annual fixed retainer of $3,000 for each member of the Audit Committee of the Board of Directors, and (iii) a fee of $1,000 per meeting for each of the four (4) scheduled meetings of the Board of Directors and Audit Committee during each calendar year, whether participation for such meeting is attended in person or via phone. Participation in all other meetings of the Board of Directors or the audit committee does not entitle any director to additional compensation. All directors are reimbursed for their reasonable expenses incurred for each Board of Directors or committee meeting attended in person. With respect to our external directors, such compensation and reimbursement of expenses are made in accordance with the applicable provisions of the Companies Law. For additional information, please see the discussion under the heading “External Directors; Independent Directors”.

During 2007, 26,700 restricted shares were granted to our executive officers. These restricted shares were granted for no consideration and the restrictions on these shares lapse at a rate of 50% per year over two years from the date of grant. No restricted shares were granted to our directors during 2007.

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

All the restricted shares were granted for no consideration and the restrictions on these shares lapse at a rate of 50% per year over two years from the date of grant. All restricted shares granted to executive officers and directors are released from restriction upon the consummation of merger, acquisition or similar transaction.

Board Practices

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

Name	Current Office(s) Held	Commencement of Office	Termination/Renewal Date of Office
Samuel I. HaCohen	Executive Chairman of the Board of Directors	March 1998	2008 Annual Meeting
Memy Ish-Shalom	President and Chief Executive Officer	January 2006	Not applicable
Jeffrey J. Oskin	Chief Operating Officer	January 2006	Not applicable
Nir Diskin	Vice President, Engineering	January 2006	Not Applicable
Mark Hosking	Manager, ViryaNet Australia	June 2005	Not applicable
Vladimir Morgenstern (2)	Director	July 1999	2008 Annual Meeting
Arie Ovadia (1),(2),(3)	Director	December 2006	2009 Annual Meeting
Manuel Sanchez Ortega	Director	October 2003	2008 Annual Meeting
Nati Perry (2), (3)	Director	December 2007	2010 Annual Meeting
Ronit Lerner (1),(2),(3)	Director	November 2003	2009 Annual Meeting

(1) External Directors under the Companies Law

(2) Member of Audit Committee

(3) Independent Directors

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

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

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External Directors; Independent Directors

Companies Law

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

Who May Be Appointed

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

• an employment relationship;

• a business or professional relationship maintained on a regular basis;

• control; and

• service as an office holder.

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

Conflicts of Interest

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

How External Directors Are Elected

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

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

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

Term of Service

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

Independent Directors.

Our Ordinary Shares are no longer listed for quotation on The Nasdaq Capital Market and are no longer subject to the rules of The Nasdaq Capital Market applicable to quoted companies. However, we continue to follow certain Nasdaq rules, one of which is the requirement to appoint a minimum of three independent directors. The independence standard under the Nasdaq rules excludes any person who is a current or former employee of a company as well as the immediate family members of an executive officer of a company. Messrs. Ovadia and Perry, and Ms. Lerner serve as independent directors and meet the independence standard of the Nasdaq rules.

Audit Committee

Nasdaq Rules and Companies Law

Our Board of Directors has formed an audit committee. The audit committee exercises the powers of the Board of Directors for our accounting, reporting and financial control practices. Under the Companies Law, both of the external directors should be members of the Audit Committee. Messrs. Ovadia and Perry, and Ms. Lerner are members of our audit committee

Under the Companies Law, the Board of Directors of any company that is required to nominate external directors must also appoint an audit committee. The Companies Law requires that the audit committee be comprised of at least three directors, including all of the external directors, but excluding:

• a chairman of the Board of Directors;

• a controlling shareholder or the relative of a controlling shareholder; or

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

Role of Audit Committee

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

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

In addition to such functions as the audit committee may have under the Companies Law or under the Nasdaq rules, the primary purpose of our audit committee, including pursuant to other responsibilities with which it is charged under the Sarbanes-Oxley Act, is to assist the board of directors in fulfilling its responsibility to oversee management’s conduct of the financial reporting process, the systems of internal accounting and financial controls and the annual independent audit of the company’s financial statements. The audit committee reviews with management and our outside auditors the audited financial statements included in our Annual Report on Form 20-F and our interim quarterly financial results included on Form 6-K.

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

Conflicts of Interest

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

Employees

As of December 31, 2007, we had 32 employees in Israel, 46 in the United States, 9 in Australia, and 1 in Singapore. Of our 88 employees, 23 were engaged in research and development, 13 in sales, marketing and business development, 43 in professional services and technical support and 9 in finance, administration and operations. None of our employees is represented by a labor union.

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

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

Share Ownership

As of July 15, 2008, the aggregate number of our Ordinary Shares and Ordinary Shares which may be issued upon conversion of Preferred A Shares beneficially owned by our directors and executive officers as a group was 836,828, and includes options and warrants to purchase up to 66,440 Ordinary Shares which are exercisable or will become exercisable within 60 days of July 15, 2008 (The above number does not take into effect restricted Ordinary shares, that were granted to executive officers and directors, which will be released from restriction within more than 60 days of July 15, 2008).

The aggregate number of our Ordinary Shares beneficially owned by our directors and executive officers as a group includes Ordinary Shares held by Telvent since an affiliate of Telvent serves on our Board of Directors and, accordingly, such designee may be deemed to be the beneficial owner of the Ordinary Shares held by Telvent. Such designee disclaims beneficial ownership of such shares. See “Major Shareholders and Related Party Transactions” in Item 7 below.

The aggregate number of our Ordinary Shares beneficially owned by our directors and executive officers as a group also includes Ordinary Shares as well as Preferred A Shares held by Jerusalem High-tech Founders, Ltd. since two of its affiliates serve on our Board of Directors and, accordingly, such designees may be deemed to be the beneficial owners of the Ordinary Shares held by Jerusalem High-tech Founders, Ltd. See “Major Shareholders and Related Party Transactions” in Item 7 below.

As of July 15, 2008, stock options to purchase up to 53,660 Ordinary Shares granted to our directors and executive officers were outstanding and 102,467 restricted Ordinary Shares, granted to our directors and executive officers, were not released from restrictions, under our option plans. The weighted average exercise price of these stock options was $9.75 per Ordinary Share and the restricted Ordinary Shares were granted for no consideration. As of July 15, 2008, stock options to purchase 53,660 Ordinary Shares are exercisable within 60 days of July 15, 2008 (no restricted Ordinary Shares included as the restrictions are not released within 60 days of July 15, 2008).

As of July 15, 2008, we had approximately 500 shareholders of record.

Option Plans

We maintain three option plans, , the 1998 Stock Option and Incentive Plan, the 1999 Stock Option and Incentive Plan and the 2005 Share Option Plan. The purpose of the option plans is to afford an incentive to our officers, directors, employees and consultants, or any of our subsidiaries, to acquire a proprietary interest in us, to continue as officers, directors, employees and consultants, to increase their efforts on behalf of ViryaNet and to promote the success of our business.

The 1996 Stock Option and Incentive Plan the 1997 Stock Option and Incentive Plan and the 1998 Stock Option and Incentive Plan have expired. The 60,068 Ordinary Shares that were still available for grants of additional options under these plans were transferred to the 1999 Stock Option and Incentive Plan.

The 1999 Stock Option and Incentive Plan

In 1999, we adopted the 1999 Stock Option and Incentive Plan and reserved options to purchase an aggregate of 60,000 Ordinary Shares for issuance and transferred an additional 60,068 Ordinary Shares to the 1999 Stock Option and Incentive Plan from the 1996 Stock Option and Incentive Plan, the 1997 Stock Option and Incentive Plan and the 1998 Stock Option and Incentive Plan.

In June 2001, November 2003, December 2004, and November 2005, our shareholders approved the reservation of options to purchase additional Ordinary Shares in the amounts of 60,000, 40,000, 70,000, and 30,000, respectively, for an aggregate additional amount of 200,000 Ordinary Shares to be granted under the 1999 Stock Option and Incentive Plan.

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As of July 15, 2008, options to purchase 102,404 Ordinary Shares were outstanding under the 1999 Stock Option and Incentive Plan, options to purchase 36,531 Ordinary Shares had been exercised into Ordinary Shares. Additional Ordinary Shares in the amount of 189,063 that were available for grants of additional options were transferred to the 2005 Share Option Plans.

On December 30, 2005, we accelerated the vesting of 27,975 unvested stock options outstanding as of December 30, 2005, with an exercise price equal to or greater than $ 8.20 per share, which were held by our employees, including officers. As a result, these unvested stock options became fully exercisable effective as of December 30, 2005, rather than becoming exercisable at the later dates when such options would have otherwise vested in the normal course. Our stock options have generally vested over two to four-year period.

The decision to accelerate the vesting of these stock options was made primarily to reduce compensation expense that otherwise would have been required to be recorded in future periods following our adoption in the first quarter of 2006 of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS 123(R)”) (see also Note 2 of our consolidated financial statements included in this annual report).

The 2005 Share Option Plans

The tax rules and accounting regulations regarding the grant of share-based awards have changed significantly since we adopted our 1999 Stock Option and Incentive Plan. Therefore, our Board of Directors believed that it was appropriate for us to adopt and approve, subject to shareholders’ approval, a new form of Israeli share option and restricted share plan and a new form of international share option and restricted share plan (the “2005 Share Option Plans”), which will supersede and replace all existing options plans, including the 1999 Stock Option and Incentive Plan. The 2005 Share Option Plans were approved by shareholders at our annual general meeting held on November 29, 2005.

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

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

As of July 15, 2008, grants of 289,000 restricted shares to purchase Ordinary Shares were outstanding under the 2005 Share Option Plans, 47,700 Ordinary Shares were granted without restrictions, and 42,960 additional Ordinary Shares were available for grants under the 2005 Share Option Plans.

Administration of Our Option Plans

Our share option plans are administered by the Board of Directors. Under the share option plans, options to purchase our Ordinary Shares or restricted shares may be granted to the officers, directors, employees or consultants of ViryaNet or of any of our subsidiaries. Under the share option plans, the exercise price of options shall be determined by the Board of Directors. The Board of Directors also determines the vesting schedule of the options and the restricted shares, but generally the options and the restricted shares vest over a two to four year period. Each option granted under the share option plans is exercisable, unless extended, until seven years from the date of the grant of the option. The 2005 Share Option Plans will expire on December 31, 2015.

Item 7. Major Shareholders and Related Party Transactions

Major Shareholders

The following table summarizes information about the beneficial ownership of our outstanding Ordinary Shares as of July 15, 2008 for each person or group that we know owns more than 5% of our outstanding Ordinary Shares.

We determine beneficial ownership of shares under the rules of the Securities and Exchange Commission and include any Ordinary Shares over which a person exercises sole or shared voting or investment power, or of which a person has the right to acquire ownership at any time within 60 days of July 15, 2008. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power for all Ordinary Shares held by them. Applicable percentage ownership in the following table is based on 3,021,489 shares outstanding as of July 15, 2008, including 326,798 Preferred A Shares which can be converted at the discretion of their holders into Ordinary Shares on a one-to-one basis at any time.

Ordinary Shares Beneficially Owned

Name and Address	Number	Percent of Class
Lewis Opportunity Fund Group(1) 45 Rockefeller Center Suite 2570 New York, NY 10111	1,277,272	32.5	%
Jerusalem High-tech Founders, Ltd. (2) c/o Hamotal Insurance Agency 9 HaRatom Street Har Hotzvim Jerusalem 41450 Israel	382,876	12.5	%

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LibertyView Special Opportunities Fund, LP (3) LibertyView Capital Management Neuberger Berman, LLC 111 River Street – Suite 1000 Hoboken, NJ 07030-5776	323,366	10.4	%
Telvent Investments, S.L. (4) Valgrande 6 28108 Alcobendas Madrid, Spain	307,862	10.1	%
The Clal Group (5) Kiriat Atidim Ramat Hachayal P.O. Box 61581, Tel Aviv 58177 Israel	172,296	5.7	%
All directors and executive officers as a group (10 persons)(6)	836,828	27.1	%

(1) Includes

• (i) 283,636 Ordinary Shares, (ii) warrants to purchase 234,000 Ordinary Shares exercisable within 60 days of July 15, 2008 and (iii) 60,606 Ordinary Shares that may be issued upon a conversion of convertible note at a fixed conversion price of $1.65 per Ordinary share, held by Lewis Opportunity Fund LP.

• (ii) 80,000 Ordinary Shares and (ii) warrants to purchase 66,000 Ordinary Shares exercisable within 60 days of July 15, held by LAM Opportunity Fund LP.

• (iii) warrants to purchase 250,000 Ordinary Shares exercisable within 60 days of July 15, 2008 and (iii) 303,030 Ordinary Shares that may be issued upon a conversion of convertible note at a fixed conversion price of $1.65 per Ordinary share, held by W.A. Lewis IV.

(2) Includes (i) 1,315 Ordinary shares held by Jerusalem High-tech Founders Ltd., (ii) 23,087 Ordinary Shares including Ordinary Shares held by Mr. HaCohen and Mr. Morgenstern, who serve on our Board of Directors and have a financial interest in Jerusalem High-tech Founders, Ltd. and, accordingly, such designees are considered beneficial owners of the Ordinary Shares of Jerusalem High-tech Founders, Ltd., (iii) 322,814 Preferred A Shares which can be converted to Ordinary Shares on a one-to-one basis at any time, and (iv) 35,660 options held by Mr. HaCohen and Mr. Morgenstern that are exercisable or whose restrictions lapse within 60 days of July 15, 2008.

(3) Includes (i) 245,845 Ordinary Shares, , (ii) 43,537 Ordinary Shares for which the balance of the convertible debt issued to LibertyView in the amount of $480,000 may be converted at any time at a fixed conversion price of $11.025 per Ordinary Share, and (iii) warrants to purchase 33,984 Ordinary Shares exercisable within 60 days of July 15, 2008.

(4) Includes (i) 291,082 Ordinary Shares, (ii) warrants to purchase 12,780 Ordinary Shares exercisable within 60 days of July 15, 2008, and (iii) options to purchase 4,000 Ordinary Shares exercisable within 60 days of July 15, 2008, held by Manuel Sanchez Ortega, a director of our company and the chief executive officer of Telvent, whose rights have been assigned to Telvent.

(5) Includes

• 15,076 Ordinary Shares and warrants to purchase 67 Ordinary Shares exercisable within 60 days of July 15, 2008, held by Clal Venture Capital;

• Warrants to purchase 67 Ordinary Shares exercisable within 60 days of July 15, 2008, held by Clalit Capital Fund;

• 27,661 Ordinary Shares held by Clal Industries and Investments;

• 27,971 Ordinary Shares held by Clal Electronics Industries;

• 38,224 Ordinary Shares and warrants to purchase 5,497 Ordinary Shares exercisable within 60 days of July 15, 2008, held by FBR Infinity II Venture Israel LP, which may be deemed an affiliate of the Clal Group;

• 36,454 Ordinary Shares and warrants to purchase 5,270 Ordinary Shares exercisable within 60 days of July 15, 2008, held by FBR Infinity II Ventures LP, which may be deemed an affiliate of the Clal Group;

• 13,997 Ordinary Shares and warrants to purchase 2,013 Ordinary Shares exercisable within 60 days of July 15, 2008, held by FBR Infinity II Ventures (Erisa) LP, which may be deemed an affiliate of the Clal Group;

(6) Also includes options and restricted shares granted to our directors and executive officers that are exercisable or whose restrictions lapse within 60 days of July 15, 2008. This number includes (i) Ordinary Shares held by Telvent since an affiliate of Telvent serves on our Board of Directors and, accordingly, such designee may be deemed to be the beneficial owner of the Ordinary Shares held by Telvent. Such designee disclaims beneficial ownership of such shares, (ii) Ordinary Shares held by e-Wise Solutions Pty Ltd which are beneficially owned by Mark Hosking, and (iii) Ordinary shares held by Jerusalem High-tech Founders Ltd since two of its affiliates serve on our Board of Directors and, accordingly, such designees may be deemed to be the beneficial owners of the Ordinary Shares held by Jerusalem High-tech Founders, Ltd.

Our shareholders do not have different voting rights.

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Related Party Transactions

Registration Rights

On February 18, 2005, we entered into a Registration Rights Agreement with Telvent Investments, S.L. in connection with a private financing that raised approximately $1.3 million. Under the terms of this agreement, we agreed to use best efforts to file a registration statement with the SEC covering the resale of the Ordinary Shares from this transaction after receipt of a written request from Telvent. We have also provided Telvent with “piggyback” rights subject to certain terms and conditions.

On August 8, 2005, we completed with LibertyView a private placement that involved (i) the issuance of 66,667 of our Ordinary Shares for consideration of $700,000, (ii) the issuance of a warrant to purchase additional 23,334 Ordinary Shares, and (iii) the replacement of the loan under the Debt with a $2.98 million loan under a new debt, which is convertible at a fixed conversion price of $11.025 per Ordinary Shares into 270,295 Ordinary Shares. Under the terms of this agreement, we agreed to file a registration statement with the SEC covering the resale of the shares issued as part of this transaction including any shares that may be issued in the future upon the conversion of the debt and warrants.

On May 5, 2006, we signed an agreement with LibertyView, which was approved by our shareholders and consummated on June 2, 2006, to convert $2.0 million of its Convertible Debt to Preferred A Shares at $7.65 per Preferred A Share, which may be converted at the discretion of LibertyView on a one-to-one basis to Ordinary Shares at any time. Under the terms of this agreement, we have agreed to file a registration statement with the SEC covering the Ordinary Shares that may be issued upon the conversion of the Preferred A Shares by no later than sixty (60) days from the date of the agreement.

On May 5, 2006, we entered into a Registration Rights Agreement with C.E. Unterberg, Towbin, LLC Telvent Investments SL, FBR Infinity II Ventures (Israel) LP, FBR Infinity II Ventures LP, and FBR Infinity II Ventures (Erisa) LP (collectively, the “May 2006 Investors”) in connection with a private financing that raised $1.1 million. Under the terms of this agreement, we have agreed to use best efforts to file a registration statement with the SEC covering the resale of the Ordinary Shares within six months from the date of the closing for this transaction.

On June 6, 2006, we have provided LibertyView, in connection with a private financing that raised $250,000, similar registration rights as the ones provided to the May 2006 Investors.

On November 30, 2006, LibertyView sold $500,000 of its Convertible Debt to Jerusalem High-tech Founders, Ltd. (“JHTF”), a company controlled by Samuel HaCohen, the Company’s Chairman of the Board of Directors, and in which Vladimir Morgenstern, a member of the Company’s Board of Directors, has an economic interest. Upon the sale of the debt, we signed an agreement with JHTF, which was approved by our shareholders and consummated on December 29, 2006, to convert the $500,000 Convertible Debt to Preferred A Shares at $7.65 per Preferred A Share, which may be converted at the discretion of JHTF on a one-to-one basis to Ordinary Shares at any time. Under the terms of this agreement, we have agreed to use reasonable efforts to file a registration statement with the SEC covering the Ordinary Shares that may be issued upon the conversion of the Preferred A Shares as soon as practicable.

On December 19, 2007, we entered into a Registration Rights Agreement with the Lewis Opportunity Fund Ltd., LAM Opportunity Fund Ltd., and W. A. Lewis IV in connection with a private financing transaction that included ordinary shares, convertible note and warrants,. Under the terms of this agreement, we have agreed to use best efforts to register all securities underlying this private financing within 180 days of the closing of this transaction.

Insurances Policies with Clal Credit Insurance and Clal Insurance

During the period 2005 through 2007, we purchased several insurance policies with Clal Insurance, which is affiliated with The Clal Group, our 5.7% shareholder as set forth above. All of these insurance policies were contracted on an arms-length basis. In 2006 and 2007, the policy we purchased included the following items: Fire and general liability insurance and employer’s liability insurance for payments that total approximately $6,000 and $7,000, respectively.

Unsecured Debt Agreement with an Officer

As part of the e-Wise acquisition in June 2005, we assumed an amount of approximately $285,000 of unsecured debt payable to e-Wise’s major shareholder, Mark Hosking. As a result of our acquisition of e-Wise, Mr. Hosking became a shareholder, officer and employee of our Company. On August 28, 2007, a revision in the payment terms for the $115,000 remaining balance of the unsecured debt payable to e-Wise was reached with Mr. Hosking. Accordingly, we paid $30,000 to Mr. Hosking on October 1, 2007 and the balance will be paid by us in eight equal monthly installments beginning January 1, 2008. As of December 31, 2007, the balance of the outstanding debt to Mr. Hosking was $90,000.

Consulting Agreement with a Director

On July 21, 2003, the Board of Directors and audit committee approved an agreement with Vladimir Morgenstern, a director of our Company, to provide project management services to us in connection with our engagements with high profile customers and prospects. The compensation provided under the terms of this agreement is based on the average compensation provided to employees providing similar services to us. During 2005, Mr. Morgenstern was paid $8,000 for services provided to us under this agreement. During 2006 and 2007, Mr. Morgenstern did not provide any consulting services and received no compensation from us related to this consulting agreement.

Loans

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

Commercial Transactions with Telvent

On June 30, 2004, we entered into a value added reseller agreement with Telvent, under which Telvent became a non-exclusive reseller of our products at normal reseller terms. As part of the reseller agreement Telvent paid us support and maintenance in 2005, 2006, and 2007 in the amounts of $140,000, $137,000, and $105,000, respectively.

On December 1, 2004, we entered into an agreement with Telvent under which Telvent provides us with certain technical consulting services on a time and materials basis, relating to our agreement with our customer, Las Vegas Valley Water. During 2005, we paid Telvent $163,000 for services provided to us in support of this customer under the terms of this agreement. No services were provided by Telvent to us during 2006 and 2007.

Directors and Officers Insurance

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

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Indemnification of Office Holders

Our Articles of Association provide that we may indemnify an office holder against:

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

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

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

Our Articles of Association also include:

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

• authorization to indemnify retroactively an office holder.

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

Interests of Experts and Counsel

Not applicable.

Item 8. Financial Information

Consolidated Statements and Other Financial Information

See Item 18 “Financial Statements” and included herein by reference.

Legal Proceedings

We are not involved in any legal proceedings that we believe, individually or in the aggregate, will have a material adverse effect on the Company.

Dividend Distribution Policy

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

Significant Changes

Not applicable.

Item 9. The Offer and Listing

Market Price Information

Through June 30, 2008, the high and low reported sales prices for our Ordinary Shares were as follows:

Period	High		Low
Year ending
December 31, 2007	$	4.40	$	1.01
December 31, 2006		9.60		3.60
December 31, 2005		15.40		8.05
Quarters ending:
2008
Second Quarter, ending June 30, 2008		1.55		0.95
First Quarter, ending March 31, 2008		1.90		1.10
2007
Fourth Quarter, ending December 31, 2007		2.38		1.01
Third Quarter, ending September 30, 2007		2.65		2.38
Second Quarter, ending June 30, 2007		3.43		2.50
First Quarter, ending March 31, 2007		4.40		3.30

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2006
Fourth Quarter, ending December 31, 2006	5.45	3.60
Third Quarter, ending September 30, 2006	5.25	3.85
Second Quarter, ending June 30, 2006	6.25	3.75
First Quarter, ending March 31, 2006	9.60	4.95
2005
Fourth Quarter, ending December 31, 2005	11.75	8.05
Third Quarter, ending September 30, 2005	11.95	10.05
Second Quarter, ending June 30, 2005	14.25	11.40
First Quarter, ending March 31, 2005	15.4	10.30

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Most Recent 6 months	High	Low
August 2008	1.54	1.54
July 2008	1.55	1.54
June 2008	1.55	0.51
May 2008	1.55	1.01
April 2008	1.10	0.95
March 2008	1.50	1.10

Markets on Which Our Ordinary Shares Trade

Our Ordinary Shares were listed on The Nasdaq National Market on September 19, 2000, under the symbol “VRYA”. Prior to September 19, 2000, there was no public market for our Ordinary Shares. On October 29, 2001 our Ordinary Shares were listed for trading on the Tel Aviv Stock Exchange (“TASE”) as well, and were delisted from trading on the TASE on June 3, 2004.

On September 5, 2002, we were notified by The Nasdaq National Market that we were not in compliance with Marketplace Rule 4450(a)(2) by failing to maintain a minimum market value of $5,000,000 for our publicly held shares and had until December 4, 2002 to regain compliance. Due to the economic and market conditions affecting our valuation, we concluded that we would request a transfer of our securities listing from The Nasdaq National Market to The Nasdaq Capital Market. The transfer was approved on December 20, 2002, and our trading on The Nasdaq Capital Market began on December 31, 2002.

On June 4, 2007, we voluntarily requested that The Nasdaq National Market delist our Ordinary Shares from The Nasdaq Capital Market. Subsequent to this request, NASDAQ formally notified us in writing that our Ordinary Shares would be delisted from The Nasdaq Capital Market on June 12, 2007. Effective on December 14, 2007, our Ordinary Shares were approved for trading on the Over-The-Counter Bulletin Board (“OTCBB”) under the ticker symbol “VRYAF.OB”.

On September 11, 2008, due to our delinquency with respect to the filing of our annual report on Form 20-F for the period ended December 31, 2007, our Ordinary shares ceased to be eligible for quotation on the OTC Bulletin Board (“OTCBB”) and have been removed from OTCBB. Following the removal from OTCBB, our Ordinary shares became immediately eligible for quotation and trading on the Pink Sheets. After the filing of this Form 20-F we will review our alternatives for the reinstatement of our quotation on the OTC Bulletin Board.

For further information, see “Risk Factors—Our shares were delisted from The Nasdaq Capital Market which could adversely affect the market price and trading market of our Ordinary Shares.”

Item 10. Additional Information

Share Capital

Not applicable.

Memorandum and Articles of Association

Company’s Objectives

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

Directors

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

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

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

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

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

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Rights attached to our shares

We have two types of shares authorized and outstanding: Ordinary Shares and Preferred A Shares. The rights attached to the Preferred A Shares are the same rights attached to our Ordinary Shares and the Preferred A Shares are deemed to be Ordinary Shares for all purposes hereunder, except for the Preferred A Shares have superior liquidation preference, as set forth below.

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

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

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

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

Changes of rights attached to our shares

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

General Meetings

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

Ownership of our shares

Our Articles of Association and the laws of the State of Israel do not restrict in anyway the ownership or voting of our shares by non-residents of Israel.

Change of Control

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

Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those discussed in the Property, Plant and Equipment section, the Liquidity and Capital Resources section under Item 5 “Operating and Financial Review and Prospects”, and in the Related Party Transactions section under Item 7 “Major Shareholders and Related Party Transactions”.

Exchange Controls

Until May 1998, Israel imposed restrictions on transactions in foreign currency. These restrictions affected our operations in various ways, and also affected the right of non-residents of Israel to convert into foreign currency amounts they received in Israeli currency, such as the proceeds of a judgment enforced in Israel. Despite these restrictions, foreign investors who purchased shares with foreign currency were able to repatriate in foreign currency both dividends (after deduction of withholding tax) and the proceeds from the sale of the shares. In 1998, the Israeli currency control regulations were liberalized significantly, as a result of which Israeli residents generally may freely deal in foreign currency and non-residents of Israel generally may freely purchase and sell Israeli currency and assets. There are currently no Israeli currency control restrictions on remittances of dividends on the Ordinary Shares or the proceeds from the sale of the shares; however, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.

Neither our Memorandum of Association nor our Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of Ordinary Shares by non-residents of Israel.

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Taxation

United States Federal Income Tax Consideration

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

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

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

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

• has a functional currency that is not the United States dollar.

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

For purposes of this discussion, a person is a United States holder if such person holds Ordinary Shares and if such person is:

• a citizen or resident of the United States;

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

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

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

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

Distributions

We have never paid dividends, and do not intend to pay dividends in the future. In general, and subject to the discussion below, if we do make a distribution on the Ordinary Shares, the distribution will be treated as a dividend for United States federal income tax purposes to the extent of our current and accumulated earnings and profits, as calculated under United States federal income tax principles. If the amount of the distribution exceeds our earnings and profits, the excess will first be treated as a non-taxable return of a United States holder’s tax basis in the Ordinary Shares that reduces that United States holder’s tax basis dollar-for-dollar, and then as gain from the constructive disposition of the Ordinary Shares.

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

• will be includible in the United States holder’s gross income;

• will be subject to tax at the rates applicable to ordinary income; and

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

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

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

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

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

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

Sale, Exchange or Other Disposition

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

Personal Holding Companies

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

• if at any time during the last half of the company’s taxable year, five or fewer individuals without regard to their citizenship or residency actually or constructively own, under attribution rules, more than 50% of the stock of the corporation by value; and

• 60% or more of the foreign corporation’s gross income derived from United States sources or effectively connected with a United States trade or business, as specifically adjusted, is from passive sources like dividends and royalty payments.

A personal holding company generally is taxed at a rate of 38.6% of its undistributed personal holding company income, which is generally calculated based on the corporation’s taxable income, after making adjustments including deducting dividends paid and income taxes. We cannot provide any assurance that either test will not be satisfied in 2008 or future years because it is difficult to make accurate predictions of future income and the amount of stock an individual will actually or constructively own in us.

Foreign Personal Holding Companies

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

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

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

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

Foreign Investment Companies

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

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

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

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

Passive Foreign Investment Company Rules

In general, a foreign corporation will be a passive foreign investment company if:

• 75% or more of its gross income, including the pro rata share of the gross income of any United States or foreign company in which the corporation is considered to own 25% or more of the shares by value, in a taxable year is passive income; or

• at least 50% of the average value of the assets of the corporation, including the pro rata share of the assets of any United States or foreign company in which the corporation is considered to own 25% or more of the shares by value, in a taxable year are held for the production of, or produce, passive income. If the foreign corporation is a publicly traded corporation for its entire taxable year, this 50% test is based on the average value of its assets. This 50% test may instead be based on the adjusted bases of the foreign corporation’s assets, rather than value, if the foreign corporation is not a publicly traded corporation for a portion of its taxable year and either the foreign corporation is a controlled foreign corporation or elects to use the adjusted bases of its assets for purposes of this test.

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If we were a passive foreign investment company, and a United States holder did not make a qualifying election either to treat us as a qualified electing fund or mark our shares to market:

• excess distributions by us to a United States holder would be taxed in a special way. Excess distributions are amounts received by a United States holder concerning our Ordinary Shares in any taxable year that exceed 125% of the average distributions received by the United States holder from us in the shorter of either the three previous years or the United States holder’s holding period for Ordinary Shares before the current taxable year. Excess distributions must be allocated ratably to each day that a United States holder has held our Ordinary Shares. A United States holder must include amounts allocated to the current taxable year and to pre-passive foreign investment company years in its gross income as ordinary income for the current taxable year. A United States holder must pay tax on amounts allocated to each prior taxable year for which we were a passive foreign investment company at the highest rate in effect for that year on ordinary income and the tax is subject to an interest charge at the rate applicable to deficiencies for income tax.

• the entire amount of gain that is recognized by a United States holder upon the sale or other disposition of Ordinary Shares will also be considered an excess distribution and will be subject to tax as described above.

• if a corporation is a passive foreign investment company, a United States holder who acquires Ordinary Shares in the corporation from a decedent who was a United States shareholder is denied the normally available step-up in the tax basis of the Ordinary Shares to fair market value at the date of death and instead will hold the Ordinary Shares with a tax basis equal to the decedent’s basis, if lower than the fair market value. A United States holder cannot avoid this result, however, by electing to mark our Ordinary Shares to market.

If a United States holder has made a qualified electing fund election for all taxable years during which the United States holder owned our Ordinary Shares and we were a passive foreign investment company, the passive foreign investment company rules described above will not apply to the United States holder. Instead, a United States holder of a qualified electing fund is required for each taxable year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to defer payment of taxes and incur an interest charge. The qualified electing fund election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service. A United States holder generally makes a qualified electing fund election by obtaining and retaining the passive foreign investment company annual information statement, attaching a completed Internal Revenue Service Form 8621 to a timely filed United States federal income tax return and by filing the form with the Internal Revenue Service center in Philadelphia, Pennsylvania. Even if a qualified electing fund election is not made, a shareholder in a passive foreign investment company who is a United States holder generally must file a completed Internal Revenue Service Form 8621 every year.

A United States holder of publicly traded passive foreign investment company stock could elect to mark the stock to market annually and generally could be subject to specific rules for each of the United States holder’s taxable years, including:

• if the fair market value of the United States holder’s passive foreign investment company stock exceeds the United States holder’s adjusted tax basis in that stock as of the close of the United States holder’s taxable year, the United States holder will recognize the amount of the excess as ordinary income;

• if the fair market value of the United States holder’s passive foreign investment company stock is less than the United States holder’s adjusted tax basis in that stock as of the close of the United States holder’s taxable year, the United States holder may recognize the amount of the difference as ordinary loss. Losses would be allowed only for the amount of net gain previously included by the United States holder under the election for prior taxable years; and

• if the United States holder has elected to mark our Ordinary Shares to market for all taxable years during which the United States holder owned our Ordinary Shares and we were a passive foreign investment company, the passive foreign investment company rules generally will not apply to the United States holder.

United States holders who hold Ordinary Shares during a period when we are a passive foreign investment company will be subject to the preceding rules, even if we cease to be a passive foreign investment company, subject to exceptions for United States holders who made a qualified electing fund election. United States holders are urged to consult their tax advisors about the passive foreign investment company rules, including the specific rules and requirements applicable to making qualified electing fund and other elections.

Status of ViryaNet as a Passive Foreign Investment Company (“PFIC”)

Although we do not believe that we were a PFIC in 2007, there can be no assurance that the IRS will agree with that conclusion or that we will not become a PFIC in 2008 or in a subsequent year. Passive foreign investment company status is determined as of the end of each taxable year and is dependent upon a number of factors, including the value of a corporation’s assets and the amount and type of its gross income. The determination of whether we are or will become a passive foreign investment company will be affected by how rapidly we use our cash and investment assets in our business.

Also, a significant decline in the market price of our Ordinary Shares may result in our being classified as a passive foreign investment company.

Backup Withholding and Information Reporting

Dividends on our Ordinary Shares, and payments of the proceeds of a sale of our Ordinary Shares, paid within the United States or through certain United States-related financial intermediaries are subject to information reporting and may be subject to backup withholding at a 30% rate unless (i) the payer is entitled to, and does in fact, presume the United States holder of our Ordinary Shares is a corporation or other exempt recipient or (ii) the United States holder provides a taxpayer identification number on a properly completed Form W-9 and certifies that no loss of exemption from backup withholding has occurred. The amount of any backup withholding will be allowed as a credit against a United States holder’s United States federal income tax liability and may entitle that United States holder to a refund, provided that required information is furnished to the Internal Revenue Service.

Israeli Taxation and Investment Programs

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

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General Corporate Tax Structure

In August 2005, the Israeli Government passed the Amendment to the Income Tax Ordinance (No. 147), which progressively reduces the tax rates applicable to companies to the following: 2004—35%, 2005—34%, 2006—31%, 2007—29%, 2008—27%, 2009—26% and 2010 and thereafter—25%. The amendment had no impact on our financial statements. However, the effective tax rate payable by a company that derives income from an approved enterprise may be considerably less.

Law for the Encouragement of Industry, Taxes, 1969

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

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

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

Industrial enterprises which are approved enterprises can also choose between

• the special rates referred to above; and

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

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

Law for the Encouragement of Capital Investments, 1959

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

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

Tax Benefits

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

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

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

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

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

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

(ii) Grant / Reduced tax package – for an “Approved Enterprise”: Fixed asset grants of between 20% and 32% for enterprises in a development area and reduced company tax rates between 0% and 25% for a period of 7 to 15 years.

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We currently have two approved enterprise programs under the capital investments law, before the 2005 Amendment, which entitle us to some tax benefits. The Company’s production facilities have been granted an “approved enterprise” status under the law, for three separate investment programs, which were approved in February 1989, March 1995 and April 1998. The status of "approved enterprise” granted for the February 1989 investment program has expired and the status of “approved enterprise” granted for the March 1995 investment program will expire in 2008.

The tax benefits period for the April 1998 program has not yet begun. Income derived from this alternative benefit programs is exempted from tax for a period of ten years, starting in the first year in which the Company generates taxable income from the approved enterprise, subject to a condition that we will have a certain minimum number of professional employees. We have not yet met this condition; however we have applied for relief, and adjustment of this requirement. There can be no assurance that the relief will be granted to us, and if the relief is not granted we will lose our entitlement to future benefits under Law.

Generally, “Approved Enterprise” tax benefits are limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier. Pursuant to the Law, we have elected for our two investment programs the “alternative benefits” track and waived Government grants in return for a tax exemption. Our offices and research and development center are located in Jerusalem, in a region defined as a “Priority A Development Region”. Therefore, income derived from these programs will be tax-exempt for a period of ten years commencing with the year in which it first earns taxable income, subject to certain conditions.

As the Company currently has no taxable income, the benefits from all these programs have not been yet utilized

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

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

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

Taxation Under Inflationary Conditions

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

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

Tax Benefits of Research and Development

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

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

Withholding and Capital Gains Taxes Applicable to Non-Israeli Shareholders

Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income like dividends, royalties and interest, as well as non-passive income from business conducted or services rendered in Israel. We are generally required to withhold income tax at the rate of 25%, 15% for dividends generated by an approved enterprise, on all distributions of dividends.

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

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

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

• individuals that are residents of the United States;

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

• other entities, to the extent that the other entities’ income is taxable in the United States as the income of residents of the United States.

