As filed with the Securities and Exchange Commission on August 25, 2000
Registration No. 333-42158
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM F-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933

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VIRYANET LTD.
(Exact name of Registrant as specified in its charter)

Not Applicable
(Exact name of Registrant's name in English)

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Israel 7372 Not Applicable
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)

5 Kiryat Hamada Street
Science Based Industries Campus
P.O. Box 23052, Har Hotzvim
Jerusalem 91230, Israel
(972-2) 581-1462
(Address and telephone number of Registrant's principal executive offices)

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ViryaNet, Inc.
2 Willow Street
Southborough, MA 01745-1027
(508) 490-8600
(Name, address and telephone number of agent for service)

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Copies to:

Howard S. Dan Geva, Adv. Aner Berger, Adv. Brian B. Margolis,
Rosenblum, Esq. Meitar, Liquornik, Herzog, Fox & Neeman Esq.
Testa, Hurwitz & Geva & Co. Asia House Charles S. Lee, Esq.
Thibeault, LLP 16 Abba Hillel 4 Weizmann Street Brobeck, Phleger &
High Street Tower Silver Road Tel Aviv 64239 Harrison LLP
125 High Street Ramat Gan 52506, Israel 1633 Broadway, 47th
Boston, MA 02110 Israel (972-3) 692-2020 Floor
(617) 248-7000 (972-3) 610-3100 New York, NY 10019
(212) 581-1600

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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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Calculation of Registration Fee

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- -------------------------------------------------------------------------------------------------------

Proposed Maximum
Proposed Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Offering Price Registration
Securities to be Registered Registered (1) per Share (2) (2) Fee(3)
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Ordinary shares, par value NIS 0.1 per
share.................................. 5,175,000 $12.00 $62,100,000 $16,395
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(1) Includes 675,000 shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee, in accordance with Rule 457(a) promulgated under the
Securities Act of 1933.
(3) Previously paid.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED AUGUST 25, 2000.

PROSPECTUS

4,500,000 Ordinary Shares

[LOGO OF VIRYANET]

This is an initial public offering of ordinary shares by ViryaNet Ltd. We
are selling 4,500,000 ordinary shares. We anticipate the initial public
offering price to be between $10.00 and $12.00 per ordinary share.

-------------

No public market exists for our ordinary shares. We propose to list our
ordinary shares on the Nasdaq National Market under the symbol VRYA.

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Per Share Total
--------- --------

Initial public offering price............................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to ViryaNet, before expenses....................... $ $

We have granted the underwriters an option for a period of 30 days to
purchase up to 675,000 additional ordinary shares.

-------------

Investing in our ordinary shares involves a high degree of risk.

See Risk Factors beginning on page 6.

-------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.

Chase H&Q

Salomon Smith Barney

Dain Rauscher Wessels

, 2000

[ViryaNet logo in upper left-hand corner. Text in upper right-hand corner reads:
"Using ViryaNet Service Hub, a service organization's entire service community,
including its internal employees and field engineers, customers, suppliers and
vendors, can immediately access service information, share documents,
collaborate with other users and obtain service."

Eight photographs arranged in a circle in the lower two thirds of page.
Starting from top and reading clockwise, photographs are labeled: "Customer,"
"Reseller," "Field Engineer," "Subcontractor," "Supplier," "Contract
Administrator," "Shipper," and "Call Center Agent." In center of circle, text
reads: "ViryaNet Service Hub." Arrows connect photographs and center text.]

TABLE OF CONTENTS

Page
----

Prospectus Summary................................................. 1
Risk Factors....................................................... 6
Forward-Looking Statements......................................... 16
Use of Proceeds.................................................... 16
Dividend Policy.................................................... 16
Capitalization..................................................... 17
Dilution........................................................... 18
Selected Consolidated Financial Data............................... 19
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 21
Business........................................................... 34
Management......................................................... 47
Related Party Transactions......................................... 55
Principal Shareholders............................................. 58
Description of Share Capital....................................... 60
Shares Eligible for Future Sale.................................... 63
United States Federal Income Tax Considerations.................... 65
Israeli Taxation and Investment Programs........................... 71
Conditions in Israel............................................... 76
Enforceability of Civil Liabilities................................ 78
Underwriting....................................................... 79
Legal Matters...................................................... 83
Experts............................................................ 83
Where You Can Find More Information................................ 83
Index to Consolidated Financial Statements......................... F-1

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our ordinary shares. You should read the entire
prospectus carefully, including Risk Factors and the consolidated financial
statements, before making an investment decision.

ViryaNet Ltd.

Our Business

We develop, market and support software products which provide companies
with business-to-business internet solutions for service communities. Service
communities encompass all participants in the service management and delivery
process, including service organizations and their field engineers, customers,
partners, vendors and suppliers. ViryaNet Service Hub, our internet solution,
supports a variety of service business processes and models based on our
extensive expertise in providing software products and services to the service
industry. Our solutions include workforce management, service level agreement
management, customer self-service, repair return automation and auction-based
procurement and replenishment. Service Hub is designed to meet the needs of
service organizations of companies with large, complex product
service commitments as well as third-party service providers who fulfill these
commitments on an outsourced basis. Since its introduction in the fourth
quarter of 1999, we have licensed Service Hub to BGE Home Products, Broadwing,
CapRock, ITC Deltacom, Picus, Symbol and Teraoka Seiko. Since June 2000, we
have signed letters of intent to license Service Hub to an additional five
customers, and we are targeting our sales and marketing efforts to other
companies in the high technology, telecommunications, utilities and industrial
automation industries.

Before we introduced Service Hub, we derived substantially all of our
revenues from licensing Service Suite, a suite of enterprise applications for
managing service delivery. These applications, which may be incorporated into
our Service Hub solution, enable service organizations to combine many of the
processes required for service fulfillment, including contract management,
workforce management, repair depot operations and supply chain logistics.
Customers of Service Suite include EMC Corporation, GE Medical Systems, NTL and
Sun Microsystems.

Our Market

In the intensely competitive global business environment, businesses have
increasingly adopted the internet to streamline their business processes,
interact more meaningfully with customers, make their employees more productive
and collaborate more effectively with their business partners. The process of
providing service is a combination of numerous, complex processes distributed
across a wide service community of interacting constituents who typically rely
on separate systems and applications. To capitalize on the opportunities
offered by the internet, service organizations need a solution that supports
their complex service delivery requirements while enabling collaboration of the
service community to achieve high quality and cost-effective service delivery.

Our Products

Using Service Hub, a service organization's employees, customers,
suppliers and vendors can immediately access service information, share
documents, collaborate with other users and obtain service. Service Hub can be
rapidly deployed and combined with existing service management and other
critical business applications. Service Hub is designed to be highly scalable,
enabling organizations to interact with large service communities through the
internet and other platforms. The remote access features of Service Hub allow
users of wireless devices like mobile telephones and handheld computers to view
service reports and provide information about their service operations.
Companies can employ our solution on a global scale to manage, monitor and
enhance all aspects of service delivery in multiple currencies and time zones.

Where You Can Contact Us

We were incorporated in Israel under the name R.T.S. Relational Technology
Systems Ltd. We changed our name to RTS Business Systems Ltd. in September 1997
and to RTS Software Ltd. in February 1998. In April 2000, we changed our name
to ViryaNet Ltd. Our principal executive offices are located at 5 Kiryat Hamada
Street, Science Based Industries Campus, P.O. Box 23052, Har Hotzvim,
Jerusalem, 91230, Israel and our telephone number is 972-2-581-1462. Our United
States subsidiary, ViryaNet, Inc., is located at 2 Willow Street, Southborough,
Massachusetts 01745-1027 and its telephone number is 508-490-8600.

------------------

As used in this prospectus, references to we, our, ours, us and ViryaNet
refer to ViryaNet Ltd. and its subsidiaries.

We have prepared our consolidated financial statements under United States
GAAP in United States dollars. All references in this prospectus to dollars or
$ are to United States dollars and all references to NIS are to new Israeli
shekels.

While financial numbers have been rounded for presentation in the
prospectus, all percentages were calculated based on actual numbers, which can
be found in our financial statements.

The following are trademarks of ViryaNet:

.ViryaNet;

.ViryaNet Service Hub;

.ViryaNet Access;

.ViryaNet Service Exchange;

.ViryaNet Service Suite;

.ViryaNet Service Portal;

.ViryaNet Service Process;

.ViryaNet Service Intelligence;

.ViryaNet Integration Server;

.ViryaNet mService Gateway;

.ViryaNet Service Contract;

.ViryaNet WorkForce Management;

.ViryaNet Depot Repair;

.ViryaNet Service Supply Chain; and

.the ViryaNet logo.

This prospectus also contains trademarks, trade names and service marks of
other companies.

The Offering

Ordinary shares offered by us....................... 4,500,000 shares
Ordinary shares to be outstanding after this
offering........................................... 21,936,760 shares

Use of proceeds............................. . expand internationally;
. expand our sales and
marketing channels;
. invest in research and
development activities;
. repay our working capital
lines of credit; and
. working capital and general
corporate purposes,
including possible
acquisitions of
complementary products,
technologies or businesses.

Proposed Nasdaq National Market symbol.............. VRYA

------------------

The number of ordinary shares to be outstanding after this offering is
based on the number of ordinary shares outstanding as of July 31, 2000 and does
not include:

. 5,869,550 ordinary shares subject to options outstanding as of July 31,
2000 with a weighted average exercise price of $4.63 per share;

. 260,885 ordinary shares available for grant at July 31, 2000 under our
option plans; and

. 839,619 ordinary shares issuable upon exercise of warrants outstanding
as of July 31, 2000 with a weighted average exercise price of $6.30 per
share.

Unless otherwise noted, ordinary share and per ordinary share amounts in
this prospectus:

. give effect to the conversion of all outstanding preferred shares and
convertible debentures into 12,578,304 ordinary shares immediately
before the completion of the offering;

. assume the exercise of warrants outstanding on July 31, 2000 to purchase
2,112,066 ordinary shares, at exercise prices which are below the price
of the offering and range from $2.00 to $5.75 per share, and which would
otherwise expire upon the completion of this offering;

. assume one-time financing expense of approximately $16.5 million upon
conversion of our convertible debentures; and

. assume no exercise of the underwriters' over-allotment option.