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

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

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

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

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

Documents on Display

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

Item 11. Quantitative And Qualitative Disclosures About Market Risk

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

Item 12. Description Of Securities Other Than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages And Delinquencies

None.

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

Use of Proceeds

On September 19, 2000, we commenced an IPO of 80,000 of our Ordinary Shares, pursuant to our final prospectus dated September 19, 2000 (the “Prospectus”). The Prospectus was contained in our Registration Statement on Form F-1, which was declared effective by the Securities and Exchange Commission (SEC File No. 333-42158) on September 19, 2000. The IPO closed on September 22, 2000 upon the sale of 80,000 Ordinary Shares to the underwriters. Chase Securities Inc., Salomon Smith Barney, Inc., and Dain Rauscher Incorporated acted as the representatives of the underwriters in the IPO.

The aggregate offering price of the IPO to the public was $32,000,000, with proceeds to us, after deduction of the underwriting discount, of $29,760,000 (before deducting offering expenses payable by us). The aggregate amount of expenses incurred by us in connection with the issuance and distribution of Ordinary Shares offered and sold in the IPO was approximately $6,376,000, including $2,240,000 in underwriting discounts and commissions, $428,000 in payments to directors and officers and $3,708,000 in other expenses.

The net proceeds to us from the IPO, after deducting underwriting discounts and commissions and other expenses, were approximately $25,624,000. These net proceeds were used for the purchase of equipment and software in the amount of approximately $2,339,000, and approximately $23,285,000 was used for working capital purposes.

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Item 15. Controls and Procedures

(a) Disclosure Controls and Procedures. Our management, with the participation of our Executive Chairman and Chief Executive Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2007. Based on this evaluation, our Executive Chairman and Chief Executive Officer have concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities and Exchange Act of 1934, as amended, (i) is recorded, processed, summarized, and reported, within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Executive Chairman and Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosures.

(b) Report of Management on Internal Control Over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management assessed the effectiveness of internal control over financial reporting as of December 31, 2007 based on the criteria in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on that assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2007, based on those criteria, at providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

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

(c) Not yet applicable

(d) Changes in Internal Control Over Financial Reporting. There has been no change in the Company’s internal control over financial reporting that occurred during 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 16.

Item 16A. Audit Committee Financial Expert

Our Board of Directors has determined that we have at least one audit committee financial expert, Mr. Arie Ovadia.

Item 16B. Code of Ethics

We have in place a Code of Ethics that applies to all of our directors, officers and employees. .This code was adopted within the meaning of Section 406 of the Sarbanes-Oxley Acot of 2002 and the rules promulgated thereunder. The full text of the Code of Ethics is available on our website, www.viryanet.com/company/investors, or, you may request a copy of our code of ethics, at no cost, by writing to or telephoning us as follows:

ViryaNet, Inc.

2 Willow Street

Southborough

MA 01745-1027

Telephone: 508-490-8600

Item 16C. Principal Accountant Fees and Services

During each of the last two fiscal years, Kost Forer Gabbay & Kasierer, a member of Ernst and Young Global, has acted as the Company’s independent auditors.

Audit fees

Ernst & Young billed the Company approximately $102,000 for audit services for fiscal 2007, including fees associated with the annual audit and reviews of the Company’s quarterly financial results submitted on Form 6-K, and consultations on various accounting issues. Ernst & Young billed the Company approximately $115,000 for audit services for fiscal 2006.

Tax fees

Ernst & Young billed the Company approximately $42,000 for tax services, including fees associated with tax compliance services, tax planning services and other tax consulting services in fiscal 2007. Ernst & Young billed the Company approximately $36,000 for tax services, including fees associated with tax compliance services, tax planning services and other tax consulting services in fiscal 2006.

All other fees

We did not pay Ernst & Young for any fees other than the Audit Fees and Tax Fees described above for fiscal 2007 and 2006.

Pre-Approval Policies for Non-Audit Services

Prior to the engagement of Ernst & Young each year, the engagement is approved by the Audit Committee of the Board of Directors and by vote of the Company’s shareholders at the Company’s Annual General Meeting of Shareholders. The Company’s Audit Committee has also adopted its own rules of procedure. The Audit Committee’s rules of procedure provide for a process with respect to the prior approval of all services, including non-audit services, to be performed by the independent auditors for the Company. In fiscal 2007, the Company’s Audit Committee approved all of the services provided by Ernst & Young.

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

Not applicable.

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

Not applicable.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

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

Item 19. Exhibits

Exhibit Index	Description of Document
1	1)	Memorandum of Association of Registrant (English translation) dated March 8, 1988	Filed as Exhibit 3.1 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	2)	Amended Articles of Association of ViryaNet	Filed as Exhibit 1(2) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
4(a)26	3)	Amended Articles of Association of ViryaNet
	4)	The 2000 Amendment and Restatement to the Investors Rights Agreement among ViryaNet and the Investors dated April 5, 2000	Filed as Exhibit 10.5 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	5)	The Registration Rights Agreement, among ViryaNet and the previous shareholders of iMedeon, Inc. dated February 25, 2002.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
	6)	The Agreement and Plan of Merger among ViryaNet, iMedeon, Inc. and the stockholders of iMedeon, Inc, dated February 25, 2002.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
	7)	Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot) Ltd. to purchase Ordinary Shares.	Filed as Exhibit 10.10 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	8)	Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot) Ltd. to purchase Ordinary Shares.	Filed as Exhibit 10.11 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	9)	Form of warrant issued by ViryaNet to customers prior to July 1, 2000 to purchase Ordinary Shares.	Filed as Exhibit 10.12 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	10)	Form of warrant issued by ViryaNet to customers after July 1, 2000 to purchase Ordinary Shares.	Filed as Exhibit 10.17 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference
	11)	Warrant issued by ViryaNet to Bank Hapoalim Ltd. to purchase Ordinary Shares dated effective February 13, 2002.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
	12)	Warrant issued by ViryaNet to GE Capital Equity Investments, Inc. to purchase Ordinary Shares dated effective February 21, 2002.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
	13)	Letter of Credit issued by Bank Hapoalim B.M. to ViryaNet dated February 10, 2002.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.

49

Exhibit Index	Description of Document
	14)	Letter from Bank Hapoalim B.M. to ViryaNet dated July 14, 2003.	Translation. Filed as exhibit 11 of the Company’s 20-F for the year ending December 31, 2002 and incorporated herein by reference.
	15)	Share Purchase Agreement dated July 28, 2003, by and among the company and Telvent GIT, S.A., and exhibits thereof	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2003 and incorporated herein by reference.
	16)	Share Purchase Agreement dated October 30, 2003, among ViryaNet and the investors identified in such agreement, and exhibits thereof	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2003 and incorporated herein by reference.
	17)	Agreements dated November 6, 2003, among ViryaNet and the investors identified in such agreements	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2003 and incorporated herein by reference.
	18)	Agreement and Plan of Merger dated July 9, 2004, among Utility Partners, Inc., ViryaNet and ViryaNet Acquisition Inc.	Filed as Exhibit 4(a)15 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	19)	Note Purchase Agreement dated July 27, 2004, between ViryaNet and LibertyView Special Opportunities Fund LP, and exhibits thereof	Filed as Exhibit 4(a)16 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	20)	Share Purchase Agreement dated February 7, 2005, between ViryaNet and Telvent Investments, S.L. and exhibits thereof	Filed as Exhibit 4(a)17 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	21)	Letter dated March 14, 2005, between ViryaNet and Bank Hapoalim Ltd.	Translated from the Hebrew original. Filed as Exhibit 4(a)18 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	22)	Warrant dated March 14, 2005, issued by ViryaNet to Bank Hapoalim Ltd. to purchase Ordinary Shares	Filed as Exhibit 4(a)19 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	23)	Asset Purchase Agreement dated June 1, 2005, between ViryaNet and e-Wise Solutions	Filed as Exhibit 4(a)20 of the Company’s 20-F for the year ending December 31, 2004 and incorporated herein by reference.
	24)	Purchase Agreement, and Amended and Restated Notes dated August 5, 2005 among ViryaNet and LibertyView Special Opportunities Fund LP, and exhibits thereof	Filed as Exhibit 4(a)21 of the Company’s 20-F for the year ending December 31, 2005 and incorporated herein by reference.
	25)	Subscription Agreement dated September 26, 2005 among ViryaNet and the investors identified in such agreement, and exhibits thereof	Filed as Exhibit 4(a)22 of the Company’s 20-F for the year ending December 31, 2005 and incorporated herein by reference.
	26)	Letter dated December 22, 2005 between ViryaNet and Bank Hapoalim Ltd.	Translated from the Hebrew original. Filed as Exhibit 4(a)23 of the Company’s 20-F for the year ending December 31, 2005 and incorporated herein by reference.
	27)	Conversion Agreement to Preferred A Shares dated May 5, 2006 between ViryaNet and LibertyView Special Opportunities Fund, LP	Filed as Exhibit 4(a)24 of the Company’s 20-F for the year ending December 31, 2005 and incorporated herein by reference.
	28)	Share Purchase Agreement dated May 5, 2006 among ViryaNet and the investors identified in such agreement, and exhibits thereof	Filed as Exhibit 4(a)25 of the Company’s 20-F for the year ending December 31, 2005 and incorporated herein by reference.
	29)	Letter dated August 29, 2007, between ViryaNet and Bank Hapoalim Ltd.	Translated from the Hebrew original. Filed as Exhibit 4(a)26 of the Company’s 20-F for the year ending December 31, 2006 and incorporated herein by reference.
4(a)27	30)	Equity and Convertible Note Financing Agreements dated December 19, 2007 among ViryaNet and the investors identified in such agreement, and exhibits thereof
	31)	Lease for approximately 16,950 square feet of office space in Jerusalem, Israel.	Filed as Exhibit 10.14 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	32)	A new Lease agreement reducing the current Company premises leased in Jerusalem, Israel, to an area of approximately 7,600 square feet of office space, dated February 25, 2002 (as summarized and translated into English).	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.

50

Exhibit Index	Description of Document
	33)	Lease for approximately 13,807 square feet in Southborough, Massachusetts.	Filed as Exhibit 10.15 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	34)	Lease for approximately 20,000 square feet located in Alpharetta, Georgia.	Filed as Exhibit 4(a) of the Company’s 20-F for the year ending December 31, 2001 and incorporated herein by reference.
4(a)29	35)	Lease for approximately 10,000 square feet of office space in Southborough, Massachusetts.
4(b)5	36)	Consent of Kost, Forer, Gabbay & Kasierer, a member of Ernst and Young Global
	37)	First Amendment to the Lease Agreement by and between the Company and Three and 400 Northwinds Center L.P., dated June 10, 2003.	Filed as Exhibit 4(b) of the Company’s 20-F for the year ending December 31, 2002.
	38)	Promissory Notes by and between the Company and Three and 400 Northwinds Center L.P., dated June 10, 2003.	Filed as Exhibit 4(b) of the Company’s 20-F for the year ending December 31, 2002.
4(b)8	39)	Consent of Nexia ASR, for the audit of ViryaNet Pty Ltd.
	40)	The Company’s 1996 Stock Option and Incentive Plan.	Filed as Exhibit 10.1 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	41)	The Company’s 1997 Stock Option and Incentive Plan.	Filed as Exhibit 10.2 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	42)	The Company’s 1998 Stock Option and Incentive Plan.	Filed as Exhibit 10.3 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	43)	The Company’s 1999 Stock Option and Incentive Plan.	Filed as Exhibit 10.4 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	44)	Form of Indemnification Agreement entered into with directors and officers of the Company.	Filed as Exhibit 10.16 to the Company’s Registration Statement on Form F-1, No. 333-42158 and incorporated herein by reference.
	45)	Tender Offer Statement under Section 13(e)(1) of the Securities Exchange Act of 1934.	Filed on Form SC TO-I, No. 005-60313 and incorporated herein by reference.
	46)	The Company’s 2005 Israeli Share Option and Restricted Share Plan.	Filed as Exhibit 4(c)7 of the Company’s 20-F for the year ending December 31, 2005.
	47)	The Company’s 2005 International Share Option and Restricted Share Plan.	Filed as Exhibit 4(c)8 of the Company’s 20-F for the year ending December 31, 2005.
12.1	48)	Certifications of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a)
12.2	49)	Certifications of Executive Chairman pursuant to Rule 13a-14(a)/Rule 15d-14(a)
13.1	50)	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
13.2	51)	Certification of Executive Chairman pursuant to 18 U.S.C. Section 1350

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 20-F and has duly caused this Form 20-F to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jerusalem, Israel, on this 29th day of September, 2008.

VIRYANET LTD.
By:	/s/ Memy Ish-Shalom
	Memy Ish-Shalom
	President and Chief Executive Officer

51

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

IN U.S. DOLLARS

INDEX

	Page
Report of Independent Registered Public Accounting Firm	2 - 3
Consolidated Balance Sheets	4 - 5
Consolidated Statements of Operations	6
Statements of Changes in Shareholders’ Equity	7 - 9
Consolidated Statements of Cash Flows	10 - 11
Notes to Consolidated Financial Statements	12 - 48

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

VIRYANET LTD.

We have audited the accompanying consolidated balance sheets of ViryaNet Ltd. (the “Company”) and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of a wholly-owned subsidiary, whose statements reflect total assets constituting 12% and 16% as of December 31, 2007 and 2006, respectively and whose total revenues constituting 9%, 14% and 7% of the related consolidated totals for each of the three years in the period ended December 31, 2007. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for this subsidiary, is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

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

- 2 -

INDEPENDENT AUDIT REPORT

TO THE MEMBERS OF VIRYANET PTY LTD. (AUSTRALIA)

Scope

We have audited the balance sheets of ViryaNet Pty Ltd. (Australia) (the “Company”) as of December 31, 2007 and the related statements of operations for the year in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

Audit approach

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

Audit opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ViryaNet Pty Ltd (Australia) as of 31 December, 2007, and the results of its operations for the year in the period ended 31 December, 2007, in conformity with United States generally accepted accounting principles.

NEXIA ASR

ABN 16 847 721 257

GEORGE S. DAKIS

Partner

Audit & Assurance Services

Melbourne, Victoria, Australia.

23 September 2008.

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

- 3 -

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2006		2007
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	736	$	413
Trade receivables (net of allowance for doubtful accounts of $52 as of December 31, 2007 and 2006)		731		788
Unbilled receivables		314		311
Other accounts receivable and prepaid expenses (Note 3)		522		226
Total current assets		2,303		1,738
SEVERANCE PAY FUND		830		995
PROPERTY AND EQUIPMENT, NET (Note 4)		163		238
INTANGIBLE ASSETS:
GOODWILL (Notes 1, 6)		7,088		7,152
CUSTOMER RELATIONSHIP, NET (Notes 1, 5c)		875		653
OTHER INTANGIBLE ASSETS AND DEBT ISSUANCE COSTS, NET (Notes 1, 5)		660		414
Total intangible assets:		8,623		8,219
Total assets	$	11,919	$	11,190

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

- 4 -

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

	December 31,
	2006			2007
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 7)	$	1,187		$	1,815
Current maturities of long-term bank loans (Note 10)		574			589
Trade payables		702			821
Deferred revenues		2,361			2,212
Other accounts payable and accrued expenses (Note 8)		1,884			2,070
Loan from related party (Notes 1b, 17e)		115			90
Payment on account of convertible note and warrants (Note 9)		—			239
Total current liabilities		6,823			7,836
LONG-TERM LIABILITIES:
Long-term bank loan, net of current maturities (Note 10)		718			149
Long-term convertible debt (Note 11)		568			556
Long-term deferred revenues		—			1,031
Accrued severance pay		1,276			1,568
Total long-term liabilities		2,562			3,304
COMMITMENTS AND CONTINGENT LIABILITIES (Note 12)
SHAREHOLDERS’ EQUITY:
Share capital (Note 13) *) -
Ordinary shares of NIS 5.0 par value - Authorized: 4,600,000 shares at December 31, 2006 and 2007; Issued and outstanding: 1,922,711 and 2,570,240 shares at December 31, 2006 and 2007, respectively		2,266			3,087
Preferred A shares of NIS 5.0 par value - Authorized: 400,000 shares at December 31, 2006 and 2007; Issued and outstanding: 326,797 shares at December 31, 2006 and 2007, respectively. Aggregate liquidation preference of $2,500 at December 31, 2006 and 2007		369			369
Additional paid-in capital		115,937			116,121
Accumulated other comprehensive income (loss)		(314	)		62
Accumulated deficit		(115,724	)		(119,589	)
Total shareholders’ equity		2,534			50
Total liabilities and shareholders’ equity	$	11,919		$	11,190

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

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

- 5 -

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

	Year ended December 31,
	2005			2006			2007
Revenues (Notes 15a, 16):
Software licenses	$	1,720		$	1,520		$	1,769
Maintenance and services		12,487			12,340			9,390
Total revenues		14,207			13,860			11,159
Cost of revenues:
Software licenses		358			356			358
Maintenance and services		7,855			6,831			5,633
Total cost of revenues		8,213			7,187			5,991
Gross profit		5,994			6,673			5,168
Operating expenses:
Research and development		2,504			2,121			2,290
Selling and marketing		5,214			3,692			3,429
General and administrative		3,004			2,735			2,485
Total operating expenses		10,722			8,548			8,204
Operating loss		(4,728	)		(1,875	)		(3,036	)
Financial expenses, net (Note 16)		(1,330	)		(44	)		(535	)
Loss from liquidation of a subsidiary (1)		—			—			(239	)
Net loss	$	(6,058	)	$	(1,919	)	$	(3,810	)
Basic and diluted net loss per share	$	(4.68	)	$	(1.03	)	$	(1.66	)
Weighted average number of shares used in computing basic and diluted net loss per Ordinary share *)		1,294,834			1,857,217			2,292,190

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

(1) (See also Note 1a).

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

- 6 -

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

							Additional paid-in capital		Deferred stock compensation			Accumulated other comprehensive income (loss)			Accumulated deficit			Total comprehensive loss			Total shareholders’ equity
	Ordinary Shares			Preferred shares
	Number *)	Amount		Number *)	Amount
Balance as of January 1, 2005	1,082,778	$	1,312	—	$	—	$	108,511	$	(50	)	$	(348	)	$	(107,747	)				$	1,678
Issuance of shares, net of issuance expenses	230,618		263	—		—		2,057		—			—									2,320
Proceeds allocated to warrants in connection with issuance of convertible debts	—		—	—		—		337		—			—			—						337
Issuance of shares in connection with the acquisition of e-Wise	111,156		126	—		—		1,129		—			—			—						1,255
Issuance of shares, in connection with interest expenses, waivers and debt issuance costs related to the convertible notes	38,891		45	—		—		415		—			—			—						460
Compensation related to warrants granted to a bank	—		—	—		—		61		—			—			—						61
Issuance of shares in connection with refinancing short-term bank loan on a long-term basis	6,000		7	—		—		50		—			—			—						57
Exercise of stock options	725		1	—		—		5		—			—			—						6
Beneficial conversion feature of convertible debt	—		—	—		—		58		—			—			—						58
Compensation related to warrants granted to consultants	—		—	—		—		42		—			—			—						42
Deferred stock compensation related to issuance of restricted shares to directors	—		—	—		—		139		(139	)		—			—						—
Amortization of deferred stock compensation	—		—	—		—		—		54			—			—						54
Comprehensive loss:
Foreign currency translation adjustments	—		—	—		—		—		—			(87	)		—		$	(87	)		(87	)
Net loss	—		—	—		—		—		—			—			(6,058	)		(6,058	)		(6,058	)
Total comprehensive loss																		$	(6,145	)
Balance as of December 31, 2005	1,470,168		1,754	—		—		112,804		(135	)		**) (435	)		(113,805	)					183

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

**) All accumulated other comprehensive loss derived from foreign currency translation adjustment.

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

- 7 -

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

					Additional paid-in capital			Deferred stock compensation		Accumulated other comprehensive Income (loss)		Accumulated deficit		Total comprehensive loss			Total shareholders’ equity
	Ordinary Shares		Preferred shares
	Number *)	Amount	Number *)	Amount
Balance as of January 1, 2006	1,470,168	1,754	—	—	$	112,804		(135	)	(435	)	(113,805	)				183
Issuance of shares, net of issuance expenses	287,540	323	—	—		1,020		—		—		—					1,343
Issuance of shares in connection with the conversion of long-term convertible debt	—	—	326,797	369		1,598		—		—		—					1,967
Issuance of shares in connection with the conversion of short-term convertible debt	106,326	124	—	—		376		—		—		—					500
Issuance of shares, in connection with interest expenses, related to the convertible debts	36,883	41	—	—		164		—		—		—					205
Issuance of shares in connection with compensation to consultant	4,000	4	—	—		17		—									21
Exercise of stock options	200	—	—	—		2		—		—		—					2
Restricted shares to employees and directors, net	7,000	8	—	—		76		—		—		—					84
Exercise of warrants by way of cashless exercise	10,594	12	—	—		(12	)	—		—		—					—
Reclassification of deferred stock compensation due to implementation of SFAS123(R)	—	—	—	—		(135	)	135		—		—					—
Share-based compensation	—	—	—	—		27		—		—		—					27
Comprehensive loss:
Foreign currency translation adjustments	—	—	—	—		—		—		121		—		$	121		121
Net loss	—	—	—	—		—		—		—		(1,919	)		(1,919	)	(1,919	)
Total comprehensive loss														$	(1,798	)
Balance as of December 31, 2006	1,922,711	2,266	326,797	369		115,937		—		**)(314	)	(115,724	)				2,534

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

**) All accumulated other comprehensive loss derived from foreign currency translation adjustment.

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

- 8 -

VIRYANET LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands, except share data

							Additional paid-in capital			Deferred stock compensation		Accumulated other comprehensive Income (loss)			Accumulated deficit			Total comprehensive loss			Total shareholders’ equity
	Ordinary Shares			Preferred shares
	Number *)	Amount		Number *)	Amount
Balance as of January 1, 2007	1,922,711		2,266	326,797		369		115,937			—		(314	)		(115,724	)					2,534
Issuance of shares and convertible note to an investor, net of issuance cost (see also note 13t)	363,636		461	—		—		239			—		—			—						700
Issuance of shares in connection with a conversion of short-term convertible note	211,457		268					(268	)													—
Issuance of shares, in connection with interest expenses, related to the convertible debts	14,546		17	—		—		23			—		—			—						40
Issuance of shares and release of restricted shares in connection with compensation to consultants	38,500		50	—		—		(19	)		—											31
Stock based compensation	—		—	—		—		208			—		—			—						208
Release of restricted shares to employees and directors, net	9,390		13	—		—		(13	)		—		—			—						—
Issuance of shares in connection with restructuring bank covenants and credit line	10,000		12	—		—		14			—		—			—						26
Comprehensive loss:
Cumulative effect of adjustment upon adoption of FIN 48	—		—	—		—		—			—		—			(55	)					(55	)
Foreign currency translation adjustments recognized as loss resulting from dissolution of Company’s subsidiary in Japan	—		—	—		—		—			—		239			—						239
Foreign currency translation adjustments	—		—	—		—		—			—		137			—		$	137			137
Net loss	—		—	—		—		—			—		—			(3,810	)		(3,810	)		(3,810	)
Total comprehensive loss																		$	(3,673	)
Balance as of December 31, 2007	2,570,240	$	3,087	326,797	$	369	$	116,121		$	—		$ **) 62		$	(119,589	)				$	50

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

**) All accumulated other comprehensive loss derived from foreign currency translation adjustments.

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

- 9 -

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2005			2006			2007
Cash flows from operating activities:
Net loss	$	(6,058	)	$	(1,919	)	$	(3,810	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		672			783			680
Amortization of deferred debt issuance cost related to convertible notes		18			44			1
Amortization of convertible notes premium, discounts and beneficial conversion feature		(8	)		50			(12	)
Accrued severance pay, net		(43	)		4			127
Stock based compensation related to directors and employees		54			111			208
Stock based compensation related to restricted shares and shares to a bank		53			29			46
Stock based compensation related to restricted shares and shares to consultants		67			45			31
Interest expenses paid in shares		231			148			48
Loss (gain) from extinguishment of convertible note		787			(974	)		—
Loss from liquidation of a subsidiary		—			—			239
Decrease (increase) in trade receivables, net and unbilled receivables		144			312			(26	)
Decrease in other accounts receivable and prepaid expenses		109			240			303
Increase (decrease) in trade payables		(43	)		(379	)		110
Increase (decrease) in long-term and short-term deferred revenues, net		461			(857	)		863
Increase (decrease) in other accounts payable and accrued expenses		(114	)		(318	)		61
Other		1			—			—
Net cash used in operating activities		(3,669	)		(2,681	)		(1,131	)
Cash flows from investing activities:
Purchase of property and equipment		(104	)		(30	)		(194	)
Acquisitions of subsidiary (a)		(100	)		—			—
Net cash used in investing activities		(204	)		(30	)		(194	)
Cash flows from financing activities:
Short-term bank credit		555			934			628
Repayment of short-term bank credit and long-term loan		(1,066	)		(728	)		(600	)
Repayment of loan from related party		—			(190	)		(38	)
Proceeds from issuance of share capital and convertible debt		3,520			1,343			761
Proceeds from payment on account of convertible debt		—			—			239
Debt issuance costs related to convertible debts		(47	)		—			—
Proceeds from exercise of stock options		6			2			—
Net cash provided by financing activities		2,968			1,361			990
Effect of exchange rate differences on cash and cash equivalents		2			46			12
Decrease in cash and cash equivalents		(903	)		(1,304	)		(323	)
Cash and cash equivalents at the beginning of the year		2,943			2,040			736
Cash and cash equivalents at the end of the year	$	2,040		$	736		$	413

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

- 10 -

VIRYANET LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,
	2005		2006		2007
Supplemental disclosure of cash flow activities:
Cash paid during the year for:
Interest	$	180	$	261	$	319
Supplemental disclosure of non-cash investing and financing activities:
Refinancing of short-term bank loan on a long-term basis	$	1,800	$	—	$	—
Compensation related to warrants to a bank	$	61	$	—	$	—
Issuance of shares in connection with refinancing of short-term bank loan on a long-term basis	$	50	$	—	$	—
Accrued issuance expenses to be paid	$	32	$	—	$	61
Conversion to shares of accrued interest expenses, waivers and deferred charges related to the convertible debt and note	$	462	$	205	$	67
Debt issuance cost	$	34	$	—	$	—
Compensation related to options and warrants to consultants and a settlement agreement with a customer	$	42	$	—	$	—
Conversion of convertible notes into shares	$	—	$	2,507	$	—

(a) Acquisition of e-Wise

In June 2005, the Company, through its Australian subsidiary, acquired assets and assumed liabilities of e- Wise (see also Note 1b). The estimated fair value of the assets acquired and liabilities assumed as of the date of acquisition was as follows:

Working capital deficiency (no cash and cash equivalents was acquired)	$	25
Assumption of unsecured debt related to the acquisition of e-Wise		285
Property and equipment		(31	)
Current technology		(690	)
Customer relationship		(420	)
Goodwill		(550	)
Less - amounts acquired by issuance of shares		1,268
Less - accrued acquisition costs		13
	$	(100	)

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

- 11 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:- GENERAL

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

The Company has five wholly-owned subsidiaries: three in the United States (“ViryaNet Inc.” and its subsidiaries “iMedeon Inc.” and “Utility Partners Inc.”, collectively “ViryaNet U.S.”), one in Australia (“ViryaNet Australia”), which is a subsidiary of ViryaNet Inc, one in the United Kingdom (“ViryaNet U.K.”) which is not active. The Company’s subsidiary in Japan (“ViryaNet Japan”), was dissolved in April 2007.

The Company’s sales are generated in the United States, Europe, and Asia-Pacific. As for major customers, see Note 15b.

The Ordinary shares of the Company were traded until June 11, 2007 on the Nasdaq Capital Market. On June 12, 2007, the Company’s Ordinary shares were delisted from the Nasdaq Capital Market and on November 14, 2007 became eligible for quotation and trading on the OTC Bulletin Board (“OTCBB”). On September 11, 2008 the Company’s Ordinary shares ceased to be eligible for quotation and trading on the OTCBB and became eligible for quotation and trading on the Pink Sheets.

The Company is devoting substantial efforts towards activities such as marketing its products, financial planning and capital raising. In the course of such activities, the Company and its subsidiaries have sustained operating losses. The Company and its subsidiaries have generated variable levels of revenues over the past several years and have not achieved profitable operations or positive cash flows from operations or positive working capital. The Company’s accumulated deficit aggregated to $119,589 through December 31, 2007. There is no assurance that profitable operations or positive cash flows from operations, if ever achieved, could be sustained on a continuing basis, and no assurance that capital raising activities will be sufficient to offset the impact of non-positive cash flows from operations.

All share data in this report are reported after the effect of the 1 for 5 reverse split that occurred on January 17, 2007 (see Note 13).

b. Acquisition of e-Wise Solutions:

On June 15, 2005, the Company, through its newly wholly-owned Australian subsidiary, ViryaNet Pty Ltd. (“ViryaNet Australia”), acquired substantially all of the assets of privately-held e-Wise Solutions (“e-Wise”). e-Wise, based in Melbourne, Australia, developed and implemented front-office automation solutions for mobile and desktop platforms for large organizations in the utility, government, and oil and gas services market segments, across Australia and New Zealand. Through ViryaNet Australia, the Company acquired substantially all of the assets of e-Wise, including intellectual property rights, and assumed certain customer and partnership agreements. The acquisition of e-Wise provides the Company with an installed base of customers and organization in Australia to expand its presence in the Asia Pacific region. The aggregate purchase price for this transaction consisted of the issuance of 111,156 of the Company’s Ordinary shares (including 56,503 Ordinary shares issued on August 9, 2005, under the amendment to the agreement as described below) at an estimated fair value of $ 1,268, assumption of approximately $ 285 of unsecured debt, and transaction expenses of approximately $ 113. The unsecured debt is payable to e-Wise’s major shareholder, who became a shareholder and an employee of the Company as a result of the acquisition. As of December 31, 2007, $ 90 of the unsecured debt is unpaid.

- 12 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:- GENERAL (CONT.):

The purchase price included an additional consideration of up to $ 700 in unregistered Ordinary shares to be issued to e-Wise in 2006 based on the achievement of certain performance objectives for 2005 (the “Contingent Consideration”). On July 5, 2005, the Company signed an amendment to the agreement with e-Wise under which the Company received an option to pay 90% of the Contingent Consideration at any time before October 15, 2005, as satisfaction of its payment obligation in connection with such Contingent Consideration. On August 9, 2005, the Company exercised its option and issued 56,503 of its Ordinary shares (estimated fair value of $ 604) as the second component of consideration of the acquisition of e-Wise’s business.

The total purchase price was comprised as follows:

Fair value of Ordinary shares issued	$	1,268
Assumption of unsecured debt		285
Acquisition related costs		113
Total purchase price	$	1,666

The Company determined the fair value of the issued shares using Emerging Issues Task Force No. 99-12, “Determination of the Measurement Date For the Market Price of Acquirer Securities Issued in a Purchase Business Combination” (“EITF No. 99-12”). According to EITF No. 99-12, the fair value is determined based on the average market price of the Company’s Ordinary shares two days before and after the transaction date.

The operations of e-Wise are included in the consolidated statements from the date of acquisition.

The acquisition was accounted for under the purchase method of accounting, in accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), and accordingly, based upon a valuation, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the estimated fair value of the net identifiable assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

Current assets	$	97
Property and equipment		31
Technology (1)		690
Customer relationship (1)		420
Goodwill		550
Total assets acquired		1,788
Current liabilities		(122	)
Total liabilities assumed		(122	)
Net assets acquired	$	1,666

(1) See also Note 5.

- 13 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1:- GENERAL (CONT.)

Amortization of acquired intangible assets is calculated using the following estimated useful lives:

	Years
Technology	5
Customer relationship	5

Goodwill of $ 550 represents the excess of the purchase price over the fair market value of the net tangible and intangible assets acquired. Goodwill will not be amortized and will be tested for impairment at least annually. The Company believes that the goodwill represents synergies as the acquisition of e-Wise provides the Company with technology, an installed base of customers, a talented organization in Australia, and infrastructure to expand its presence in the Asia Pacific region.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:

The consolidated financial statements were prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”).

Use of estimates:

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Financial statements in U.S. dollars:

Substantially all of the revenues of the Company and ViryaNet U.S. are generated in U.S. dollars (“dollars”). In addition, a substantial portion of the costs of the Company and certain of its subsidiaries is incurred in dollars. Financing and investment activities are made in U.S. dollars. Since management believes that the dollar is the primary currency in the economic environment in which the Company and certain of its subsidiaries operate, thus, the dollar is the functional and reporting currency. Accordingly, amounts in currencies other than U.S. dollars have been remeasured as follows:

Monetary balances - at the exchange rate in effect on the balance sheet date.

Non-monetary balances - at the historical rate in effect as of the date of recognition of the transaction.

Revenues and cost - at the exchange rate in effect as of the date of recognition of the transaction.

All the exchange gain and losses from the remeasurement mentioned above are reflected in the statement of operations in financial expenses (income), net.

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

- 14 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Principles of consolidation:

The consolidated financial statements include the accounts of the Company and its subsidiaries (“the Group”). Intercompany balances and transactions including profit from intercompany sales not yet realized outside the Group have been eliminated upon consolidation.

Cash equivalents:

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

Property and equipment:

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

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

Goodwill, other intangible assets and debt issuance cost:

Goodwill reflects the excess of the purchase price of business acquired over the fair value of net assets acquired. Identifiable intangible assets consist mainly of acquired technology, trade names and customer relationships.

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), Goodwill is not amortized for financial reporting purposes. Instead, the Company is required to test, annually (or more frequently if certain indicators exist) for impairment of goodwill using a two-phase process. The first phase screens for impairment; while the second phase (if necessary) measures impairment.

In the first phase of impairment testing, goodwill is tested for impairment by comparing the fair value of the reporting unit with its carrying value. As of December 31, 2007, no instances of impairment were found.

Finite-lived intangible assets are amortized using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up in accordance with SFAS No. 142.

- 15 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Costs incurred in respect of issuance of debentures are deferred and amortized as a component of interest expense over the contractual life of the debenture using the effective interest method. The amortization periods for the Company’s finite-lived intangibles and debt issuance costs are as follows:

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	Amortization period in years
Technology	3-5
Customer relationship	5-6
Database	2
Trademark and trade name	4
Debt issuance costs	7

Impairment of long-lived assets other than goodwill:

The Company’s and its subsidiaries’ long-lived assets, including identifiable intangibles assets, are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. During 2005, 2006 and 2007, no impairment losses have been identified.

Income taxes:

The Company and its subsidiaries account for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), using the liability method whereby deferred tax assets and liability account balances are determined based on the differences between financial reporting and the tax basis for assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to the amounts that are more likely-than-not to be realized.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in its provision for income tax.

Revenue recognition:

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

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

- 16 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenues from software license agreements are recognized in accordance with Statement of Position No. 97-2, “Software Revenue Recognition”, as amended (“SOP No. 97-2”). SOP No. 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has adopted Statement of Position No. 98-9, “Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain Transactions” (“SOP No. 98-9”). SOP No. 98-9 requires that revenue be recognized under the “residual method” when vendor specific objective evidence (“VSOE”) of fair value exists for all undelivered elements and VSOE does not exist for all of the delivered elements. Under the residual method any discount in the arrangement is allocated to the delivered elements. The VSOE of fair value of the undelivered elements is determined based on the price charged for the undelivered element when sold separately. If VSOE of fair value does not exist for all elements to support the allocation of the total fee among all delivered and undelivered elements of the arrangement, revenue is deferred until such evidence exists for the undelivered elements, or until all elements are delivered, whichever is earlier.

Generally, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. The Company does not grant a right of return to its customers. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer, assuming all other revenue recognition criteria have been met.

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

Arrangements that include services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. Services that are considered essential consist primarily of significant production, customization, or modification. When such services are provided, revenues under the arrangement are recognized using contract accounting on a percentage of completion method, based on the relationship of actual labor days incurred to total labor days estimated to be incurred over the duration of the contract, in accordance with Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP No. 81-1”). When services are not considered essential, the revenues allocable to the software services are recognized as the services are performed.

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are first determined, in the amount of the estimated loss on the entire contract. During 2005, 2006 and 2007, no such estimated losses were identified.

Deferred revenues include unearned amounts received under maintenance and support contracts, and amounts received from customers but not recognized as revenues.

Research and development costs:

Research and development costs, net of grants received, are charged to the statement of operations as incurred.

Statement of Financial Accounting Standards No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS No. 86”), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

- 17 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release, have been insignificant. Due to the relatively short time between the date the products achieve technological feasibility and the date they generally become available to customers, costs subject to capitalization under SFAS No. 86 have been immaterial and have been expensed as incurred.

Concentrations of credit risk:

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

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

The Company’s and its subsidiaries’ trade and unbilled receivables are derived from sales to customers located primarily in the United States, Europe, Australia and the Far East. The Company and its subsidiaries perform ongoing credit evaluations of their customers and insure certain trade receivables under foreign trade risks insurance. An allowance for doubtful accounts is determined with respect to specific receivables for which collection may be doubtful. In management’s opinion, the allowance for doubtful accounts adequately covers anticipated losses with respect to its accounts receivable.

From time to time, the Company sells certain of its accounts receivable to financial institutions, within the normal course of business. Where receivables are sold without recourse to the Company and such sales constitute a true sale as this term is determined in Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS No. 140”), the relevant receivable is de-recognized and cash recorded. Where receivables are sold and the transfers of the rights to future cash receipts are related to underlying sales transactions for which the revenue has not been recognized, the receivable is not de-recognized and a liability reflecting the obligation to the financial institution is recorded within the short-term bank credit until the liability is discharged through the financial institution receiving payment.

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

Long term convertible debt:

The Company presents the outstanding principal amount of its long term convertible debts as a long-term liability, in accordance with APB No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB 14”). The debt is classified as a long-term liability until the date of conversion on which it would be reclassified to equity, or at the first contractual redemption date, on which it would be reclassified as a short-term liability (see also Note 11). Accrued interest on the convertible debt is included in “other accounts payable and accrued expenses”.

- 18 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Convertible note:

The Company presents the outstanding principal amount of the convertible note as a separate component in the shareholders equity in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 150, “ Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The Note was classified as an equity component since it has no repayment date, does not bear any interest and may be converted only to the Company’s Ordinary shares. The note will be classified as a separate component in shareholders’ equity until the date of actual conversion.

Accounting for stock-based compensation:

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-based Payment” (“SFAS No. 123(R)”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS No. 123(R) supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS No. 123(R).

SFAS No. 123(R) requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. Prior to the adoption of SFAS No. 123(R), the Company accounted for equity-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).

The Company adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. Under that transition method, compensation cost recognized in the year ended December 31, 2006, included: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). As required by the modified prospective method, results for prior periods have not been restated.

The Company recognizes compensation expenses for the value of these awards, which has graded vesting, based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

As a result of adopting SFAS No. 123(R) on January 1, 2006, the Company’s net loss for the year ended December 31, 2006, was $ 27 higher than if it had continued to account for stock-based compensation under APB 25. Basic and diluted net loss per share for the year ended December 31, 2006, was $ 0.01 higher than if the Company had continued to account for share-based compensation under APB 25.

Prior to January 1, 2006, the Company applied the intrinsic value method of accounting for stock options as prescribed by APB 25, whereby compensation expense is equal to the excess, if any, of the quoted market price of the stock over the exercise price at the grant date of the award.

- 19 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The pro forma table below illustrates the effect of the Company’s stock-based compensation expense on net loss and basic and diluted loss per share for 2005, had the Company applied the fair value recognition provisions of SFAS No. 123.

The fair value for options granted in 2005 is amortized over their vesting period and estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

	2005
Dividend yield	0	%
Expected volatility	73	%
Risk-free interest	4	%
Expected life	4 years

Pro forma information under SFAS No. 123:

	Year ended December 31, 2005
Net loss as reported	$	(6,058	)
Add - stock-based employee compensation expenses recorded in reported net loss		54
Deduct - stock-based employee compensation expenses determined under fair value method		(409	)
Pro forma net loss	$	(6,413	)
Basic and diluted net loss per share, as reported	$	(4.68	)
Pro forma basic and diluted loss per share	$	(4.95	)

The assumptions below are relevant to options granted in 2005 as it relates to Black-Scholes calculations:

The dividend yield assumption is based on the Company’s historical experience and expectation of future dividend payouts and may be subject to substantial change in the future.

The Company used its historical volatility in accordance with SFAS No. 123.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding. The expected life for options granted by the Company for the year ended December 31, 2005 is 4 years and the risk-free interest rate assumption is the implied yield available on United States treasury zero-coupon issues with a remaining term equal to the expected life term of the Company’s options.

The assumptions below are relevant to restricted shares granted in 2005, 2006 and 2007:

In accordance with FAS123(R), restricted shares are measured at their fair value as if it was vested and issued on the grant date. All restricted shares to employees granted in 2007, 2006 and 2005 were granted for no consideration; therefore their fair value was equal to the share price at the date of grant. No stock options were granted in 2006 and 2007.

- 20 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The fair value of all restricted shares was determined based on the opening trading price of the Company’s shares on the grant day. The weighted average grant date fair value of shares granted during the years 2007, 2006 and 2005 was $ 3.34, $ 4.15 and $ 9.95, respectively.

The Company applies SFAS No. 123 and EITF No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, with respect to options and warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

Severance pay:

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

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

Severance expenses for the years ended December 31, 2005, 2006 and 2007 amounted to approximately $ 45, $ 68 and $ 149, respectively.

Fair value of financial instruments:

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

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

Long-term bank loan and long and short-term convertible debt are estimated by discounting the future cash flows using current interest rates for loans of similar terms and maturities. The carrying amount of such long-term debts approximates their fair value.

Net loss per share:

Basic net loss per share is computed based on the weighted average number of shares outstanding during each year. Diluted net loss per share is computed based on the weighted-average number of shares outstanding during each year, plus dilutive potential shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”).

- 21 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

All outstanding stock options and non vested restricted shares, warrants and shares issuable upon conversion of the convertible debts and note have been excluded from the calculation of the diluted net loss per share because all such securities are anti-dilutive for all periods presented. The total weighted-average number of shares related to the outstanding options and unvested restricted shares, warrants and shares issuable upon conversion of the convertible debts and note excluded from the calculations of diluted net loss per share, was 348,255, 355,218 and 465,087 for the years ended December 31, 2005, 2006 and 2007, respectively.

Impact of recently issued accounting standards:

SFAS No. 157:

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 applies to other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis, and should be applied prospectively. The adoption of the provisions of SFAS 157 related to financial assets and liabilities and other assets and liabilities that are carried at fair value on a recurring basis is not anticipated to materially impact the Company’s consolidated financial position and results of operations. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The company does not expect the adoption of SFAS No. 157 will have an impact on its consolidated financial statements.

SFAS No. 159:

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company does not expect the adoption of SFAS No. 159 will have an impact on its consolidated financial statements.

SAB No. 110:

On December 21, 2007, the SEC staff issued Staff Accounting Bulletin No. 110 (“SAB 110”), which, effective January 1, 2008, amends and replaces SAB 107, “Share-Based Payment”. SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), “Share-Based Payment”. Under the “simplified” method, the expected term is calculated as the midpoint between the vesting date and the end of the contractual term of the option.

The use of the “simplified” method, which was first described in Staff Accounting Bulletin No. 107, was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The SEC staff does not expect the “simplified” method to be used when sufficient information regarding exercise behavior, such as historical exercise data or exercise information from external sources, becomes available.

- 22 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company does not expect the adoption of SAB No. 110 will have significant impact on its consolidated financial statement.

SFAS No. 141(R)

In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). This Statement replaces SFAS 141, “Business Combinations”, and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)’s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, “Accounting for Income Taxes”, to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, “Goodwill and Other Intangible Assets”, to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will have an impact on accounting for future business combinations once adopted and not on prior acquisitions. As such, the nature and magnitude of the specific effects will dependent upon the nature, terms and size of the acquisitions it consummates after the effective date.

SFAS No. 160

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin 51, “Consolidated Financial Statements”, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS 160 could have on its financial statements.

- 23 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

	December 31,
	2006		2007
Prepaid expenses	$	469	$	217
Employees		6		3
Government authorities		47		6
	$	522	$	226

NOTE 4:- PROPERTY AND EQUIPMENT

a. Composition:

	December 31,
	2006		2007
Cost:
Computers, peripheral equipment and software	$	5,259	$	5,442
Office furniture and equipment		818		819
Leasehold improvements		533		533
		6,610		6,794
Accumulated depreciation		6,447		6,556
Depreciated cost	$	163	$	238

Depreciation expenses for the years ended December 31, 2005, 2006 and 2007 were approximately $ 537, $ 150 and $ 117, respectively.

b. As for charges, see Note 12c.

NOTE 5:- OTHER INTANGIBLE ASSETS AND DEBT ISSUANCE COSTS, NET

a. Other intangible assets and debt issuance costs composition:

	December 31,
	2006		2007
Costs:
Technology	$	1,484	$	1,566
Database		21		21
Trademark and trade name		110		110
Debt issuance costs related to convertible debts		112		112
		1,727		1,809
Accumulated amortization:
Technology		874		1,173
Database		21		21
Trademark and trade name		66		94
Debt issuance costs related to convertible debts		106		107
		1,067		1,395
Amortized cost	$	660	$	414

See also Notes 1b, 1c.

- 24 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 5:- OTHER INTANGIBLE ASSETS AND DEBT ISSUANCE COSTS, NET (Cont.)

b. Amortization expenses of other intangible assets and debt issuance costs amounted to $ 336, $ 417 and $ 303 for the years ended December 31, 2005, 2006 and 2007, respectively.

c. Customer relationship acquired as part of the acquisitions of certain subsidiaries. Amortization expenses amounted to $ 204, $ 248 and $ 256 for the years ended December 31, 2005, 2006 and 2007, respectively.

d. Following is the estimated amortization expenses with respect to identifiable intangible assets and debt issuance costs for the years ended:

	December 31,
2008	$	472
2009	$	456
2010	$	135
2011	$	4

NOTE 6:- GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2007 are as follows:

Balance as of January 1, 2006	$	7,048
Foreign currency translation adjustments		40
Balance as of December 31, 2006		7,088
Foreign currency translation adjustments		64
Balance as of December 31, 2007	$	7,152

NOTE 7:- SHORT-TERM BANK CREDIT

As of December 31, 2004, the Company had a credit line facility with Bank Hapoalim (the “Bank”) of up to $ 137, of which the Company used $ 13, and a short-term loan in the amount of $ 1,500. The weighted-average interest on the credit line and the short-term loan was approximately 4% and 5%, respectively.

On December 22, 2005, the Company refinanced its debt arrangement with the Bank by converting $ 1,800 of the outstanding balance of short-term borrowings and line of credit to long-term debt and established a revolving line of credit for approximately $ 415 with the Bank, of which the Company used $ 264 as of December 31, 2005 (see Note 10). The weighted-average interest on the credit line was approximately 7%.

During 2006, the Company increased its credit line facility to $ 1,187 with the Bank and as of December 31, 2006, the Company had an outstanding balance of short-term borrowings under the credit line with the Bank in the amount of $ 728 and a short-term loan in the amount of $ 459. The weighted-average interest on the credit line and the short-term loan ranged from 7.6% to 9%.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 7:- SHORT-TERM BANK CREDIT (Cont.)

During 2007, the Company increased its credit line facility with the Bank to $ 1,719 and as of December 31, 2007, the Company had an outstanding balance of short-term borrowings under the credit line with the Bank in the amount of $ 130 and a short-term loan in the amount of $ 1,589. The weighted-average interest on the credit line and the short-term loan ranged from 7% to 10%.

In August, 2007, Bank Hapoalim agreed to modify the Company’s bank covenant requirements as part of its overall bank financing arrangement such that on a quarterly basis starting August 1, 2007 (i) the Company’s shareholders’ equity shall be at least the higher of (a) 13% of its total assets, or (b) $ 1,500, and (ii) its cash balance shall not be less than $ 500. In addition, Bank Hapoalim provided the Company with a waiver of these new bank covenant requirements for the remainder of 2007. In connection with these changes, the Company recorded fees expenses in the amount of $ 10 and issued 10,000 Ordinary shares to the bank at no consideration.

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

In addition, as of December 31, 2007, Company had sold an amount of $ 130 of its accounts receivable to a financial institution, relating to an annual renewal of support and maintenance transactions for which the revenue has not been recognized and, therefore, was accounted for as a financing transaction pursuant to EITF 88-18.

NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2006		2007
Employees and payroll accruals	$	1,257	$	1,287
Accrued expenses		627		783
	$	1,884	$	2,070

NOTE 9:- PAYMENT ON ACCOUNT OF CONVERTIBLE NOTE

On December 19, 2007, the Company signed a financing transaction with a group of new financial investors. The transaction included an equity investment of $ 600 at a price of $ 1.65 per Ordinary share and a convertible note of $ 600 (the “Convertible Note”) at a conversion price of $ 1.65 per Ordinary share. In addition, as part of the transaction, the investors received warrants to purchase an aggregate of up to 600,000 Ordinary shares at an exercise price of $ 2.00 per Ordinary share (see also Note 13). The Convertible Note does not bear interest, does not have any maturity, is not subject to a repayment in any event including liquidation and can only be converted into Ordinary shares. The Note Holder shall be entitled to convert any or all of the outstanding principal amount into Ordinary shares of the Company at a fixed conversion price of $1.65 per Ordinary share, as may be adjusted to reflect stock splits, reconsolidation or similar technical adjustments to the Company’s share capital. The Note Holder may convert the Principle Amount at any time at its discretion.

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

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 9:- PAYMENT ON ACCOUNT OF CONVERTIBLE NOTE (Cont.)

As of December 31, 2007, the Company received from the investors $ 600 of the equity investment and $ 161 of the Convertible Note, which both were not subject to shareholders approval. The Company also received an additional amount of $ 239 as payment on account of the Convertible Note and warrants which was subject to shareholders approval.

The amount of Convertible Note of $ 161 which was not subject to shareholders approval, was classified as equity in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”.

The amount of $ 239 of Convertible Note and warrants which was received in 2007 and was subject to shareholders approval, is classified as current liabilities as of December 31, 2007 as payment on account of convertible note.

The remaining balance of the Convertible Note and warrants in the amount of $ 200 was received after December 31, 2007.

NOTE 10:- LONG-TERM BANK LOAN

a. Composed as follows:

	Currency	Interest rate	December 31,
			2006		2007
Loan from a bank	U.S. $	LIBOR+2.25	$	1,292	$	738
Less - current maturities				574		589
			$	718	$	149

On December 22, 2005, and effective as of January 1, 2006, the Company refinanced its debt arrangement with the Bank by converting $ 1,800 of its outstanding balance of short-term borrowings to long-term debt payable in twelve quarterly installments of $ 150, with the first payment due on April 1, 2006, and interest payable quarterly at a rate of LIBOR + 2.25%. In addition, the Bank’s covenant requiring that the Company maintain a $ 2,000 quarterly cash balance in the Company’s accounts beginning January 1, 2006, has been modified such that (i) the Company’s cash balance on January 1, 2006 shall not be less than $ 1,000, and (ii) the Company’s cash balance on a quarterly basis beginning July 1, 2006, shall not be less than $ 1,000.

During 2006 and 2007, the Company did not comply with the covenants set forth under the long-term loan agreement. However, the Company received written waivers from the Bank for each period in which it was in default under which the Bank agreed not to act upon its contractual rights on the Company’s default.

In connection with this debt refinancing, the Company issued to the Bank 6,000 Ordinary shares in consideration of the par value of these Ordinary shares.

- 27 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- LONG-TERM BANK LOAN (Cont.)

The fair value of the Ordinary shares issued to the Bank (“Bank’s Shares”) was determined using the market price of the Company’s Ordinary shares at December 22, 2005. This resulted in an amount of $ 50. In accordance with APB 14, the Company allocated a portion of the proceeds to the Bank’s Shares, based on their applicable fair value. Amounts allocated to the Bank’s Shares were recorded as additional paid-in capital against a discount on the loan. The discount related to this loan will be amortized as financial expenses over the term of the loan of three years.

In August 2007, In connection with changes in bank arrangements including bank covenants, the Company issued 10,000 Ordinary shares to the bank at no consideration (see also Note 7).

b. The aggregate annual maturities of the long-term loans are as follows:

	December 31,
2008	$	589
2009		149
	$	738

An amount of $ 12 as of December 31, 2007, which relates to the discount, was deducted from the principal amount of the loan.

c. As for charges, see Note 12c(1).

NOTE 11:- LONG TERM CONVERTIBLE DEBT

Composed as follows:

	Interest rate		December 31,
			2006		2007
Convertible debt	7.5	%	$	568	$	556
Less - current maturities				—		—
			$	568	$	556

a. On July 28, 2004, the Company issued to LibertyView Special Opportunities Fund, L.P. (“LibertyView”) $ 2,500 aggregate principal amount of 7.5% Convertible debt (the “Debt”) due July 28, 2014. The Company is obligated to pay interest on the Debt on a quarterly basis commencing October 15, 2004, with interest to be paid either in cash or in Ordinary shares of the Company, at the discretion of the Company.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:- LONG TERM CONVERTIBLE DEBT (CONT.):

The Debt is convertible, at the option of LibertyView at any time before the maturity date, into Ordinary shares of the Company at a fixed conversion price of $ 21.498 per Ordinary share. LibertyView also has an option to obligate the Company to purchase the Debt for an amount equal to 100% of the principal amount plus accrued and unpaid interest, on July 15, 2008, July 15, 2009 and July 15, 2011. If LibertyView elects to obligate the Company to purchase the Debt, the Company can elect to pay the repurchase price in cash, Ordinary shares or a combination thereof.

The Debt is also subject to repurchase for cash, at LibertyView’s option and at a repurchase price equal to 100% of the principal amount plus accrued and unpaid interest, on the occurrence of certain events, including the following:

(i) an acquisition of the Company for cash only, (ii) an acquisition of the Company by another company whose market value is less than $ 25,000, (iii) if the Ordinary shares are neither listed for trading on a U.S. national securities exchange nor approved for trading on the Nasdaq Stock Market or any similar system of automated dissemination of quotations of securities prices, and (iv) if the Company is subject to bankruptcy or similar proceedings.

In accordance with Emerging Issues Task Force No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF No. 98-5”) and Emerging Issues Task Force No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF No. 00-27”), no beneficial conversion features were recognized or recorded.

In connection with the Debt, the Company agreed to file an F-3 Registration Statement covering the Ordinary shares which may be issued upon conversion of the Debt within the earlier of (i) 60 days from the date of the Debt, and (ii) 5 business days after the registration statement that was filed with the SEC prior to the date the Debt is declared effective by the SEC. In that respect, the Company has also agreed that in the event that the F-3 is not filed on time or not declared effective by the SEC within 90 days after it is filed, the Company shall pay LibertyView a cash compensation equal to 1% of the loan under the Debt for each month of delay (on a pro-rated basis).

b. On May 27, 2005, the Company entered into a letter agreement with LibertyView under which the Company agreed to issue to LibertyView 10,000 Ordinary shares at an estimated fair value of $ 140 (as determined by applying EITF No. 96-18) and pay a cash amount of $ 40 as sole and complete remedy for the Company’s inability to meet such registration deadlines.

c. On June 29, 2005, the Company issued to LibertyView 2,000 Ordinary shares at an estimated fair value of $ 23 (as determined by applying EITF No. 96-18) as sole and complete remedy for the Company’s inability to meet certain share listing conditions.

d. On August 5, 2005, the Company completed another financing transaction with LibertyView. The transaction included an equity investment of $ 700 at a price of $ 10.50 per Ordinary share with warrants to purchase up to 23,334 Ordinary shares at an exercise price of $ 10.50 per Ordinary share (see also Note 13), and an increase in the amount of the existing $ 2,500 convertible Debt with LibertyView to $ 2,980 (“New Convertible Debt”). The fixed conversion price for the entire value of the New Convertible Debt has been adjusted to $ 11.025 per Ordinary share, and may be converted to Ordinary shares at the discretion of LibertyView at any time during the term of the loan. The New Convertible Debt bears interest of 7.5%, payable quarterly in cash, and is due on August 3, 2013. LibertyView has the option to request earlier repayment during fixed time periods - beginning on July 15, 2008, July 15, 2009 and July 15, 2011.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:- LONG-TERM CONVERTIBLE DEBT (CONT.)

The Company has agreed to file a registration statement with the SEC covering the Ordinary shares from the equity investment and related warrants and the resale of the Ordinary shares, which may be issued upon conversion of the New Convertible Loan in accordance with the fixed conversion price explained above, subject to certain terms and conditions.

The Company filed a registration statement on Form F-3 with the SEC on December 22, 2005 covering the Ordinary shares from the equity investment and related warrants and the resale of the Ordinary shares which may be issued upon conversion of the Convertible Loan in accordance with the fixed conversion price explained above, subject to certain terms and conditions. The registration statement was declared effective by the SEC on January 26, 2006.

This transaction was accounted for according to APB 14. The fair value of the warrants and the conversion option was determined using the Black-Scholes pricing model, assuming a risk-free interest rate of 4.25%, a volatility factor 80%, dividend yields of 0% and a contractual life of eight years for the convertible Debt and five years for the warrant.

In connection with the New Convertible Debt, the Company recorded a deferred debt premium of $ 645 with respect to the premium arising from fair value allocation of the various elements of the transaction according to APB 14, which is being amortized from the date of issuance to the stated redemption date, August, 3, 2013. No beneficial conversion features were recorded. In the event that the debt instrument is converted to equity, the carrying amount of the debt, as well as any interest accrued through the date of conversion, as prescribed in EITF No. 85-17, “Accrued Interest upon Conversion of Convertible Debt”, would be credited to the capital accounts. Upon conversion, any un-amortized premium will be converted to equity.

In accordance with EITF Issue No. 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (“EITF 96-19”), the Company concluded that the adjustment of the conversion price of the LibertyView Debt on August 5, 2005, is considered a modification of a debt instrument which is “substantial”, and therefore, results in a debt extinguishment of the existing Debt. As a result, the Company recorded a loss in the amount of $ 787 in financial expenses representing the change in the present value of the cash flows of the debt component.

According to the Debts’ terms, the holders were granted two Put options (i) the option to request earlier repayment during fixed time periods - beginning on July 15, 2008, July 15, 2009 and July 15, 2011; (ii) If a designated event occurs, as defined in the Debts’ terms, the Debt shall be purchased by the Company, at the option of the holder thereof, at a cash purchase price equal to 101% of the principal amount of those securities, plus accrued and unpaid interest. The Company applied the guidance of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”), and determined that SFAS No. 133 does require the bifurcation of the embedded Put options and to account for them separately. Based on a fair value valuation, these Put options have nominal value and their fair market value is immaterial as of December 31, 2006. The Company will monitor the value of these options on an on-going basis and when the fair value becomes material, mark the bifurcated derivatives to market through earnings.

e. On June 2, 2006, the Company and LibertyView amended the agreement described in d. above, and according to the amended agreement LibertyView converted $ 2,000 of the Company’s 7.5% convertible Debt to 261,438 Preferred A shares of the Company, at a conversion price of $ 7.65 per Preferred A share. The remaining $ 980 principal balance of LibertyView’s convertible Debt with the Company remained in effect under the existing terms of the Debt.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 11:- LONG-TERM CONVERTIBLE DEBT (CONT.)

Since the conversion involved the issuance of a new class of shares, Preferred A shares, which is not pursuant to the conversion rights provided in the Convertible Debt terms at issuance, the Company accounted for this transaction as an early extinguishment of the Convertible Debt under the guidance of APB No. 26, “Early Extinguishment of Debt” (“APB 26”). Accordingly, the difference between the fair value of the issued Preferred A shares and the net carrying amount of the extinguished debt in the amount of $ 743 was recognized as financial income in the period of extinguishment. The Company also considered the issued Preferred A shares as permanent equity in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and recorded the fair value of the Preferred A shares that were issued as equity.

f. On November 30, 2006, LibertyView sold $ 500 of its Convertible Debt to Jerusalem High-tech Founders, Ltd. (“JHTF”), a company controlled by Samuel HaCohen, the Company’s Chairman of the Board of Directors, and in which Vladimir Morgenstern, a member of the Company’s Board of Directors, has an economic interest. Upon the sale of the Debt, the Company signed an agreement with JHTF, which was approved by the Company’s shareholders, and consummated on December 29, 2006, to convert the $ 500 Convertible Debt to Preferred A shares at $ 7.65 per Preferred A share, which may be converted at the discretion of JHTF on a one-to-one basis to Ordinary shares at any time. The Company issued 65,360 Preferred A shares to JHTF in exchange for the conversion of $ 500 of JHTF debt to the Company.

Since the conversion involved the issuance of a new class of shares, Preferred A shares, which is not pursuant to the conversion rights provided in the Convertible Debt terms at issuance, the Company accounted for this transaction as an early extinguishment of the Convertible Debt under the guidance of APB No. 26, “Early Extinguishment of Debt” (“APB 26”). Accordingly, the difference between the fair value of the issued Preferred A shares and the net carrying amount of the extinguished debt in the amount of $ 231 was recognized as financial income in the period of extinguishment. The Company also considered the issued Preferred A shares as permanent equity in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” and recorded the fair value of the of Preferred A shares that were issued as equity.

g. As of December 31, 2007 the balance of the convertible Debt in the amount of $ 556 was classified as a long-term convertible Debt in accordance with FAS 78, “Classification of Obligations That Are Callable by the Creditor an Amendment of ARB No. 43, Chapter 3A” since LibertyView, the convertible debt holder, did not exercise its right to call for repayment of the debt on July 15, 2008 and as such the debt can be called for repayment only on the next exit date, which is July 15, 2009.

- 31 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 12:- COMMITMENTS AND CONTINGENT LIABILITIES

a. Royalty commitments:

The Company participated in programs sponsored by the Israeli Government for the support of research and development activities, through the Office of the Chief Scientist of the Israel’s Ministry of Industry, Trade and Labor (the “OCS”). Through December 31, 2007, the Company had obtained aggregate grants from the OCS of $ 372.

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

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

Through December 31, 2007, the Company has paid or accrued royalties to the OCS in the amount of $ 18. As of December 31, 2007, the total contingent liability to the OCS amounted to $ 387.

b. Lease commitments:

The Company’s facilities, its subsidiaries’ facilities and its motor vehicles are leased under various operating lease agreements, which expire on various dates, the latest of which is in 2011.

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

Year ended December 31,	Facilities
2008	$	384
2009		188
2010		190
2011		95
Total	$	857

Lease expenses in respect of facilities for the years ended December 31, 2005, 2006 and 2007 were approximately $ 661, $ 598 and $ 524, respectively.

Lease expenses in respect of motor vehicles for the years ended December 31, 2005, 2006 and 2007 were approximately $ 211, $ 276 and $ 289, respectively. In addition, as of December 31, 2007 future minimum rental payments in connection with motor vehicles leased for the years 2008, 2009 and 2010 are $ 252, $ 134 and $ 99, respectively.

c. Charges and guarantees:

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

2. The Company obtained bank guarantees in the amount of $ 82, in order to secure an office lease agreement.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY

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

The Preferred A shares are not publicly traded.

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

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

General:

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

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

b. In November 2005, the Company’s shareholders approved in the annual general meeting an increase in the Company’s authorized share capital by 1,000,000 Ordinary shares.

c. In June 2006, the Company’s shareholders approved in a special meeting an increase in the Company’s authorized share capital by 1,538,562 Ordinary shares, and by 261,438 Preferred A shares.

d. In December 2006, the Company’s shareholders approved in the annual general meeting to increase the authorized number of Preferred A shares by 138,562 by decreasing the authorized number of Ordinary shares by 138,562.

e. In February 2005, the Company issued to Telvent Investments S.L., an existing shareholder of the Company, in a private placement, 116,332 Ordinary shares at a price per share of $ 11.435, for the total consideration of $ 1,332.

f. In May 2005, the Company issued to LibertyView 10,000 Ordinary shares at an estimated fair value of $ 140 (as determined by applying EITF No. 96-18) and paid a cash amount of $ 40 as sole and complete remedy for the Company’s inability to meet certain registration deadlines (see also Note 11).

- 33 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (CONT.)

g. In June 2005, the Company issued to LibertyView 2,000 Ordinary shares at an estimated fair value of $ 23 (as determined by applying EITF No. 96-18) as sole and complete remedy for the Company’s inability to meet certain share listing conditions (see also Note 11).

h. In June 2005 and August 2005, the Company issued a total of 111,156 Ordinary shares related to the acquisition of e-Wise at an estimated fair value of $ 1,268 (see also Note 1b).

i. In August 2005, the Company issued to LibertyView in a private placement 66,667 Ordinary shares at a price per share of $ 10.50 and warrants to purchase up to 23,334 Ordinary shares at an exercise price of $ 10.50 per Ordinary share, for the total consideration of $ 700 (see also Note 11). The warrants are exercisable through August 2010. As of December 31, 2007, the warrants are outstanding.

j. In September 2005, the Company issued to a group of new financial investors, in a private placement, 47,619 Ordinary shares at a price per share of $ 10.50 and warrants to purchase an aggregate of up to 32,540 Ordinary shares at an exercise price of $ 10.50 per Ordinary share, for the total consideration of $ 500. The warrants are exercisable through September 2010. As of December 31, 2007, the warrants are outstanding.

k. In September 2005, the Company issued to a financial investor 6,508 Ordinary shares for no consideration at an estimated fair value of $ 68, as a finders fees related to the September 2005 transaction in item j, above.

l. In December 2005, in connection with the refinancing of short-term to long-term debt, the Company issued to the Bank 6,000 Ordinary shares in consideration of the par value at an estimated fair value of $ 50 (see also Note 10).

m. During 2005, the Company issued to LibertyView a total of 20,384 Ordinary shares for interest expenses due on the convertible Debts at an estimated fair value of $ 231.

n. In January and May 2006, a warrant holder exercised a total of 23,867 warrants into 10,612 Ordinary shares in a cashless exercise.

o. In January 2006, the Company issued 4,000 Ordinary shares to a service provider in consideration of consulting services.

p. In June 2006, the Company issued to a group of investors, including three existing shareholders and another institutional investor, 287,540 Ordinary shares at a price of $ 4.695 per share for a total consideration of $ 1,350. The investors received warrants to purchase 57,510 Ordinary shares of the Company at an exercise price of $ 5.635 per Ordinary share and 2,693 Ordinary shares of the Company at an exercise price of $ 4.693 per Ordinary share

q. In June 2006, LibertyView, a convertible debt holder, converted $ 2,000 of the Company’s 7.5% convertible debt to 261,438 Preferred A shares of the Company, at a conversion price of $ 7.65 per Preferred A share (see also Note 11).

r. In September 2006, the Company converted its short-term convertible debt (including accrued interest) to 114,301 Ordinary shares of the Company, at a conversion price of $ 4.7025 per Ordinary share.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

s. In December 2006, Jerusalem High-tech Founders Ltd., a convertible debt holder, converted $ 500 of the Company’s 7.5% convertible debt to 65,360 Preferred A shares of the Company, at a conversion price of $ 7.65 per Preferred A share (see also Note 11f).

t. In December 19, 2007, the Company issued to a group of new financial investors 363,636 Ordinary shares at a price of $ 1.65 per share for a total consideration of $ 600. The transaction included also a non interest bearing convertible note of $ 600 at a conversion price of $ 1.65 per Ordinary share and warrants to purchase an aggregate of up to 600,000 Ordinary shares at an exercise price of $ 2.00 per Ordinary share (see also Note 9). The Convertible note does not have any maturity, does not bear any interest and can only be converted into Ordinary shares. 50% of the warrants are callable by the Company when all shares issued in connection with the new investment are registered with the SEC.

All of the warrants and an amount of $ 439 of the Convertible Note are subject to the Company’s shareholders approval which was granted on January 31, 2008 (see also Note 9) and, therefore, the amounts received as of December 31, 2007 on account of the Convertible Note was recorded in liabilities as “payments on account of convertible note and warrants”.

u. Following the December 19, 2007 financing described in t. above, the Company had issued 211,457 Ordinary shares to a group of existing shareholders at no consideration which exercised its anti-dilution protection right, granted under the September 2006 conversion terms of the short-term convertible debt (see also r above).

v. In November 2007 and December 2007, the Company issued 28,500 Ordinary shares under the 2005 Share Options Plans to service providers in consideration of consulting services.

Stock options and Restricted shares:

a. Under the Company’s 1996, 1997, 1998 and 1999 Stock Option Plans (the “Plans”), the Company reserved for issuance 28,000, 10,000, 30,000 and 60,000 Ordinary shares, respectively. The options may be granted to officers, directors, employees and consultants of the Company or its subsidiaries. Pursuant to the Plans

In 2001, 2003, 2004 and 2005, the Company increased the number of shares reserved for issuance under the 1999 Stock Option Plan by additional 60,000, 40,000, 70,000 and 30,000 shares, respectively.

Each option granted under the Plans is exercisable until the earlier of seven years from the date of the grant of the option or the expiration dates of the respective option plans. The Company’s 1999 option plan will expire on December 31, 2008, The exercise price of the options granted under the Plan may not be less than the nominal value of the shares into which such options are exercised. The options vest primarily over periods of two to four years. Any options which are canceled or forfeited before expiration become available for future grants.

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

- 35 -

VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

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

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

As of December 31, 2007, an aggregate of 27,023 Ordinary shares of the Company were available for future grant.

b. In November 2005, the Company issued to the Company’s directors 14,000 restricted Ordinary shares for no consideration (the “Restricted Shares”). The Restricted Shares shall be released ratably on an annual basis over a two-year period (“release period”), starting from the date of grant, and are subject to acceleration provisions upon certain events such as merger or acquisition. The Company has accounted for this award in accordance with FIN 44 and is amortizing the deferred stock compensation in the amount of $ 139, reflecting the quoted market price of the Company’s Ordinary shares as of the date of grant over the exercise price at the grant date of the award ($ 0) as compensation expense ratably over the release period of the Restricted Shares. Compensation expenses of approximately $ 6, $ 65 and $ 49 were recognized during the years ended December 31, 2005, 2006 and 2007, respectively.

c. On December 30, 2005, the Company decided to accelerate the vesting of 27,975 unvested stock options outstanding with an exercise price equal to or greater than $ 8.20 per share, which were held by the Company’s employees, including officers. As a result, these unvested stock options became fully exercisable effective as of December 30, 2005, rather than becoming exercisable at the later dates when such options would have otherwise vested in the normal course. The Company’s stock options have generally vested over a period of two to four years.

The decision to accelerate the vesting of these stock options was made primarily to reduce compensation expense that otherwise would be recorded in future periods following the Company’s adoption in the first quarter of 2006 of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”) (see also Note 2). The acceleration was accounted for in accordance with FIN 44, which resulted in no additional compensation expenses.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

d. In April 2006 and in December 2006, the Company issued to the Company’s employees and director’s 26,270 and 10,000 restricted Ordinary shares, respectively, for no consideration (the “Restricted Shares”). The Restricted Shares shall be released ratably on an annual basis over a two-year period (“release period”), starting from the date of grant, and some of them are subject to acceleration provisions upon certain events such as merger or acquisition. The Company has accounted for this award in accordance with FAS123(R). The total grant date fair value was $ 151, reflecting the quoted market price of the Company’s Ordinary shares as of the date of grant over the purchase price of $ 0 as compensation expense, ratably over the release period of the Restricted Shares. Compensation expenses of approximately $34 and $ 37 were recognized during the years ended December 31, 2006 and 2007, respectively.

e. In March 2007, the Company issued to the Company’s employees and consultants 61,160 and 6,000 restricted Ordinary shares, respectively, at no consideration (the “Restricted Shares”). The Restricted Shares shall be released ratably on an annual basis over a two or three-year period (“release period”), starting from the date of grant, and some of them are subject to acceleration provisions upon certain events such as merger or acquisition. The Company has accounted for this award in accordance with FAS123(R) and for the awards granted to consultants in accordance with FAS123(R) and EITF 96-18. The total grant date fair value was $ 224, reflecting the quoted market price of the Company’s Ordinary shares as of the date of grant over the purchase price of $ 0 as compensation expense, ratably over the release period of the Restricted Shares. Compensation expenses of approximately $ 110 were recognized during the year ended December 31, 2007.

f. The following is a summary of the Company’s employees’ and directors’ stock option activity under the Plans and related information:

	Year ended December 31, 2007
	Number of options		Weighted average remaining contractual term (years)	Aggregate intrinsic value	Weighted average exercise price
Outstanding - beginning of the year	123,805				$	10.92
Canceled	(16,085	)			$	16.62
Outstanding - end of the year	107,720		3.91	—	$	10.06
Vested and expected to vest	107,720		3.91	—	$	10.06
Options exercisable	107,720		3.91	—	$	10.06

The total intrinsic value of options exercised during the years ended December 31, 2005, and 2006, was $ 6, and $ 2, respectively. No options were exercised in 2007.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

The options outstanding as of December 31, 2007, under the Plans, have been separated into ranges of exercise price, as follows:

Range of exercise price	Options outstanding and exercisable as of December 31, 2007	Weighted average remaining contractual life (years)	Weighted average exercise price
$ 7.95-8.20	61,943	2.51	$	7.99
$ 10.00-11.65	39,700	3.81	$	10.78
$ 20.50-28.00	6,077	1.12	$	25.92
	107,720		$	10.06

Compensation expenses related to options of approximately $ 115, $ 59 and $ 0 were recognized during the years ended December 31, 2005, 2006 and 2007, respectively.

As of December 31, 2007, there was no unrecognized compensation cost related to options to employees’ compensation arrangements granted under the plan, as a result of the acceleration of all unvested stock options outstanding as of December 30, 2005.

g. A summary of the status of the Company’s restricted shares as of December 31, 2007, and changes during the year ended December 31, 2007, is presented below:

Restricted shares	Shares		Weighted average grant- date fair value
Restricted at January 1, 2007	39,470		$	5.01
Granted	67,160		$	3.34
Vested	(19,390	)	$	5.93
Forfeited	(6,525	)	$	3.75
Restricted at December 31, 2007	80,715		$	3.50

As of December 31, 2007, there was $160 of total unrecognized compensation cost related to restricted shares compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of restricted shares released during the year ended December 31, 2007 was 43.