Summary Consolidated Financial Information

This table summarizes our consolidated statement of operations data for
the periods presented. The pro forma information gives effect to the conversion
of all of our outstanding preferred shares, convertible debentures into
ordinary shares automatically upon the closing of the offering, and one-time
financing expense of $16.5 million upon conversion of our convertible
debentures.

Six Months Ended
Year Ended December 31, June 30,
--------------------------- ------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(unaudited)
(in thousands, except per share data)

Consolidated Statement of
Operations Data:
Revenues:

Software licenses.......... $ 1,067 $ 1,801 $ 4,269 $ 1,612 $ 6,963
Maintenance and services... 12,400 11,724 11,533 5,476 4,457
------- -------- -------- -------- --------
Total revenues........... 13,467 13,525 15,802 7,088 11,420
Cost of revenues:

Software licenses.......... 106 146 952 548 409
Maintenance and services... 8,817 9,709 9,978 4,914 3,476
------- -------- -------- -------- --------
Total cost of revenues... 8,923 9,855 10,930 5,462 3,885
------- -------- -------- -------- --------
Gross profit................. 4,544 3,670 4,872 1,626 7,535
------- -------- -------- -------- --------
Operating loss............... (4,643) (13,366) (19,846) (11,113) (5,634)
------- -------- -------- -------- --------
Net loss..................... $(4,728) $(13,132) $(20,411) (11,384) (6,052)
======= ======== ======== ======== ========
Preferred shares deemed
dividend.................... $ (116) $ (61) $ (303) $ -- $ --
======= ======== ======== ======== ========

Net loss to shareholders of
ordinary shares............. $(4,844) $(13,193) $(20,714) $(11,384) $ (6,052)
======= ======== ======== ======== ========
Net loss pro forma
(unaudited)................. $(20,714) $(22,566)
======== ========
Basic and diluted net loss
per share................... $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
======= ======== ======== ======== ========
Pro forma basic and diluted
net loss per share
(unaudited)................. $ (1.71) $ (1.60)
======== ========

Quarter Ended
----------------------------------------------------------

March 31, June 30, Sept. 30, Dec. 30, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
(unaudited)
(in thousands)

Revenues:
Software licenses..... $ 746 $ 866 $ 1,260 $ 1,397 $ 3,209 $ 3,754
Maintenance and
services............. 2,607 2,869 2,782 3,275 1,954 2,503
------- ------- ------- ------- ------- -------
Total revenues...... $ 3,353 $ 3,735 $ 4,042 $ 4,672 $ 5,163 $ 6,257
------- ------- ------- ------- ------- -------
Gross profit............ 754 872 1,427 1,819 3,289 4,246
------- ------- ------- ------- ------- -------
Operating loss.......... (5,352) (5,761) (4,342) (4,391) (2,801) (2,833)
------- ------- ------- ------- ------- -------
Net loss................ $(5,481) $(5,903) $(4,362) $(4,665) $(3,082) $(2,970)
======= ======= ======= ======= ======= =======
Preferred shares deemed
dividend............... -- (303) -- -- -- --
======= ======= ======= ======= ======= =======
Net loss to shareholders
of ordinary shares..... $(5,481) $(6,206) $(4,362) $(4,665) $(3,082) $(2,970)
======= ======= ======= ======= ======= =======

June 30, 2000
----------------------------
Pro Forma
as
Actual Pro Forma Adjusted
------- --------- ---------
(in thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 5,286 $11,771 $55,680
Working capital (deficit)........................ (522) 5,964 49,964
Total assets..................................... 12,884 19,369 63,278
Convertible debentures........................... 15,492 -- --
Total shareholders' equity (deficiency).......... (15,180) 6,898 50,898

The balance sheet above summarizes our balance sheet at June 30, 2000:

. on an actual basis;

. on a pro forma basis to give effect to:

. the automatic conversion of all outstanding convertible debentures and
all preferred shares into 12,578,304 ordinary shares immediately
before the completion of the offering;

. one-time financing expense of approximately $16.5 million upon
conversion of our convertible debentures;

. the exercise of warrants to purchase 2,112,066 ordinary shares at
exercise prices which are below the price of this offering and which
would otherwise expire upon the completion of the offering; and

. on a pro forma as adjusted basis to give effect to:

. the issuance and sale by us of 4,500,000 ordinary shares at an assumed
public offering price of $11.00 per share; and

. our anticipated application of the net proceeds of the offering.

RISK FACTORS

Investing in our ordinary shares involves a high degree of risk. Any of
the following risks could harm our business, operating results and financial
condition and could result in a complete loss of your investment.

Risks Related to Our Business

We have a limited operating history in our current principal market, which will
make it difficult or impossible for you to predict our future results of
operations.

We began operations in March 1988 as a general software services company.
In 1995, we changed our strategic focus to the development of service delivery
chain management applications, including Service Suite. We did not introduce
our first internet-based service community management product, Service Hub,
until the fourth quarter of 1999. Each of these changes has required us to
adjust our business processes and make a number of significant personnel
additions and changes. Historically, most of our revenues were generated from
our services activities. Substantially all of our revenues in 1998, 1999 and
the six months ended June 30, 2000 were generated from our service delivery
chain management applications, including Service Suite, which represented 84%
of our total license revenues in 1998, 70% in 1999, 92% in the three months
ended March 31, 2000, and 30% in the three months ended June 30, 2000. In the
remainder of 2000, we anticipate that the substantial majority of our revenues
will be generated from transactions which will include the Service Hub and
related products. Our prospects must be considered in light of the risks and
difficulties frequently encountered by companies dependent upon operating
revenues from a new product line in an emerging and rapidly evolving market.
Because of our limited experience in our principal market and with our
principal product, we cannot assure you that our strategy for operating in that
market or selling that product will be successful. You should not rely on our
historical results of operations as indications of future performance.

We have a history of losses and we cannot assure you that we will operate
profitably in the future.

We incurred net losses of approximately $4.7 million in 1997, $13.1
million in 1998, $20.4 million in 1999 and $6.1 million for the six months
ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit of
approximately $54.1 million. As a result, we will need to generate significant
revenues to achieve and maintain profitability. If we do achieve profitability,
we cannot be certain that we can sustain or increase it in the future.

We may experience significant fluctuations in our quarterly results, which
makes 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:

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

. timing of product releases;

. the dollar value and timing of contracts;

. delays in implementation;

. changes in the proportion of service and license revenues;

. price and product competition;

. increases in selling and marketing expenses, as well as other operating
expenses;

. technological changes;

. adverse economic conditions and currency fluctuations; and

. consolidation of our clients.

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. 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. 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.

Historically, our revenues have been concentrated in a few large orders and a
small number of customers and 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 clients. In 1997, 1998, 1999 and the six
months ended June 30, 2000, we derived 73%, 55%, 55% and 7% of our revenues
from two customers, Sun Microsystems and GE Medical, who are shareholders or
warrant holders. In 1999, 71% of our revenues were derived from four customers,
including Sun Microsystems and GE Medical, and no one customer accounted for
more than 33% of our revenues. In the six months ended June 30, 2000, four
customers each accounted for approximately 10% or more of our revenues, and
represented an aggregate of 65% of our total revenues. We do not expect that
these customers 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 loss of key customers or the occurrence of significant
reductions in sales from a key customer would cause our revenues to decrease
and make it more difficult for us to reach profitability.

Our sales cycle is variable and sometimes long and involves significant
resources on our part, but may never result in actual sales.

Our sales cycle has historically been lengthy and is variable, ranging
between three to twelve months from our initial contact with a potential
customer to the signing of a license agreement. We expect the sales cycle for
Service Hub to decrease to three to six months in the future, but have not seen
any significant decrease in the sales cycle. 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. The
purchasing decisions of our customers are subject to the uncertainties and
delays associated with the budgeting, approval and competitive evaluation
processes that typically accompany significant capital expenditures. Any delays
in sales could cause our operating results to vary widely. If our sales cycle
shortens, our quarterly operating results may become less predictable and may
fluctuate more widely than in the past. A number of companies decide which
products to buy through a request for proposal process. In those situations, we
run the risk of investing significant resources in a proposal, only to lose to
our competition.

Since we have historically depended upon Service Suite applications, the
failure of these products in the marketplace in the future could adversely
affect our revenues.

Revenues from licensing Service Suite applications accounted for
approximately 11% of our total revenues, or 84% of total license revenues,
during 1998, 19% of our total revenues, or 70% of total license revenues,
during 1999, 58% of our total revenues, or 92% of total license revenues during
the three months ended March 31, 2000 and 18% of our total revenues, or 30% of
total license revenues, during the three months ended June 30, 2000. We expect
license revenues from Service Suite applications to account for a

portion of our future total revenues. Our future success depends on market
acceptance of our new Service Hub internet-based products, as well as continued
acceptance of our Service Suite and related applications. We have licensed
applications to only a small number of clients. If our products do not achieve
or maintain market acceptance or if our competitors release new products that
achieve quicker market acceptance, have more advanced features, offer better
performance or are more price competitive, license revenues for our products
may not grow and may even decline.

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

The market for internet-based service community platforms has only
recently begun to develop and is rapidly evolving. This makes it difficult to
predict demand and market acceptance for our products. We cannot guarantee that
the market for our internet-based products will grow or that our products will
become widely accepted. If the market for our internet-based products does not
develop as quickly as we expect or if our internet-based products are not
accepted by clients, our future revenues and profitability will be adversely
affected. Changes in technologies, industry standards, the regulatory
environment, client 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. A significant increase in
the number of clients, or a significant increase in our development of new
product offerings, or both, could require us to expend significant amounts of
money, time and other resources to meet the demand. This could strain our
personnel and financial resources.