The weighted average grant date fair value of shares granted during 2005, 2006 and 2007 were $9.95, $4.15 and $3.34, respectively.

h. The following table sets forth the total stock-based compensation expense for each of the two years ended December 31 2006 and 2007, resulting from awards granted to employees, directors and consultants, included in the Company’s consolidated statement of operations (no stock options were granted during 2006 and 2007):

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

	Year ended December 31, 2006		Year ended December 31, 2007
Cost of revenues	$	6	$	23
Research and development cost		3		9
Selling and marketing expenses		3		24
General and administrative expenses		99		152
Total stock-based compensation expense	$	111	$	208

The fair value for restricted shares granted is amortized over their vesting period.

g. Options issued to consultants:

1. The Company’s outstanding options to consultants as of December 31, 2007, are as follows:

Issuance date	Options for Ordinary shares	Exercise price per share		Options exercisable	Exercisable through
January 2002	1,000	$	20.50	1,000	January 2009
September 2002	3,812	$	8.20	3,812	September 2009
August 2003	4,900	$	7.95	4,900	August 2010
August 2004	500	$	10.00	500	August 2011
March 2005	7,000	$	10.30	7,000	March 2012
Total	17,212			17,212

Compensation expenses of approximately $ 36, $ 25 and $ 3 were recognized during the years ended December 31, 2005, 2006 and 2007, respectively as sales and marketing expenses. Compensation expenses of approximately $ 12, $ 0 and $ 0 were recognized during the years ended December 31, 2005, 2006 and 2007, respectively as general and administrative expenses.

2. In January 2006, the Company issued 4,000 Ordinary shares under the 2005 Share Options Plans to a service provider in consideration of consulting services.

In March 2007, the Company granted 6,000 restricted shares under the 2005 Share Options Plans to service providers in consideration of consulting services.

4. In November 2007 and December 2007, the Company issued 28,500 Ordinary shares under the 2005 Share Options Plans to service providers in consideration of consulting services.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 13:- SHAREHOLDERS’ EQUITY (Cont.)

Warrants:

a. Warrants issued for financing transactions:

1. In connection with an additional credit line received in March 2005 (see Note 10), the Company issued to a subsidiary of Bank Hapoalim a warrant to purchase an additional 10,000 Ordinary shares of the Company for an aggregate exercise price of $ 10.30 per share. The warrant is exercisable during a period of two years from the date of grant.

During 2005, 2006 and 2007, the Company recorded a compensation of approximately $ 24, $ 12 and $ 12, respectively, which was included in the financial expenses. This transaction was accounted for according to APB 14.

The fair value of this warrant was determined using the Black-Scholes pricing model, assuming a risk free interest rate of 3%, a volatility factor of 113%, dividend yield of 0% and an expected term of two years.

As of December 31, 2007, all of the above warrants are outstanding.

2. The Company’s outstanding warrants to investors and consultants as of December 31, 2007, are as follows:

Issuance date	Warrants for Ordinary shares	Exercise price per share		Warrants exercisable	Exercisable through
April 1998	578	$	1.25	578	No expiration date
August 2005	23,334	$	10.50	23,334	August 2010
September 2005	32,540	$	10.50	32,540	September 2010
May 2006	57,510	$	5.63	57,510	May 2008
May 2006	2,663	$	4.69	2,663	May 2008
Total	116,625			116,625

3. See also Notes 9 and 11.

Dividends:

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

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:- TAXES ON INCOME

FIN-48:

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized an increase of approximately $ 55 in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of the accumulated deficit and an amount of $ 13 related to interest and penalties on tax positions for the year ended December 31, 2007 which was recorded in financial expenses. The interest liability related to uncertain tax positions in the amounts of $ 13, is included within the income tax provision on the Company’s consolidated balance sheet as of December 31, 2007.

The reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits was not provided due to immateriality.

In accordance with the Company’s accounting policy, both before and after adoption of FIN 48, interest expense and potential penalties related to income taxes are included in the financial expenses, net line of the Company’s consolidated statements of operations.

The Company and its subsidiaries file federal and state income tax returns in the U.S., Israel, Australia and the U.K. ViryaNet Ltd. may be subject to examination by the Israel tax authorities for fiscal years 2003 through 2007. ViryaNet Inc.’s (the U.S. subsidiary) tax returns through 2006 were audited by the U.S. Internal Revenue Service (“IRS”) which resulted with no incremental tax liability. ViryaNet Inc. may be subject to examination by the IRS for fiscal year 2007. ViryaNet PTY (the Australian subsidiary) may be subject to examination by the Australian tax authorities for fiscal years 2005 through 2007.

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

Reduction in Israeli tax rates:

For tax year 2007, Israeli companies are subject to “Corporate Tax” on their taxable income at the rate of 29%. Following an amendment to the Israeli Income Tax Ordinance, 1961 (the “Israeli Tax Ordinance”), which came into effect on January 1, 2006, the corporate tax rate is scheduled to decrease as follows: 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and thereafter.

Israeli companies are generally subject to capital gains tax at a rate of 25% for capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (the “Law”):

The Company’s production facilities have been granted an “approved enterprise” status under the law, for three separate investment programs, which were approved in February 1989, March 1995 and April 1998.

The status of “approved enterprise” granted for the February 1989 investment program has expired.

The status of “approved enterprise” granted for the March 1995 investment program will expire in 2008.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:- TAXES ON INCOME (CONT.):

The tax benefits period for the April 1998 program has not yet begun. Income derived from this alternative benefits track program is exempted from tax for a period of ten years, starting in the first year in which the Company generates taxable income from the approved enterprise, subject to a condition that the Company will have a certain minimum number of professional employees. The Company has not yet met this condition; however it has applied for relief, and adjustment of this requirement. There can be no assurance that the relief will be granted to the Company, and if the relief is not granted the Company will lose its entitlement to future benefits under Law. Generally, “Approved Enterprise” tax benefits are limited to 12 years from commencement of production or 14 years from the date of approval, whichever is earlier.

Pursuant to the Law, the Company has elected for its two other investment programs the “alternative benefits” track and has waived Government grants in return for a tax exemption. The Company’s offices and its research and development center are located in Jerusalem, in a region defined as a “Priority A Development Region”. Therefore, income derived from these programs will be tax-exempt for a period of ten years commencing with the year in which it first earns taxable income, subject to certain conditions.

As the Company currently has no taxable income, the benefits from all these programs have not been yet utilized.

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

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

The Law also grants entitlement to accelerated depreciation claim on buildings and equipment used by the “approved enterprise” during the first five tax years of using the assets.

Income from sources other than the “approved enterprise” during the benefit period will be subject to tax at the regular Israeli corporate tax rate, as describe above.

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

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:- TAXES ON INCOME (CONT.):

However, the Capital Investments Law provides that terms and benefits included in any letter of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore the Company’s existing “approved enterprise” will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the new Law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income. As of December 31, 2007, the Company did not generate income under the provision of the new Law.

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

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

The Company is an “industrial company”, as defined by this law and, as such, is entitled to certain tax benefits, mainly amortization of costs relating to know-how and patents over eight years, the right to claim public issuance expenses and accelerated depreciation.

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

Results of the Company for tax purposes are measured and reflected in real terms in accordance with the changes in the CPI. As explained in Note 2, the financial statements are presented in U.S. dollars. The difference between the rate of change in Israeli CPI and the rate of change in the NIS/U.S. dollar exchange rate causes a difference between taxable income or loss and the income or loss before taxes reflected in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on this difference between the reporting currency and the tax bases of assets and liabilities.

On February 26, 2008, the Israeli Parliament (the Knesset) enacted the Income Tax Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Effective Period), 2008, which the Company refers to as the Inflationary Adjustments Amendment. In accordance with the Inflationary Adjustments Amendment, the effective period of the Inflationary Adjustments Law will cease at the end of the 2007 tax year and as of the 2008 tax year the provisions of the law shall no longer apply, other than the transitional provisions intended at preventing distortions in the tax calculations. In accordance with the Inflationary Adjustments Amendment, commencing with the 2008 tax year, income for tax purposes will no longer be adjusted to a real (net of inflation) measurement basis. Furthermore, the depreciation of inflation immune assets and carried forward tax losses will no longer be linked to the Israeli Consumer Price Index.

Net operating losses carryforward:

The Company has accumulated losses for tax purposes as of December 31, 2007, in the amount of approximately $ 30,302, which may be carried forward and offset against taxable income and capital gain in the future for an indefinite period.

Through December 31, 2007, ViryaNet U.K. had accumulated losses for income tax purposes of approximately $ 18,224, which can be carried forward and offset against taxable income in the future for an indefinite period.

In April 2007, the Company dissolved ViryaNet Japan, and the accumulated loss for income tax purposes of $ 1,197 was extinguished as part of the dissolution.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:- TAXES ON INCOME (CONT.):

As of December 31, 2007, the U.S. subsidiary had U.S. federal net operating loss carryforward for income tax purposes in the amount of approximately $ 7,218. Net operating loss carryforward arising in taxable years beginning before August 6, 1997, can be carried forward and offset against taxable income for 15 years and expiring between 2010 and 2012. Net operating loss carryforwards arising in taxable years beginning after August 6, 1997 can be carried forward and offset against taxable income for 20 years, expiring between 2017 and 2026.

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

Through December 31, 2007, ViryaNet Australia had accumulated losses for income tax purposes of approximately $ 262, which can be carried forward and offset against taxable income in the future for an indefinite period.

Deferred income taxes:

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

	December 31,
	2006			2007
Deferred tax assets:
U.S. net operating loss carryforward	$	2,470		$	2,815
Israeli net operating loss carryforward		6,337			7,573
U.K. net operating loss carryforward		5,384			5,467
Japan net operating loss carryforward		359			—
Australia net operating loss carryforward		52			79
Allowances and reserves		198			257
Total deferred tax assets before valuation allowance		14,800			16,191
Valuation allowance		(14,800	)		(16,191	)
Net deferred tax asset	$	—		$	—

As of December 31, 2007, the Company and its subsidiaries have provided valuation allowances in respect of deferred tax assets resulting from tax loss carryforward and other temporary differences, since they have a history of operating losses and current uncertainty concerning its ability to realize these deferred tax assets in the future. Management currently believes that it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 14:- TAXES ON INCOME (CONT.):

Net loss consists of the following:

	Year ended December 31,
	2005		2006		2007
Domestic	$	3,133	$	1,800	$	2,660
Foreign		2,925		119		1,150
	$	6,058	$	1,919	$	3,810

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

In 2005, 2006 and 2007, the main reconciling item of the statutory tax rate of the Company (34% - in 2005, 31% in 2006 and 29% in 2007) to the effective tax rate (0%) is tax loss carryforwards and other deferred tax assets for which a full valuation allowance was provided.

NOTE 15:- SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION

a. Summary information about geographical areas:

The Company adopted Statement of Financial Accounting Standard No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”). The Company operates in a single reportable segment, the Field Service business segment (see Note 1 for a brief description of the Company’s business). The total revenues are attributable to geographic areas based on the location of the end customer.

The following table presents total revenues for the years ended December 31, 2005, 2006 and 2007 and long-lived assets as of December 31, 2005, 2006 and 2007:

	2005				2006				2007
	Total revenues		Long-lived assets		Total revenues		Long-lived assets		Total revenues		Long-lived assets
United States	$	11,249	$	1,226	$	9,917	$	793	$	8,809	$	611
Europe and the Middle East		1,052		151		1,021		81		1,001		43
Asia Pacific		1,906		996		2,922		816		1,349		644
	$	14,207	$	2,373	$	13,860	$	1,690	$	11,159	$	1,298

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

There were no major customers representing 10% of more of revenues in 2007 and 2006. One customer accounted for approximately 15% of revenues in 2005.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 16:- FINANCIAL EXPENSES, NET

	Year ended December 31,
	2005		2006		2007
Income:
Interest income	$	9	$	—	$	—
Foreign currency translation adjustments		34		—		—
Income from conversion of convertible debt		—		975		—
Other income		114		—		—
Total income		157		975		—
Expenses:
Interest and bank charges		394		604		286
Foreign currency translation adjustments		—		188		113
Loss from extinguishment of convertible note and other expenses related to convertible note		920		—		—
Bank fees and stock based compensation expenses related to options and shares granted to a Bank		173		227		136
Total expenses		1,487		1,019		535
Financial expenses, net	$	1,330	$	44	$	535

NOTE 17:- RELATED PARTIES TRANSACTIONS

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

b. On July 21, 2003, the board of directors and audit committee approved an agreement with a director of the Company, to provide project management services to the Company in connection with its engagements with customers and prospects. The compensation provided under the terms of this agreement is based on the average compensation provided to employees providing similar services to the Company. During 2005, the director was paid $ 8 for these services. No payments were made to the director in 2006 and 2007.

c. Insurances policies with Clal Credit Insurance and Clal Insurance:

During the period from 2005 through 2007, the Company purchased several insurance policies from Clal Credit Insurance and Clal Insurance, both of which are affiliated with the Clal Group, which is the Company’s shareholder.

d. Transactions with Telvent Interactive S.A. (“Telvent”), a shareholder in the Company, an affiliate of which serves on the Company’s board of directors:

On June 30, 2004, the Company entered into a value added reseller agreement with Telvent, under which Telvent became a non-exclusive reseller of the Company’s products at normal reseller terms.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 17:- RELATED PARTIES TRANSACTIONS (CONT.):

On December 1, 2004, the Company entered into an agreement with Telvent, under which, Telvent provides the Company with certain technical consulting services relating to one of the Company’s customers.

The following is a summary of the transactions with Telvent:

	Year ended December 31,
	2005		2006		2007
Revenues:
Software license	$	—	$	—	$	—
Maintenance and services		140		137		105
Total	$	140	$	137	$	105
Cost of revenues:
Maintenance and services	$	163	$	—	$	—

There were no trade payables with Telvent as of December 31, 2006 and 2007.

e. As part of the e-Wise acquisition (see also Note 1(a)), the Company assumed an amount of approximately $ 285 in unsecured debt. The unsecured debt is payable to e-Wise’s major shareholder, Mark Hosking, who became a shareholder and an officer of the Company as a result of the acquisition.

On August 28, 2007, the Company and Mark Hosking, agreed to a revision in the payment terms for the $ 115 balance of the Company’s unsecured debt arrangement with Mr. Hosking. Accordingly, the Company paid $ 25 on October 1, 2007 and the balance will be paid by the Company in eight equal monthly installments beginning January 1, 2008. As part of this arrangement, the Company reserves the right to make early payment of the outstanding debt in full at any time in advance of the payment conditions set forth above, without penalty.

As of December 31, 2007, the outstanding amount of the debt is $ 90.

f. On November 30, 2006, LibertyView sold $ 500 of its Convertible Debt to Jerusalem High-tech Founders, Ltd. (“JHTF”), a company controlled by Samuel HaCohen, the Company’s Chairman of the Board of Directors, and in which Vladimir Morgenstern, a member of the Company’s board of directors, has an economic interest. Upon the sale of the debt, the Company signed an agreement with JHTF, which was approved by the Company’s shareholders and consummated on December 29, 2006, to convert the $ 500 Convertible Debt to Preferred A shares at $ 7.65 per Preferred A share, which may be converted at the discretion of JHTF on a one-to-one basis to Ordinary shares at any time. The Company issued 65,360 Preferred A shares to JHTF in exchange for the conversion of $ 500 of JHTF debt to the Company. See also Note 11.

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VIRYANET LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 18:- SUBSEQUENT EVENTS

a. On January 31, 2008, the Company’s shareholders approved the additional issuance of convertible note in the amount of $ 439 and warrants in the amount of $ 1,200 in accordance with the agreement with the new financial investors from December 19, 2007 (see also Note 13t)

b. On January 31, 2008, the Company’s shareholders approved an increase of the authorized share capital of the Company by NIS 10,000,000 (consisting of 2,000,000 Ordinary shares of NIS 5.0 per share) and increase the number of restricted shares and shares options reserved in the Company’s 2005 Share Option Plans by 200,000.

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

d. On September 28, 2008, the Company received from Bank Hapoalim a waiver of its bank covenants for the balance of 2008 and for the first quarter of 2009. In connection with the waiver and the conversion of the short-term loan to Long term loan (see also Note 18c above), the Company agreed to pay $ 30 of fees to the bank.

e. On July 31, 2008, in connection with the December 19, 2007 financing transaction (see Note 13t), the new financial investors signed an exercise letter in which they exercise warrants to purchase 300,000 Ordinary shares at an exercise price of $ 2.00 per Ordinary share and further undertook to transfer the exercise price no later than October 30, 2008.

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EX-4.(A)26

Exhibit 4(a)(26)

THE COMPANIES LAW- 1999

A COMPANY LIMITED BY SHARES

ARTICLES OF ASSOCIATION

OF

VIRYANET LTD.

PRELIMINARY

1. In these Articles, unless the context otherwise requires:

“these Articles” shall mean these Articles of Association of the Company as shall be amended from time to time;

“Auditors” shall mean the auditors of the Company, from time to time;

The “Board” shall mean the Company’s board of directors;

The “Company” shall mean ViryaNet Ltd.;

“Director” shall mean a director of the Company, form time to time;

“External Directors” shall mean directors appointed and serving in accordance with Sections 239 through 249 of the Law;

The “Law” shall mean the Companies Law, 5759-1999, as it may be amended from time to time, and any regulations promulgated thereunder;

“Deemed Liquidation” shall mean any transaction effecting a merger, consolidation or sale of all or substantially all of the Company’s assets, property, business or securities, other than a merger, consolidation or amalgamation in which the Company is the surviving entity or in which the shareholders of the Company immediately prior to such transaction hold more than 50% of the surviving entity.

“Month” shall mean a Gregorian month;

The “Office” shall mean the registered Office of the Company as it shall be from time to time;

“Office Holder” shall mean every director and every other person defined, under the Law as a “Nosei Misra,” including specified executive officers of the Company;

The “Ordinance” shall mean the Companies Ordinance [New Version] 1983, as amended, and any regulations promulgated thereunder, and those provisions of the Ordinance which are still in effect from time to time;

The “Preferred Shares Adjusted Issue Price” shall mean US$7.65.

The “Register” shall mean the Register of Shareholders that is to be kept pursuant to Section 127 of the Law or, if the Company shall keep branch registers, any such branch register, as the case may be;

A “Shareholder” shall mean any person or entity that is the owner of at least one share, or any fraction thereof, in the Company, as registered in the Register;

“Writing” shall mean handwriting, typewriting, facsimile, print, lithographic printing and any other mode or modes of presenting or reproducing words in visible form;

“Year” shall mean a Gregorian year.

In these Articles, subject to this Article and unless the context otherwise requires, expressions defined in the Law or any modification thereof in force at the date on which these Articles become binding on the Company, shall have the meaning so defined; and words importing the singular shall include the plural, and vice versa; words importing the masculine gender shall include the feminine; and words importing persons shall include companies, partnerships, associations and all other legal entities. The titles of the Articles or of a chapter containing a number of Articles are not part of the Article.

In the event that an Article has been added to these Articles which contradicts an original Article found in these Articles, the Articles added shall take precedence.

LIMITED LIABILITY AND COMPANY OBJECTIVES

2. The Company is a public company as such term is defined in Section 1 of the Law. The liability of the Company’s shareholders is limited and accordingly each shareholder’s responsibility for the Company’s obligations shall be limited to the payment of the par value of the shares held by such shareholder, subject to the provisions of these Articles and the Law.

3. The Company’s objectives are to carry on any business and do any act which are not prohibited by law. The Company may also make contributions of reasonable sums to worthy purposes even if such contributions are not made on the basis of business considerations.

CAPITAL

4. The share capital of the Company shall consist of NIS 35,000,000 consisting of 6,600,000 Ordinary Shares (the “Ordinary Shares”), each having a nominal value of NIS 5.0 and 400,000 Preferred A Shares (the “Preferred Shares”), each having a nominal value of NIS 5.0. The powers, preferences, rights, restrictions, and other matters relating to the Ordinary Shares are as set forth in the following Articles. Warrants and options shall not be considered as shares for purposes of these Articles. The Ordinary Shares all rank pari passu in all respects except as set forth in the warrant itself.

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The rights attached to the Preferred Shares shall be exactly the same rights attached to the Ordinary Shares of the Company, except for the Preferred Shares Liquidation Preference set forth in Article 131 below. In these Articles, unless the context specifically requires otherwise, any reference to Ordinary Shares shall include the Preferred Shares as an integral part of such class of shares. The Preferred Shares shall for all intents and purposes, except as specifically set forth in these Articles, be deemed part of the class of Ordinary Shares, and shall vote on all matters together with the Ordinary Shares of the Company as a single class (including for the purpose of Section 20(c) of the Companies Law).

4A Conversion of Preferred Shares

(a) Each Preferred Share shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, into Ordinary Shares on a one-to-one basis (i.e. one Ordinary Share for one Preferred Share). In the event that any adjustment is made in the Company’s Ordinary Shares (by way of stock split, stock dividend, recapitalization or any other event), then the Preferred Shares shall be treated and effected similarly (i.e. the same adjustments) such that each Preferred Share shall always be convertible into one Ordinary Share.

(b) Each Preferred Share shall automatically be converted into one Ordinary Share upon the closing of a Deemed Liquidation. In the event of such automatic conversion, the person(s) entitled to receive the Ordinary Shares issuable upon such conversion of Preferred Shares shall not be deemed to have converted such Preferred Shares until immediately prior to the closing of such Deemed Liquidation.

(c) Before any holder of Preferred Shares shall be entitled to convert the same into Ordinary Shares and to be registered as the owner thereof in the Register, the holder shall give written notice to the Company that the holder elects to convert the same; provided, however, that in the event of an automatic conversion pursuant to Article 4A(b) above, the outstanding Preferred Shares shall be converted automatically without any further action by the holders of such shares. Any conversion shall be deemed to have been made immediately prior to the close of business on the date of receipt of notice by the Company of such conversion, or in the case of automatic conversion, then on the date of closing of a Deemed Liquidation, and the person or persons entitled to receive the Ordinary Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Ordinary Shares on such date.

5. Subject to the Law and these Articles and to the terms of any resolution creating new shares, the unissued shares from time to time shall be under the control of the Board which may, subject as aforesaid, allot the same to such persons, against cash, or for such other considerations which is not cash, with such restrictions and conditions, in excess of their nominal value, or at their nominal value, or at a discount to their nominal value, and at such times as the Board shall deem appropriate. Subject as aforesaid, the Board shall have the power to cause the Company to grant to any person the option to acquire from the Company any unissued shares or issue to any person other securities convertible or exercisable to or rights to acquire shares or other securities of the Company, and on such terms as the Board shall deem appropriate.

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6. The Board shall have the power, to the extent permitted under the Law and these Articles, to cause the Company to purchase shares of the Company during such period, for such consideration and on such terms as the Board shall deem fit.

7. The Company shall not issue bearer shares or exchange a share certificate for a bearer share certificate.

8. Subject to the Law and these Articles, and without prejudice to any special rights previously conferred upon the holders of any existing shares or class of shares, the Company may, from time to time, create shares with such preferential, deferred, qualified or other special rights, privileges, restrictions or conditions, whether in regard to dividend, voting, repayment of capital of otherwise as may be stipulated in the resolution or other instrument authorizing such new shares.

9. The Company shall have the power to issue redeemable shares and redeem the same all in accordance with, and subject to, the provisions of the Law.

SHAREHOLDERS

10. If two or more persons are registered in the Register as joint holders of a share, they shall be jointly and severally liable for any calls or any other liability with respect to such share. However, with respect to voting, power of attorney and furnishing of notices, the one registered first in the Registers shall be deemed to be the sole owner of the share, unless all the registered joint holders notify the Company in writing to treat another one of them as the sole owner of the share, unless registered, subject to the provisions of Article 68 hereof.

If two or more persons are registered together as holders of a share, each one of them shall be permitted to give receipts binding all the joint holders for dividends or other monies or property received from the Company in connection with the share and the Company shall be permitted to pay all the dividend or other monies or property due with respect to the share to one or more of the joint holders, as it shall choose.

11. Except upon court order so directing, the Company shall not recognize the holder of a share as a trustee, and shall not be obligated to recognize a right based upon the rules of equity or a right dependent upon a condition or a future right or a partial right in a share, or any other right whatsoever with respect to the share, except for the exclusive right of the registered holder with respect to the share.

SHARE CERTIFICATES

12.

12.1.  A shareholder shall be entitled to receive from the Company without payment, one or more certificate(s) that shall state the number of shares owned by him, their serial numbers and the amount paid on account of their par value. However, in the event of more than one person

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holding a share, the Company shall not be obligated to issue more than one certificate to all of the joint holders, and the delivery of such a certificate to one of the joint holders shall be deemed to be a delivery to all of the partners.

Where a shareholder has transferred only a part of the shares represented in a certificate, the old certificate shall be cancelled and he shall be entitled, without charge, to a new certificate representing the balance of shares.

12.2.  Each certificate shall carry the signature or signatures of those persons appointed by the Board for this purpose and the stamp or seal of the Company.

A Registration Company (as such term is defined in the Securities Law 5728-1968) shall be entitled, without payment, to receive, within such time as may be prescribed under the Statutes or, if not prescribed as aforesaid, within such time period as the Board may deem fit, a certificate that specifies the number and class of shares, together with any other details the Company is required, under the Law, for inclusion therein that are registered in its name in the Register.

If a share certificate is defaced, lost or destroyed, it may be renewed on payment of such fee, if any, not exceeding one United States dollar or the New Israeli Shekel equivalent thereof on the date of payment and on such terms, if any, as to evidence and indemnity as the Board thinks fit.

PLEDGE

13. The Company shall have a lien and first pledge on any share that is registered in the name of any Shareholder (whether registered in the Shareholder’s name only or together with another or others), but not fully paid, for any amount still outstanding with respect to that share, whether or not presently payable. Any such pledge shall apply to all dividends and other moneys, if any payable in connection with such share. The Board may at any time release any share, wholly or in part, temporarily or permanently, from the provisions of this Article. Unless otherwise provided, registration by the Company of a share transfer shall be deemed to be a waiver by the Company of its lien and pledge on those shares.

14. The Company may sell, in such manner and at such time as the Board thinks fit, any pledged shares when the debt, liability or other obligation giving rise to the lien has matured, but no sale shall be made unless a written request has been furnished to the Shareholder or person who has acquired a right in the shares, setting out the amount or obligation or commitment due and demanding payment or, fulfillment of the debt, liability or other obligation within seven days of service of the notice, and the person fails to fulfill his obligation pursuant to the notice within such seven days period.

15. The net proceeds of any such sale of pledged shares shall be applied in satisfaction of the debt, liability or other obligation relating to the pledged share, and the remainder (if any) shall be paid to the Shareholder or to the person who had acquired a right in the share sold, pursuant to the above.

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16. After execution of a sale of pledged shares as provided for in Articles 13 and 14, the Board shall be permitted to sign or to appoint any person to sign a deed of transfer of the shares sold and to register the buyer’s name in the Register as the owner of the shares. Such buyer shall not be obligated to supervise the application of monies nor will his right in the shares be affected by a defect or illegality in the sale proceedings after his name has been registered in the Register with respect to those shares. The sole remedy of any person aggrieved by the sale shall be in damages only and against the Company exclusively.

TRANSFER OF SHARES AND THE MANAGEMENT THEREOF

17. The shares of the Company are transferable subject to the restrictions contained in these Articles and the Law. Each transfer shall be made in writing in any usual or common form, or in any form approved by the Board from time to time. Such form shall be delivered to the office, or such other place that the Board may from time to time approve, together with the transferred share certificates, if share certificates have been issued with respect to the shares to be delivered, and any other proof of the transferor’s title that the Board may require under the Law. The Board may, in its absolute discretion, refuse to register a transfer of any share which is not fully paid.

18. The share transfer deed shall be executed both by the transferor and transferee, and the transferor shall be deemed to remain a holder of the share until the name of the transferee is entered into the Register in respect thereof. The share transfer deed with respect to a share that has been fully paid may be signed by the transferor only.

19. Every instrument of transfer of a share must be in respect of only one class of share.

20. Subject to Article 23, all instruments of transfer which shall be registered in the Register shall (except in case of fraud) be retained by the Company, but any instrument of transfer which the Board may refuse to register in the Register shall (except in case of fraud) be returned to the party presenting the same.

21. No fee shall be charged:

21.1.  for registration of a transfer; or

21.2.  on the registration of any probate, letters of administration, certificate of death or marriage, power of attorney, notice or other instrument relating to or affecting the title any shares.

22. The Company shall maintain a Register and, if applicable, a register of Substantial Shareholders (as defined in the Law) as required by the Law. Subject to and in accordance with the provisions of the Law, the Company may cause branch registers to be kept in any other country, and to exercise all the other powers mentioned in the Law relating to such branch registers. The Company shall also be entitled to appoint a transfer agent, whose records shall be deemed a branch register.

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23. The Company shall be entitled to destroy: (a) all instruments of transfer of shares and all other documents on the faith of which entries are made in the Register at any time after the expiration of six (6) years from the date of registration of the same; (b) all dividend mandates and notifications of change of name or address at any time after the expiration of two (2) years from the date of recording; and (c) all share certificates which have been cancelled at any time after the expiration of one (1) year from the date of cancellation. If the Company destroys a document in good faith and without notice of any claim (regardless of the parties) to which the document might be relevant, it shall conclusively be presumed in favor of the Company that every instrument of transfer so destroyed was a valid and effective instrument duly and properly registered, every share certificate so destroyed was a valid and effective document duly and properly cancelled and every other document mentioned above so destroyed was a valid and effective document in accordance with the recorded particulars in the books or records of the Company. Nothing in this Article shall be construed as imposing upon the Company any liability in respect of the destruction of any document at an earlier date than that provided above or if the condition as to good faith and absence of notice is not met. References in these Articles to the destruction of any document include references to its disposal in any manner.

TRANSMISSION OF SHARES

24. Upon the death of a Shareholder, the remaining partners (in the event that the deceased was a partner in a share) or the administrators or executors or heirs of the deceased (in the event the deceased was the sole holder of the share or was the only one of the joint holders of the share to remain alive) shall be recognized by the Company as the sole holders of any title to the shares of the deceased. However, nothing herein shall release the estate of a deceased holder (whether sole or joint) of a share from any obligation to the Company with respect to any share held by the deceased.

25. Any person becoming entitled to a share as a consequence of the death or bankruptcy or liquidation of a Shareholder shall, upon such evidence being produced as may from time to time be required by the Board, have the right either to be registered as a Shareholder in respect of the share upon the consent of the Board or, to transfer such share to another person, subject to the provisions contained in these Articles with respect to transfers.

26. A person becoming entitled to a share because of the death, bankruptcy or liquidation of a Shareholder shall be entitled to receive, and to give receipts for, dividends or other payments paid with respect to the share but shall not be entitled to exercise any of the rights or privileges of Shareholder unless and until such person becomes a Shareholder in respect of the share.

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CALLS

27. Subject to the provisions of these Article and to the terms of allotment of any shares, the Board may from time to time make such calls on the Shareholders in respect of all moneys unpaid on their shares (whether on account of the nominal amount of the shares or by way of premium or, if the shares shall have been issued at a discount to their nominal value, on account of all moneys unpaid on such shares) as it may think fit, provided that at least 14 (fourteen) days’ notice is given of each call. Each Shareholder shall be liable to pay the amount of every call so made on him to the Board. A call may be wholly or in part revoked or the time fixed for its payment postponed by the Board. A Shareholder upon whom a call is made shall remain liable for calls made upon him notwithstanding the subsequent transfer of the shares in respect of which the call was made. Unless otherwise stipulated by the Board in the notice given in respect of the call, each payment in response to a call shall be deemed to constitute a pro rata payment on account of all the shares in respect of which such call was made.

28. A call shall be deemed to have been made at the time when the resolution of the Board authorizing such call was passed.

29. The joint holders of a share shall be jointly and severally liable for the payment of all calls and installments in respect hereof.

30. If a call or installment payable in respect of a share is not paid before or on the day appointed for payment thereof, the Shareholder from whom the call or installment is due shall pay interest on the amount of the call or installment from the day such call or installment is payable to the time of actual payment at such rate as the Board shall fix, but the Board may waive payment of such interest wholly or in part. The provisions of this Articles shall not deprive the Company of, or derogate from, any other rights or remedies the Company may have against such person pursuant to these Articles or applicable law.

31. No Shareholder shall be entitled to receive any dividend or other payment or distribution or be present or vote at any General Meeting either personally or (save as proxy for another Shareholder) by proxy, or by any other means as may be permitted under the Law, or be reckoned in a quorum, or to exercise any other privilege as a Shareholder until such Shareholder shall have paid all calls then due and payable on every share registered in such Shareholder’s name, whether registered alone or jointly with any other person, (as referred to in Article 29), together with interest and expenses.

32. Any sum which by the terms of issue of a share is made payable upon allotment or at any fixed date, whether on account of the nominal value of the share or by way of premium, or, if such share shall have been issued at a discount to its nominal value, on account of the amount payable in respect of such share, shall for all purposes of these Articles be deemed to be a call duly made and payable on the date fixed for payment, and in case of non-payment all the relevant provisions of these Articles as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum were a call duly made and notified.

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33. The Board may, at its discretion, receive from any Shareholder willing to pay in advance all or a part of the amounts then due on account of such Shareholder’s shares, in addition to any amounts requested for payment. The Board shall be permitted to pay such Shareholder: (1) interest at such rate as the Board and the Shareholder shall agree upon for the amounts paid in advance as aforesaid, or upon the part thereof which is in excess of the amounts whose payment was at the time requested on account of the Shareholder’s shares, and (2) any dividends that may be paid for that part of the shares for which the Shareholder has paid in advance.

34. The Board may at any time cause the Company to repay the amount so advanced upon the least three (3) months’ written notice to such Shareholder of its instruction to do so, unless before the expiration of such notice the amount so advanced shall have been called up on the share in respect of which it was advanced.

FORFEITURE OF SHARES

35. If a Shareholder fails to pay all or any part of a call or installment of a call on or prior to the day appointed for payment thereof, the Board may, so long as such amount remains unpaid, serve notice on the Shareholder requiring payment of such unpaid amount, together with any interest which may have accrued and any expenses that were incurred as a result of such non-payment.

36. The notice shall specify a date not less than seven (7) days from the date of the notice, on or before which the payment of the call or installment or part thereof is to be made together with interest and any expenses incurred as a result of such non-payment. The notice shall also state the place the payment is to be made and that in the event of non-payment at or before the time appointed, the share in respect of which the call was made will be liable to forfeiture.

37. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect. Any such forfeiture shall apply to dividends that were declared but not yet distributed with respect to the forfeited shares.

38. Forfeited shares shall be deemed the property of the Company and may be sold or otherwise disposed of, on such terms and in such manner as the Board sees fit. At any time prior to the sale or disposition of forfeited shares, the forfeiture may be canceled on such terms as the Board sees fit. Notwithstanding the foregoing, no such cancellation shall stop the Board from adopting a subsequent resolution of forfeiture in respect of a failure to amounts due in respect of the shares.

39. The Company may, by resolution of the Board, accept a surrender of any share liable to be forfeited hereunder. A surrendered share shall be treated as if it has been forfeited.

40. A person whose shares have been forfeited or surrendered shall cease to be a shareholder in respect of them but shall notwithstanding the forfeiture or surrender remain liable to pay to the Company all calls made and not paid on such shares at

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the time of forfeiture or surrender, and interest thereon to the date of payment in the same manner in all respects as if the shares had not been forfeited or surrendered, and to satisfy all (if any) claims and demands which the Company might have enforced in respect of the shares at the time of forfeiture or surrender without any reduction or allowance for the value of the shares at the time of forfeiture. In the event of any such forfeiture or surrender, the Company, by resolution of the Board, may accelerate the date(s) of payment of any or all amounts then owing to the Company by the shareholder in question (but not yet due) in respect of shares, whether registered in his name or registered jointly with any other person forfeited or surrendered as aforesaid.

41. The forfeiture or surrender of a share shall involve the extinction at the time forfeiture or surrender of all interest in and all claims and demands against the Company in respect of the share as between the Shareholder whose share is forfeited or surrendered and the Company, except only such of those rights and liabilities as are by these Articles expressly saved, or as are by the Law given or imposed in the case of past Shareholders.

42. A declaration in writing by a director or secretary of the Company that a share in the Company has been duly forfeited on the date stated in the declaration shall be conclusive evidence of the facts therein stated against all persons claiming to be entitled to the share. That declaration, together with the receipt of the Company for the consideration, if any, given for the share on the sale or disposition thereof and specifying the place of payment of the consideration, shall constitute good title to the share. The person to whom the share is sold or disposed of shall be registered as the holder of the share and shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.

43. The provisions of these Articles as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the amount of the share, or by way of premium, as if the same had been payable by virtue of a call duly made and notified.

ALTERATION OF CAPITAL

44. With regard to its capital the Company may:

44.1.  From time to time, by resolution of its Shareholders subject to these Articles and the Law:

44.1.1.  Consolidate and divide all or any of its issued or unissued share capital into shares of larger nominal value than its existing shares;

44.1.2.  Cancel any shares which at the date of the adoption of such resolution have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled;

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44.1.3.  Subject to applicable laws, subdivide its shares (issued or outstanding) or any of them, into shares of smaller nominal value than is fixed by the Memorandum of Association (if applicable) or these Articles. The resolution whereby any share is subdivided may determine that, as among the holders of the shares resulting from such subdivision, one or more of the share may, as compared with the others, have special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new share;

44.1.4.  Reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient and, in particular, exercise any or all of the powers conferred under the Law in relation to such reduction of share capital or capital redemption reserve.

44.2.  Upon any consolidation or subdivision of shares, settle any difficulty which may arise with regard thereto, as it deems fit, including (but without prejudice to the generality of the foregoing), in the event of a consolidation or any action which may result in fractional shares:

44.2.1.  Allotting, in contemplation of, or subsequent to, such consolidation or other action, such shares or fractional shares sufficient to preclude or remove fractional shareholdings;

44.2.2.  Subject to Section 295 of the Law, making such arrangements for the sale or transfer of the fractional shares to such person or persons at such times and at such price as the Board thinks fit so as to most expeditiously preclude or remove any fractional shareholdings. The Board shall cause the Company to distribute the net proceeds of any such sale in due proportion among the Shareholders who would have been entitled to the fractional shares so sold or transferred;

44.2.3.  To the extent as may be permitted under the law redeem or purchase such fractional shares sufficient to preclude and remove such fractional shareholding and the Board shall cause the Company to distribute the net proceeds payable in connection with such redemption or purchase in due proportion among the shareholders who would have been entitled to such fractional shares; and

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44.2.4.  Determining, as to the holders of shares so consolidated, which issued shares shall be consolidated into each share of a larger nominal value.

INCREASE OF CAPITAL

45. The Company may from time to time, whether or not all the shares then authorized have been issued, and whether or not all the shares theretofore issued have been fully called up for payment, increase its share capital by the creation of new shares. Any such new share capital shall be of such amount and divided into shares of such nominal amounts and (subject to any special rights then attached to any existing class of shares) bear such rights or preferences or be subject to such conditions or restrictions (if any) as the resolution approving such share capital increase shall provide.

46. Except so far as otherwise provided in such resolution or pursuant to these Articles, such new shares shall be subject to all the provisions applicable to the shares of the original capital of the same class and par value.

VARIATION OF CLASS RIGHTS

47. If at any time the share capital of the Company is divided into different classes of shares, the right attached to any class (unless otherwise provided by the terms of issue of the shares of that class) may be varied only upon consent of a separate General Meeting of the holders of the shares of that class. The provisions of these Articles relating to General Meetings shall mutatis mutandis apply to every such separate General Meeting.

48. Unless otherwise provided by these Articles, the enlargement of an authorized class of shares, or the issuance of additional shares thereof out of the authorized and unissued share capital, shall not be deemed, for the purposes of Article 47 to vary, modify or abrogate the rights attached to previously issued shares of such class or of any other class of shares.

BORROWING POWERS

49. Subject to these Articles and the Law the Board may from time to time, cause the Company to borrow or secure the payment of any sum of money for the purposes of the Company and raise or secure the repayment of any such sum upon such terms and conditions as it sees fit, and, in particular, issue bonds, perpetual or redeemable debentures, or other securities or mortgage, charge, its undertaking property and assets of the property of the Company, both present and future, including its uncalled capital and its called but unpaid capital whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.

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GENERAL MEETINGS

50.

50.1.  An Annual General Meeting shall be held once in every calendar year at such time (within a period of not more than fifteen (15) months after the last preceding Annual General Meeting) and at such place, either within or without the State of Israel, as may be determined by the Board.

50.2.  Subject to the provisions of these Articles, the function of the Annual General Meeting shall be to elect the members of the Board; to receive and discuss the Financial Statements, the ordinary reports and accounts of the Company’s Directors and Auditors; to appoint the Company’s Auditors and to fix their remunerations and to transact any other business which under these Articles or the Law are to be transacted at a General Meeting.

51. All General Meetings other than Annual General Meeting shall be called Extraordinary General Meetings. The Board, whenever it sees fit, may, and upon a demand in writing as provided for in Section 63(b) of the Law, shall convene an Extraordinary General Meeting. Every such demand shall include the purposes for which the meeting is called, shall be signed by those making the demand (the “Petitioners”) and shall be sent to the Office. Any such demand may consist of several documents in like form, each signed by one or more Petitioners. The date of a meeting called by the Board pursuant hereto must be no later than 56 days from the date of submission of the demand. If the Board does not call a meeting within 21 days from the date of submission of the demand, the Petitioners, or any of them representing more than one half of the voting rights held by the Petitioners, may convene the meeting by themselves. However, any such meeting shall not be held after three months have passed since the date of the submission of the demand.

52. Subject to these Articles, applicable law and regulations, prior notice of at least 21 days of any General Meeting, specifying the place, date and hour of the meeting, shall be given as, hereinafter provided, to the Shareholders thereunto entitled pursuant to these Articles and the Law. Non-receipt of any such notice shall not invalidate any resolution passed or the proceedings held at that meeting. With the consent of all the Shareholders entitled to receive notice thereof, a meeting may be convened upon shorter notice or without any notice and in such manner, generally, as shall be approved by such Shareholders.

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53. Notice of a General Meeting shall include:

53.1.  The agenda for such meeting. The contents of such agenda shall include, among other things as determined by the Board and subject to the Law and these Articles, the following:

53.1.1.  if such meeting is being held pursuant to a requisition of Shareholders or Directors in the manner as provided by the Law, particulars of the objectives for which such meeting has been called;

53.1.2.  any subject as may be requested for inclusion in the manner referred to in Article 54;

53.1.3.  the methods or mechanisms available for submitting written votes; and

53.1.4.  any other particulars as may be required under the Law.

53.2.  The text of any resolution which is proposed to be put and voted upon at such meeting, unless the Law permits a general description of the text; and

53.3.  Any other matter as so required, under the Law, for inclusion in any such notice.

54.

54.1.  Notwithstanding any provision of these Articles to the contrary, and to allow the Company to determine the Shareholders entitled to notice of, or to vote at, any Annual or Extraordinary General Meeting or any adjournment thereof, or to express consent to or dissent from any corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of, or to take or be the subject to, any other action, the Board may fix, a record date, which shall not be more than forty (40), or any longer period permitted under the Law, nor less than four (4) days before the date of such meeting or other action. A determination of holders of record entitled to notice of or to vote at a meeting shall apply to any adjournment of the meeting: provided, however, that the Board may fix a new record date for the adjourned meeting.

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54.2.  Any Shareholder or Shareholders of the Company holding, at least, one percent (1%) of the voting rights in the issued share capital of the Company may, pursuant to the Law, request that the Board include a subject in the agenda of a General Meeting to be held in the future. Any such request must be in writing, give particulars of the subject which is requested to be included in such agenda, be signed by the Shareholder or Shareholders making such request and must be deposited at the Office and addressed to the Board. In addition subject to the Law and the provisions of Article 89, the Board shall be required to include such subject in the agenda of the meeting only if the request has been delivered to the Secretary of the Company not later than (i) with respect to an Annual General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting and (ii) with respect to an Extraordinary General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the proposed date of such meeting, provided, however, that in the event that less than ninety (90) days notice or prior public disclosure of the date of any such meeting is given, such request must have been delivered to the Secretary of the Company not later than the close of business on the 10^th day following the day on which notice or prior public disclosure of the meeting was given, provided that the preceding provision shall not derogate from the Company’s obligations pursuant to Section 69(b) of the Law. Each such request shall also set forth: (a) the name and address of the Shareholder making the request; (b) a representation that the Shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting; (c) a description of all arrangements or understandings between the Shareholder and any other person or persons (naming such person or persons) in connection with the subject which is requested to be included in the agenda; and (d) a declaration that all the information that is required under the Law and any other applicable law to be provided to the Company in connection with such subject, if any, has been provided. The Chairman of the General Meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. The Board will include in the agenda for a General Meeting a subject as requested if the Board deems that subject suitable for discussion at a General Meeting.

55. Subject to the Law, all General Meetings shall be held at such time and place as the Board may determine. The Board may, in its absolute discretion, resolve to enable persons entitled to attend a General Meeting to do so by simultaneous attendance

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and participation at the principal meeting place and a satellite meeting place or places anywhere in the world and the Shareholders present in person, by proxy or by written ballot at satellite meeting places shall be counted in the quorum for and entitled to vote at the General Meeting in question, and that meeting shall be duly constituted and its proceedings valid, provided that the Chairman of the General Meeting is satisfied that adequate facilities are available throughout the General Meeting to ensure that Shareholders attending at all the meeting place able to:

55.1.  participate in the business for which the meeting has been convened;

55.2.  hear all persons who speak (whether by the use of microphones, loudspeakers audio-visual communications equipment or otherwise) in the principal meeting place and any satellite meeting place, and

55.3.  be heard by all other persons so present in the same way.

56. The Chairman of the General Meeting shall be present at, and the meeting shall be deemed to take place at, the principal meeting place.

57. The officer of the Company who has charge of the Register shall prepare and make, at least ten (10) days before every meeting of the Shareholders, a complete list of the Shareholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each Shareholder and the number of shares registered in the name of each Shareholder. Such list shall be open to the examination of any Shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting at a place specified in the notice of the meeting or at the place where the meeting is to be held. The list shall also be present at the meeting during the whole time thereof, and may be inspected by any Shareholder who is present.

PROCEEDINGS AT GENERAL MEETINGS

58. No business shall be transacted at any General Meeting unless a quorum is present when the meeting proceeds to business. For all purposes, the quorum shall not be less than two (2) Shareholders present in person, or by proxy, or deemed by the Law, to be present at such meeting, holding, in the aggregate, at least, thirty-three and one-third percent (33 1/3%) of the voting rights in the issued share capital of the Company.

59. If within half an hour from the time appointed for the meeting a quorum is not present (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide), the meeting, if convened upon the requisition of the Shareholders, shall be dissolved; in any other case, it shall stand adjourned to the same day in the next week at the same place and time (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday), or any other day, hour and/or place as the Directors shall notify the Shareholders in the notice of General Meeting delivered by the

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Company pursuant to Article 52 in connection with the meeting from which the adjournment occurred. If a quorum is not present at the second meeting within half an hour from the time appointed for the meeting, any two Shareholders present personally or by proxy or any other valid instrument shall Constitute a quorum, and shall be entitled to deliberate and to resolve in respect of the matters for which the meeting was convened.

60. The Chairman (if any) of the Board shall preside as Chairman at every General Meeting of the Company. If there is no Chairman or if at any meeting he is not present within fifteen (15) minutes from the time appointed for the meeting, or if he refuses to preside as Chairman of the meeting, the deputy Chairman (if any) shall, if present and willing to act, preside at the meeting but if neither the Chairman and deputy Chairman are present and willing to preside, the Directors present shall choose a Director to preside, or if there is only one director present he shall preside if willing to act. If there is no Director present and willing to preside, the Shareholders present and entitled to vote shall choose a Shareholder to be Chairman of the meeting. The Chairman of any General Meeting shall not, by virtue of such office, be entitled to vote at any General Meeting nor shall the Chairman of a meeting have a second or casting vote (without derogation, however from the rights of such Chairman to vote as a Shareholder or proxy of a Shareholder if, in fact, he is also a Shareholder or a duly appointed proxy).

61. The Chairman may, with the consent of any meeting at which a quorum is present, and shall if so directed by the meeting, adjourn the meeting from time to time and from place to place, as the meeting shall decide. The Chairman may, at his sole discretion and without the requirement for the consent of the meeting, adjourn or otherwise make alternative appropriate arrangements for any General Meeting at which in his opinion the venue arrangements cannot cater in an orderly fashion so as to enable the shareholders present adequately to hear, speak and vote on the matters before the meeting. Without prejudice to the generality of the foregoing, the Chairman may in such circumstances direct that the meeting be held simultaneously in two or more venues connected for the duration of the meeting by audio or audio-visual links or in two or more consecutive sessions with the votes taken being aggregated or that it be adjourned to a later time on the same day or a later date at the same or any other venue.

62. Notwithstanding anything in these Articles to the contrary, if a meeting shall be adjourned for twenty-one (21) days or more, a notice shall be given of the adjourned meeting as in the case of an original meeting. Except as aforesaid no Shareholder shall be entitled to receive any notice of an adjournment or of the business to be transacted at the adjourned meeting. At an adjourned meeting no matters shall be discussed except for those which could properly have been discussed at the meeting from which the adjournment occurred.

63. Subject to these Articles and the Law, a resolution of the Company in a General Meeting shall be deemed adopted if passed by Shareholders present, in person, by proxy, or by written ballot, or deemed under the Law to be present, holding greater than fifty percent (50%) of the total voting power attached to the shares whose holders were present, in person, by proxy, or by written ballot, or deemed under the Law to be present, at such General Meeting, and voted thereon. Every vote at a General Meeting shall be conducted according to the number of votes to which each Shareholder is entitled on the basis of the number of shares held by him which confer on him a right to vote at a General Meeting.

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64. At any General Meeting, a resolution, in respect of any business, put to vote of the meeting shall be decided by a poll. Such poll shall be held in the manner, at the time and place as the Chairman of the General Meeting directs (including the use of ballots or tickets), whether immediately or after an interval or postponement, or in any other way, and, subject to the other provisions of these Articles and the Law, the results of the poll shall be deemed to be a resolution of the General Meeting. The holding of a poll shall not prevent the continued business of the General Meeting.

65. A resolution in writing signed by all Shareholders of the Company then entitled to attend and vote at General Meetings or to which all such Shareholders have given their written consent (by letter, facsimile telecopier, telegram, telex or otherwise), or their oral consent by telephone (provided that a written summary thereof has been approved and signed by the Chairman of the meeting) shall be deemed to have been unanimously adopted by a General Meeting duly commenced and held.

66. A declaration by the Chairman of the meeting that a resolution has been passed, or has been passed unanimously or by a particular majority, lost, or not passed by a particular majority shall be conclusive and entry to that effect in the minute book of the Company signed by the Chairman of the meeting shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution. Without derogating from the generality of the foregoing, if:

(a) any objection shall be raised to the qualification of any voter; or

(b) any votes have been counted which ought not to have been counted or which might have been rejected; or

(c) any votes are not counted which ought to have been counted,

the objection or error shall not vitiate the decision of the meeting or adjourned meeting on any resolution unless it is raised or pointed out at the meeting or, as the case may be, the adjourned meeting at which the vote objected to is given or tendered or at which the error occurs. Any objection or error shall be referred to the Chairman of the meeting; and shall only vitiate the decision of the meeting on any resolution if the Chairman decides that it may have affected the decision of the meeting. The decision of the Chairman on such matters shall be final and conclusive.

VOTES OF SHAREHOLDERS

67. Subject to any rights or restrictions then attached to any class or classes of shares and to these Articles, every Shareholder who is present, in person, by proxy, or by written ballot or is deemed under the Law to be present shall be entitled to one vote for each share of which he is the holder.

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68. In the case of joint holders the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. For the purpose of this Article seniority shall be determined by the order in which the names appear in the Register. The appointment of a proxy to vote on behalf of a share held by joint holders shall be executed by the signature of the senior of the joint holders.

69. A Shareholder in respect of whom an order has been made by any court having jurisdiction in matters concerning a mental disability may vote in person, by proxy or by written ballot, through the person authorized by such court or by law to act on such Shareholder’s behalf, provided that such evidence as the Board, or some other person who may be authorized by the Board for such purpose, may require of the authority of the person claiming such authorization shall have been deposited at the Office, or at such other place as is specified in accordance with these Articles for the lodgment of instruments of proxy, not less than forty-eight (48) hours before the time appointed for holding the meeting or adjourned meeting.

70. No Shareholder shall, unless the Board otherwise determines, be entitled in respect of any share held by that Shareholder, to vote at any General Meeting, personally or by proxy or by any other lawful means, or at any separate meeting of the holders of any class of shares, or to exercise any other right conferred by virtue of being a Shareholder in relation to any such meeting if any call or other sum presently payable by the Shareholder in respect of that share remains unpaid.

71. Subject to the Law and the other provisions of these Articles, shares may be voted personally, by proxy, by ballot or by any other manner that the Company is required to recognize and a Shareholder entitled to more than one vote need not use all his votes or cast all the votes he uses in the same way. Any person (whether a Shareholder or not) may be appointed to act as a proxy.

72. A Shareholder that is a corporation shall be entitled by a decision of its board of directors or by a decision of a person or other body, according to a resolution of its board of directors, to appoint a person who it shall deem fit to be its representative at every meeting of the Company. The representative appointed as aforesaid shall be entitled to perform on behalf of the corporation he represents all the powers that the corporation itself might perform as if it were an individual Shareholder.

73. A vote pursuant to an instrument appointing a proxy shall be valid notwithstanding the death of the appointor or the appointor becoming of unsound mind or the cancellation of the proxy or its expiration in accordance with any law, or the transfer of the shares with respect to which the proxy was given, unless a notice in writing of the death, becoming of unsound mind, cancellation or transfer was received at the Office at least twenty-four (24) hours before the commencement of the meeting or adjourned meeting.

74. A Shareholder is entitled to vote by a separate proxy with respect to each share held by him provided that each proxy shall have a separate letter of appointment containing the serial number of the share(s) with respect to which the proxy is entitled to vote. Where valid but differing instruments of proxy or other instrument which the Company is required, under the Law, to recognize in relation to the exercise of the voting rights in respect of a share, are delivered in respect of the

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same share for use at the same meeting, the instrument which is delivered last (regardless of its date or of the date of its execution) shall be treated as replacing and revoking the others as regards that share. However, if the Board, or some other person as may be authorized by the Board for such purpose, is unable to determine which was the last delivered, none of them shall be treated as valid in respect of that share. Delivery of an instrument appointing a proxy or any other instrument, as aforesaid, shall not preclude a Shareholder from attending and voting in person at the meeting.

75. The Board may cause the Company to send, by mail or otherwise, instruments of proxy to Shareholders for use at any General Meeting.

76. A letter of appointment of a proxy, power of attorney or other instrument pursuant to which a person is acting shall be in writing, and the signature of the appointor shall be confirmed by an advocate or notary or bank or in any other manner acceptable to the directors. Unless such confirmed instrument or a copy thereof is deposited in the Office, or at such other place in Israel or abroad as the directors may direct from time to time, at least twenty-four (24) hours before the time appointed for the meeting or adjourned meeting wherein the person referred to in the instrument is appointed to vote, that person shall not be entitled to vote that share. An instrument appointing a proxy and which is not limited in time shall expire 12 months after the date of its execution. If the appointment shall be for a limited period, whether in excess of 12 months or not, the instrument shall be valid for the period stated therein.

77. An instrument appointing a proxy

(i) shall:

(a) be in writing under the hand of the appointor or of his attorney duly authorized in writing, or if such appointor is a corporation, either under its seal or under the hand of some officer or attorney duly authorized in that behalf;

(b) be deemed to include the power to vote on any amendment of a resolution put to the meeting for which it is given as the proxy thinks fit; and

(c) unless the contrary is stated therein, be valid as well for any adjournment of the meeting as for the meeting to which it relates;

(ii) (whether for a specific meeting or otherwise) may be in the following form or in any other similar form which is appropriate under the circumstances.

Letter of Appointment of Proxy

“I,                     , of                     , holding shares in                      and entitled to                      votes hereby appoint                      of                      or in his place                      of                      to vote in my name and in my place at the general meeting (regular, extraordinary, adjourned - as the case may be) of the Company to be held on the                      day of                               and at any adjournment thereof.

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In witness whereof, I have hereby affixed my signature the                      day of                     , __.

Appointor’s Signature

I hereby confirm that the foregoing instrument was signed before me by the Appointor

(name, profession and address)

DIRECTORS

78. The Board shall be composed of not more than nine (9) members and not less than three (3) members.

79. Subject to the Law, no person shall be disqualified to serve as a director by reason of his not holding shares in the Company or by reason of his having served as a director in the past.

80. Subject to the Law, the remuneration of a director shall be such sum (if any) as shall from time to time be approved by the Company in General Meeting. The directors and their alternates shall be entitled to be repaid all reasonable travelling, hotel and other expenses incurred by them arising from their travelling to and from Board meetings or meetings of any committee of the Board. If by any arrangement, approved by the Board, any director shall perform or render any special duties or services outside his ordinary duties as a director, the Board may cause the Company to pay him special remuneration, in addition to his ordinary remuneration, and such special remuneration may be by way of salary, commission, participation in profits, or otherwise as may be arranged, all subject to the provisions of the Law with regard to all such matters, including Shareholder and audit committee approvals required under the Law for various arrangements relating to director remuneration.

81. The office of a director shall be vacated, ipso facto:

(a) if he becomes bankrupt or suspends payment or colludes or compounds with his creditors;

(b) if he be declared legally incompetent;

(c) if by notice in writing given to the Company he resigns his office;

(d) if he is removed from office by a resolution of the General Meeting of the Company approved by Shareholders holding more than 50% of the outstanding share capital of the Company;

(e) if, under the Law, his term otherwise automatically terminates; or

(f) upon his death.

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82. Subject to the provisions of the Law, no director shall be disqualified by virtue of his office from holding any office or place of profit in the Company or in any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as vendor, purchaser or otherwise, nor shall any such contract, or any contract or arrangement entered into by or on behalf of the Company in which any director shall be in any way interested be avoided, nor, other than as required by the Law, shall any director be liable to account to the Company for any profit arising from any such office or place of profit or realized by any such contract or arrangement by reason only of such director’s holding that office or of the fiduciary relations thereby established, but the nature of his interest, as well as any material fact or document, must be disclosed by him at the meeting of the Board at which the contract or arrangement is first considered, if his interest then exists, or, in any other case, at no later than the first meeting of the Board after the acquisition of his interest.

83. The entering into of a transaction by the Company with an Office Holder or a third party in which an Office Holder has a personal interest (as more fully described in Section 270(1) of the Law), which is not an Extraordinary Transaction (as defined in the Law) shall, if such Office Holder is a director or the General Manager, be approved in such manner as may be prescribed by the Board, from time to time, or otherwise by the Board itself. If such Office Holder is not a director, then such transaction shall be approved in such manner as may be prescribed by the General Manager from time to time and in the absence of any such determination, by the General Manager.

POWERS AND DUTIES OF DIRECTORS

84.

84.1.  The business of the Company shall be managed by the Board, which may exercise all such powers of the Company and perform on behalf of the Company all such acts as may be exercised and performed by the Company as are not by the Law or by these Articles required to be exercised or done by the Company through a General Meeting or, if the Company is under an obligation under the Law to appoint a General Manager, the General Manager, subject to the provisions of the Law and of these Articles and to such regulations (not being inconsistent with such aforesaid provisions) as may be prescribed by the Company in General Meeting. Notwithstanding the foregoing, no regulation made by the Company in a General Meeting shall invalidate any prior act of the Board which would have been valid if such regulation had not been made. The general powers given by this Article shall not be limited or restricted by any special authority or power given to the Board by any other Article.

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84.2.  The Board may from time to time, at its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions as it deems fit, and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges, or other securities on the undertaking or the whole or any part of the property of the Company, both present and future, including its uncalled or called but unpaid capital for the time being.

84.3.  The Board may, from time to time, set aside any amount(s) out of the profits of the Company as a reserve or reserves for any purpose(s) which the Board, in its absolute discretion, shall deem fit, including without limitation, capitalization and distribution of bonus shares, and may invest any sum so set aside in any manner and from time to time deal with and vary such investments and dispose of all or any part thereof, and employ any such reserve or any part thereof in the business of the Company without being bound to keep the same separate from other assets of the Company, and may subdivide or redesignate any reserve or cancel the same or apply the funds therein for another purpose, all as the Board may from time to time think fit.

85. Subject to the provisions of these Articles and the Law, the Board may at any time and from time to time, by power of attorney or otherwise, appoint any person to be the attorney or attorneys of the Company for such purposes and with such powers, authorities and responsibilities (not exceeding those vested in or exercisable by the Board under these Articles) and for such period and subject to such conditions as it may think fit, and any such power of attorney may contain such provisions for the protection and convenience of persons dealing with any such attorney as the Board may think fit, and may also authorize any such attorney to sub-delegate all or any of the powers, authorities and responsibilities vested in him.

86. The Board may act at any time notwithstanding any vacancy in its body provided that in the event that the number of directors shall at any time be less than the minimum number prescribed by or in accordance with these Articles it shall be lawful for them to act as a Board for the purpose of filling any vacancies in their body or for summoning a General Meeting of the Company, but not for any other purpose.

87. The Board may delegate all or any of its powers, authorities and responsibilities (except for those powers, authorities and responsibilities which, under the Law (including, but not limited to, those listed in Section 112 of the Law), the Board is unable to delegate) to any committee consisting of such members of the Board as the Board may, from time to time, think fit, subject to applicable requirements of the Law (the “Committee of the Board”). The Board may, subject to the Law,

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widen, curtail or revoke such delegation of powers, authorities and responsibilities. To the fullest extent permitted by law, the Board, after determining a number of shares reserved for the issuance of shares, options or warrants to the Company’s employees, directors, and consultants, may delegate the power to issue such options and shares to a committee of the Board. Any committee of the Board so formed shall in the exercise of the power, authorities and responsibilities so delegated conform to any regulations that may be lawfully imposed on it by the Board. The meetings and proceedings of a Committee of the Board shall be governed by the provisions herein contained for regulating the meetings and proceedings of the Board, so far as the same are applicable thereto and are not lawfully suspended or superseded by any regulations imposed by the Board. The Board shall appoint an audit committee consisting of at least three (3) members, the members of which and the authorities, powers and responsibilities of which shall be governed by the Law and any other applicable law or rule.

ELECTION OR REMOVAL OF DIRECTORS

88. The members of the Board shall be elected and appointed at the Company’s Annual General Meetings. At each Annual General Meeting of the Shareholders, successors to the Directors shall be elected for a one-year term (until the next Annual General Meeting) by a resolution of the General Meeting.

89.    (a)         Nominations for the election of Directors may be made by the Board or a committee appointed by the Board or by any Shareholder holding at least 1% of the outstanding voting power in the Company. However, any Shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such Shareholder’s intent to make such nomination or nominations has been given to the Secretary of the Company not later than (i) with respect to an election to be held at an Annual General Meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the anniversary date of the immediately preceding annual meeting and (ii) with respect to an election to be held at an extraordinary meeting of Shareholders, not less than ninety (90) days and not more than one hundred and twenty (120) days prior to the proposed date of such meeting, provided, however, that in the event that less than ninety (90) days notice or prior public disclosure of the date of any such meeting is given, such request must have been delivered to the Secretary of the Company not later than the close of business on the 10^th day following the day on which notice or prior public disclosure of the meeting was given, provided that the preceding provision shall not derogate from the Company’s obligations pursuant to Section 69(b) of the Law. Each such notice shall set forth: (a) the name and address of the Shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the Shareholder is a holder of record of shares of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the Shareholder and each nominee and any other

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person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the Shareholder; and (d) the consent of each nominee to serve as a director of the Company if so elected and a declaration signed by each of the nominees declaring that there is no limitation under the Law or any other applicable law for the appointment of such a nominee and that all the information that is required under the Law to provided to the Company in connection with such an appointment has been provided. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure.

(b) To the extent required under the Law, the Company shall appoint or arrange the election of two (2) persons as External Directors. The appointment or election and removal of such directors shall be made in accordance with the Law, notwithstanding the provisions of these Articles. The provisions of Article 88 shall not apply to a Director who is an External Director.

(c) Notwithstanding the provisions of paragraphs (a) and (b) of this Article, no person shall be nominated or appointed to the office of a Director if such person is disqualified, under the Law, from being appointed as a director.

90. Subject to the provisions of Articles 88, the Board may at any time appoint any other person as a director, whether to fill a vacancy or as an addition to the then current number of directors, provided that the total number of directors shall not at any time exceed any maximum number (if any) fixed by or in accordance with these Articles. Any director so appointed shall hold office until the Annual General Meeting of Shareholders at which the term for the other directors of his class expires, unless otherwise stated in the appointing resolution.

ALTERNATE DIRECTORS

91.    (a)         A director may, by written notice to the Company given in the manner set forth in Article 89(a), appoint any individual who is qualified to serve as a director, to act as alternate director (an “Alternate Director”) at meetings of the Board or any committee of the Board of which the appointor is a member in his place during his absence (and, at his discretion, to revoke such nomination) provided that such individual is not a director or is a person acting as an Alternate Director for any other director or any other person disqualified by law.

(b) Any Director appointing an Altetrnate Director may remove such Alternate Director and appoint another Alternate Director in place of any Alternate Director appointed by him whose office has been vacated for any reason whatsoever. The appointment of an Alternate Director shall be subject to the consent of the Board. Unless the appointing Director, by the instrument appointing an Alternate Director or by written notice to the Company, limits such appointment to a specified period of time or restricts it to a specified meeting or action of the Board, or otherwise restricts its scope, the appointment shall be for all purposes, and for a period of time concurrent with the term of the appointing Director.

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(c) Any appointment or removal of an Alternate Director shall be effected by an instrument in writing delivered at the Office and signed by the appointor or by such other method as may be approved by the Board.

(d) An Alternate Director shall be entitled to receive notice of meetings of the Board and of any committee of the Board of which the appointor is a member, to attend and to vote at any such meeting at which his appointor is not personally present and generally to perform all the functions of his appointor (except as regards power to appoint an alternate, unless the instrument of his appointment states otherwise) as a director in his absence. Save as otherwise provided in these Articles, an Alternate Director shall be deemed for all purposes to be a director and shall be responsible for his or her own acts and defaults.

(e) An Alternate Director shall not be entitled to receive from the Company in respect of his appointment as Alternate Director any remuneration.

(f) An Alternate Director shall ipso facto cease to be an Alternate Director if his appointor ceases for any reason to be a Director or on the happening of any event which, if he were a director, would cause him to vacate the office of Director.

PROCEEDINGS OF DIRECTORS

92. Meetings of the Board will be convened in accordance with the needs of the Company and, in any event, shall be convened at least once every three (3) months. Save as aforesaid, the Board may meet, adjourn and otherwise regulate its meetings as it thinks fit. Board meetings may be convened at any time by the Chairman of the Board. The Chairman of the Board shall convene a Board meeting upon the request of any two directors as soon as practicable after receiving such request and shall otherwise convene a Board meeting as provided by the Law. If the Chairman of the Board does not, within fourteen (14) days after the date of receiving a request from two directors as aforesaid, convene a Board meeting, then the directors requesting the convening of such Board meeting may convene the Board meeting. If the Chairman of the Board does not, within fourteen (14) days after being obliged to convene a Board meeting as provided under the Law, convene a Board meeting, the person who, as provided in the Law in such circumstances, is entitled to convene the Board meeting, may convene such meeting. Notice of a Board meeting shall contain the information required by the Law and shall be delivered to the directors not less than seven (7) days before such meeting.

93. Notice of a meeting of the Board may be given orally or in writing, and if given in writing, may be sent by hand, post, facsimile or electronic mail to a director at the address, facsimile number or electronic mail address given by such director to the Company for such purpose. Any such notice shall be deemed duly received, if sent by post, three (3) days following the day when any such notice was duly posted and if delivered by hand or transmitted by facsimile transmission or

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electronic mail, such notice shall be deemed duly received by the director on the date of delivery or, as the case may be, transmission of the same. Notwithstanding anything contained to the contrary herein, failure to deliver notice to a director of any such meeting in the manner required hereby may be waived by such director and a meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defect is waived prior to action being taken at such meeting, by all directors entitled to participate at such meeting to whom notice was not duly given as aforesaid.

94. Any director may participate in a meeting of the Board by means of telephone or similar communication equipment whereby all the directors participating in the meeting can hear each other and the directors participating in this manner shall be deemed to be present in person at such meeting and shall be entitled to vote or be counted in a quorum accordingly. Such a meeting shall be deemed to take place where the largest group of those participating is assembled or, if there is no such group, where the Chairman of the meeting is then located.

95. Until otherwise decided by the Board, a quorum at a meeting of the Board shall be constituted by the presence in person, by alternate or by telephone or similar communication equipment of a majority of the directors then in office who are lawfully entitled to participate and vote at the meeting. If within one-half an hour (or within such longer time not exceeding one (1) hour as the Chairman of the meeting may decide) from the time appointed for the holding of the Board meeting a quorum is not present, the Board meeting shall stand adjourned to the same day in the next week at the same time and place (unless such day shall fall on a public holiday either in Israel or the United States, in which case the meeting will be adjourned to the first day, not being a Friday, Saturday or Sunday, which follows such public holiday). If at such adjourned Board meeting a quorum is not present within half an hour from the time appointed for holding the meeting, the directors present, in person, by alternate or by telephone or similar communication equipment (as referred to in Article 94) who are lawfully entitled to participate and vote at such meeting shall be a quorum. No business shall be transacted at a meeting of the Board unless the requisite quorum is present (in person, by alternate or by telephone as aforesaid) when the meeting proceeds to business. For the purpose of these Articles an Alternate Director shall be counted in a quorum if the director who appointed him is not present.

96. A resolution proposed at a meeting of the Board at which there is a quorum shall be deemed adopted if supported by a majority of the number of directors present at the meeting and lawfully entitled to vote on such resolution.

97. The Chairman of the Board shall not have a second or casting vote at any Board meeting.

98. A resolution in writing signed by all the directors then in office lawfully entitled to vote thereon, shall be as effective for all purposes as a resolution passed at a meeting of the Board duly convened, held and constituted and may consist of several documents in like form each signed by one or more of the directors. For the purpose of this Article, the signature of an Alternate Director, the appointer of which is entitled to vote on such resolution, shall suffice in lieu of the signature of the director appointing him.

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99. The Board may from time to time elect by resolution or otherwise appoint a director to be Chairman or deputy Chairman and determine the period for which each of them is to hold office.

100. The Chairman of the Board, or in his absence the deputy Chairman, shall preside at meetings of the Board, but if no such Chairman or deputy Chairman shall be elected or appointed, or if at any meeting the Chairman or deputy Chairman shall not be present within fifteen (15) minutes after the time appointed for holding such meeting, or if the Chairman, or, if applicable, deputy Chairman, is unwilling or unable to chair such meeting, the directors present shall choose one of their number to be Chairman of such meeting.

101. Subject to the provisions of the Law, all bona fide actions of any meeting of the Board, or of a committee of the Board, or of any person acting as a director or Alternate Director or a member of such committee shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or such committee or person acting as aforesaid, or that they or any of them were disqualified, or had vacated office or were not entitled to vote, be as valid as if every such person had been duly appointed or had duly continued in office and was qualified and had continued to be a director or, as the case may be, an Alternate Director and had been entitled to vote.

GENERAL MANAGER

102. Subject to these Articles and the Law, the Board may from time to time appoint one or more persons, whether or not directors, as the General Manager, Chief Executive Officer, and/or President of the Company. Subject to the Law, the powers, authorities and responsibilities any such General Manager, Chief Executive Officer and/or President shall have shall be those that the Board may, at its discretion, lawfully confer on the same. The Board may, from time to time, as the Board may deem fit, modify or revoke, such title(s), duties and authorities the Board conferred as aforesaid. Subject to these Articles and the Law, any such appointment(s) and any such powers, authorities and responsibilities, conferred as aforesaid may be either for a fixed term or without any limitation of time, and may be made upon such conditions and subject to such limitations and restrictions as the Board may, from time to time, determine and the Board may from time to time (subject to the provisions of the Law and of any contract between any such person and the Company) fix his or their salaries and remove or dismiss him or them from office and appoint another or others in his or their place.

MINUTES

103. The Company shall cause minutes to be made of all General Meetings of the Company and also of all appointments of directors and Office Holders and of the proceedings of all meetings by the Board and any committees thereof, and of the persons present at any such meetings, and all business transacted at such meetings, (which shall include any written resolution of the directors pursuant to Article 98

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above). Any such minute of any meeting, if purporting to be signed by the Chairman of such meeting, or by the Chairman of the Board, shall be prima facie evidence of the facts therein stated. Minutes of a meeting shall be kept at the Office for the period, and in the manner, prescribed in the Law.

STAMP AND SIGNATURES

104.  (a)        The Company may have one or more official stamps.

(b) The Company may keep an official stamp for documents made for foreign jurisdictional purposes, and may authorize, from time to time, a person appointed for this purpose to make use of such stamp.

(c) A document shall be deemed signed by the Company upon the fulfillment of all of the following:

(1) The Company’s stamp was stamped on the document by a person authorized therefor by the Board, or the document bears the name of the Company in print;

(2) It bears the signature of one or more persons authorized, generally or in the specific instance, to sign such document by the Board.

(d) An authorization of one or more persons by the Board to sign a document on behalf of the Company shall be deemed to include the authority to stamp the Company’s stamp thereon, unless otherwise provided by the Board.

(e) An authorization by the Board as provided in Article 104(d) may be for a specific document or for a certain sort of document or for all the Company’s documents or for a definite period of time or for an unlimited period of time, provided that any such authority may be terminated by the Board, at any time.

(f) The provisions of this Article shall apply both to the Company’s documents executed in Israel and the Company’s documents executed abroad.

SECRETARY

105. The Board shall appoint a Secretary of the Company on any terms it thinks proper. The Board may from time to time by resolution appoint a temporary substitute for the Secretary.

LOCAL MANAGEMENT

106. The directors may organize from time to time arrangements for the management of the Company’s business in any particular place, whether in Israel or abroad, as they shall see fit, and the provisions of the next section shall not derogate from the general powers granted to the Board pursuant to this Article.

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107. The Board may from time to time convene any local management or agency to conduct the business of the Company in any particular place, whether in Israel or abroad, and may appoint any person to be a member of such local management, or to be a director or agent, and may decide his manner of compensation. The Board may from time to time grant a person so appointed any power, authority, or discretion that the Board has at that time, and may authorize any person acting at that time as a member of a local management to continue in his position notwithstanding that some position has been vacated there, and any such appointment or authorization may be made upon such conditions as the Board deems fit. The Board may from time to time relieve any person so appointed or revoke or change any such authorization.