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

Our margins on service revenues have declined from 29% in 1997 to 17% in
1998 and 13% in 1999. Our margins on service revenues improved to 22% in the
six months ended June 30, 2000, but this trend may not continue. These
decreases are primarily caused by the additional costs associated with our
transition from providing customization services to our major clients to
providing implementation services to a larger number of clients. To improve our
margins, we are working on increasing our service revenues and decreasing our
cost of service revenues. Failure to improve our margins on service revenues
could cause our business to be less profitable.

If we fail to expand our relationships with third parties, 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 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 service community 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. A number of our competitors have significantly more
established relationships with these third parties and, as a result, these
third parties may be more likely to recommend competitors' products and
services rather than our own. Even if we are successful in developing
relationships with third-party implementation and consulting providers, we will
be subject to significant risk as we cannot control the level and quality of
service provided by third-party implementation and consulting partners.

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 client environments into which our
products are deployed. Despite testing conducted by us and our clients, 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 critical
to our clients' operations. As a result, our clients and potential clients have
a greater sensitivity to product defects than do clients of software products
generally.

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 client 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 may also expose us to product liability claims.

Decisions by clients to develop their own service management solutions or
greater market acceptance of our competitors' products could result in reduced
revenues or gross margins.

The market for third-party internet-based service community platforms is
relatively immature, but has begun to develop rapidly and competition is
intense. This market and the market for service management solutions is
fragmented and stratified. We compete for the business of global or nationwide
organizations that seek to support complex and sophisticated products across a
variety of industries.

Our competitors may 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 client
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.
As 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 client orders,
reduced gross margins or loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations.

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.

We integrate various third-party software products as components 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. 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.

We may be unable to expand our sales, marketing and support organizations which
may hinder our ability to grow and meet customer demands.

We have sold our products primarily through our direct sales force and we
have supported our clients through our technical and customer support staff. We
need to substantially expand our direct and indirect sales and marketing
operations to increase market awareness and sales of our products. We will also
need to increase our technical and customer support staff to support new
clients and the expanding needs of existing clients. Qualified individuals are
in great demand throughout the software industry and there is intense
competition for qualified personnel. Competition for qualified people may lead
to increased labor and personnel costs. If we do not succeed in retaining our
personnel or in attracting new employees, our business could suffer
significantly.

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.

As our business continues to grow, we will need to hire additional
qualified engineering, administrative, operational, sales and technical support
personnel. The process of locating, training and successfully integrating
qualified personnel into our operations can be lengthy and expensive. We may
not be able to compete effectively for the personnel we need. Many of our
senior management, including our president, chief financial officer and vice
president of worldwide marketing, were only recently hired. 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 is intense in both Israel and the United States. 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 carry out our business plan.

If we fail to address the strain on our resources caused by our growth, we will
be unable to effectively manage our business.

Our business has grown in size and complexity over the past few years.
Total revenues increased from $13.5 million in 1997 and 1998 to $15.8 million
in 1999 and $11.4 million in the six months ended June 30, 2000. The number of
employees increased from 119 as of January 1, 1997 to 189 as of June 30, 2000.
This growth has placed and will continue to place a strain on our personnel and
resources. Our ability to manage any future growth depends on our ability to
continue to implement and improve our operational, financial and management
information control and reporting systems on a timely basis and to expand,
train, motivate and manage our work force. If we cannot manage our growth
effectively our business, financial condition and results of operations could
be materially adversely affected.

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. We filed one patent application
covering some of our technologies for creating and supporting service
communities on the internet. 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.

We have received a notice from a third party claiming that our use of the
Service Hub name infringes on this third party's trademark rights. We have
responded and denied this claim. We cannot predict whether

this third party will prevail, or other third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will harm our business. If we are forced to defend against this
claim or any other claims, whether they are with or without merit or determined
in our favor, then we may face costly litigation, diversion of management
resources or, if any claims prevail, damages or significant increases in
development or marketing costs.

We have placed, and in the future may place, our software in escrow. The
software may, under specified circumstances, be made available to our clients.
We have provided our software directly to clients. 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. 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 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, United
Kingdom and Japan and we plan to establish additional facilities in these and
other parts of the world. We received 17% of our total revenues in 1997, 26% of
our total revenues in 1998, 24% of our total revenues in 1999 and 29% of our
total revenues in the six months ended June 30, 2000 from sales to customers
located outside of the United States. The expansion of our existing operations
and entry into additional international markets will require significant
management attention and financial resources. We have limited experience in
developing localized versions of our products and marketing and distributing
our products outside of the United States. We are subject to a number of risks
customary for international operations, including:

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

. economic or political changes in international markets;

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

. unexpected changes in regulatory requirements;

. difficulties and costs of staffing and managing foreign operations;

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

. multiple and possibly overlapping tax structures; and

. currency and exchange rate fluctuations.

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

We may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. 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 be able to make the acquisitions or
investments on commercially acceptable terms or at all. If we acquire or invest
in another company, we could have difficulty assimilating that company's
personnel, operations, 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 and adversely affect our results of
operations. We may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity securities could be dilutive to our
existing shareholders. We do not have any agreement to enter into any material
investment or acquisition transaction.

Risks Related to the Internet

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

Our market is relatively new and rapidly evolving. Our future success will
depend on the acceptance by clients of the internet and business-to-business
internet solutions as an integral part of their business model. Demand for and
market acceptance of recently introduced services are each subject to a high
level of uncertainty. If use of the internet does not continue to develop, or
develops more slowly than expected, we may not be able to execute our business
plan successfully.

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

. inadequate network infrastructure and congestion of traffic on the
internet;

. actual or perceived lack of security of information;

. inconsistent quality of service;

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

. lack of access and ease of use;

. excessive governmental regulation; and

. uncertainty over intellectual property ownership.

We cannot assure you that the internet infrastructure will be able to
support expected growth or that the performance and reliability of the internet
will not decline as a result of this growth. Many internet sites have
experienced a variety of interruptions in their service as a result of outages
and other delays occurring throughout the internet network infrastructure. If
these outages or delays frequently occur in the future, internet usage could
grow more slowly than anticipated or even decline.

If acceptance and growth of the internet as a medium for business-to-
business commerce does not continue, our business strategy may not be
successful because there may not be a continuing market demand for our
services. Any well-publicized compromise of security could deter businesses
from using the internet to conduct transactions that involve transmitting
confidential information. Computer viruses that spread over the internet could
disable or damage the systems we develop for our clients. Decreased internet
traffic as a result of general security concerns or viruses could cause
companies to reduce their amount of technology spending, which could hurt our
results of operations.

Risks Related to This Offering

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,
particularly internet-related companies, have been extremely volatile, and have
experienced fluctuations that have often been unrelated or disproportionate to

the operating performance of those companies. These broad market fluctuations
could adversely affect the market price of our ordinary shares. The market
price of the ordinary shares may fluctuate substantially due to a variety of
factors, including:

. any actual or anticipated fluctuations in our financial condition and
operating results;

. public announcements concerning us or our competitors, or the internet
industry;

. 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; and

. the loss of any of our key personnel.

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

Future sales of our ordinary shares in the public market or issuances of
additonal securities could cause the market price for our ordinary shares to
fall.

After this offering, we will have 21,936,760 ordinary shares outstanding
and will have reserved an additional 6,970,054 ordinary shares for issuance
under our option plans and outstanding warrants. We intend to register for
resale the ordinary shares reserved for issuance under our option plans
approximately 90 days after the date of this prospectus. If a large number of
our ordinary shares are sold following this offering, the price of our ordinary
shares would likely decrease.

In addition, we have made contingent commitments to issue warrants to some
of our customers, subject to execution of definitive license agreements, and
such warrants may be exercised at per share prices below the price of this
offering. We may continue to issue warrants to certain of our customers, and
the issuance of such securities could be dilutive to our shareholders. These
warrants will be valued using the Black-Scholes method when they are issued,
and we will reflect appropriate charges in our financial statements at that
time.

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.

We anticipate that our executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
33.8% of our outstanding ordinary shares following the completion of this
offering. These shareholders, if acting together, will be able to significantly
influence all matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or other business combination
transactions.

Risks Related to Our Location in Israel

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

We are organized under the laws of the State of Israel. Many of our
executive officers and directors and some of the experts named in this
prospectus 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.
Although all of our sales are being made to customers outside 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. Several Arab countries still
restrict business with Israeli companies. We could be adversely affected by
restrictive laws or policies directed towards Israel and Israeli businesses.

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

Most of our revenues are in dollars or are linked to the dollar, while a
substantial portion of our expenses, principally salaries and the related
personnel expenses, are in new Israeli shekels, or NIS. As a result, we are
exposed to the risk that the rate of inflation in Israel will exceed the rate
of devaluation of the NIS in relation to the dollar or that the timing of this
devaluation lags behind inflation in Israel. This would have the effect of
increasing the dollar cost of our operations. In 1997 and 1998, the rate of
devaluation of the NIS against the dollar exceeded the rate of inflation, a
reversal from prior years. However, in 1999 and the first six months of 2000,
while the rate of inflation was low, there was a devaluation of the dollar
against the NIS. We cannot predict any future trends in the rate of inflation
in Israel or the rate of devaluation of the NIS against the dollar. If the
dollar cost of our operations in Israel increases, our dollar-measured results
of operations will be adversely affected.

The tax benefits available to us from government programs may be discontinued
or reduced at any time, which would likely increase our taxes.

We have received grants in the past and receive tax benefits under Israeli
government programs. To maintain our eligibility for these programs and
benefits, we must continue to meet specified conditions, including making
specified investments in fixed assets. Some of these programs restrict our
ability to manufacture particular products or transfer particular technology
outside of Israel. If we fail to comply with these conditions in the future,
the benefits received could be canceled and we could be required to refund any
payments previously received under these programs or pay increased taxes. The
government of Israel has reduced the benefits available under these programs
recently and these programs and tax benefits may be discontinued or reduced in
the future. In May 2000, the Israeli government approved in principle a tax
reform proposal that would reduce or eliminate some of these benefits in the
future. Legislation will be required to implement these changes, and we are not
certain whether legislation will be enacted. If these tax benefits and programs
are terminated or reduced, we could pay increased taxes in the future, which
could decrease our profits.

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

Although we do not believe that we were a passive foreign investment
company for U.S. federal income tax purposes during 1999, we cannot assure you
that we will not be treated as a passive foreign investment company in 2000 or
in future years. We would be a passive foreign investment company if 75% or
more of our gross income in a taxable year is passive income. We would also be
a passive foreign investment company if at least 50% of the average value, or
possibly the adjusted bases of our assets in particular circumstances, of our
assets 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
you 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 of our ordinary shares to fair market
value at the date of your death.

FORWARD-LOOKING STATEMENTS

Some of our statements in this prospectus, including those in the
Prospectus Summary, Risk Factors, Use of Proceeds, Management's Discussion and
Analysis of Financial Condition and Results of Operations and Business
sections, are forward-looking statements that involve risks and uncertainties.
These forward-looking statements include statements about our plans,
objectives, strategies, expectations, intentions, future financial performance
and other statements that are not historical facts. We use words like
anticipates, believes, expects, future and intends, and similar expressions to
mean that the statement is forward-looking. You should not unduly rely on these
forward-looking statements, which apply only as of the date of this prospectus.
Our actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the risks described
under Risk Factors.

USE OF PROCEEDS

The net proceeds to us from the sale of the 4,500,000 ordinary shares we
are offering are estimated to be $43.7 million, based on an assumed public
offering price of $11.00 per share, after deducting the estimated underwriting
discounts and commissions and offering expenses payable by us. If the over-
allotment option is exercised in full, the net proceeds to us are estimated to
be $50.5 million.

We intend to use the net proceeds:

. to expand internationally;

. to expand our sales and marketing channels;

. to invest in research and development activities;

. to repay the outstanding balance on our working capital revolving
lines of credit; and

. for working capital and general corporate purposes.

As of June 30, 2000, the outstanding balance on our working capital
revolving lines of credit was $191,000, $25,000 of which was outstanding under
our working capital revolving line of credit with Bank Hapoalim. The working
capital revolving line of credit with Bank Hapoalim bears interest annually at
the London interbank offered rate plus 1.5%. Our other lines of credit bear
interest at annual rates equal to the prime rate of the lending bank plus 1% or
the prime rate of the lending bank plus 0.25%.

We may use a portion of the net proceeds to acquire complementary
products, technologies or businesses. However, we have no commitments or
agreements for any specific acquisition and are not involved in any
negotiations for any acquisition transactions.

Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing investments, or bank deposits with
interest and principal linked to a non-Israeli currency or consumer price
index, or deposit the net proceeds in non-Israeli currency or non-Israeli
currency linked bank accounts in Israel or outside of Israel.

DIVIDEND 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 for use in the expansion and operation of our business and,
therefore, do not expect to pay any dividends in the future.

CAPITALIZATION

This table describes our capitalization as of June 30, 2000. We present
capitalization on:

. an actual basis;

. a pro forma basis to give effect to:

. the automatic conversion of all preferred shares and all
convertible debentures into ordinary shares upon completion of this
offering;

. one-time financing expenses of approximately $16.5 million upon
conversion of our convertible debentures;

. the exercise of the warrants to purchase 2,112,066 ordinary shares,
at exercise prices which are below the price of this offering and
range from $2.00 to $5.75 per share, and which would otherwise
expire upon the completion of this offering; and

. a pro forma as adjusted basis to give further effect to:

. the issuance and sale by us of the ordinary shares at an assumed
public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us; and

. our anticipated application of the net proceeds of this offering.

June 30, 2000
--------------------------------
Pro Pro Forma as
Actual Forma Adjusted
-------- -------- ------------
(in thousands, except share
data)

Short-term bank credit........................ $ 91 $ 91 $ --
Current maturities of long-term loans......... -- -- --
Convertible debentures........................ 15,492 -- --
Shareholders' equity (deficiency):
Preferred shares, NIS 0.1 par value:
16,100,000 shares authorized; 10,146,387
shares issued and outstanding, actual; no
shares issued and outstanding, pro forma
and pro forma as adjusted.................. 294 -- --
Ordinary shares, NIS 0.1 par value:
18,900,000, 35,000,000 and 35,000,000
shares authorized, actual, pro forma and
pro forma as adjusted; 2,715,140,
17,405,510 and 21,905,510 shares issued and
outstanding, actual, pro forma and pro
forma as adjusted.......................... 107 512 622
Additional paid-in capital.................. 40,095 78,571 122,461
Deferred stock compensation................. (1,547) (1,547) (1,547)
Accumulated deficit......................... (54,129) (70,638) (70,638)
-------- -------- -------
Total shareholders' equity (deficiency).... (15,180) 6,898 50,898
-------- -------- -------
Total capitalization...................... $ 403 $ 6,989 $50,898
======== ======== =======

This table is based on the number of ordinary shares outstanding at June
30, 2000 and does not include:

. 5,869,550 ordinary shares subject to options outstanding as of July
31, 2000 with a weighted average exercise price of $4.63 per share;

. 260,885 ordinary shares available for grant at July 31, 2000 under our
option plans; and

. 839,619 ordinary shares issuable upon exercise of warrants outstanding
as of July 31, 2000 with a weighted average exercise price of $6.30
per share.

This table should be read with our consolidated financial statements and
the notes to our consolidated financial statements included in this prospectus.
Par value, as used in the table above, is an assigned amount used to compute
the accounting value of our preferred shares and ordinary shares on our balance
sheet. Par value has no relation to market value.

DILUTION

If you invest in our ordinary shares, your interest will be diluted by the
amount of the difference between the initial public offering price per share
and the pro forma consolidated net tangible book value per share after this
offering. We calculate pro forma consolidated net tangible book value per share
by dividing the pro forma consolidated net tangible book value, which is total
assets less intangible assets and total liabilities, by the number of
outstanding ordinary shares assuming the conversion of all outstanding
preferred shares and convertible debentures into ordinary shares and the
exercise of warrants which expire upon the completion of this offering.

Our pro forma consolidated net tangible book value as of June 30, 2000 was
approximately $6.9 million or approximately $0.40 per ordinary share. After
giving effect to the sale of the 4,500,000 ordinary shares by us at an assumed
public offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us, our
adjusted pro forma consolidated net tangible book value at June 30, 2000 would
have been $50.9 million or approximately $2.32 per ordinary share. This
represents an immediate increase in pro forma consolidated net tangible book
value of $1.92 per ordinary share to existing shareholders and an immediate
dilution in pro forma net tangible book value of $8.68 per ordinary share to
new investors in this offering. This table illustrates this dilution on a per
ordinary share basis:

Assumed initial public offering price per ordinary share.......... $11.00
Pro forma consolidated net tangible book value per ordinary
share as of June 30, 2000...................................... $0.40
Consolidated increase in pro forma net tangible book value per
ordinary share attributable to new investors................... 1.92
-----
Adjusted pro forma consolidated net tangible book value per ordi-
nary share after the offering.................................... 2.32
------
Dilution in pro forma consolidated net tangible book value per or-
dinary share to new investors.................................... $ 8.68
======

This table shows, on a pro forma basis as of July 31, 2000, the number of
ordinary shares purchased from us, the total consideration paid to us and the
average price per ordinary share paid by the existing shareholders and by the
new investors purchasing ordinary shares in this offering, before deducting the
estimated underwriting discounts and commissions and offering expenses payable
by us. The table assumes the conversion of all outstanding preferred shares and
convertible debentures into ordinary shares and the exercise of warrants which
expire upon the completion of this offering.

Average
Shares Purchased Total Consideration Price
--------------------- ----------------------- Per
Number Percentage Amount Percentage Share
---------- ---------- ------------ ---------- -------

Existing shareholders..... 17,436,760 79.5% $ 60,939,000 55.2% $ 3.49
New investors............. 4,500,000 20.5 49,500,000 44.8 11.00
---------- ----- ------------ -----
Total................... 21,936,760 100.0% $110,439,000 100.0%
========== ===== ============ =====

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 Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this prospectus.

We derived the selected consolidated statements of operations data below
for the years ended December 31, 1997, 1998 and 1999, and the selected
consolidated balance sheet data as of December 31, 1998 and 1999, from our
audited consolidated financial statements which are included elsewhere in this
prospectus. These financial statements have been prepared under United States
GAAP. We derived the consolidated statements of operations data for the years
ended December 31, 1995 and 1996 and the selected consolidated balance sheet
data as of December 31, 1995, 1996 and 1997 from audited consolidated financial
statements that are not included in this prospectus. We derived the selected
consolidated statement of operations data below for the six months ended June
30, 1999 and 2000 and the selected consolidated balance sheet data as of June
30, 2000 from our unaudited consolidated financial statements which are
included elsewhere in this prospectus. Our unaudited consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, that our management considers necessary for a fair presentation of
our financial position and results of operations for those periods. Our
operating results for the six months ended June 30, 2000 are not necessarily
indicative of the results that you can expect for future periods or the entire
year.