DIVIDENDS AND RESERVES

108. Subject to these Articles, the Company may declare and pay any dividend permitted under the Law.

109. The Board may, before declaring any dividend, set aside, out of the profits of the Company, such sums as it thinks proper as a reserve or reserves, which shall, at the discretion of the Board, be applicable for any purpose to which the profits of the Company may be properly applied and pending such application may be employed in the business of the Company as the Board may, from time to time, deem fit. The Board may, alternatively, carry forward any profits which it may deem prudent not to distribute as a dividend.

110. The Company may, by a resolution of the Board, declare a dividend in accordance with the respective rights of the Shareholders.

111. The Board may, from time to time, cause the Company to pay to the Shareholders such interim dividends as appear to the Board to be justified by the profits of the Company. The validity of any interim dividend shall not be affected by the subsequent failure of the Board to declare a dividend.

112. No dividend shall bear interest or linkage against the Company.

113. All dividends unclaimed for one year, after having been declared, may be invested or otherwise made use of by the Company as the Board shall see fit, until the same is claimed. The Company shall not be deemed a trustee in respect of any such unclaimed dividends.

Any dividend or other sum remaining unclaimed for a period of seven (7) years after having been declared shall be forfeited and shall revert to the Company.

114. Subject to any special or restricted rights conferred upon the holders of shares as to dividends, all dividends shall be declared by the Board and paid in proportion to the amount paid up on account of the nominal value of the shares in respect of which the dividend is being paid. As regards shares not fully paid throughout the period in respect of which the dividend is paid, dividends in respect thereto shall be apportioned and paid pro rata according to amounts deemed under this Article to be paid up on account of the nominal value of such shares during any portion or portions of the period in respect of which the dividend is paid. For this purpose, the amount deemed to be paid on account on the nominal value of such partly paid

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shares shall be such proportion of the nominal value as the amount paid to the Company with respect to the share bears to its full issuance price. Subject to the terms of article 33 above, no amount paid on a share, in advance of a call, shall be treated as paid up on a share.

115. Subject to the terms of any share issuance regarding the date or the occurrence of an event from which such shares are to be eligible for dividends, the persons registered in the Register as Shareholders on the record date for the declaration of a dividend shall be entitled to receive the dividend. A transfer of shares shall not transfer the right to a dividend which has been declared after the transfer but before the registration of the transfer.

116. The Board may deduct from any dividend payable to any Shareholder all sums of money (if any) presently payable by such Shareholder to the Company on account of calls or otherwise in relation to the shares of the Company. The Board may retain any dividend or other moneys payable on or in respect of a share on which the Company has a lien, and may apply the same in or toward the satisfaction of the debts, liabilities or engagement in respect of which the lien exists.

117. Subject to the provisions of the Law, any resolution of the Board declaring a dividend may, direct payment of such dividend wholly or partly by the distribution of specific assets of the Company, or by distribution of paid up shares, debentures, or debenture stock of the Company or any other companies or in any one or more of such ways, and the Board shall give effect to such resolution, and where any difficulty arises in regard to such distribution, the Board may settle the same as it thinks expedient, and in particular may fix the value for distribution of such specific assets or any part thereof and may determine that cash payments shall be made to any Shareholders on the basis of the value so fixed in order to adjust the rights of all parties, and may vest any such specific assets in trustees as may seem expedient to the Board.

118. The Board may cause the Company to pay the dividends, interest or other moneys payable on shares in respect of which any person is by transmission entitled to be registered as holder to such person upon production of such certificate and evidence as would be required if such person desired to be registered as a Shareholder in respect of such shares.

119. Any dividend, interest or other moneys payable in cash on or in respect of a share may be paid by check or money order sent through the post to the registered address of the holder or person entitled thereto and in the case of two or more persons being registered as joint holders of such share, to the registered address of that one of the joint holders who is first named on the Register, or to such person and to such address or by such other means offered by the Company as the holder or joint holders or person entitled thereto, as applicable, may agree in writing with the Company. Every such check or money order shall be made payable to the order of the person to whom it is sent or to such person as the Shareholder, person entitled or joint holders direct. Any one of two or more persons registered as joint holders of a share may give effectual receipts for any dividends or other moneys payable in respect of the shares held by them as joint holders. The Company shall not be responsible nor shall have any liability for any check or money order lost in transmission or in respect of sums lost or delayed in the course of payment by a method offered by the Company as aforesaid.

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CAPITALIZATION OF RESERVE FUNDS

120. The Board may from time to time resolve that any sum, investment or property not required as a source for payment of fixed preferential dividends and (a) standing credited at that time to any fund or to any reserve liability account of the Company, including also premiums received from issuance of shares, debentures, or debenture stock of the Company; or (b) being net profits not distributed and remaining in the Company, shall be capitalized, and that such investment sum or property be released for distribution and be distributed as capital among the Shareholders according to the proportion to which they would be entitled if such amount were distributed as dividends on shares, in the manner so directed by such resolution. The Board shall use such investment sum or property, according to such a resolution, for full payment of such shares of the Company’s capital not issued to the Shareholders and to issue such shares and to distribute them as fully paid up shares among those Shareholders according to the pro rata rate for payment of the value of the shares and their rights in the amount capitalized, or as full payment of shares to be issued upon the exercise of warrants on a net issuance basis. The Board may also use such investment sum or property or any part thereof for the aforesaid Shareholders for full payment of those shares not issued, in proportion to such shares of the Company’s capital issued and held by such Shareholders, or use such investment sum or property in any other manner permitted by such a resolution. If any difficulty shall arise with respect to such a distribution the Board may organize the distribution as it deems desirable. They shall particularly be permitted to determine the value of the property or investment for the purpose of distribution of all fully paid up shares, to pay money to any such Shareholder according to the value determined in this manner in order to coordinate and adjust the Shareholders’ rights. The Board shall also be permitted to decide that parts with a value of less than one New Israel Shekel shall not be taken into account in order to adjust the rights of all parties, to give all such shares, cash or property to trustees to hold in escrow for such persons entitled to part of the allocation and the distribution in accordance with and against such securities as the Board deems desirable.

ACCOUNTS AND AUDIT

121. The Board shall cause accounting records to be kept in accordance with applicable law. The books of account shall be kept at the Office, or at such other place or places as the Board shall deem fit (either within the State of Israel or elsewhere in the world) and shall be open for inspection by directors. No Shareholder (not being a director) shall have any right to inspect any account or book or document of the Company, except as conferred by applicable law or as authorized by the Board or a resolution of the Company’s General Meeting.

122. At least once every fiscal year, the accounts of the Company shall be examined and audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors.

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123. The appointment, authorities, rights and duties of the Auditors shall be regulated by applicable law, provided, however, that in exercising its authority to fix the remuneration of the Auditors, the Company’s General Meeting may, act (and in the absence of any action in connection therewith, shall be deemed to have so acted) to authorize the Board to fix such remuneration, subject to such criteria or standards, if any, as may be provided in such resolution, and if no such criteria or standards are so provided, such remuneration shall be fixed in an amount commensurate with the volume and nature of the services rendered by such Auditors.

NOTICES

124. Subject to the Law, notice to a Shareholder may be served, as general notice to all Shareholders, by publication in one of the daily Hebrew newspapers appearing in Israel and in one daily English language newspaper appearing in the City of New York, and otherwise in such manner as may be required under the Law, but in place of the publication of general notice as aforesaid, notice may be served on each Shareholder individually or by hand or by post to the registered address of each Shareholder. The date of such publication in the newspaper shall be deemed to be the date of service on all Shareholders. A notice served on a Shareholder not sent by post but left at the Shareholder’s registered address shall be deemed duly served on the day it was left there. A notice served on a Shareholder through the post shall be deemed duly served on the third day following the day when the envelope containing it was posted. Proof that an envelope containing a notice was properly addressed, stamped and posted shall be conclusive evidence that notice was given.

125. A notice may be given by the Company to the joint holders of a share by giving notice to the joint holder named in the Register in respect of the shares.

126. Subject to the Law, where a given number of days’ notice extending over any period is required to be given, the day of service shall be counted in such number of days or other period.

127. Any Shareholder whose address is not contained in the Register and who shall not have designated in writing an address for receipt of notices shall not be entitled to receive any notice from the Company.

128. Apart from the publication of any advertisement in the press, as mentioned in Article 124, a person entitled to a share in consequence of the death or bankruptcy of a Shareholder upon supplying to the Company such evidence as the Board may reasonably require as evidence of his title to the share, and upon supplying also an address in Israel or the United States for the service of notices, shall be entitled to have served upon or delivered to him at such address any notice or document to which the Shareholder but for his death or bankruptcy would be entitled, and such service or delivery shall for all purposes be deemed to be sufficient service for delivery of such notice or document on all persons interested (whether jointly with or as claiming through or under him) in the share. Save as aforesaid any notice or document delivered or sent by post to or left at the address of any Shareholder shall, notwithstanding that such Shareholder be then dead or bankrupt, and whether or not the Company shall have notice of his death or bankruptcy, be deemed to have been duly served or delivered in respect of any share registered in the name of such Shareholder as sole or first-named joint holder.

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129. Any notice or other document (including, but not limited to, a share certificate) may be served or delivered by the Company to the Shareholders listed in the Register as it stands at any time, as may be determined by the Board from time to time, provided that the date so determined by the Board shall not be more than fifteen (15) days prior to the date of posting (where the notice or other document is posted) or otherwise not more than fifteen (15) days before the date of service. No change in the Register after the time determined by the Board shall invalidate any such service or delivery. Every person who becomes entitled to a share shall be bound by any notice in respect of that share which, before his name is entered in the Register, has been duly given, or deemed to be duly given to the person from whom he received or became entitled to receive the share.

INSURANCE AND INDEMNITY OF OFFICERS

130. Subject to the provisions of the Law with regard to such matters:

130.1.  the Company may enter into a contract for the insurance of all or part of the liability of an Office Holder with respect to an obligation imposed on such Office Holder due to an act performed by him in his capacity as an Office Holder of the Company arising from any of the following:

130.1.1.  a breach of his duty of care to the Company or to another person;

130.1.2.  a breach of his duty of loyalty to the Company, provided that the Office Holder acted in good faith and had reasonable cause to assume that such act would not prejudice the interests of the Company;

130.1.3.  a financial liability imposed on such Office Holder in favor of another person;

130.2.  (a) the Company may undertake, in advance, to indemnify, or may indemnify, an Office Holder in respect of, a liability or expense (as referred to in subparagraph 130.2(b) below) that may be imposed on such Office Holder (due to an act performed by him in his capacity as an Office Holder):

(1) that arises from those types of events which the Board deems to be forseeable, and limited to those amounts determind by the Board to be reasonable under the circumstances; or

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(2) that arises from an event that took place prior to the Company’s giving such indemnity;

(b) the liability and expense referred to in sub-paragraph 130.2(a) above are as follows:

(1) a financial liability imposed on an Office Holder in favor of another person by a court judgment, including a compromise judgment given as a result of a settlement or an arbitrator’s award which has been confirmed by a court;

(2) reasonable litigation expences, including attorneys’ fees, expended by an Office Holder or which were imposed on an Office Holder by a court in proceedings instituted against him by the Company or in its name or by any other person or in a criminal charge from which he was acquitted or in a criminal charge in which he was convicted for a criminal offense that does not require proof of criminal thought (as such term is defined by the Penal Law, 5737-1977);

130.3. the Company may release exculpate and exempt, in advance, all or part of an Office Holder’s liability to the Company for damage which arises from the breach of his duty of care to the Company (as such term is understood by Sections 252 and 253 of the Law).

(iv) The provisions of Articles 130.1, 130.2 and 130.3 above are not intended, and shall not be interpreted, to restrict the Company in any manner in respect of the procurement of insurance and/or in respect of indemnification (i) in connection with any person who is not an Office Holder, including, without limitation, any employee, agent, consultant or contractor of the Company who is not an Office Holder, and/or (ii) in connection with any Office Holder to the extent that such insurance and/or indemnification is not specifically prohibited under law; provided that the procurement of any such insurance and/or the provision of any such indemnification shall be approved by the Board or in such manner as may be required by the Law.

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WINDING UP

131. WINDING UP

131.1.  Subject to Article 131.2 below, if the Company is wound up, then subject to applicable law and to the rights of the holders of shares with special rights upon winding up, the assets of the Company available for distribution among the members shall be distributed to them in proportion to the respective holdings of the shares in respect of which such distribution is being made.

131.2.  Notwithstanding Article 131.1 to the contrary, in the event of any liquidation, dissolution or winding up of the Company, the Preferred Shares will entitle their holders to receive (from assets and funds legally available for distribution to the shareholders), and prior to the pro-rata distribution to all the Ordinary Shares of the Company, per each such Preferred Share, an amount equal to the Preferred Shares Adjusted Issue Price (adjusted for share combinations or subdivisions or other recapitalizations of the Company’s shares) (the “Preferred Shares Liquidation Preference”). Following such distribution of the Preferred Shares Liquidation Preference to the holders of Preferred Shares, the Preferred Shares shall not participate in the distribution of the remaining assets to the shareholders of the Company and their holders shall not be entitled to any additional distributions.

131.3.  In case of a Deemed Liquidation, the assets and funds of the Company legally available for distribution shall be distributed ratably to the holders of all Ordinary Shares (including the Ordinary Shares issued upon the automatic conversion of the Preferred Shares, as set forth in these Articles) in proportion to their relative holdings in the Company, provided however that the Ordinary Shares that resulted from the conversion of the Preferred Shares shall entitle their holders to a minimum price per share equal to the Preferred Shares Liquidation Preference.

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EX-4.(A)27

Exhibit 4(a)(27)

SHARE PURCHASE AGREEMENT

THIS SHARE PURCHASE AGREEMENT (this “Agreement”) is made as of December 19, 2007 (the “Effective Date”), by and among ViryaNet Ltd., a company organized under the laws of the State of Israel (the “Company”), Lewis Opportunity Fund LP and LAM Opportunity Fund Ltd (each, a “Purchaser”, and collectively, the “Purchasers”).

W I T N E S S E T H:

WHEREAS, The Board of Directors of the Company (the “Board”) has determined that it is in the best interests of the Company to raise additional capital by means of the issuance of Ordinary Shares of the Company, nominal value NIS 5.0 per share (each, an “Ordinary Share” and collectively, the “Ordinary Shares”; all Ordinary Shares purchased by the Purchasers under this Agreement shall be referred to as the “Purchased Shares” and the Ordinary Shares purchased by a Purchaser shall be referred to as the “Respective Purchased Shares”), at a price per Purchased Share of US$1.65 (the “Purchase Price Per Share”) (unless otherwise explicitly indicated, all monetary amounts herein designated by the symbol “$” are in United States dollars) as set forth below.

WHEREAS, The Purchasers wish to invest in the Company an amount as set forth in Exhibit 1 hereto (such aggregate amount, the “Purchase Price”) by the purchase of Purchased Shares from the Company pursuant to the terms and conditions more fully set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:

1. Issuance and Purchase of Ordinary Shares. Subject to the terms and conditions hereof and the payment of the Purchase Price by the Purchasers, the Company shall, as of the Closing, issue and allot to the Purchasers an aggregate of 363,636 Ordinary Shares of the Company, in accordance with the table attached as Exhibit 1 setting forth the respective Purchase Price and number of Purchased Shares per each of the Purchasers. Subject to the payment of the Purchase Price by the Purchasers, the Company shall, as of the Second Closing, issue and allot to the Purchasers Warrants (as defined below), in accordance with the table attached as Exhibit 1 setting forth the respective additional Purchase Price and number of additional Purchased Shares available to each of the Purchasers under the Warrants.

2. Closing and Second Closing.

2.1. Closing. The initial sale and purchase hereunder shall take place on the Effective Date or as soon as indicated by the Company (the “Closing”) at the offices of the Company.

2.2. Transactions at Closings. At the Closing, the following transactions shall occur, which transactions shall be deemed to take place simultaneously, and no transactions shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered:

2.2.1. The Company shall deliver to the Purchasers true and correct copies of resolutions of the Company’s Board of Directors (the “Board Resolutions”) (i) authorizing the execution of the Agreement, the Registration Rights Agreement and the Warrant (collectively, the “Transaction Documents”) and the consummation of the transactions set forth in such Transaction Documents, and (ii) issuing and allotting to the Purchasers the Ordinary Shares issued in the Closing, in form to be mutually agreed upon;

2.2.2. The Company shall deliver to the Purchasers the following documents at the Closing (with respect to subsection (a) only, as soon as practicable after the Closing):

(a) Validly executed share certificate representing the Respective Purchased Shares purchased at the Closing (representing less than 20% of the Company’s issued share capital as of the date of Closing), issued in the name of each Purchaser;

(b) A certificate duly executed by the Chairman of the Board of the Company, dated as of the Closing, in a form to be mutually agreed upon;

(c) A legal opinion of Meitar, Liquornik Geva & Leshem Brandwein, Israeli counsel to the Company, in a form to be mutually agreed upon; and

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2.2.3. Each Purchaser shall deliver to the Company an undertaking to the Chief Scientist of the Ministry of Trade and Commerce of the State of Israel, duly executed by the Purchaser.

2.2.4. Each Purchaser shall cause the transfer to the Company of the applicable Purchase Price for its Respective Purchased Shares in immediately available funds, by wire transfer to the following bank account of the Company Bank Name: Silicon Valley Bank; Account Name: ViryaNet Inc., 2 Willow Street, Southborough, MA 01745; Account Number: 3300041451; Bank ABA Number: 121140399; The payment of the Purchase Price at the Closing shall be in US dollars.

2.2.5. At the Closing, the Company and the Purchasers shall enter into the Registration Rights Agreement, in the form attached hereto as Exhibit 2.2.5 hereto.

Second Closing. Upon the consummation of the Second Closing (which will occur immediately after and subject to the approval of the shareholders of the Company) the following shall take place:

2.2.6. The Company shall deliver to the Purchasers the following documents at the Second Closing (with respect to subsection (a) only, as soon as practicable after the Second Closing):

(a) Validly executed warrants (each, the “Warrant”) in a form attached as Exhibits 2.27(a)(i) and 2.27(a)(ii).

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3. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to, and, where appropriate, covenants with the Purchasers at the Closings, except as set forth in the Company Disclosure Schedule attached as Exhibit 3 hereto, which exceptions shall be deemed to be representations and warranties as if made hereunder, as follows:

3.1. Organization. The Company is duly organized and validly existing under the laws of the State of Israel, and has full corporate power and authority to own, lease and operate its properties and assets and to conduct its business as now being conducted and as proposed to be conducted. The Company has all requisite power and authority to execute and deliver this Agreement and other agreements contemplated hereby or which are ancillary hereto, including the Transaction Documents, and to consummate the transactions contemplated hereby and thereby. The Company has not taken any action or failed to take any action, which action or failure would preclude or prevent the Company from conducting its business after the Closing in the manner heretofore conducted. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted and as proposed to be conducted, the lack of which could materially adversely affect the business, properties, prospects or financial condition of the Company.

3.2. Share Capital. Immediately after the Closing, the authorized share capital of the Company shall be NIS 25,000,000 divided into 4,600,000 Ordinary Shares and 400,000 Preferred A Shares, out of which 1,981,240 Ordinary Shares and 326,798 Preferred A Shares are issued and outstanding (2,308,038 in total), all as specified in the capitalization table set forth in Section 3.2 of the Company Disclosure Schedule (the “Capitalization Table”). Except as set forth in the Capitalization Table, the transactions contemplated by this Agreement, the Transaction Documents and in the Articles of Association, there are no other share or equity capital, preemptive rights, convertible securities, outstanding warrants, options or other rights to subscribe for, purchase or acquire from the Company any share or equity capital of the Company and there are not any contracts or binding commitments providing for the issuance of, or the granting of rights to acquire, any share or equity capital of the Company or under which the Company is, or may become, obligated to issue any of its securities. All issued and outstanding share capital of the Company is duly authorized, validly issued and outstanding and fully paid and non-assessable.

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3.3. The Purchased Shares. The Purchased Shares, when and if issued and allotted in accordance with this Agreement, will be duly authorized, validly issued, fully paid, non-assessable and free of any preemptive rights, and will have the rights, preferences, privileges and restrictions set forth in the Articles of Association and will be free and clear of any liens, claims, encumbrances or third party rights of any kind and duly registered in the name of the Purchasers in the Company’s share transfer register.

3.4. Subsidiaries. Other than the subsidiaries set forth in Section 3.4 of the Company Disclosure Schedule (the “Subsidiaries”), the Company has no subsidiaries or affiliated companies and does not otherwise own or control, directly or indirectly, any equity interest in any corporation, association or business entity. ViryaNet, Inc. is duly organized and validly existing under the laws of the State of Delaware, and has full corporate power and authority to own, lease and operate its properties and assets and to conduct its business as now being conducted and as proposed to be conducted and is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business and its ownership or leasing of property require it to be so qualified. The Company holds title to all shares of the Subsidiaries free of any preemptive rights and free and clear of any liens, claims, encumbrances or third party rights of any kind.

3.5. SEC Filings; Financial Statements.

3.5.1. The Company has timely or within the extensions granted by the U.S. Securities and Exchange Commission (“SEC”), filed all required forms, reports and documents with the SEC since becoming a SEC reporting company on September 19, 2000, and (except as set forth in Section 3.5.1 of Company Disclosure Schedule) has complied with all applicable requirements of the Securities Act of 1933, as amended (the “Securities Act”) and

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the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder, each as in effect on the dates such forms, reports, and documents were filed. The Company has made available to the Purchaser accurate and complete copies (excluding copies of exhibits) of each report, registration statement and definitive proxy statement filed by the Company with the SEC between such date and the date of this Agreement (the “Company SEC Documents”). As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) each of the Company SEC Documents, including any financial statements or schedules included or incorporated by reference therein, complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act and the rules and regulations promulgated thereunder (as the case may be).

3.5.2. The consolidated financial statements contained in the Company SEC Documents: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with US generally accepted accounting principles applied on a consistent basis throughout the periods covered; and (iii) fairly present the consolidated financial position of Company and its subsidiaries as of the respective dates thereof and the consolidated results of operations of Company and its subsidiaries for the periods covered thereby.

3.6. Authority; Binding Nature of the Transaction Document. The Company has the rights, power and authority to perform its obligations under the Transaction Documents. The execution, delivery and performance by Company of each of the Transaction Documents have been duly authorized by all necessary action on the part of the Company. Each of the Transaction Documents constitutes the legal, valid and binding obligation of the Company, enforceable against it in accordance with its terms, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies.

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3.7. Consents and Approvals. Except as set forth on Section 3.7 of the Company Disclosure Schedule, no filing or registration with, no notice to and no permit, authorization, consent or approval of any third party or any governmental body is necessary for the consummation by the Company of the transactions contemplated by the Transaction Documents.

3.8. No Violation. Neither the execution and delivery of the Transaction Documents by the Company, the performance by it of its obligations hereunder nor the consummation by the Company of the transactions contemplated hereby will (a) violate, conflict with or result in any breach of any provision of the Articles of Association or Memorandum of Association of the Company, or (b) violate any order, writ, judgment, injunction, decree, statute, rule or regulation of any court or domestic or foreign governmental body applicable to the Company, or (c) constitute a default under any material contract to which the Company is party.

3.9. Additional Representations. Until the expiration of the Survival Period (defined below), any additional representations which may be made by the Company in the next financing round after the Closing hereunder shall be deemed to be, for all intents and purposes, incorporated by reference into this Agreement and apply to the investment of Purchaser under this Agreement.

3.10. No Brokers. Except as set forth on Section 3.10 of the Company Disclosure Schedule, No broker’s or finder’s or placement fee or commission will be payable by the Company in connection with the transactions under the Transaction Documents and the Company will hold the Purchaser harmless from any claim, demand or liability for broker’s or finder’s or placement fees or commissions alleged to have been incurred by such Purchaser in connection with the issuance of such securities.

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4. Representations and Warranties of the Purchasers. Each of the Purchasers hereby represents and warrants to the Company, severally but not jointly, as follows:

4.1. Authorization. The execution, delivery and performance of the Transaction Documents by the Purchaser have been duly authorized by all necessary corporate or other action.

4.2. The Purchaser (i) is an “accredited investor” within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, (ii) is acquiring the Purchased Shares for its own account and not with a present view to the distribution of any part thereof, and (iii) the Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer, or grant participations to such person or to any third person, with respect to any of the Purchased Shares.

4.3. No broker’s or finder’s or placement fee or commission will be payable by the Purchaser in connection with the transactions under the Transaction Documents and the Purchaser will hold the Company harmless from any claim, demand or liability for broker’s or finder’s or placement fees or commissions alleged to have been incurred by the Company in connection with the issuance of such securities.

4.4. The Purchaser has been furnished by the Company with, and reviewed, the Company’s Form 20-F for the fiscal years ended December 31, 2005 and December 31, 2006, and the Forms 6-K for the fiscal periods ended June 30, 2007 and September 30, 2007.

4.5. The Purchaser has been furnished access to the business records of the Company and such additional information and documents as such Purchaser has requested and has been afforded an opportunity to ask questions of and receive answers from representatives of the Company concerning the terms and conditions of this Agreement and the Transaction Documents, the purchase of Purchased Shares, the Company’s business, operations, market potential, capitalization, financial condition and prospects, and all other matters deemed relevant by such purchase.

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4.6. The Purchaser has sought independent legal, investment and tax advice to the extent that it has deemed necessary and appropriate in connection with such Purchaser’s decision to purchase the Purchased Shares and the transactions set forth in the Transaction Documents, and has not relied on the representations of any party other than the Company.

4.7. The Purchaser understands that the Purchased Shares, shall bear legends in the form set forth in this Agreement.

4.8. The Purchaser understands that the Purchased Shares are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties, agreements, acknowledgments and understandings of such Purchaser set forth herein in order to determine the availability of such exemptions and the eligibility of the Purchaser thereunder.

4.9. The Purchaser understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Purchased Shares.

5. Conditions of Closing of the Purchasers. The obligations of the Purchasers to consummate the Closing and transfer funds at the Closing are subject to the fulfillment at or before each Closing of the following conditions precedent, any one or more of which may be waived in whole or in part by the Purchasers, which waiver shall be at the sole discretion of such Purchasers:

5.1. Representations and Warranties. The representations and warranties made by the Company in this Agreement shall have been true and correct when made, and shall be true and correct as of the Closing as if made on the date of the Closing.

5.2. Covenants. All covenants, agreements, and conditions contained in this Agreement to be performed or complied with by the Company prior to the Closing shall have been performed or complied with by the Company prior to or at the Closing.

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5.3. Consents, etc. The Company shall have secured all permits, consents, authorizations and approvals that shall be necessary or required lawfully to consummate the transactions to be consummated prior to the Closing pursuant to the Transaction Documents and to issue the Purchased Shares to be purchased by the Purchasers at the Closing.

5.4. Delivery of Documents. All of the documents to be delivered by the Company pursuant to Section 2.2 shall have been delivered to the Purchasers.

5.5. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory in substance and form to the Purchasers and their counsel, and the Purchasers and their counsel shall have received all such counterpart originals or certified or other copies of such documents as the Purchasers or their counsel may request

6. Conditions of Closing of the Company. The Company’s obligations to sell and issue the Purchased Shares at the Closing are subject to the fulfillment at or before such Closing of the following conditions, which may be waived in whole or in part by the Company, and which waiver shall be at the sole discretion of the Company:

6.1. Representations and Warranties. The representations and warranties made by the Purchasers in this Agreement shall have been true and correct when made, and shall be true and correct as of the date of the Closing.

6.2. Covenants. All covenants, agreements and conditions contained in this Agreement to be performed, or complied with, by the Purchasers prior to the Closing shall have been performed or complied with by the Purchasers prior to the Closing.

6.3. Consents, etc. The Company shall have secured all permits, consents, authorizations and approvals that shall be necessary or required lawfully to consummate the transactions contemplated by the Transaction Documents and to issue the Purchased Shares to be purchased by the Purchasers at the Closing.

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6.4. Purchase Price. The Purchasers shall have transferred to the Company the applicable Purchase Price.

7. Affirmative Covenants.

7.1. Shareholders Meeting to approve the Second Closing. As the Second Closing is subject to the approval of the shareholders of the Company, the Company shall, after the Closing Date, use reasonable efforts to prepare and file a Proxy Statement requesting shareholders approval to consummate the Second Closing hereunder. The Company shall keep the Purchasers informed on the status of the Proxy Statement and the required shareholders approval. The Company shall notify the Purchasers immediately after the general meeting of the outcome of such general meeting and if the Company’s shareholders approve the Second Closing the Company and the Purchasers shall consummate the Second Closing immediately thereafter.

7.2. Use of Proceeds. The Company shall use the proceeds of the issuance and sale of the Purchased Shares in accordance with the Company’s budget as approved by the Company’s Board.

7.3. Stamp Tax. The Company shall pay all stamp duty applicable in connection with this Agreement and the Transaction Documents and the issuance of the Purchased Shares, if and when applicable.

7.4. Legends. Any stock certificate representing Purchased Shares, if and when issued, shall bear a legend reading substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSE ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR

11

UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER SECURITY MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

8. Miscellaneous.

8.1. Further Assurances. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of the Transaction Documents and the intentions of the parties as reflected thereby.

8.2. Survival of Representations. All representations and warranties made by any party to this Agreement or pursuant hereto shall survive the Closing and shall remain in full force and effect for a period of one (1) year following the date of the Closing (the “Survival Period”). The representations of the Company set forth in Section 3.1. of this Agreement shall survive the Closing indefinitely.

8.3. Governing Law; Jurisdiction. The transactions contemplated under the Transaction Documents shall be governed by the laws of the state of Israel; all disputes arising of the transactions contemplated under the Transaction Documents or any interpretation controversies regarding the Transaction Documents or the transactions contemplated thereto shall be brought before the International Chamber of Commerce in Geneva, Switzerland.

8.4. Successors and Assigns; Assignment. Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. None of the rights, privileges or obligations set forth in, arising

12

under or created by this Agreement may be assigned or transferred by Purchasers without the consent of the Company, except for any transfers or assignments to any Affiliate of Purchasers. For purposes of this Agreement, the term “Affiliate” shall mean (a) any general, special or limited partner, member, shareholder or any other person or entity that holds a beneficial interest in Purchasers, or (b) an “affiliate” as defined in Rule 144 promulgated under the U.S. Securities Act of 1933.

8.5. Entire Agreement; Amendment and Waiver. This Agreement, the recitals hereto, the Schedules and the Exhibits attached hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only by written agreement specifically referring to this Agreement and signed by the Company and the Purchasers.

8.6. Notices. All notices and other communications required or permitted hereunder to be given to a party to this Agreement and any of the Transaction Documents shall be in writing and shall be delivered by hand or by messenger, addressed to such party’s address as set forth on Exhibit 8.6, or such other address with respect to a party as such party shall notify each other party in writing as provided herein and on Exhibit 8.6. Any notice sent in accordance with this Section 8.6 shall be effective (i) if sent by messenger, upon delivery, and (ii) if sent via overnight courier, upon delivery of such internationally recognized overnight courier service, including, but not limited to, DHL or Federal Express.

8.7. Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on

13

the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative.

8.8. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.

8.9. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

8.10. Further Actions. Each of the parties hereto shall, from time to time after the Closing, upon the request of the other party hereto and at the expense of such requesting party, duly execute, acknowledge and deliver or cause to be duly executed, acknowledged and delivered, all such further instruments and documents reasonably requested by the other party to further effectuate the intents and purposes of this Agreement.

8.11. Confidentiality. Each Purchaser agrees that any information obtained by such Purchaser from or on behalf of the Company which has been marked as confidential (including the contents of all of the Transaction Documents) will not be disclosed to any person other than such Purchaser’s officers, directors, and employees, professional advisors, consultants, or agents, each on a need-to-know basis only, without the prior written consent of the

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Company and will not be used by such Purchaser other than in connection with the transactions contemplated by this Agreement (including all reporting obligations that such Purchaser may be obligated to undertake as a result of such transactions); provided, however, that such Purchaser may disclose such information in connection with periodic reports to their shareholders, partners, members, professional advisors and potential acquirer(s) and such acquirer’s professional advisors, subject to such third parties being under confidentiality obligations to such Purchaser that cover the disclosed confidential information. The Company agrees that the contents of this Agreement and the Transaction Documents shall be treated by it as confidential information, and shall not be disclosed to any person except as required by law. Confidential information as referred to in this Section 8.11 shall not include information, with respect to the Purchaser, (i) which is or becomes public knowledge through no fault of the Purchaser; (ii) which was or is known by the Purchaser prior or at the time of disclosure by the disclosing party as can be evidenced by the Purchaser; (iii) is or has become lawfully available to the Purchaser from a source (other than the Company) which the Purchaser does not know or reasonably believe to be under an obligation of confidentiality; (iv) is disclosed with the prior written consent of the Company; or (v) is legally required to be disclosed by judicial as other governmental action, provided, however, that prompt notice of such judicial or other governmental action shall have been given to the Company, provided that if Purchaser receives a subpoena or similar document requiring it to disclose the Confidential information, the Purchaser shall notify the Company so that the Company can take appropriate action to suppress the disclosure of its Confidential Information or else insure that its Confidential information is disclosed under confidentiality provisions only.

8.12. Indemnification by Company. During the Survival Period and subject to Section 8.14 below, the Company shall and hereby does indemnify and hold the Purchasers harmless from and against and in respect of any and all actual loss, damage and

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expense incurred (other than losses that the Purchasers may incur as a stockholder of the Company) by the Purchasers resulting from, arising out of, attributable to, or in any manner connected with:

(a) Any misrepresentation or breach of any representation or warranty made by the Company pursuant to this Agreement or failure to fulfill any covenant or agreement on the part of the Company contained in this Agreement or in any certificate or other document delivered, or to be delivered, by the Company to the Purchasers in connection with this Agreement; and

(b) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and expenses (including reasonable legal and accounting fees and investigation costs) incident to the foregoing and the enforcement thereof.

If any event shall occur or any circumstance arise which might give rise to a claim in respect of any matter against which the Company has indemnified the Purchasers hereunder, the Purchasers promptly shall give notice thereof to the Company. Such notice shall be given within fifteen (15) days after said claim shall have been presented to the Purchasers. Unless the parties otherwise agree in writing, the Company shall defend against all such third-party claims or otherwise satisfy said claims, at its sole cost and expense, through counsel and accountants designated by it, which approval shall not be delayed or withheld unreasonably. The Purchasers shall have the right to participate with the Company in the defense of any such matter. The Company shall not be liable for any settlement of a claim by the Purchasers without the Company’s consent. Notwithstanding anything to the contrary herein, the Purchasers shall not lay claim and the Company shall not be liable under this Section for any action, proceeding or investigation in respect of which indemnity may be sought as provided above, amounting to less than $50,000 in the aggregate, provided that such persons shall be liable from the first dollar for any claim or claims exceeding such amount.

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8.13. Indemnification by Purchasers. During the Survival Period and subject to Section 18.14 below, each Purchaser shall and hereby does indemnify and hold the Company harmless from and against and in respect of any and all actual loss, damage and expense incurred by the Company resulting from, arising out of, attributable to, or in any manner connected with:

(a) Any misrepresentation or breach of any representation or warranty made by the Purchaser pursuant to this Agreement or failure to fulfill any covenant or agreement on the part of the Purchaser contained in this Agreement or in any certificate or other document delivered, or to be delivered, by the Purchaser to the Company in connection with this Agreement; and

(b) Any and all actions, suits, proceedings, demands, assessments or judgments, costs and expenses (including reasonable legal and accounting fees and investigation costs) incident to the foregoing and the enforcement thereof.

If any event shall occur or any circumstance arise which might give rise to a claim in respect of any matter against which the Purchaser has indemnified the Company hereunder, the Company promptly shall give notice thereof to the Purchaser. Such notice shall be given within fifteen (15) days after said claim shall have been presented to the Company. Unless the parties otherwise agree in writing, the Purchaser shall defend against all such third-party claims or otherwise satisfy said claims, at its sole cost and expense, through counsel and accountants designated by it, which approval shall not be delayed or withheld unreasonably. The Company shall have the right to participate with the

17

Purchaser in the defense of any such matter. The Purchaser shall not be liable for any settlement of a claim by the Company without the Purchaser’s consent. Notwithstanding anything to the contrary herein, the Company shall not lay claim and the Purchaser shall not be liable under this Section for any action, proceeding or investigation in respect of which indemnity may be sought as provided above, amounting to less than $50,000 in the aggregate, provided that such persons shall be liable from the first dollar for any claim or claims exceeding such amount.

8.14. Limitation of Liability. In no event shall either the Company or the Purchasers be liable to the other party for any consequential, indirect, special or incidental costs, damages or loss (including, without limitation, lost profits, loss of business), regardless of the nature, arising out of or relating in any way to this Agreement.

8.15. The parties hereto shall pay their own costs and expenses in connection herewith.

IN WITNESS WHEREOF the parties hereto have signed this Share Purchase Agreement as of the date first set forth above.