Six Months Ended
Year Ended December 31, June 30,
--------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- -------- -------- -------- -------
(unaudited)
(in thousands, except per share data)

Statement of Operations
Data:
Revenues:
Software licenses...... $ 30 $ 916 $ 1,067 $ 1,801 $ 4,269 $ 1,612 $ 6,963
Maintenance and
services.............. 4,198 10,547 12,400 11,724 11,533 5,476 4,457
------- ------- ------- -------- -------- -------- -------
Total revenues......... 4,228 11,463 13,467 13,525 15,802 7,088 11,420
Cost of revenues:
Software licenses...... -- 120 106 146 952 548 409
Maintenance and
services.............. 2,415 6,342 8,817 9,709 9,978 4,914 3,476
------- ------- ------- -------- -------- -------- -------
Total cost of
revenues.............. 2,415 6,462 8,923 9,855 10,930 5,462 3,885
Gross profit............ 1,813 5,001 4,544 3,670 4,872 1,626 7,535
------- ------- ------- -------- -------- -------- -------
Operating expenses:
Research and
development, net...... 870 953 3,443 5,322 6,865 3,202 3,372
Sales and marketing,
net................... 2,405 1,124 3,329 8,862 13,537 7,614 7,423
General and
administrative........ 719 2,049 2,403 2,602 3,518 1,688 1,798
Amortization of
deferred stock
compensation (1)...... -- -- 12 250 798 235 576
Write-off of goodwill.. 2,035 -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Total operating
expenses.............. 6,029 4,126 9,187 17,036 24,718 12,739 13,169
Operating income
(loss)................. (4,216) 875 (4,643) (13,366) (19,846) (11,113) (5,634)
Financial income
(expenses), net........ (206) (105) (85) 234 (565) (271) (418)
------- ------- ------- -------- -------- -------- -------
Income (loss) from
continued operations... (4,422) 770 (4,728) (13,132) (20,411) (11,384) (6,052)
Loss from discontinued
operations............. (1,295) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Net income (loss)....... $(5,717) $ 770 $(4,728) $(13,132) $(20,411) $(11,384) $(6,052)
======= ======= ======= ======== ======== ======== =======
Preferred shares deemed
dividend............... $ -- $ -- $ (116) $ (61) $ (303) $ -- $ --
======= ======= ======= ======== ======== ======== =======
Net income (loss) to
shareholders of
ordinary shares........ $(5,717) $ 770 $(4,844) $(13,193) $(20,714) $(11,384) $(6,052)
======= ======= ======= ======== ======== ======== =======
Basic net earnings
(loss) per share from
continuing operations.. $ (1.90) $ 0.31 $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
------- ------- ------- -------- -------- -------- -------
Basic net earnings
(loss) per share from
discontinued
operations............. $ (0.56) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Basic net earnings
(loss) per share....... $ (2.46) $ 0.31 $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
------- ------- ------- -------- -------- -------- -------
Diluted net earnings
(loss) per share from
continuing operations.. $ (1.90) $ 0.23 $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
------- ------- ------- -------- -------- -------- -------
Diluted net earnings
(loss) per share from
discontinued
operations............. $ (0.56) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- -------
Diluted net earnings
(loss) per share....... $ (2.46) $ 0.23 $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
------- ------- ------- -------- -------- -------- -------
Cost of revenues....... -- -- -- -- $ 16 -- $ 29
Research and
development, net...... -- -- -- -- 391 -- --
Sales and marketing.... -- -- -- $ 120 39 $ 22 75
General and
adminstrative......... -- -- $ 12 130 352 213 472
------- ------- ------- -------- -------- -------- -------
-- -- $ 12 $ 250 $ 798 $ 235 $ 576
======= ======= ======= ======== ======== ======== =======

- ------------------
(1) Amortization of deferred stock compensation relates to the following:

December 31,
-----------------------------------------
June 30,
1995 1996 1997 1998 1999 2000
------- ------ ------ ------- -------- -----------
(unaudited)
(in thousands)

Balance Sheet Data:
Cash and cash
equivalents............ $ 453 $ 905 $ 817 $ 554 $ 1,886 $ 5,286
Working capital
(deficit).............. (2,787) 1,425 (519) (2,343) (11,305) (522)
Total assets............ (2,760) 8,699 7,333 8,638 8,692 12,884
Long-term loan,
including current
maturities............. 1,767 671 133 62 11 --
Convertible debentures.. -- -- -- -- -- 15,492
Shareholders' equity
(deficiency)........... (3,833) 1,569 69 (1,452) (10,555) (15,180)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We were founded in 1988. Through 1997, we generated revenue primarily from
the sale of customized systems for customer service and product support and
related services and invested relatively few resources in developing software
products. In the first quarter of 1997, we began to develop standardized
service delivery chain management software. During 1997 and 1998, we
intensified our research and development activities and, in the second quarter
of 1998, we commercially released our service delivery chain management
product, Service Suite. Concurrently with the release, we began to build our
direct sales force and expand our marketing activities. In the fourth quarter
of 1999, we introduced our initial internet-based product, Service Hub.

Where We Derive Our Revenues

We derive revenues from licenses of our software products and from related
services, which include implementation, consulting, customer customization and
integration, post-contract customer support and training. Our products are
typically licensed directly to customers for a perpetual term. Before the first
quarter of 2000, all of our license revenues were derived from licenses of
Service Suite products. In the first quarter of 2000, we also started to
recognize revenues relating to licenses and implementation of Service Hub. We
bill customers according to contract terms. Amounts collected from customers in
excess of revenues recognized are recorded as deferred revenue.

How We Recognize Revenue

We recognize license and services revenues on contracts involving
significant implementation or customization by us using the percentage-of-
completion method. We classify revenue from these arrangements as license and
service revenues based on the estimated fair value of each element. Provision
for estimated contract losses are recognized in the period in which the loss
becomes probable and can be reasonably estimated. Most of our license and
service revenues were recognized using this percentage-of-completion method.
License revenues on contracts that do not involve significant implementation or
customization by us are recognized, under Statement of Position No. 97-2, when
persuasive evidence of an arrangement exists, the fee is fixed and
determinable, collection is probable and delivery has occurred. Where software
arrangements involve multiple elements, revenue is allocated to each element
based on vendor-specific objective evidence of the relative fair values of each
element in the arrangement. Our vendor-specific objective evidence used to
allocate the sales price to professional services and maintenance is based on
the price charged when these elements are sold separately. License revenues are
recorded based on the residual method according to SOP 98-9, Modification of
SOP 97-2, Software Revenue Recognition, for certain transactions. Under the
residual method, revenue is recognized for the delivered elements when (1)
there is vendor-specific objective evidence of the fair values of all the
undelivered elements, (2) vendor-specific objective evidence 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.

Service revenues from professional services and training are recognized as
these services are performed. Service revenues from post-contract maintenance
services are recognized pro-rata over the contractual support term, generally
one year.

Maintenance and Services Revenues

Maintenance and services revenues as a percentage of total revenues were
92% in 1997, 87% in 1998, 73% in 1999 and 39% in the six months ended June 30,
2000. We expect that service revenues as a percentage of total revenues will
remain below the levels we experienced in 1999 and prior years due to the
increased built-in functionality of our products that enables us to implement
our products at customer sites faster and with little or no modification. We
are starting to use the services of third-party system integrators in the
implementation of our products. These integrators may bill our customers
directly for their services and, as a result, service revenues as a percentage
of total revenues will be further reduced.

How We Sell Our Products

We sell our products through our direct sales force, and expand our sales
efforts through relationships with system integrators and vendors of
complementary products. Our revenues are derived from customers in the United
States, United Kingdom and Japan. We price our products based on the market
conditions in each jurisdiction where we operate.

A significant portion of our revenues has been derived from a small number
of relatively large companies. In 1997, 1998, 1999 and the six months ended
June 30, 2000, we derived 73%, 55%, 55% and 7% of our revenues from two
customers, Sun Microsystems and GE Medical, who are shareholders or warrant
holders. In 1999, 71% of our revenues were derived from four clients, including
Sun Microsystems and GE Medical, and no one customer accounted for more than
33% of our revenues. In the six months ended June 30, 2000, four customers each
accounted for approximately 10% or more of our revenue and represented an
aggregate of 65% of our total revenues. We do not expect that these customers
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 expect this portion
to decrease as a percentage of our total revenues. We do not believe that the
loss of these customers would have a material adverse effect on us.

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 No. 52. Assets and liabilities have been translated
at period-end exchange rates. Results of operations have been translated at
average exchange rates. As the exchange gains and losses arising from these
translations are immaterial, they are recorded as financial expenses.

Stock-Based Compensation

We have recorded unearned stock compensation related to stock option
grants to our employees and consultants totaling $3.2 million through June 30,
2000, of which $1.5 million remains to be amortized through 2005. This amount
represents the difference between the exercise price and the estimated fair
value of our ordinary shares on the date these stock options were granted. This
amount is included as a component of shareholders' equity and is being
amortized by charges to operations over the vesting period of the options,
consistent with the method described in Accounting Principles Board Opinion No.
25 and Statement of Financial Accounting Standards No. 123 and EITF 96-18. We
recorded amortization of unearned stock compensation of $798,000 in 1999. In
July 2000, we granted options to purchase 548,750 ordinary shares to our
employees and consultants, and will record an additional $265,000 as unearned
stock compensation during the quarter ending September 30, 2000. The
amortization of stock compensation is classified as a separate component of
operating expenses in our consolidated statement of operations.

Private Placements

In February and March 2000, some of our shareholders loaned us an
aggregate of $5.0 million. These convertible loans converted into the
convertible debentures issued in April 2000 as described below. These
shareholders were also issued warrants to purchase up to an aggregate of
124,999 ordinary shares at an exercise price of $6.27 per share. The warrants
which may be exercised until the earlier of five years from the date of
issuance, our merger or the sale of all or substantially all of our shares or
assets were valued at $505,000. In April 2000, we issued convertible debentures
to three additional investors in an aggregate amount of $11.0 million.

All of the convertible debentures bear annual interest at the London
interbank offered rate plus 2%. All of the convertible debentures are
automatically convertible into ordinary shares upon the completion of this
offering at a conversion price per share reflecting a discount of 40% to 50% of
the price per share in this offering, depending on the timing of the offering.
If this offering is completed by December 20, 2000, the discount will be 40%
and we will be required to issue to these investors and those investors who
provided us with the convertible loans, 2,431,917 of our ordinary shares at an
implied price per share of $6.60.

We expect that this conversion will cause us to record, on the
effectiveness of our initial public offering, a one-time financing expense of
approximately $16.5 million.

Results of Operations

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

Six Months
Year Ended Ended
December 31, June 30,
---------------------- --------------
1997 1998 1999 1999 2000
----- ----- ------ ------ -----
(unaudited)

Revenues:
Software licenses.................. 7.9% 13.3% 27.0% 22.7% 61.0%
Maintenance and services........... 92.1 86.7 73.0 77.3 39.0
----- ----- ------ ------ -----
Total revenues.................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses.................. 0.8 1.1 6.0 7.7 3.6
Maintenance and services........... 65.5 71.8 63.1 69.3 30.4
----- ----- ------ ------ -----
Total costs of revenues........... 66.3 72.9 69.1 77.0 34.0
Gross profit........................ 33.7 27.1 30.9 23.0 66.0
----- ----- ------ ------ -----
Operating expenses:
Research and development, net...... 25.6 39.3 43.4 45.2 29.5
Sales and marketing................ 24.7 65.5 85.7 107.4 65.0
General and administrative......... 17.8 19.2 22.3 23.8 15.7
Amortization of deferred stock
compensation...................... 0.1 1.8 5.0 3.3 5.1
----- ----- ------ ------ -----
Total operating expenses.......... 68.2 125.8 156.4 179.7 115.3
Operating loss...................... (34.5) (98.7) (125.5) (156.7) (49.3)
Financial income (expenses), net.... (0.6) 1.7 (3.6) (3.9) (3.7)
----- ----- ------ ------ -----
Net loss............................ (35.1) (97.0) (129.2) (160.6) (53.0)
===== ===== ====== ====== =====
Preferred shares deemed dividend.... (0.9) (0.5) (1.9) -- --
===== ===== ====== ====== =====
Net loss to shareholders of ordinary
shares............................. (36.0)% (97.5)% (131.1)% (160.6)% (53.0)%
===== ===== ====== ====== =====

Geographic Distribution

While our products are sold in specified countries, the implementation of
these products may be performed for global clients on a worldwide basis. 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 Six Months Ended
December 31, June 30,
---------------- -------------------
Country 1997 1998 1999 1999 2000
- ------- ---- ---- ---- -------- --------
(unaudited)

United States............................... 83% 74% 76% 70% 71%
United Kingdom.............................. 17 22 19 26 6
Japan....................................... -- 4 5 3 23
--- --- --- -------- --------
Total....................................... 100% 100% 100% 100% 100%
=== === === ======== ========

Six Months Ended June 30, 1999 and 2000

Revenues

Total revenues increased 61% from $7.1 million in the six months ended
June 30, 1999 to $11.4 million in the six months ended June 30, 2000.

Software Licenses. Software licenses revenues consist of licenses of our
software as well as third-party software. Third-party software consists of
software that is either embedded in our software or enhances the functionality
of our software. We resell third-party software to our customers at margins
that are lower than margins that we earn on our software. Software licenses
revenues increased 332% from $1.6 million in the six months ended June 30, 1999
to $7.0 million in the six months ended June 30, 2000. This increase was
primarily attributable to software licenses revenues recognized from contracts
with three customers that accounted for $4.8 million of revenues and additional
customers that accounted for the remainder of the revenues.

Maintenance and Services. Maintenance and services revenues consist of
consulting, implementation, customization and integration, post-contract
customer maintenance and training. Our maintenance and services revenues
decreased 19% from $5.5 million in the six months ended June 30, 1999 to
$4.5 million in the six months ended June 30, 2000. This decrease was primarily
due to a reduction in customization and implementation services of
approximately $1.2 million from the six months ended June 30, 1999 to the six
months ended June 30, 2000. This decrease was partially offset by increases in
maintenance revenues of approximately $200,000. Maintenance and services
revenues comprised 77% of our revenues in the six months ended June 30, 1999
and 39% in the six months ended June 30, 2000. This decrease was a result of
our efforts to increase sales of software licenses and because the
implementation of our products requires less customization.

Cost of Revenues

Total cost of revenues decreased 29% from $5.5 million in the six months
ended June 30, 1999 to $3.9 million in the six months ended June 30, 2000.

Software Licenses. Cost of software licenses revenues consists primarily
of payments to third parties for our reselling of their software. Software
licenses costs decreased 25% from $548,000 in the six months ended June 30,
1999 to $409,000 in the six months ended June 30, 2000. This decrease was
primarily due to higher revenues from software licenses in the six months ended
June 30, 1999 which included a component of third-party software. Cost of
software licenses as a percentage of revenues from software licenses declined
from 34% in the six months ended June 30, 1999 to 6% in the six months ended
June 30, 2000. This decline was primarily due to a contract with one client in
the six months ended June 30, 1999 that involved an unusually large component
of third-party software.

Maintenance and Services. Cost of maintenance and services revenues
consists primarily of salaries and facility costs. Maintenance and service
costs decreased 29% from $4.9 million in the six months ended June 30, 1999 to
$3.5 million in the six months ended June 30, 2000. This decrease resulted
primarily from streamlining of support and training personnel. Maintenance and
services costs as a percentage of related maintenance and services revenues was
90% in the six months ended June 30, 1999 and 78% in the six months ended June
30, 2000. The decrease in maintenance and services costs as a percentage of
maintenance and services revenues results primarily from the personnel
reductions which we implemented in the fourth quarter of 1999. We expect that
the cost of service revenues will increase in dollar amount as we expand our
professional service organization to meet anticipated customer demand.

Operating Expenses

Research and Development, Net. Research and development, net includes
costs relating to the development of our products. These costs consist
primarily of employee salaries and benefits, facilities costs, and the cost of
consulting resources that supplement our internal development team. 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. Research and development, net expenses increased 5% from $3.2 million
in six months ended June 30, 1999 to $3.4 million in the six months ended June
30, 2000. This increase was attributable to the increase of personnel costs due
to the hiring of new personnel for our ongoing development efforts. We expect
that we will continue to devote substantial resources to research and
development and that these expenses will continue to increase.

Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and entertainment, promotional
expenses and facility costs. Sales and marketing expenses decreased 3% from
$7.6 million in the six months ended June 30, 1999 to $7.4 million in the six
months ended June 30, 2000. The decrease of $189,000 was attributable to a
decrease in personnel which occurred in March 1999 and was partially offset by
an increase in personnel in the six months ended June 30, 2000. We expect that
sales and marketing expenses will continue to increase as we continue to expand
our sales efforts and increase promotional activities.

General and Administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, information
system costs, professional services and allocated facilities costs. These costs
increased 7% from $1.7 million in the six months ended June 30, 1999 to $1.8
million in the six months ended June 30, 2000. This increase was attributable
to increases in personnel expenses. We believe that our general and
administrative expenses will continue to increase as a result of growing
operations and additional expenses associated with operating as a public
company.

Amortization of Stock-Based Compensation. Amortization of stock-based
compensation includes the amortization of unearned employee stock-based
compensation and expenses for stock granted to consultants in exchange for
services. Stock-based compensation expense is amortized over the vesting
schedule of the option, typically four years, using the straight line approach.
With the grant of some stock options, we recorded aggregate unearned stock-
based compensation expense of $3.2 million through June 30, 2000. Stock-based
compensation included in operating expenses totaled $235,000 in the six months
ended June 30, 1999 and $576,000 in the six months ended June 30, 2000.

Financial Income and Financial Expenses. Financial expenses were $271,000
in the six months ended June 30, 1999 compared to financial expenses of
$418,000 in the six months ended June 30, 2000. This increase in financial
expenses resulted from interest expenses from the use of bank lines of credit.

Years Ended December 31, 1998 and 1999

Revenues

Total revenues increased 17% from $13.5 million in 1998 to $15.8 million
in 1999.

Software Licenses. Software licenses revenues increased 137% from $1.8
million in 1998 to $4.3 million in 1999. This increase was primarily
attributable to software licenses revenues recognized from contracts with two
major customers that accounted for $3.0 million in 1999 compared to $424,000 in
1998. In 1998 and 1999, revenues from licenses of third-party software were 16%
and 30% of total software licenses revenues.

Maintenance and Services. Our maintenance and services revenues decreased
2% from $11.7 million in 1998 to $11.5 million in 1999. The reason for the
decrease was a reduction in customization services of $1.9 million from 1998 to
1999. This decrease was offset by increases in revenues from other professional
services generated by the implementation of our software and by increases in
maintenance revenues. Service revenues from the implementation of our software
and post-contract maintenance increased by $1.7 million from 1998 to 1999.
Maintenance and services revenues comprised 87% of our

revenues in 1998 and 73% in 1999. This decrease was a result of our efforts to
increase sales of software licenses and limit the scope of projects involving
significant customization.

Cost of Revenues

Total cost of revenues increased 11% from $9.9 million in 1998 to
$10.9 million in 1999.

Software Licenses. Software licenses costs increased from $146,000 in 1998
to $952,000 in 1999. This increase was primarily due to a contract with one
client in 1999 that involved a large component of third-party software.

Maintenance and Services. Maintenance and service costs increased 3% from
$9.7 million in 1998 to $10.0 million in 1999. This increase resulted primarily
from hiring and training additional consulting, support and training personnel
to support our growing client base. Maintenance and services costs as a
percentage of related maintenance and services revenues was 83% in 1998 and 87%
in 1999. The increase in maintenance and services costs as a percentage of
maintenance and services revenues resulted primarily from the additional costs
of our transition from providing customization services to two major clients to
providing implementation services to a larger number of clients. We expect that
the cost of service revenues will increase in dollar amount as we expand our
professional service organization to meet anticipated customer demand.

Operating Expenses

Research and Development, Net. Research and development expenses increased
29% from $5.3 million in 1998 to $6.9 million in 1999. This increase in
research and development expenses was attributable to the increase of personnel
costs due to the hiring of new personnel for our ongoing development efforts.

Sales and Marketing. Sales and marketing expenses increased 53% from
$8.9 million in 1998 to $13.5 million in 1999. The increase of $4.6 million for
1999 compared to 1998 was attributable to a $3.6 million increase in personnel
expenses and a $1.0 million increase in marketing costs.

General and Administrative. General and administrative costs increased 35%
from $2.6 million in 1998 to $3.5 million in 1999. This increase was
attributable to increases of $810,000 in personnel expenses and $230,000 in
professional services expenses.