VIRYANET LTD.
By:	(Signature)
	(Print Name)
Title:

18

LEWIS OPPORTUNITY FUND LP
By:	(Signature)
	(Print Name)
Title:

LAM OPPORTUNITY FUND Ltd
By:	(Signature)
	(Print Name)
Title:

19

Exhibit 1

Purchaser	Closing Purchased Shares	Second Closing Warrant for additional Purchased Shares	Closing Purchase Price		Second Closing Warrant Purchase Price
Lewis Opportunity Fund LP	283,636	234,000	$	1.65	$	2.00
LAM Opportunity Fund Ltd	80,000	66,000	$	1.65	$	2.00

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Convertible Note

This Convertible Note Agreement (this “Agreement”) is dated as of May 12, 2008 (the “Effective Date”), by and between ViryaNet Ltd., a company organized under the laws of the State of Israel (“Company”), and W. Austin Lewis IV (the “Note Holder”).

Recitals

WHERAS, the Note Holder has made certain loans to the Company, under the terms hereof.

NOW THEREFORE, in connection with the mutual promises and covenants contained herein, the parties agree as follows:

1. Extension of Funds by the Note Holder. The Note Holder has loaned to the Company $500,000 (the “Principal Amount”) prior to the date hereof.

2. Non-Repayment. The Principal Amount under this Agreement shall not be subject to a repayment by the Company in any event and may be converted at the discretion of the Note holder into the Company’s Ordinary Shares, subject to the conditions and limitations set forth in Section 3 below.

3. Conversion. The Note Holder shall be entitled to convert any or all of the outstanding Principal Amount into Ordinary Shares of the Company of NIS 5.0 per share (the “Ordinary Shares”), at a fixed conversion price of US$1.65 per Ordinary Share, as may be adjusted to reflect stock splits, reconsolidation or similar technical adjustments to the Company’s share capital. The Note Holder may convert the Principle Amount at any time at its discretion. Upon any such conversion the Company shall issue to the Note Holder stock certificate(s) evidencing the applicable number of Ordinary Shares, and such stock certificate(s) to bear a legend reading substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSE ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER SECURITY MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

4. Registration Rights. The Ordinary Shares which may be issued upon conversion of the Principal Amount and the Warrants, shall be included as part of the Registrable Securities under the Registration Rights Agreement.

5. Governing Law. Jurisdiction. The transactions contemplated under this Agreement shall be governed by the laws of the state of Israel; all disputes arising of the transactions contemplated under the this Agreement or any interpretation controversies regarding the this Agreement or the transactions contemplated thereto shall be brought before the International Chamber of Commerce in Geneva, Switzerland.

6. Entire Agreement. This Agreement supersedes and replaces the Convertible Note Agreements dated as of December 12, 2007 by and between Company and the “Note Holder.

Date:                     

VIRYANET LTD.
By:	(Signature)
	(Print Name)
Title:

W. AUSTIN LEWIS IV
By:	(Signature)
	(Print Name)
Title:

Convertible Note

This Convertible Note Agreement (this “Agreement”) is dated as of May 12, 2008 (the “Effective Date”), by and between ViryaNet Ltd., a company organized under the laws of the State of Israel (“Company”), and Lewis Opportunity Fund L.P. (the “Note Holder”).

Recitals

WHERAS, the Note Holder has made certain loans to the Company, under the terms hereof.

NOW THEREFORE, in connection with the mutual promises and covenants contained herein, the parties agree as follows:

1. Extension of Funds by the Note Holder. The Note Holder has loaned to the Company $100,000 (the “Principal Amount”) prior to the date hereof.

2. Non-Repayment. The Principal Amount under this Agreement shall not be subject to a repayment by the Company in any event and may be converted at the discretion of the Note holder into the Company’s Ordinary Shares, subject to the conditions and limitations set forth in Section 3 below.

3. Conversion. The Note Holder shall be entitled to convert any or all of the outstanding Principal Amount into Ordinary Shares of the Company of NIS 5.0 per share (the “Ordinary Shares”), at a fixed conversion price of US$1.65 per Ordinary Share, as may be adjusted to reflect stock splits, reconsolidation or similar technical adjustments to the Company’s share capital. The Note Holder may convert the Principle Amount at any time at its discretion. Upon any such conversion the Company shall issue to the Note Holder stock certificate(s) evidencing the applicable number of Ordinary Shares, and such stock certificate(s) to bear a legend reading substantially as follows:

THE SHARES REPRESENTED BY THIS STOCK CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSE ONLY AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR UNDER ANY APPLICABLE STATE SECURITIES LAWS. NEITHER SECURITY MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

4. Registration Rights. The Ordinary Shares which may be issued upon conversion of the Principal Amount and the Warrants, shall be included as part of the Registrable Securities under the Registration Rights Agreement.

5. Governing Law. Jurisdiction. The transactions contemplated under this Agreement shall be governed by the laws of the state of Israel; all disputes arising of the transactions contemplated under the this Agreement or any interpretation controversies regarding the this Agreement or the transactions contemplated thereto shall be brought before the International Chamber of Commerce in Geneva, Switzerland.

Date:                     

VIRYANET LTD.
By:	(Signature)
	(Print Name)
Title:

LEWIS OPPORTUNITY FUND L.P.
By:	(Signature)
	(Print Name)
Title:

THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.

WARRANT TO PURCHASE ORDINARY SHARES

ViryaNet Ltd., an Israeli Company (the “Company”), hereby grants to LAM Opportunity Fund Ltd (the “Holder”), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 5.0 each (the “Ordinary Shares”), set forth below, subject to the terms and conditions set forth below, effective as of December 19, 2007 (the “Effective Date”).

1. Number of Ordinary Shares Available for Purchase and Exercise Price

This Warrant may be exercised to purchase up to 66,000 Ordinary Shares. The exercise price for each Ordinary Share shall be $2.00 (the “Warrant Price”), subject to adjustments under Section 7 of this Warrant (the “Warrant Shares”).

2. Term

This Warrant may be exercised, in whole, or in part (subject to Section 4 below), during the period beginning on the Effective Date and ending on the date which is the earlier of (i) 3 years following the Effective Date, or (ii) such time that the Company consummates a transaction whereby all or substantially all or the shares and/or assets of the Company are purchased by any third party, whether as part of an acquisition, merger, reorganization or any other similar transaction.

3. Exercise of Warrant; Mandatory Exercise

This Warrant may be exercised in whole or in part on any number of occasions during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder. This Warrant may be exercised for cash only. To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment.

Notwithstanding any other terms and conditions herein, the Company may, in its sole discretion and at any time after the Ordinary Shares that may be issued upon exercise of this Warrant have been registered with the SEC and prior to the expiration of this Warrant, demand that the Holder exercises this Warrant and purchase up to 33,000 Ordinary Shares (to the extent not already purchased by the Holder due to previous exercise(s) of this Warrant) and in any such event within no later than 20 days after written notice by the Company to such effect, the Holder shall transfer to the Company the respective exercise price and the Company shall issue to the Holder the respective number of Ordinary Shares.

The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise.

4. Fractional Interest

No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded down to the nearest whole number.

5. Warrant Confers No Rights of Shareholder

Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares.

6. Investment Representation

Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view to distribution; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities

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hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

7. Adjustment of Warrant Price and Number of Shares

The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

a. Adjustment for Shares Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

b. Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 7(b) as of the time of actual payment of such dividends or distributions.

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c. Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company’s Articles of Association with respect to the rights of the Holder.

d. Adjustment for Reclassification, Exchange and Substitution. If the Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company’s Articles of Association.

e. Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s shares or properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company’s Articles of Association with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Subsection and the Company’s Articles of Association (including adjustment of the number of shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable.

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f. Adjustment of Warrant Price. Upon each adjustment in the number of Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted.

8. Transfer of This Warrant or Securities Issuable on Exercise Hereof

a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an “accredited” investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than to any transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company’s Articles of Association.

b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer.

9. Representations and Warranties.

The Company represents and warrants to the Holder as follows:

a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms.

b. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights.

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c. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Articles of Association.

10. Loss, Theft, Destruction or Mutilation of Warrant

Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate.

11. Notices

Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows:

If to Holder:	LAM Opportunity Fund Ltd. [Address to be added]
If to Company:	ViryaNet Ltd. 2 Willow Street, Southborough, Massachusetts attn.: Samuel HaCohen fax: 508-490-8666

Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph.

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12. Applicable Law; Jurisdiction

This Warrant shall be governed by and construed in accordance with the laws of the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.

13. Entire Agreement

This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supercedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof.

Dated:                     

VIRYANET LTD.

By:

Title:

LEWIS OPPORTUNITY FUND LP

By:

Title:

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NOTICE OF EXERCISE

To: ViryaNet Limited

1. The undersigned hereby elects to purchase              shares of Ordinary Shares of                     , pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned.

4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned.

(Date)	(Print Name)
	(Signature)

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THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.

WARRANT TO PURCHASE ORDINARY SHARES

ViryaNet Ltd., an Israeli Company (the “Company”), hereby grants to Lewis Opportunity Fund LP (the “Holder”), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 5.0 each (the “Ordinary Shares”), set forth below, subject to the terms and conditions set forth below, effective as of December 19, 2007 (the “Effective Date”).

1. Number of Ordinary Shares Available for Purchase and Exercise Price

This Warrant may be exercised to purchase up to 234,000 Ordinary Shares. The exercise price for each Ordinary Share shall be $2.00 (the “Warrant Price”), subject to adjustments under Section 7 of this Warrant (the “Warrant Shares”).

2. Term

This Warrant may be exercised, in whole, or in part (subject to Section 4 below), during the period beginning on the Effective Date and ending on the date which is the earlier of (i) 3 years following the Effective Date, or (ii) such time that the Company consummates a transaction whereby all or substantially all or the shares and/or assets of the Company are purchased by any third party, whether as part of an acquisition, merger, reorganization or any other similar transaction.

3. Exercise of Warrant; Mandatory Exercise

This Warrant may be exercised in whole or in part on any number of occasions during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder. This Warrant may be exercised for cash only. To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment.

Notwithstanding any other terms and conditions herein, the Company may, in its sole discretion and at any time after the Ordinary Shares that may be issued upon exercise of this Warrant have been registered with the SEC and prior to the expiration of this Warrant, demand that the Holder exercises this Warrant and purchase up to 117,000 Ordinary Shares (to the extent not already purchased by the Holder due to previous exercise(s) of this Warrant) and in any such event within no later than 20 days after written notice by the Company to such effect, the Holder shall transfer to the Company the respective exercise price and the Company shall issue to the Holder the respective number of Ordinary Shares.

The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise.

4. Fractional Interest

No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded down to the nearest whole number.

5. Warrant Confers No Rights of Shareholder

Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares.

6. Investment Representation

Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view to distribution; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities

- 2 -

hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

7. Adjustment of Warrant Price and Number of Shares

The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

a. Adjustment for Shares Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

b. Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 7(b) as of the time of actual payment of such dividends or distributions.

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c. Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company’s Articles of Association with respect to the rights of the Holder.

d. Adjustment for Reclassification, Exchange and Substitution. If the Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company’s Articles of Association.

e. Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s shares or properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company’s Articles of Association with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Subsection and the Company’s Articles of Association (including adjustment of the number of shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable.

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f. Adjustment of Warrant Price. Upon each adjustment in the number of Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted.

8. Transfer of This Warrant or Securities Issuable on Exercise Hereof

a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an “accredited” investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than to any transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company’s Articles of Association.

b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer.

9. Representations and Warranties.

The Company represents and warrants to the Holder as follows:

a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms.

b. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights.

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c. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Articles of Association.

10. Loss, Theft, Destruction or Mutilation of Warrant

Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate.

11. Notices

Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows:

If to Holder:	Lewis Opportunity Fund LP
	[Address to be added]
If to Company:	ViryaNet Ltd.
	2 Willow Street, Southborough, Massachusetts
	attn.: Samuel HaCohen
	fax: 508-490-8666

Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph.

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12. Applicable Law; Jurisdiction

This Warrant shall be governed by and construed in accordance with the laws of the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.

13. Entire Agreement

This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supercedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof.

Dated:                     

VIRYANET LTD.

By:

Title:

LEWIS OPPORTUNITY FUND LP

By:

Title:

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NOTICE OF EXERCISE

To: ViryaNet Limited

1. The undersigned hereby elects to purchase                      shares of Ordinary Shares of                     , pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned.

4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned.

(Date)	(Print Name)
	(Signature)

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THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.

WARRANT TO PURCHASE ORDINARY SHARES

ViryaNet Ltd., an Israeli Company (the “Company”), hereby grants to W. Austin Lewis IV (the “Holder”), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 5.0 each (the “Ordinary Shares”), set forth below, subject to the terms and conditions set forth below, effective as of December 19, 2007 (the “Effective Date”).

1. Number of Ordinary Shares Available for Purchase and Exercise Price

This Warrant may be exercised to purchase up to 80,790 Ordinary Shares. The exercise price for each Ordinary Share shall be $2.00 (the “Warrant Price”), subject to adjustments under Section 7 of this Warrant (the “Warrant Shares”).

2. Term

This Warrant may be exercised, in whole, or in part (subject to Section 4 below), during the period beginning on the Effective Date and ending on the date which is the earlier of (i) 3 years following the Effective Date, or (ii) such time that the Company consummates a transaction whereby all or substantially all or the shares and/or assets of the Company are purchased by any third party, whether as part of an acquisition, merger, reorganization or any other similar transaction.

3. Exercise of Warrant; Mandatory Exercise

This Warrant may be exercised in whole or in part on any number of occasions during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder. This Warrant may be exercised for cash only. To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment.

Notwithstanding any other terms and conditions herein, the Company may, in its sole discretion and at any time after the Ordinary Shares that may be issued upon exercise of this Warrant have been registered with the SEC and prior to the expiration of this Warrant, demand that the Holder exercises this Warrant and purchase up to 40,395 Ordinary Shares (to the extent not already purchased by the Holder due to previous exercise(s) of this Warrant) and in any such event within no later than 20 days after written notice by the Company to such effect, the Holder shall transfer to the Company the respective exercise price and the Company shall issue to the Holder the respective number of Ordinary Shares.

The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise.

4. Fractional Interest

No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded down to the nearest whole number.

5. Warrant Confers No Rights of Shareholder

Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares.

6. Investment Representation

Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view to distribution; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities

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hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

7. Adjustment of Warrant Price and Number of Shares

The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

a. Adjustment for Shares Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

b. Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 7(b) as of the time of actual payment of such dividends or distributions.

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c. Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company’s Articles of Association with respect to the rights of the Holder.

d. Adjustment for Reclassification, Exchange and Substitution. If the Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company’s Articles of Association.

e. Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s shares or properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company’s Articles of Association with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Subsection and the Company’s Articles of Association (including adjustment of the number of shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable.

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f. Adjustment of Warrant Price. Upon each adjustment in the number of Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted.

8. Transfer of This Warrant or Securities Issuable on Exercise Hereof

a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an “accredited” investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than to any transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company’s Articles of Association.

b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer.

9. Representations and Warranties.

The Company represents and warrants to the Holder as follows:

a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms.

b. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights.

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c. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Articles of Association.

10. Loss, Theft, Destruction or Mutilation of Warrant

Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate.

11. Notices

Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows:

If to Holder:	__________
If to Company:	ViryaNet Ltd.
	2 Willow Street, Southborough, Massachusetts
	attn.: Samuel HaCohen
	fax: 508-490-8666

Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph.

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12. Applicable Law; Jurisdiction

This Warrant shall be governed by and construed in accordance with the laws of the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.

13. Entire Agreement

This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supercedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof.

Dated:                     

VIRYANET LTD.

By:

Title:

W. AUSTIN LEWIS IV

By:

Title:

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NOTICE OF EXERCISE

To: ViryaNet Limited

1. The undersigned hereby elects to purchase                      shares of Ordinary Shares of                     , pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned.

4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned.

(Date)	(Print Name)
	(Signature)

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THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR QUALIFIED UNDER ANY STATE OR FOREIGN SECURITIES LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT COVERING THIS WARRANT AND/OR SUCH SECURITIES, OR THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THE WARRANT AND/OR SUCH SECURITIES SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND THE QUALIFICATION REQUIREMENTS UNDER APPLICABLE STATE OR FOREIGN LAW.

WARRANT TO PURCHASE ORDINARY SHARES

ViryaNet Ltd., an Israeli Company (the “Company”), hereby grants to W. Austin Lewis IV (the “Holder”), the right to purchase from the Company the number of Ordinary Shares of the Company, nominal value NIS 5.0 each (the “Ordinary Shares”), set forth below, subject to the terms and conditions set forth below, effective as of December 19, 2007 (the “Effective Date”).

1. Number of Ordinary Shares Available for Purchase and Exercise Price

This Warrant may be exercised to purchase up to 219,210 Ordinary Shares. The exercise price for each Ordinary Share shall be $2.00 (the “Warrant Price”), subject to adjustments under Section 7 of this Warrant (the “Warrant Shares”).

2. Term

This Warrant may be exercised, in whole, or in part (subject to Section 4 below), during the period beginning on the Effective Date and ending on the date which is the earlier of (i) 3 years following the Effective Date, or (ii) such time that the Company consummates a transaction whereby all or substantially all or the shares and/or assets of the Company are purchased by any third party, whether as part of an acquisition, merger, reorganization or any other similar transaction.

3. Exercise of Warrant; Mandatory Exercise

This Warrant may be exercised in whole or in part on any number of occasions during its term. The Warrant may be exercised by the surrender of the Warrant to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder. This Warrant may be exercised for cash only. To exercise for cash, the Notice of Exercise must be accompanied by payment in full of the amount of the aggregate purchase price of the Warrant Shares being purchased upon such exercise in immediately available funds, in U.S. Dollars or NIS equivalent thereof, based on the representative rate of exchange published by the Bank of Israel and known at the time of payment.

Notwithstanding any other terms and conditions herein, the Company may, in its sole discretion and at any time after the Ordinary Shares that may be issued upon exercise of this Warrant have been registered with the SEC and prior to the expiration of this Warrant, demand that the Holder exercises this Warrant and purchase up to 109,605 Ordinary Shares (to the extent not already purchased by the Holder due to previous exercise(s) of this Warrant) and in any such event within no later than 20 days after written notice by the Company to such effect, the Holder shall transfer to the Company the respective exercise price and the Company shall issue to the Holder the respective number of Ordinary Shares.

The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter, and that the Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this Warrant shall be surrendered, together with payment in full as required above. In the event of a partial exercise, the Company shall concurrently issue to the Holder a replacement Warrant on the same terms and conditions as this Warrant, but representing the number of Warrant Shares remaining after such partial exercise.

4. Fractional Interest

No fractional shares will be issued in connection with any exercise hereunder, and the number of Warrant Shares issued shall be rounded down to the nearest whole number.

5. Warrant Confers No Rights of Shareholder

Except as otherwise set forth in this Warrant, the Holder shall not have any rights as a shareholder of the Company with regard to the Warrant Shares prior to actual exercise resulting in the purchase of any Warrant Shares.

6. Investment Representation

Neither this Warrant nor the Warrant Shares issuable upon the exercise of this Warrant have been registered under the Securities Act, or any other securities laws. The Holder acknowledges by acceptance of the Warrant that (a) it has acquired this Warrant for investment and not with a view to distribution; (b) it has either a pre-existing personal or business relationship with the Company, or its executive officers, or by reason of its business or financial experience, it has the capacity to protect its own interests in connection with the transaction; and (c) it is an accredited investor as that term is defined in Regulation D promulgated under the Securities Act. The Holder agrees that any Warrant Shares issuable upon exercise of this Warrant will be acquired for investment and not with a view to distribution and such Warrant Shares will not be registered under the Securities Act and applicable state securities laws and that such Warrant Shares may have to be held indefinitely unless they are subsequently registered or qualified under the Securities Act and applicable state securities laws, or based on an opinion of counsel reasonably satisfactory to the Company, an exemption from such registration and qualification is available. The Holder, by acceptance hereof, consents to the placement of legend(s) on all securities

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hereunder as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

7. Adjustment of Warrant Price and Number of Shares

The number and kind of securities purchasable initially upon the exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time upon the occurrence of certain events, as follows:

a. Adjustment for Shares Splits and Combinations. If the Company at any time or from time to time during the term of this Warrant effects a subdivision of the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the subdivision shall be proportionately increased, and conversely, if the Company at any time or from time to time combines the outstanding Ordinary Shares, the number of Ordinary Shares issuable upon exercise of this Warrant immediately before the combination shall be proportionately decreased. Any adjustment under this Section 7(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

b. Adjustment for Certain Dividends and Distributions. In the event the Company at any time or from time to time, during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary Shares entitled to receive a dividend or other distribution payable in additional shares of Ordinary Shares, then and in each such event the number of Ordinary Shares issuable upon exercise of this Warrant shall be increased as of the time of such issuance or, in the event such a record date is fixed, as of the close of business on such record date, by multiplying the number of Ordinary Shares issuable upon exercise of this Warrant by a fraction: (i) the numerator of which shall be the total number of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of Ordinary Shares issuable in payment of such dividend or distribution, and (ii) the denominator of which is the total number of shares of Ordinary Shares issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed thereof, the number of Ordinary Shares issuable upon exercise of this Warrant shall be recomputed accordingly as of the close of business on such record date and thereafter the number of shares of Ordinary Shares issuable upon exercise of this Warrant shall be adjusted pursuant to this Section 7(b) as of the time of actual payment of such dividends or distributions.

c. Adjustments for Other Dividends and Distributions. In the event the Company at any time or from time to time during the term of this Warrant makes, or fixes a record date for the determination of holders of Ordinary

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Shares entitled to receive a dividend or other distribution payable in securities of the Company other than Ordinary Shares, then in each such event provision shall be made so that the Holder shall receive upon exercise of this Warrant, in addition to the number of Ordinary Shares receivable thereupon, the amount of securities of the Company that the Holder would have received had this Warrant been exercised for Ordinary Shares immediately prior to such event (or the record date for such event) and had the Holder thereafter, during the period from the date of such event to and including the date of exercise, retained such securities receivable by it as aforesaid during such period, subject to all other adjustments called for during such period under this Section and the Company’s Articles of Association with respect to the rights of the Holder.

d. Adjustment for Reclassification, Exchange and Substitution. If the Ordinary Shares issuable upon the exercise of this Warrant are changed into the same or a different number of shares of any class or classes of shares, whether by recapitalization, reclassification or otherwise (other than a subdivision or combination of shares or shares dividend or a reorganization, merger, consolidation or sale of assets, provided for elsewhere in this Section), then and in any such event the Holder shall have the right thereafter to exercise this Warrant into the kind and amount of shares and other securities receivable upon such recapitalization, reclassification or other change, by holders of the number of shares of Ordinary Shares for which this Warrant might have been exercised immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein and under the Company’s Articles of Association.

e. Reorganization, Mergers, Consolidations or Sales of Assets. If at any time or from time to time during the term of this Warrant there is a capital reorganization of the Ordinary Shares (other than a recapitalization, subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Subsection) or a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all of the Company’s shares or properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the Holder shall thereafter be entitled to receive upon exercise of this Warrant, the number of shares or other securities or property of the Company, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Ordinary Shares deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale. In any such case (except to the extent any cash or property is received in such transaction), appropriate adjustment shall be made in the application of the provisions of this Subsection and the Company’s Articles of Association with respect to the rights of the Holder after the reorganization, merger, consolidation or sale to the end that the provisions of this Subsection and the Company’s Articles of Association (including adjustment of the number of shares of Ordinary Shares issuable upon exercise of this Warrant) shall be applicable after that event and be as nearly equivalent to the provisions hereof as may be practicable.

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f. Adjustment of Warrant Price. Upon each adjustment in the number of Ordinary Shares purchasable hereunder, the Warrant Price shall be proportionately increased or decreased, as the case may be, in a manner that is the inverse of the manner in which the number of Ordinary Shares purchasable hereunder shall be adjusted.

8. Transfer of This Warrant or Securities Issuable on Exercise Hereof

a. With respect to any offer, sale or other disposition of this Warrant or securities into which such Warrant may be exercised, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with, if requested by the Company, a written opinion of such Holder’s counsel, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Such opinion letter and all such transferees must warrant and represent that each such transferee is an “accredited” investor as that term is defined under Regulation D of the Securities Act. Promptly, as practicable, upon receiving such written notice and opinion and warranties and representations, if so requested, the Company, as promptly as practicable, shall deliver to the Holder one or more replacement Warrant certificates on the same terms and conditions as this Warrant for delivery to the transferees. Each Warrant thus transferred and each certificate representing the securities thus transferred shall bear legend(s) as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required in order to ensure compliance with the Securities Act. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. Any provision of this Warrant to the contrary notwithstanding, the Holder may not offer, sell or otherwise dispose of this Warrant to any third party, other than to any transferee approved by the Company in writing in its sole discretion. In addition to the above, any transfer of this Warrant or the Warrant Shares shall be subject to the provisions of the Company’s Articles of Association.

b. In the event that the Company or its shareholders receive an offer to transfer all or substantially all of the shares in the Company, or to effect a merger or acquisition, or sale of all or substantially all of the assets of the Company, then the Company shall promptly inform the Holder in writing of such offer.

9. Representations and Warranties.

The Company represents and warrants to the Holder as follows:

a. This Warrant has been duly authorized and executed by the Company and is a valid and binding obligation of the Company enforceable in accordance with its terms.

b. The Warrant Shares are duly authorized and reserved for issuance by the Company and, when issued in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and not subject to any preemptive rights.

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c. The execution and delivery of this Warrant are not, and the issuance of the Warrant Shares upon exercise of this Warrant in accordance with the terms hereof will not be, inconsistent with the Company’s Articles of Association.

10. Loss, Theft, Destruction or Mutilation of Warrant

Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or Shares certificate, and in case of loss, theft or destruction, of indemnity, or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or Shares certificate, if mutilated, the Company will make and deliver a new Warrant or Shares certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or Shares certificate.

11. Notices

Any notice or other communication hereunder shall be in writing and shall be deemed to have been given upon delivery, if personally delivered or three business days after deposit if deposited in the mail for mailing by certified mail, postage prepaid, and addressed as follows:

If to Holder:	__________
If to Company:	ViryaNet Ltd.
	2 Willow Street, Southborough, Massachusetts
	attn.: Samuel HaCohen
	fax: 508-490-8666

Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressees notice of such new address in conformance with this paragraph.

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12. Applicable Law; Jurisdiction

This Warrant shall be governed by and construed in accordance with the laws of the State of Israel. Any dispute arising under or in relation to this Warrant shall be resolved exclusively in the competent court for Tel Aviv-Jaffa district, and each of the parties hereby submits irrevocably to the exclusive jurisdiction of such court.

13. Entire Agreement

This Warrant constitutes the entire agreement between the parties hereto with regard to the subject matters hereof, and supercedes any prior communications, agreements and/or understandings between the parties hereto with regard to the subject matters hereof.

Dated:                     

VIRYANET LTD.

By:

Title:

W. AUSTIN LEWIS IV

By:

Title:

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NOTICE OF EXERCISE

To: ViryaNet Limited

1. The undersigned hereby elects to purchase                      shares of Ordinary Shares of                     , pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full.

2. In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Ordinary Shares are being acquired solely for the account of the undersigned and not as a nominee for any other party, or for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Ordinary Shares except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws.

3. Please issue a certificate representing said shares of Ordinary Shares in the name of the undersigned.

4. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned.

(Date)	(Print Name)
	(Signature)

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REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is made as of the 19th day of December 2007, by and among ViryaNet Ltd., a company organized under the laws of the State of Israel (the “Company”), and Lewis Opportunity Fund LP and LAM Opportunity Fund Ltd (each as a “Shareholder”, and collectively, as “Shareholders”)

W I T N E S S E T H:

WHEREAS, the Company and the Shareholders have entered into a Share Purchase Agreement (the “Purchase Agreement”), pursuant to which the Shareholders will become holders of up to 363,636 Ordinary Shares par value NIS 5.0 of the Company and may be issued Warrants to purchase up to 300,000 Ordinary Shares par value NIS 5.0; and

WHEREAS, a condition to the closing of the Purchase Agreement (the “Closing”) is that the parties hereto enter into this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:

1. Definitions

Terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. As used in this Agreement, the following terms have the following meanings:

1.1. The term “Companies Law” shall mean the Israeli Companies Law of 1999, as amended.

1.2. The term “Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.3. The term “Form F-3” shall mean such form under the Securities Act, as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.4. The term “Holders” shall mean the holders of registration rights under registration rights agreements to which the Company is party to, except for the Shareholders.

1.5. The term “Israeli Securities Law” shall mean the Israeli Securities Law - 1968, as amended.

1.6. The terms “register”, “registered” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document or the equivalent actions under the laws of another jurisdiction.

1.7. The term “Registrable Securities” shall mean all Ordinary Shares issued and which may be issued to the Shareholders including any Ordinary Shares covered under Warrants which may be issued under the Note Agreement as part of the Second Closing. For the purpose of Sections 2.5 and 4.3, the Registrable Securities shall include in addition, securities granted to other holders of registration rights under other agreement(s) with the Company.

1.8. The term “SEC” shall mean the U.S. Securities and Exchange Commission.

1.9. The term “Securities Act” shall mean the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

2. Required Registration

2.1. The Company shall use best efforts to file a Registration Statement on Form F-3 covering the resale of the Registrable Securities within six months from the Closing.

2.2. In the case of any registration effected pursuant to this Section 2, the Company shall have the right to designate the managing underwriter(s), if any, in any underwritten offering, subject to the reasonable prior approval of the Shareholders.

2.3. The Company, the Shareholders and all Holders participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting.

2.4. If the underwriter of a registration being made pursuant to Section 2 advises the Shareholders or the Holders in writing that marketing factors require a limitation of the number of Registrable Securities to be included in such underwritten registration, then the Shareholders and the Holders wishing to participate in such underwritten registration shall be cut back on a pro-rata basis.

2.5. The Company shall not be required to effect more than one (1) registration pursuant to Section 2. If the Company shall be eligible to use a registration statement on Form F-3 in connection with the any registration under this Section 2, such registration may be effected by the Company on Form F-3.

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2.6. The Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan) to be initiated after the registration requested pursuant to this Section 2 and to become effective less than one hundred and twenty (120) days after the effective date of a registration made pursuant to this Section 2.

2.7. The Shareholders may request to withdraw the registration under this Section 2, at any time and shall not be deemed to have exhausted any rights to make a registration under this Section 2 in the future, provided that he reimburses the Company for all of its costs and expenses incurred in connection with such withdrawn demand registration (collectively, “Company Expenses”), if such registration has in fact been cancelled.

2.8. If a Form F-3 covering all of the Registrable Securities is not declared effective by the SEC within 180 days after the date hereof (the “Period”), then the Company shall pay each Shareholder a cash amount within 3 days after the end of each month after the end of the Period equal to 2% of the amount invested in connection with such Registrable Securities which have not yet been registered, up to a maximum of 12% on the aggregate.

3. Shelf Registration

3.1. From such time as the Company becomes eligible to file registration statements on Form F-3, at the request of the holders following 6 month from the Closing to file a shelf registration statement pursuant to Rule 415 under the Securities Act with the SEC, the Company shall:

3.1.1. within twenty (20) days after receipt of any such request, give written notice of the proposed registration to all other holders; and

3.1.2. use its best efforts to effect as soon as practicable the registration under the Securities Act of all Registrable Securities which are specified in such written request together with the registrable securities of other holders joining in such request pursuant to written requests received by the Company.

3.2. The Company undertakes that it will, once having qualified for registration on Form F-3, use its best efforts to comply with all necessary filings and other requirements so as to maintain such qualification.

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3.3. After a registration requested pursuant to Section 3, the Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan) to be initiated and to become effective less than one hundred and twenty (120) days after the effective date of any registration requested pursuant to Section 3.1.

3.4.

4. Piggyback Registrations

4.1. Whenever the Company proposes to register for its own account or for any other person other than in a registration pursuant to Section 2 or 3 any of its securities under either the Securities Act (other than a registration in connection with a merger or acquisition on Form F-4 or S-4 or one relating solely to employee benefit plans under Form S-8 or any similar form) or the Israeli Securities Laws, it will promptly, and at least thirty (30) days prior to the initial filing of a registration statement with the SEC or Israeli equivalent, give written notice to the Shareholders of its intention to effect such a registration and will include in such registration all the Registrable Securities not previously registered held by the Shareholders (subject to the provisions of Section 4.3 hereto) with respect to which the Company receives written requests for inclusion therein within twenty (20) days after receipt of such notice by the Shareholders (a “Piggyback Registration”).

4.2. In the case of any registration initiated by the Company, the Company shall have the right to designate the managing underwriter in any underwritten offering and any Shareholders participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting.

4.3. If a Piggyback Registration is an underwritten offering of the Company’s securities and the underwriter advises the Company in writing that marketing factors require a limitation of the number of Registrable Securities to be underwritten, the Company will include its securities in such registration in the following order:

(a) if the Piggyback Registration is initiated by the Company:

(i) first, all Registrable Securities proposed to be included by the Company.

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(ii) second, the Registrable Securities held by the Shareholders and the Holders on a pro rata basis.

(b) if the Piggyback Registration is not initiated by the Company:

(i) first, all Registrable Securities proposed to be included by the Shareholders and the Holders; provided that if such securities cannot be included, the Company shall include the Registrable Securities pro rata.

(ii) second, all other securities of the Company or any other shareholders proposed to be included in such registration.

5. Obligations of the Company. Whenever required hereunder to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

5.1. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its reasonable efforts to cause such registration statement to become effective in accordance with the time periods indicated above, and, upon the request of the Shareholders, registered thereunder, keep such registration statement effective for a period of up to nine months or until the distribution contemplated in the registration statement has been completed;

5.2. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement;

5.3. Furnish to the Shareholders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by him;

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5.4. Register and qualify the securities covered by such registration statement under such other securities laws of such jurisdictions as shall be reasonably requested by the Shareholders, as the case may be; provided, however, that in no event shall the Company be required to qualify to do business in any state or other jurisdiction or to take any action which would subject it to general or unlimited service of process in any jurisdiction where it is not now so subject;

5.5. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with terms generally satisfactory to the managing underwriter of such offering. The Shareholders or other shareholders participating in such underwriting shall also enter into and perform its obligations under such an agreement;

5.6. Notify the Shareholders at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included 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 the light of the circumstances then existing;

5.7. Cause all Registrable Securities registered pursuant hereto to be listed on each securities exchange on which similar securities issued by the Company are then listed;

5.8. Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities not later than the effective date of such registration; and

5.9. Furnish, at the request of Shareholders requesting registration of Registrable Securities pursuant to Section 2 hereof, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (a) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Shareholders requesting registration of Registrable Securities, and (b) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Shareholders requesting registration of Registrable Securities.

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6. Expenses of Registration. The Company shall bear and pay the expenses incurred in connection with any registration, filing or qualification of Registrable Securities for the Shareholders, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees and the reasonable fees and disbursements of one counsel (plus local counsel, if appropriate) for the Shareholders, excluding underwriting discounts and commissions relating to the sale of Registrable Securities.

7. Furnishing of Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the securities of the Shareholders that the Shareholders shall furnish to the Company such information as may be required to be included in the registration statement under the Securities Act regarding the Shareholders, the Registrable Securities held by him and the intended method of disposition of such securities as shall be required to effect the registration of such Registrable Securities.

8. Indemnification and Contribution

8.1. The Company shall indemnify and hold harmless, to the fullest extent permitted by law, the Shareholders, any underwriter for the Shareholders, each person, if any, who controls the Shareholders or such underwriter, and each of the Shareholders’ partners, shareholders, officers, directors, employees, legal counsel and accountants, from and against any and all losses, claims, damages, liabilities, and charges, joint or several (“Claims”), to which any of them may be subject under the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law, or any other statute (whether U.S. or Israeli) or at common law, insofar as such Claims arise out of, are based upon, or are in connection with (a) any untrue statement of any material fact contained in any registration statement or prospectus, in each case, as amended or supplemented, under which such securities were sold, or (b) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (c) any other violation by the Company of the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law or any state or foreign jurisdiction securities laws in connection with each such registration, and shall reimburse each such person entitled to indemnification for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such Claim, as and when such expenses are incurred; provided, however, that the Company shall

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not be liable to any such person in any such case to the extent that any such claim arises out of or is based upon any untrue statement or omission made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by such person and/or any person acting on its behalf specifically for use in such registration statement or prospectus and provided further, that this indemnity shall not apply to amounts paid pursuant to any settlement effected without the consent of the party entitled to indemnification hereunder, which consent shall not be unreasonably withheld.

8.2. The Shareholders shall indemnify and hold harmless, to the fullest extent permitted by law the Company, any underwriter for the Company, and each person, if any, who controls the Company or such underwriter and each of the Company’s or underwriter’s officers, directors, employees, legal counsel and accountants, from and against any and all Claims to which any of them may be subject under the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law, or any other statute (whether U.S. or Israeli) or at common law, insofar as such Claims arise out of, are based upon, or are in connection with (a) any untrue statement made by the Shareholders of any material fact contained in any registration statement or prospectus, in each case, as amended or supplemented, under which such securities were sold, or (b) any omission or alleged omission made by the Shareholders to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company or each such person entitled to indemnification for any legal or other expenses reasonably incurred by the Company or such person in connection with investigating or defending any such Claim, as and when such expenses are incurred; provided, however, that the Shareholders shall be liable to the Company or any such person in any such case only to the extent that any such claim arises out of or is based upon any untrue statement or omission made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by the Shareholders and/or any person acting on the Shareholders’ behalf specifically for use in such registration statement or prospectus and provided further, that this indemnity shall not apply to amounts paid pursuant to any settlement effected without the consent of the party entitled to indemnification hereunder, which consent shall not be unreasonably withheld. The indemnification provided by the Shareholders shall be limited to the amount of the net proceeds received by the Shareholders from the sale of the Registrable Securities registered in such registration.