Amortization of Stock-Based Compensation. Stock-based compensation
included in operating expenses totaled $250,000 in 1998 and $798,000 in 1999.

Financial Income and Financial Expenses. Financial income was $234,000 in
1998 compared to a financial expense of $565,000 in 1999. The financial income
in 1998 consists of interest income due to higher average cash and cash
equivalent and short-term investment balances over the period and higher income
from foreign currency re-measurement. The increase in financial expenses in
1999 resulted from interest expenses incurred from our bank lines of credit.

Years ended December 31, 1997 and 1998

Revenues

Total revenues were $13.5 million in 1997 and $13.5 million in 1998.

Software Licenses. Software licenses revenues increased 69%, from
$1.1 million in 1997 to $1.8 million in 1998. The increase was a result of
additional customers that licensed our software, offset by the completion of
some projects that began in 1997.

Maintenance and Services. Our maintenance and services revenues decreased
6% from $12.4 million in 1997 to $11.7 million in 1998. This decrease was
primarily due to a $1.0 million reduction in customization services from 1997
to 1998, partially offset by increases in revenues from other professional
services from the implementation of our software and by increases in
maintenance revenues. Services revenues from the implementation of our software
and post-contract maintenance increased by $349,000 from 1997 to 1998.
Maintenance and services revenues were equal to 92% of our revenues in 1997 and
87% in 1998. This decrease was a result of our efforts to increase sales of
software licenses and limit the scope of projects involving significant
customization.

Cost of Revenues

Total cost of revenues increased 10%, from $8.9 million in 1997 to
$9.9 million in 1998.

Software Licenses. Cost of software licenses revenues remained
approximately unchanged at $106,000 in 1997 and $146,000 in 1998.

Maintenance and Services. Cost of maintenance and service revenues
increased 10% from $8.8 million in 1997 to $9.7 million in 1998. This increase
resulted primarily from hiring and training consulting, support and training
personnel to support our growing client base. Maintenance and services costs as
a percentage of maintenance and services revenues was 71% in 1997 and 83% in
1998. This increase was primarily due to the additional costs of our transition
from providing customization services to one major client to providing
implementation services to a larger number of clients.

Operating Expenses

Research and Development, Net. Research and development, net expenses
increased 55% from $3.4 million in 1997 to $5.3 million in 1998. The increase
in research and development expenses was attributable to increased personnel
costs due to the hiring of additional personnel for our ongoing research and
development efforts.

Sales and Marketing. Sales and marketing expenses increased 166% from
$3.3 million in 1997 to $8.9 million in 1998. The increase in these expenses in
1998 was attributable to increases of $4.9 million in personnel expenses due to
the addition of new personnel and $710,000 in marketing costs.

General and Administrative. General and administrative costs increased 3%
from $2.4 million in 1997 to $2.5 million in 1998. This increase was due to an
increase in personnel expenses.

Amortization of Stock-Based Compensation. Amortization of stock-based
compensation included in operating expenses totaled $12,000 in 1997 and
$250,000 in 1998.

Financial Income and Financial Expenses. Financial expenses were $85,000
in 1997 due to interest expenses from bank lines of credit and financial income
was $234,000 in 1998 due to higher average cash and cash equivalent and short-
term investment balances over the period.

Selected Quarterly Operating Results

The following table presents statement of operations data derived from our
unaudited consolidated financial statements for the six quarters ended June 30,
2000. This data is expressed both in dollar amounts and as a percentage of
total revenues for each quarter. This data has been prepared on the same basis
as the audited consolidated financial statements appearing elsewhere in this
prospectus and reflects all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of our financial condition and
results of operations at that date and for that period. The operating results
for any quarter are not necessarily indicative of results for any future
quarter.

Quarter Ended
------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
(in thousands)

Statement of Operations
Data:
Revenues:
Software licenses..... $ 746 $ 866 $ 1,260 $ 1,397 $ 3,209 $ 3,754
Maintenance and
services............. 2,607 2,869 2,782 3,275 1,954 2,503
-------- -------- -------- -------- -------- -------
Total revenues...... $ 3,353 $ 3,735 $ 4,042 $ 4,672 $ 5,163 6,257
Cost of revenues:
Software licenses..... 245 303 258 146 300 109
Maintenance and
services............. 2,354 2,560 2,357 2,707 1,574 1,902
-------- -------- -------- -------- -------- -------
Total cost of
revenues........... 2,599 2,863 2,615 2,853 1,874 2,011
Gross profit............ 754 872 1,427 1,819 3,289 4,246
-------- -------- -------- -------- -------- -------
Operating expenses:
Research and
development, net..... 1,504 1,698 1,798 1,865 1,685 1,687
Sales and marketing... 3,773 3,841 2,931 2,992 3,224 4,199
General and
administrative....... 798 890 959 871 853 945
Amortization of
deferred stock
compensation......... 31 204 81 482 328 248
-------- -------- -------- -------- -------- -------
Total operating
expenses........... 6,106 6,633 5,769 6,210 6,090 7,079
Operating loss.......... (5,352) (5,761) (4,342) (4,391) (2,801) (2,833)
Financial income
(expense), net......... (129) (142) (20) (274) (281) (137)
-------- -------- -------- -------- -------- -------
Net loss................ $ (5,481) $ (5,903) $ (4,362) $ (4,665) $ (3,082) $(2,970)
======== ======== ======== ======== ======== =======
Preferred shares deemed
dividend............... -- (303) -- -- -- --
-------- -------- -------- -------- -------- -------
Net loss to shareholders
of ordinary shares..... $ (5,481) $ (6,206) $ (4,362) $ (4,665) $ (3,082) $(2,970)
======== ======== ======== ======== ======== =======
Basic and diluted net
loss per share......... $ (2.05) $ (2.30) $ (1.63) $ (1.73) $ (1.14) $ (1.10)
======== ======== ======== ======== ======== =======
Weighted average number
of shares used in
computing basic and
diluted net loss per
share.................. 2,669 2,669 2,675 2,693 2,701 2,709
======== ======== ======== ======== ======== =======
As a percentage of total
revenues:
Revenues:
Software licenses...... 22.2% 23.2% 31.2% 29.9% 62.2% 60.0%
Maintenance and
services............... 77.8 76.8 68.8 70.1 37.8 40.0
-------- -------- -------- -------- -------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses...... 7.3 8.1 6.4 3.1 5.8 1.7
Maintenance and
services............... 70.2 68.5 58.3 57.9 30.5 30.4
-------- -------- -------- -------- -------- -------
Total cost of
revenues............... 77.5 76.6 64.7 61.0 36.3 32.1
Gross profit............ 22.5 23.4 35.3 39.0 63.7 67.9
-------- -------- -------- -------- -------- -------
Operating expenses:
Research and
development, net....... 44.9 45.5 44.5 39.9 32.6 27.0
Sales and marketing.... 112.5 102.8 72.5 64.0 62.4 67.1
General and
administrative......... 23.8 23.8 23.7 18.6 16.5 15.1
Amortization of
deferred stock
compensation........... 0.9 5.5 2.0 10.3 6.5 4.1
-------- -------- -------- -------- -------- -------
Total operating
expenses............... 182.1 177.6 142.7 132.8 118.0 113.3
Operating loss.......... (159.6) (154.2) (107.4) (93.8) (54.3) (45.4)
Financial income
(expense), net......... (3.8) (3.8) (0.5) (5.9) (5.4) (2.2)
-------- -------- -------- -------- -------- -------
Net loss................ (163.4)% (158.0)% (107.9)% (99.7)% (59.7)% (47.6)%
======== ======== ======== ======== ======== =======
Preferred shares deemed
dividend............... -- (8.1) -- -- -- --
-------- -------- -------- -------- -------- -------
Net loss to shareholders
of ordinary shares..... (163.4)% (166.1)% (107.9)% (99.7)% (59.7)% (47.6)%
======== ======== ======== ======== ======== =======

Our gross margins have improved in each quarter since the first quarter of
1999. Gross margins from software licenses revenues in the past have been
higher than those from maintenance and services revenues. Software licenses
revenues have increased in each quarter since the first quarter of 1999. The
impact of gross profit from maintenance and service revenues on our overall
gross profit has been declining due to the decrease in these revenues as a
percentage of total revenues, and also because gross margins on maintenance and
service revenues are substantially lower than gross margins on software
licenses revenues. The large increase in sales and marketing expenses in the
first quarter of 1999 was due to the personnel expenses related to the hiring
of additional personnel and severance payments made to several terminated
employees. The increase in sales and marketing costs in the second quarter of
1999 was due to the inclusion of a $1.0 million commission to a reseller under
an arrangement that was terminated during the second quarter, net of the non-
recurring personnel expenses mentioned above.

As a result of market and technological changes, we cannot accurately
forecast operating expenses based on historical results. Most of our expenses
are fixed, and we may not be able to quickly reduce spending if revenues are
lower than projected. Our ability to forecast accurately our quarterly revenues
is
limited due to the long sales cycle of our software products, which makes it
difficult to predict the quarter in which the product license revenues and the
related professional services revenues will occur. Our operating results will
be materially adversely affected if revenues do not meet projections.

Liquidity and Capital Resources

How We Have Financed Our Business

We have primarily financed our operations through private placements of
our ordinary and preferred shares and convertible debentures. Through April 30,
2000, gross proceeds from private placements of ordinary and preferred shares
and convertible debentures totaled $54.1 million. To a lesser extent, we have
financed our operations through short-term bank facilities and other financing
arrangements. In March 1999 and January 2000 we issued warrants to purchase an
aggregate of 286,956 ordinary shares to a subsidiary of Bank Hapoalim, at
exercise prices ranging from $4.60 to $5.75 per share. The warrants expire upon
the completion of this offering. During the first four months of 2000, we sold
an aggregate of $16.0 million in principal amount of convertible debentures,
bearing interest at the London interbank offered rate plus 2%, payable on a
quarterly basis starting in April 2001. $5.0 million of the $16.0 million was
received in February and March 2000 and $11.0 million was received in April
2000. The convertible debentures are due in April 2003 but will be convertible,
including unpaid interest, into ordinary shares at a discount to the price of
the shares sold in this offering.