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8.3. Promptly after receipt by any person entitled to indemnification under Section 8.1 or Section 8.2, as the case may be, of notice of the commencement of any action, proceeding, or investigation in respect of which indemnity may be sought as provided above, such party (the “Indemnitee”) shall notify the party from whom indemnification is claimed (the “Indemnitor”). The Indemnitor shall promptly assume the defense of the Indemnitee with counsel reasonably satisfactory to such Indemnitee, and the fees and expenses of such counsel shall be at the sole cost and expense of the Indemnitor. The Indemnitee will cooperate with the Indemnitor in the defense of any action, proceeding, or investigation for which the Indemnitor assumes the defense, provided, however, that if the defendants in any action include both the Indemnitee and the Indemnitor and there is a conflict of interests which would prevent counsel for the Indemnitor from also representing the Indemnitee, the Indemnitee shall have the right to select one separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. The Indemnitor shall not be liable for the settlement by the Indemnitee of any action, proceeding, or investigation effected without its consent, which consent shall not be unreasonably withheld. The Indemnitor shall not enter into any settlement in any action, suit, or proceeding to which the Indemnitee is a party, unless such settlement includes a general release of the Indemnitee with no payment by the Indemnitee of consideration and without an admission of liability.

8.4. The parties agree to notify promptly each other of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Registrable Securities held by the Shareholders, or any preliminary prospectus or registration statement relating to any sale of any Registrable Securities, or of any other litigation or proceedings to which this Section 8 is applicable of which they became aware.

8.5. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall prevail.

8.6. The obligations of the Company and the Shareholders under this Section 8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement.

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8.7. If for any reason the foregoing indemnity is unavailable, or is insufficient to hold harmless an Indemnitee (except as specifically provided therein), then the Indemnitor shall contribute to the amount paid or payable by the Indemnitee as a result of such losses, claims, damages, liabilities or expenses (a) in such proportion as is appropriate to reflect the relative benefits received by the Indemnitor on the one hand and the Indemnitee on the other from the registration, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, or provides a lesser sum to the Indemnitee than the amount hereinafter calculated, in such proportion as is appropriate to reflect the relative fault of the Indemnitor and the Indemnitee as well as any other relevant equitable considerations; provided that in no event shall any contribution by the Shareholders hereunder exceed the net proceeds from the offering received from the Shareholders. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

9. Reports Under the Exchange Act

With a view to making available to the Shareholders the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit the Shareholders to sell securities of the Company to the public without registration or pursuant to a registration on Form F-3, the Company agrees to:

9.1. make and keep public information available, as those terms are understood and defined in Rule 144, at all times;

9.2. take such action as is necessary to enable the Shareholders to utilize Form F-3 for the sale of his Registrable Securities;

9.3. file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act;

9.4. furnish to the Shareholders, so long as the Shareholders owns any Registrable Securities, forthwith upon being so requested (a) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form F-3 (at any time after it so qualifies), (b) a copy of the most recent annual or, to the extent applicable, quarterly report of the Company and such other reports

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and documents so filed by the Company, and (c) such other information as may be reasonably requested in availing the Shareholders of any rule or regulation of the SEC which permits the selling of any Registrable Securities without registration or pursuant to such form;

9.5. comply with all other necessary filings and other requirements so as to enable the Shareholders and any transferee thereof to sell Registrable Securities under Rule 144 under the Securities Act (or any similar rule then in effect); and

9.6. use its best efforts to maintain the listing of its Ordinary Shares on the Over-the-Counter Bulletin Board (“OTCBB”), and should its Ordinary Shares be delisted from Nasdaq, to cause the reinstatement of the Ordinary Shares to listing on Nasdaq, including through the pursuit of the formal appeal process established by Nasdaq.

10. Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned (but only with all related obligations) by the Shareholders to a transferee or assignee of such securities and such transferee or assignee shall be deemed the “Shareholder” hereunder; provided, however, (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee the securities with respect to which such registration rights are being assigned; and (b) such transferee or assignee agrees in writing to be bound by and subject to all the terms and conditions of this Agreement.

11. Additional Registration Rights. Following the first anniversary of the Closing Date, the Company shall use reasonable efforts to negotiate additional registration rights for the Shareholder if he is not then entitled to sell its shares under Rule 144.

12. Deleted.

13. Miscellaneous.

13.1. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby.

13.2. This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of New York (without giving effect to principles of conflicts of laws). Each party to this Agreement consents to the exclusive jurisdiction and venue of the courts of the State of New York.

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13.3. Except as otherwise expressly limited herein and subject to the provisions of Section 10 above, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.

13.4. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Shareholders. For the avoidance of doubt, the Company may execute any other registration rights agreement and such agreement, if and when executed, shall not be deemed to be an amendment of this Agreement or require the consent of the Shareholders.

13.5. All article and section headings are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement.

13.6. All notices and other communications required or permitted hereunder are to be given pursuant to the provisions of the Agreement.

13.7. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.

13.8. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

13.9. In no event shall either the Company or the Shareholders be liable to the other party for any consequential, indirect, special or incidental costs, damages or loss (including, without limitation, lost profits, loss of business), regardless of the nature, arising out of or relating in any way to this Agreement.

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IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as of the date set forth above.

Dated:                     

VIRYANET LTD.

By:

Title:

LEWIS OPPORTUNITY FUND LP

By:

Title:

LAM OPPORTUNITY FUND LTD

By:

Title:

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (the “Agreement”) is made as of the 19th day of December 2007, by and among ViryaNet Ltd., a company organized under the laws of the State of Israel (the “Company”), and W. Austin Lewis IV (the “Note Holder”)

W I T N E S S E T H:

WHEREAS, the Company and the Note Holder have entered into a Convertible Note Agreements (the “Note Agreements”), pursuant to which the Note Holder may become holders of up to 363,636 Ordinary Shares par value NIS 5.0 of the Company and may be issued Warrants to purchase up to 300,000 Ordinary Shares par value NIS 5.0; and

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows:

1. Definitions

Terms used in this Agreement and not otherwise defined herein shall have the meanings ascribed to them in the Agreement. As used in this Agreement, the following terms have the following meanings:

1.1. The term “Companies Law” shall mean the Israeli Companies Law of 1999, as amended.

1.2. The term “Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.3. The term “Form F-3” shall mean such form under the Securities Act, as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.4. The term “Holders” shall mean the holders of registration rights under registration rights agreements to which the Company is party to, except for the Note Holders.

1.5. The term “Israeli Securities Law” shall mean the Israeli Securities Law - 1968, as amended.

1.6. The terms “register”, “registered” and “registration” refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document or the equivalent actions under the laws of another jurisdiction.

1.7. The term “Registrable Securities” shall mean all Ordinary Shares which may be issued to the Note Holder under the Note Agreements, including any Ordinary Shares covered under Warrants which may be issued under the Note Agreements. For the purpose of Sections 2.5 and 4.3, the Registrable Securities shall include in addition, securities granted to other holders of registration rights under other agreement with the Company.

1.8. The term “SEC” shall mean the U.S. Securities and Exchange Commission.

1.9. The term “Securities Act” shall mean the United States Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

2. Required Registration

2.1. The Company shall use best efforts to file a Registration Statement on Form F-3 covering the resale of the Registrable Securities within six months from the Closing.

2.2. In the case of any registration effected pursuant to this Section 2, the Company shall have the right to designate the managing underwriter(s), if any, in any underwritten offering, subject to the reasonable prior approval of the Note Holders.

2.3. The Company, the Note Holders and all Holders participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting.

2.4. If the underwriter of a registration being made pursuant to Section 2 advises the Note Holders or the Holders in writing that marketing factors require a limitation of the number of Registrable Securities to be included in such underwritten registration, then the Note Holders and the Holders wishing to participate in such underwritten registration shall be cut back on a pro-rata basis.

2.5. The Company shall not be required to effect more than one (1) registration pursuant to Section 2. If the Company shall be eligible to use a registration statement on Form F-3 in connection with the any registration under this Section 2, such registration may be effected by the Company on Form F-3.

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2.6. The Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan) to be initiated after the registration requested pursuant to this Section 2 and to become effective less than one hundred and twenty (120) days after the effective date of a registration made pursuant to this Section 2.

2.7. The Note Holders may request to withdraw the registration under this Section 2, at any time and shall not be deemed to have exhausted any rights to make a registration under this Section 2 in the future, provided that he reimburses the Company for all of its costs and expenses incurred in connection with such withdrawn demand registration (collectively, “Company Expenses”), if such registration has in fact been cancelled.

2.8. If a Form F-3 covering all of the Registrable Securities is not declared effective by the SEC within 180 days after the date hereof (the “Period”), then the Company shall pay each Note Holder a cash amount within 3 days after the end of each month after the end of the Period equal to 2% of the amount invested in connection with such Registrable Securities which have not yet been registered, up to a maximum of 12% on the aggregate.

3. Shelf Registration

3.1. From such time as the Company becomes eligible to file registration statements on Form F-3, at the request of the holders following 6 month from the Closing to file a shelf registration statement pursuant to Rule 415 under the Securities Act with the SEC, the Company shall:

3.1.1. within twenty (20) days after receipt of any such request, give written notice of the proposed registration to all other holders; and

3.1.2. use its best efforts to effect as soon as practicable the registration under the Securities Act of all Registrable Securities which are specified in such written request together with the registrable securities of other holders joining in such request pursuant to written requests received by the Company.

3.2. The Company undertakes that it will, once having qualified for registration on Form F-3, use its best efforts to comply with all necessary filings and other requirements so as to maintain such qualification.

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3.3. After a registration requested pursuant to Section 3, the Company may not cause any other registration of securities for sale for its own account (other than a registration effected solely to implement an employee benefit plan) to be initiated and to become effective less than one hundred and twenty (120) days after the effective date of any registration requested pursuant to Section 3.1.

3.4.

4. Piggyback Registrations

4.1. Whenever the Company proposes to register for its own account or for any other person other than in a registration pursuant to Section 2 or 3 any of its securities under either the Securities Act (other than a registration in connection with a merger or acquisition on Form F-4 or S-4 or one relating solely to employee benefit plans under Form S-8 or any similar form) or the Israeli Securities Laws, it will promptly, and at least thirty (30) days prior to the initial filing of a registration statement with the SEC or Israeli equivalent, give written notice to the Note Holder of its intention to effect such a registration and will include in such registration all the Registrable Securities not previously registered held by the Note Holder (subject to the provisions of Section 4.3 hereto) with respect to which the Company receives written requests for inclusion therein within twenty (20) days after receipt of such notice by the Note Holder (a “Piggyback Registration”).

4.2. In the case of any registration initiated by the Company, the Company shall have the right to designate the managing underwriter in any underwritten offering and any Note Holder participating in such underwritten registration shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting.

4.3. If a Piggyback Registration is an underwritten offering of the Company’s securities and the underwriter advises the Company in writing that marketing factors require a limitation of the number of Registrable Securities to be underwritten, the Company will include its securities in such registration in the following order:

(a) if the Piggyback Registration is initiated by the Company:

(i) first, all Registrable Securities proposed to be included by the Company.

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(ii) second, the Registrable Securities held by the Note Holder and the Holders on a pro rata basis.

(b) if the Piggyback Registration is not initiated by the Company:

(i) first, all Registrable Securities proposed to be included by the Note Holder and the Holders; provided that if such securities cannot be included, the Company shall include the Registrable Securities pro rata.

(ii) second, all other securities of the Company or any other Note Holder proposed to be included in such registration.

5. Obligations of the Company. Whenever required hereunder to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

5.1. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its reasonable efforts to cause such registration statement to become effective in accordance with the time periods indicated above, and, upon the request of the Note Holder, registered thereunder, keep such registration statement effective for a period of up to nine months or until the distribution contemplated in the registration statement has been completed;

5.2. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement;

5.3. Furnish to the such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by him;

5.4. Register and qualify the securities covered by such registration statement under such other securities laws of such jurisdictions as shall be reasonably requested by the Note Holder, as the case may be; provided, however, that in no event shall the Company be required to qualify to do business in any state or other jurisdiction or to take any action which would subject it to general or unlimited service of process in any jurisdiction where it is not now so subject;

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5.5. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with terms generally satisfactory to the managing underwriter of such offering. The Note Holder or other shareholders participating in such underwriting shall also enter into and perform its obligations under such an agreement;

5.6. Notify the Note Holder at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included 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 the light of the circumstances then existing;

5.7. Cause all Registrable Securities registered pursuant hereto to be listed on each securities exchange on which similar securities issued by the Company are then listed;

5.8. Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto and a CUSIP number for all such Registrable Securities not later than the effective date of such registration; and

5.9. Furnish, at the request of Note Holder requesting registration of Registrable Securities pursuant to Section 2 hereof, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (a) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Note Holder requesting registration of Registrable Securities, and (b) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Note Holder requesting registration of Registrable Securities.

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6. Expenses of Registration. The Company shall bear and pay the expenses incurred in connection with any registration, filing or qualification of Registrable Securities for the Note Holder, including (without limitation) all registration, filing, and qualification fees, printers and accounting fees and the reasonable fees and disbursements of one counsel (plus local counsel, if appropriate) for the Note Holder, excluding underwriting discounts and commissions relating to the sale of Registrable Securities.

7. Furnishing of Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the securities of the Note Holder that the Note Holder shall furnish to the Company such information as may be required to be included in the registration statement under the Securities Act regarding the Note Holder, the Registrable Securities held by him and the intended method of disposition of such securities as shall be required to effect the registration of such Registrable Securities.

8. Indemnification and Contribution

8.1. The Company shall indemnify and hold harmless, to the fullest extent permitted by law, the Note Holder, any underwriter for the Note Holder, each person, if any, who controls the Note Holder or such underwriter, and each of the Note Holder’ partners, shareholders, officers, directors, employees, legal counsel and accountants, from and against any and all losses, claims, damages, liabilities, and charges, joint or several (“Claims”), to which any of them may be subject under the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law, or any other statute (whether U.S. or Israeli) or at common law, insofar as such Claims arise out of, are based upon, or are in connection with (a) any untrue statement of any material fact contained in any registration statement or prospectus, in each case, as amended or supplemented, under which such securities were sold, or (b) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (c) any other violation by the Company of the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law or any state or foreign jurisdiction securities laws in connection with each such registration, and shall reimburse each such person entitled to indemnification for any legal or other expenses reasonably incurred by such person in connection with investigating or defending any such Claim, as and when such expenses are incurred; provided, however, that the Company shall

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not be liable to any such person in any such case to the extent that any such claim arises out of or is based upon any untrue statement or omission made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by such person and/or any person acting on its behalf specifically for use in such registration statement or prospectus and provided further, that this indemnity shall not apply to amounts paid pursuant to any settlement effected without the consent of the party entitled to indemnification hereunder, which consent shall not be unreasonably withheld.

8.2. The Note Holder shall indemnify and hold harmless, to the fullest extent permitted by law the Company, any underwriter for the Company, and each person, if any, who controls the Company or such underwriter and each of the Company’s or underwriter’s officers, directors, employees, legal counsel and accountants, from and against any and all Claims to which any of them may be subject under the Securities Act, the Exchange Act, the Israeli Securities Law, the Companies Law, or any other statute (whether U.S. or Israeli) or at common law, insofar as such Claims arise out of, are based upon, or are in connection with (a) any untrue statement made by the Note Holder of any material fact contained in any registration statement or prospectus, in each case, as amended or supplemented, under which such securities were sold, or (b) any omission or alleged omission made by the Note Holder to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company or each such person entitled to indemnification for any legal or other expenses reasonably incurred by the Company or such person in connection with investigating or defending any such Claim, as and when such expenses are incurred; provided, however, that the Note Holder shall be liable to the Company or any such person in any such case only to the extent that any such claim arises out of or is based upon any untrue statement or omission made in such registration statement or prospectus in reliance upon and in conformity with written information furnished to the Company by the Note Holder and/or any person acting on the Note Holder’ behalf specifically for use in such registration statement or prospectus and provided further, that this indemnity shall not apply to amounts paid pursuant to any settlement effected without the consent of the party entitled to indemnification hereunder, which consent shall not be unreasonably withheld. The indemnification provided by the Note Holder shall be limited to the amount of the net proceeds received by the Note Holder from the sale of the Registrable Securities registered in such registration.

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8.3. Promptly after receipt by any person entitled to indemnification under Section 8.1 or Section 8.2, as the case may be, of notice of the commencement of any action, proceeding, or investigation in respect of which indemnity may be sought as provided above, such party (the “Indemnitee”) shall notify the party from whom indemnification is claimed (the “Indemnitor”). The Indemnitor shall promptly assume the defense of the Indemnitee with counsel reasonably satisfactory to such Indemnitee, and the fees and expenses of such counsel shall be at the sole cost and expense of the Indemnitor. The Indemnitee will cooperate with the Indemnitor in the defense of any action, proceeding, or investigation for which the Indemnitor assumes the defense, provided, however, that if the defendants in any action include both the Indemnitee and the Indemnitor and there is a conflict of interests which would prevent counsel for the Indemnitor from also representing the Indemnitee, the Indemnitee shall have the right to select one separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. The Indemnitor shall not be liable for the settlement by the Indemnitee of any action, proceeding, or investigation effected without its consent, which consent shall not be unreasonably withheld. The Indemnitor shall not enter into any settlement in any action, suit, or proceeding to which the Indemnitee is a party, unless such settlement includes a general release of the Indemnitee with no payment by the Indemnitee of consideration and without an admission of liability.

8.4. The parties agree to notify promptly each other of the commencement of any litigation or proceedings against the Company or any of its officers or directors in connection with the sale of any Registrable Securities held by the Note Holder, or any preliminary prospectus or registration statement relating to any sale of any Registrable Securities, or of any other litigation or proceedings to which this Section 8 is applicable of which they became aware.

8.5. Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall prevail.

8.6. The obligations of the Company and the Note Holder under this Section 8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement.

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8.7. If for any reason the foregoing indemnity is unavailable, or is insufficient to hold harmless an Indemnitee (except as specifically provided therein), then the Indemnitor shall contribute to the amount paid or payable by the Indemnitee as a result of such losses, claims, damages, liabilities or expenses (a) in such proportion as is appropriate to reflect the relative benefits received by the Indemnitor on the one hand and the Indemnitee on the other from the registration, or (b) if the allocation provided by clause (a) above is not permitted by applicable law, or provides a lesser sum to the Indemnitee than the amount hereinafter calculated, in such proportion as is appropriate to reflect the relative fault of the Indemnitor and the Indemnitee as well as any other relevant equitable considerations; provided that in no event shall any contribution by the Note Holder hereunder exceed the net proceeds from the offering received from the Note Holder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

9. Reports Under the Exchange Act

With a view to making available to the Note Holder the benefits of Rule 144 promulgated under the Securities Act and any other rule or regulation of the SEC that may at any time permit the Note Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form F-3, the Company agrees to:

9.1. make and keep public information available, as those terms are understood and defined in Rule 144, at all times;

9.2. take such action as is necessary to enable the Note Holder to utilize Form F-3 for the sale of his Registrable Securities;

9.3. file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act;

9.4. furnish to the Note Holder, so long as the Note Holder owns any Registrable Securities, forthwith upon being so requested (a) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, or that it qualifies as a registrant whose securities may be resold pursuant to Form F-3 (at any time after it so qualifies), (b) a copy of the most recent annual or, to the extent applicable, quarterly report of the Company and such other reports and documents so filed by the Company, and (c) such other information as may be reasonably requested in availing the Note Holder of any rule or regulation of the SEC which permits the selling of any Registrable Securities without registration or pursuant to such form;

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9.5. comply with all other necessary filings and other requirements so as to enable the Note Holder and any transferee thereof to sell Registrable Securities under Rule 144 under the Securities Act (or any similar rule then in effect); and

9.6. use its best efforts to maintain the listing of its Ordinary Shares on the Over-the-Counter Bulletin Board (“OTCBB”), and should its Ordinary Shares be delisted from OTCBB.

10. Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned (but only with all related obligations) by the Note Holder to a transferee or assignee of such securities and such transferee or assignee shall be deemed the “Shareholder” hereunder; provided, however, (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee the securities with respect to which such registration rights are being assigned; and (b) such transferee or assignee agrees in writing to be bound by and subject to all the terms and conditions of this Agreement.

11. Additional Registration Rights. Following the first anniversary of the Closing Date, the Company shall use reasonable efforts to negotiate additional registration rights for the Shareholder if he is not then entitled to sell its shares under Rule 144.

12. Deleted.

13. Miscellaneous.

13.1. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby.

13.2. This Agreement shall be construed in accordance with, and governed in all respects by, the internal laws of the State of New York (without giving effect to principles of conflicts of laws). Each party to this Agreement consents to the exclusive jurisdiction and venue of the courts of the State of New York.

13.3. Except as otherwise expressly limited herein and subject to the provisions of Section 10 above, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto.

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13.4. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matters hereof and thereof. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Note Holder. For the avoidance of doubt, the Company may execute any other registration rights agreement and such agreement, if and when executed, shall not be deemed to be an amendment of this Agreement or require the consent of the Note Holder.

13.5. All article and section headings are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement.

13.6. All notices and other communications required or permitted hereunder are to be given pursuant to the provisions of the Agreement.

13.7. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction.

13.8. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument.

13.9. In no event shall either the Company or the Note Holder be liable to the other party for any consequential, indirect, special or incidental costs, damages or loss (including, without limitation, lost profits, loss of business), regardless of the nature, arising out of or relating in any way to this Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the undersigned have executed this Registration Rights Agreement as of the date set forth above.

Dated:                         

VIRYANET LTD.

By:

Title:

W. AUSTIN LEWIS IV

By:

Title:

EXHIBIT 3. VIRYANET DISCLOSURE SCHEDULE

The following information in any of the sections is provided for the purposes of disclosure pursuant to this Share Purchase Agreement (the “Agreement”) by and between ViryaNet Ltd. (“ViryaNet” or the “Company”)) and Lewis Opportunity Fund LP and LAM Opportunity Fund Ltd, (each a “Purchaser”, and collectively, the “Purchasers”), and does not grant, and should not be interpreted as granting, any rights to any third parties.

This Disclosure Schedule relates to certain disclosures required and transactions contemplated by the Agreement. The Disclosure Schedule is not intended to constitute, and shall not be construed as constituting, representations or warranties of ViryaNet except as and to the extent provided in the Agreement. The disclosure of any matter in this Disclosure Schedule shall not be construed as an admission that such information is material with respect to the Company or is likely to have a material adverse effect on ViryaNet.

Each section is intended to relate to the corresponding section of the Agreement, but certain disclosure information may be categorized in one section and not another.

Reference is made to the information set forth in the Company’s reports which are hereby incorporated into this Disclosure Schedule.

All capitalized terms used in any of the sections and not otherwise defined in this Disclosure Schedule shall have the meanings assigned to them in the Agreement.

Headings have been inserted on the Sections of the Disclosure Schedule for convenience of reference only and shall to no extent have the effect of amending or changing the content or meaning of the Sections as set forth in the Agreement.

SECTION 3.2

SHARE CAPITAL

1. The Company’s capitalization table is attached hereto as Exhibit A, indicating the fully diluted capital structure prior to and immediately after execution of this Agreement.

SECTION 3.4

VIRYANET’S SUBSIDIARIES

Name of Subsidiary	Country of Incorporation
ViryaNet, Inc. (subs. of ViryaNet Ltd)	United States of America
iMedeon, Inc. (subs. of ViryaNet, Inc.)	United States of America
Utility Partners, Inc. (subs. of ViryaNet, Inc.)	United States of America
ViryaNet Europe Ltd. (subs. of ViryaNet Ltd)	United Kingdom
ViryaNet Pty Ltd. (subs. of ViryaNet, Inc.)	Australia

The Company completed the dissolution of its Japanese subsidiary, ViryaNet Japan KK, in April 2007.

SECTION 3.7

CONSENTS AND APPROVALS

1. Provide Notice to the Israeli Chief Scientist Office;

2. Provide Notice to the Israeli Investment Center;

SECTION 3.10

NO BROKERS

The Company will issue Ordinary Shares equal to 5% of the funds actually received from the Purchasers as part of this transaction hereunder based on a price per Ordinary Share of $1.65 as a finder’s fee to Holbrook Capital. Such Ordinary Shares shall be entitled to the same Registration Rights set forth in the Share Purchase Agreement.

In addition, the Company will pay the amount of 2% of the funds actually received by the Purchasers, and issue Ordinary Shares equal to 1% of the funds actually received from the Purchasers as part of this transaction hereunder based on a price per Ordinary Share as a finder’s fee to Evan Posses. Such Ordinary Shares shall be entitled to the same Registration Rights set forth in the Share Purchase Agreement.

EXHIBIT 3. VIRYANET DISCLOSURE SCHEDULE

The following information in any of the sections is provided for the purposes of disclosure pursuant to this Convertible Note Agreement (the “Agreement”) by and between ViryaNet Ltd. (“ViryaNet” or the “Company”)) and W. Austin Lewis IV, (the “Purchaser”), and does not grant, and should not be interpreted as granting, any rights to any third parties.

This Disclosure Schedule relates to certain disclosures required and transactions contemplated by the Agreement. The Disclosure Schedule is not intended to constitute, and shall not be construed as constituting, representations or warranties of ViryaNet except as and to the extent provided in the Agreement. The disclosure of any matter in this Disclosure Schedule shall not be construed as an admission that such information is material with respect to the Company or is likely to have a material adverse effect on ViryaNet.

Each section is intended to relate to the corresponding section of the Agreement, but certain disclosure information may be categorized in one section and not another.

Reference is made to the information set forth in the Company’s reports which are hereby incorporated into this Disclosure Schedule.

All capitalized terms used in any of the sections and not otherwise defined in this Disclosure Schedule shall have the meanings assigned to them in the Agreement.

Headings have been inserted on the Sections of the Disclosure Schedule for convenience of reference only and shall to no extent have the effect of amending or changing the content or meaning of the Sections as set forth in the Agreement.

SECTION 3.2

SHARE CAPITAL

1. The Company’s capitalization table is attached hereto as Exhibit A, indicating the fully diluted capital structure prior to and immediately after execution of this Agreement.

SECTION 3.4

VIRYANET’S SUBSIDIARIES

Name of Subsidiary	Country of Incorporation
ViryaNet, Inc. (subs. of ViryaNet Ltd)	United States of America
iMedeon, Inc. (subs. of ViryaNet, Inc.)	United States of America
Utility Partners, Inc. (subs. of ViryaNet, Inc.)	United States of America
ViryaNet Europe Ltd. (subs. of ViryaNet Ltd)	United Kingdom
ViryaNet Pty Ltd. (subs. of ViryaNet, Inc.)	Australia

The Company completed the dissolution of its Japanese subsidiary, ViryaNet Japan KK, in April 2007.

SECTION 3.7

CONSENTS AND APPROVALS

1. Provide Notice to the Israeli Chief Scientist Office;

2. Provide Notice to the Israeli Investment Center;

SECTION 3.10

NO BROKERS

The Company will issue Ordinary Shares equal to 5% of the funds actually received from the Purchaser as part of this transaction hereunder based on a price per Ordinary Share of $1.65 as a finder’s fee to Holbrook Capital. Such Ordinary Shares shall be entitled to the same Registration Rights set forth in the Share Purchase Agreement.

In addition, the Company will pay the amount of 2% of the funds actually received by the Purchaser, and issue Ordinary Shares equal to 1% of the funds actually received from the Purchaser as part of this transaction hereunder based on a price per Ordinary Share of $1.65 as a finder’s fee to Evan Posses. Such Ordinary Shares shall be entitled to the same Registration Rights set forth in the Share Purchase Agreement.

EX-4.(A)29

Exhibit 4(a)(29)

SECOND AMENDMENT AND EXTENSION OF LEASE

THIS SECOND AMENDMENT AND EXTENSION OF LEASE (“Amendment”) is made as of the      day of January, 2008 by and between FIRMIN JOINT VENTURE LLC, a Delaware limited liability company having an address at 2 Willow Street, Southborough, MA. (the “Landlord”) and VIRYANET, INC., a Delaware corporation having a mailing address of Two Willow Street, Southborough, Massachusetts (the “Tenant”).

WITNESSETH:

WHEREAS, Landlord and Tenant (formerly known as RTS Software, Inc. entered into that certain lease dated as of January 28, 2000 and FIRST AMENDMENT dated June 30, 2004 (the “Lease”) relating to certain premises (the “Premises”) located in the building known as Two Willow Street, Southborough, Massachusetts, as more particularly described in the Lease; and

WHEREAS, the parties hereto desire to amend and extend the Lease as set forth below.

NOW, THEREFORE, in consideration of the foregoing and for One Dollar ($1.00) and other good and valuable consideration, each of the parties hereto to the other of them in hand this day paid, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows:

1 . Term. The Term of the Lease shall expire and come to an end on June 30, 2011 unless sooner terminated as provided in the Lease.

2. Fixed Rent. Annual Fixed Rent (now calculated on 10,007 rentable square feet) for the period commencing July 1, 2008 and continuing through June 30, 2009 shall be at the annual rate of $185,129.50 ($15,427.46/month); from July 1, 2009 through June 30, 2010 shall be at the annual rate of $187,631.25 ($15,635.94/month); and from July 1, 2010 through June 30, 2011 shall be at the annual rate of $190,133 ($15,844.42/month). In addition to Fixed Rent payable under the Lease, Tenant shall be responsible for payment of an annual electric charge equal to $1.25 per square foot of the Premises.

3. Base Year for Operating; Expense and Taxes. For the purposes of calculating Tenant’s share of Operating Expenses and Real Estate Taxes pursuant to Section 4.2 of the Lease, Section 4.2 shall be modified as follows:

(a) the Base Year for Operating Expenses shall be fiscal year 2008 (May 1, 2007 – April 30, 2008); and

(b) the Tax Base Year shall be fiscal year 2009 (e.g., July 1, 2008 through June 30, 2009).

Tenant’s proportionate share is now 25.02% (10,007 ÷ 40,000 square feet).

4. Tenant Improvement Allowance. The tenant improvement allowance in the amount of $15,000 in paragraph 4 of the FIRST AMENDMENT and Extension of Lease dated June 30,2004 shall be applied to the outstanding invoice dated June 21, 2007 for the rent adjustment for May 2006 to April 2007, in the amount of $19,757.60 and such amount shall be considered payment in full of the balance due on said invoice. For the SECOND AMENDMENT and Extension of Lease, Landlord will reimburse Tenant for up to Fifteen Thousand Dollars ($15,000) for Tenant’s improvements to the Premises, whether performed as a single project or multiple smaller projects (“Tenant’s Work”), subject to the following:

(a) Landlord has approved the plans and specifications for Tenant’s Work in accordance with the provisions of the Lease, including without limitation, Section 3.3;

(b) Tenant’s Work shall be performed in a good and workmanlike manner using contractors reasonably acceptable to Landlord;

(c) Tenant shall have furnished evidence reasonably satisfactory to Landlord that all of the Tenant’s Work has been completed and has been paid for in full, and that any and all liens therefore that have been or may be filed have been satisfied of record or waived;

(d) Tenant has delivered a Certificate of Occupancy for Tenant’s Work to Landlord, where applicable;

(e) Tenant shall not be in default under the Lease; and

(f) Tenant shall have submitted receipted bills showing the amount spent by Tenant in performing Tenant’s Work (exclusive of furniture, fixtures and equipment).

Landlord’s payment shall be due thirty (30) days after Tenant has submitted all of the items required by this Paragraph 4.

In the event Tenant owes Landlord any amount pursuant to the Lease at the time Landlord’s payment is due, Landlord shall have the right to offset such amount from Landlord’s payment.

5. Brokers. Each party represents and warrants that it has dealt with no broker other than R. W. Holmes Realty (the “Broker”) in connection with this Amendment, and each agrees to defend, indemnify and save the other harmless from and against any and all claims for commission arising out of this Amendment by any broker other than that named herein. Landlord shall be responsible for any fees and commissions due to the Broker in connection with this Amendment.

6. Use of Facility. Tenant may use Landlord’s board room (the “Board Room”) located on the third floor of the Building, at no charge, for up to three (3) days during each calendar year during the term of the Lease, subject to the following:

(a) The use of the Board Room shall be scheduled upon prior notice to Landlord at a time mutually acceptable to Landlord and Tenant and in any event shall be between 9:00 a.m. and 5:00 p.m., Monday through Friday.

(b) Tenant may use the Board Room only for meetings directly related to Tenant’s business.

2

(c) Tenant shall be responsible, at its sole cost, for all set-up, meeting logistics and clean-up of the Board Room related to its use.

(d) The use of the Board Room shall be personal to Tenant and may not be assigned to any assignee or subtenant of Tenant.

7. Assignment/Subletting. If, for any assignment or sublease consented to by Landlord, Tenant receives rent or other consideration either initially or over the term of the assignment or sublease in excess of the rent called for under the Lease, or in the case of sublease of part, in excess of such rent fairly allocable to the part, after appropriate adjustments to assure that all other payments called for under the Lease are appropriately taken into account, and after deduction for reasonable expenses of Tenant in connection with, and amortized over the term of the assignment or sublease, Tenant agrees to pay to Landlord as additional rent fifty percent (50%) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt.

8. Lease Confirmed. Except as expressly set forth herein, the Lease is not otherwise amended or terminated, remains in full force and effect, and is hereby ratified and confirmed by the parties.

9. Captions. Captions used in this Amendment are for convenience only and shall not be used to construe any term or provision of this Amendment.

10. Definitions. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Lease.

11. Effective Date. This Amendment shall be effective as of July 1, 2008.

IN WITNESS WHEREOF, the parties have executed this Amendment in any number of counterpart copies, each of which shall be deemed an original for all purposes as of the day and year first above written.

WITNESS:	FIRMIN JOINT VENTURE LLC
	By:
	Name:
	Its:
	VIRYANET, INC.
	By:
	Name:
	Its:

3

EX-4.(B)5

Exhibit 4(b)(5)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements of ViryaNet Ltd. and its subsidiaries (the “Company”):

1) Registration Statement on Form S-8 (File Number 333-65904), pertaining to the 1996, 1997, 1998 and 1999 Stock Option and Incentive Plans of the Company.

2) Registration Statement on Forms F-3/A (File Number 333-114504) of the Company,

3) Registration Statement on Form F-3/A (File Number 333-130632) of the Company and,

4) Registration Statement on Form S-8 (File Number 333-146265), pertaining to the 2005 Israeli Share Option And Restricted Share Plan and 2005 International Share Option And Restricted Share Plan of the Company:

of our report dated September 23, 2008, with respect to the consolidated financial statements of the Company included in this Annual Report on Form 20-F for the year ended December 31, 2007.

Haifa, Israel	KOST, FORER GABBAY and KASIERER
September 25, 2008	A Member of Ernst & Young Global

EX-4.(B)8

Exhibit 4(b)(8)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Forms S-8 (file No. 333-65904 and file number 333-146265) and Forms F-3/A (file No, 333-114504 and file No. 333-130632) of ViryaNet Ltd. pertaining of our report dated September 23, 2008, with respect to the 2007 financial statements of ViryaNet (Pty) Ltd (a wholly-owned subsidiary of ViryaNet Ltd.), to be included in the Annual Report (Form 20-F) of ViryaNet Ltd. for the year ended December 31, 2007.

NEXIA ASR

ABN 16 847 721 257

George S. Dakis

Partner

Audit & Assurance Services

Melbourne, Victoria, Australia

26 September 2008

EX-12.1

Exhibit 12.1

CERTIFICATION

OF THE CHIEF EXECUTIVE OFFICER

I, Memy Ish-Shalom, Chief Executive Officer of ViryaNet Ltd. (the “Registrant”), certify that:

1. I have reviewed the annual report on Form 20-F of the Registrant for the year ended December 31, 2007, dated September 29, 2008;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: September 29, 2008

/s/ Memy Ish-Shalom

Memy Ish-Shalom, Chief Executive Officer

ViryaNet Limited

EX-12.2

Exhibit 12.2

CERTIFICATION OF THE EXECUTIVE CHAIRMAN

I, Samuel I. Hacohen, Executive Chairman of ViryaNet Ltd. (the “Registrant”), certify that:

1. I have reviewed the annual report on Form 20-F of the Registrant for the year ended December 31, 2007, dated September 29, 2008;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: September 29, 2008

/s/ Samuel Hacohen

Samuel Hacohen, Executive Chairman

ViryaNet Limited

EX-13.1

Exhibit 13.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 20-F of ViryaNet Ltd. (the “Registrant”) for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on September 29, 2008 (the “Report”), the undersigned, Menahem Ish-Shalom, Chief Executive Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ Memy Ish-Shalom
	Memy Ish-Shalom
	Chief Executive Officer
	September 29, 2008

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-13.2

Exhibit 13.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 20-F of ViryaNet Ltd. (the “Registrant”) for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on September 29, 2008 (the “Report”), the undersigned, Samuel Hacohen, Executive Chairman of the registrant, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of our knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ Samuel Hacohen
	Samuel Hacohen
	Executive Chairman
	September 29, 2008

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.