Cash

As of June 30, 2000, we had cash and cash equivalents of $5.3 million and
we had a working capital deficit of $522,000, including $191,000 of short-term
borrowings. We intend to repay the remaining outstanding balances from the
proceeds of this offering. As of June 30, 2000, we did not have any long-term
borrowings other than the convertible debentures.

Net cash used in operating activities was $1.9 million in 1997,
$9.4 million in 1998, $13.1 million in 1999 and $7.0 million in the six months
ended June 30, 2000. Net cash used in investing activities was $763,000 in
1997, $944,000 in 1998, $931,000 in 1999 and $484,000 in the six months ended
June 30, 2000. Investing activities consisted primarily of purchases of
property and equipment. Net cash provided by financing activities was
$2.5 million in 1997, $10.1 million in 1998, $15.4 million in 1999 and
$10.9 million in the six months ended June 30, 2000. Net cash provided by
financing activities consists primarily of net proceeds from the issuances of
preferred and ordinary shares as well as long term convertible debentures and,
in 1999, from a net increase in our short-term bank line of credit of
$5.1 million.

Lines of Credit

As of June 30, 2000, we had a line of credit with Bank Hapoalim which
allowed us to borrow up to an aggregate of $6.0 million. Borrowings under the
line of credit with Bank Hapoalim are in United States dollars and bear
interest annually at the London interbank offered rate plus 1.5%. All
borrowings under the line of credit with Bank Hapoalim are secured by a lien on
our assets. We have working capital revolving lines of credit in the amount of
$500,000 with other banks denominated in NIS, which bear annual interest at a
rate of prime plus 1% and are secured by deposits. We also have an additional
working capital revolving line of credit in the amount of $250,000 with a U.S.
bank which is denominated in dollars, which bears an annual interest at a rate
of prime plus 0.25% and is secured by a bank guarantee. Except as specified
above, borrowings under the lines are not limited by the amount of our assets
and do not require us to meet financial ratios or tests. As of June 30, 2000,
we had $191,000 of outstanding indebtedness under our lines of credit.

Operating Leases

Payments under non-cancelable operating lease agreements for facilities
and other equipment expire on various dates through 2005, resulting in
aggregate lease expenses ranging from $430,000 to $880,000 per year.

Future Cash Needs

We expect to continue to experience growth in our operating expenses and
we anticipate that operating expenses and capital expenditures will continue to
be a material use of our cash resources. We may utilize cash resources to fund
acquisitions or investments in other businesses, technologies, or product
lines. We believe that available cash and cash equivalents and the net proceeds
from the sale of ordinary shares in this offering will be sufficient to meet
our working capital and operating requirements for at least the next 12 months.
After that period, we may require additional funds to support our working
capital and operating expense requirements and may seek to raise additional
funds through public or private debt or equity financings. We cannot assure you
that this additional financing will be available, or if available will be on
reasonable terms.

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 part, through grants from the office of the chief scientist of
Israel. Under these grants royalties are payable to the Israeli government,
generally at the rate of 3% during the first three years, 4% over the following
three years and 5% in the seventh year and future years, on the revenues
derived from products developed by us according to those programs. The maximum
aggregate royalties will not exceed 100%, 150% in some circumstances, of the
dollar-linked value of the total grant received. During 1996, we paid all
royalties due to the office of the chief scientist amounting to a total of
$676,000. Therefore, we are under no further obligation to pay royalties to the
office of the chief scientist on the sale of products funded by the office of
the chief scientist. The government of Israel does not own proprietary rights
in the technology developed using its funding and there is no restriction on
the export of the products manufactured using the technology. Some restrictions
on the technology do apply, however, including the obligation to manufacture
the product based on the technology in Israel and to obtain the office of the
chief scientist's consent for the transfer of the technology to a third party.
These restrictions continue to apply to us although we have paid the full
amount of royalties payable under these grants. If the office of the chief
scientist consents to the manufacture of the products outside Israel, the
regulations allow the office of the chief scientist to require the payment of
increased royalties, ranging from 120% to 300% of the amount of the office of
the chief scientist grant, depending on the percentage of foreign manufacture.
If the chief scientist consents to the manufacture of our products outside
Israel, we cannot assure you that we will not be required to pay the office of
the chief scientist additional royalties.

In 1998, we received a grant from the United States-Israel Binational
Industrial Research and Development Foundation for a development project on our
Service Suite line of products conducted by us and a United States partner.
Under the terms of this grant, we are obligated to pay to the foundation

royalties of 3% to 5% of the revenues derived from sales of products developed
in this project, up to an aggregate amount equal to 100-150% of the grant,
linked to the dollar and to the U.S. consumer price index. The cumulative
amount of grants recognized was $330,000 as of December 31, 1999.

Effects of Currency Fluctuations

Revenues generated and costs incurred outside of the United States are
generally denominated in non-dollar currencies. In 1997, 1998, 1999 and the six
months ended June 30, 2000, 17%, 26%, 24% and 29% of our revenues were
denominated in non-dollar currencies. Costs not effectively denominated in
United States dollars are translated 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. In 1998, we had net income due to
currency fluctuations of $275,000. In 1997, 1999 and the six months ended June
30, 2000, we had a net

loss of $91,000, $47,000 and $111,000 due to currency fluctuations. We do not
generally engage in currency hedging transactions to offset the risks 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.

Impact of Inflation

Since our revenues are generated in United States dollars and currencies
other than NIS, and a substantial 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 or 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 the first
six months of 2000, while the rate of inflation was low, there was a
devaluation of the dollar against the NIS. 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.

Effective Corporate Tax Rate

Our tax rate will reflect a mix of the United States and the United
Kingdom statutory tax rates on our United States and United Kingdom income and
the Israeli tax rate discussed below. We expect that most of our taxable income
will be generated in Israel. Israeli companies are generally subject to income
tax at the rate of 36%. The majority of our income, however, is derived from
our three investment programs with approved enterprise status under the law for
the encouragement of capital investments and is eligible for some tax benefits.

Under our first investment program we will enjoy a reduced tax rate of
10-25% during a period of seven years in which this investment program produces
taxable income. Under our other two investment programs we will enjoy a tax
exemption on income derived during the first ten years in which these
investment programs produce taxable income, provided that we do not distribute
the income as dividends. All of these tax benefits are subject to various
conditions and restrictions.

As of December 31, 1999, we had net operating loss carryforwards for tax
reporting purposes of approximately $18.4 million in the United States,
$6.4 million in Israel, $10.8 million in the United Kingdom and $1.2 million in
Japan. 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, 1999, we have not used these net operating losses.

Adaptation to New Euro Currency

In January 1999, a new currency called the euro was introduced in Austria,
Belgium, Finland, France, Germany, Italy, Luxembourg, the Netherlands,
Portugal, the Republic of Ireland and Spain. By June 30, 2002, at the latest,
all participating European Monetary Union countries are expected to be
operating with the euro as their single currency. Computer systems and software
products will need to be designed or modified to accept the euro currency and,
during the transitional phase, may need to accept both the euro and local
currencies. Conversion to the euro will require restructuring of databases and
internal accounting systems and the conversion of historical data. We believe
that all products offered by us are adapted to the euro. Since the introduction
of the euro we have not experienced any difficulties or complaints from the
adaptation of our products to the euro. However, we did not contact our clients
or suppliers to determine their preparedness for the adoption of the euro.

We have not incurred any material expenses from the adaptation of our
products to the euro and we do not expect to incur any expenses from future
adaptation to the euro. However, we cannot assure you that our products or
software provided to our clients by other vendors, or developed internally by
our clients, will ensure an errorless transition to the euro. Even if our
products and services satisfy these requirements, the products and services
provided to our clients by other software vendors or developed internally by
our clients may not be euro compliant and may disrupt our clients' ability to
use our products.

BUSINESS

Overview

We develop, market and support software products which provide companies
with business-to-business internet solutions for service communities. Service
communities encompass all participants in the service management and delivery
process, including service organizations, their field engineers, customers,
partners, vendors, and suppliers. To capitalize on the opportunity offered by
the internet, service organizations need solutions that support complex service
delivery requirements while enabling collaboration of the service community to
achieve high quality and cost effective service delivery. Our solution is
designed to meet the needs of service organizations of companies with large,
complex product service commitments, as well as third-party service providers
who fulfill these commitments on an outsourced basis, by offering real-time
management and collaboration of the entire service community. Our solutions
include workforce management, service level agreement management, customer
self-service, repair return automation and auction-based procurement and
replenishment.

We have developed and sold a suite of flexible and scalable software
products for the management of service operations in organizations. These
service delivery chain management products, called Service Suite, help
organizations that provide field service to customers, develop proposals for
and track commitments under service contracts, manage inventory and field
service personnel, follow customer calls and generate accurate and detailed
bills. Service Suite customers of these products include EMC Corporation,
GE Medical Systems, NTL and Sun Microsystems.

Our Service Hub internet-based products contain models of service and
definitions of service processes that are based on our experience and knowledge
in developing and selling these service delivery chain software products. Since
their introduction in the fourth quarter of 1999, we have licensed our
internet-based products to BGE Home Products, Broadwing, CapRock, ITC Deltacom,
Picus, Symbol and Teraoka Seiko. Since June 2000, we have signed letters of
intent to license Service Hub to an additional five customers, and we are
targeting our sales and marketing efforts to companies in the high technology,
telecommunications, utilities and industrial automation industries.

Industry Overview

Growth of the Internet

The internet has emerged as a revolutionary global communications medium,
enabling millions of individual consumers and business users to share
information and conduct business electronically. The efficient, pervasive and
interactive nature of the internet makes it a necessary platform for relevant
content exchange and e-commerce transactions from business-to-business.
According to the Gartner Group, the worldwide business-to-business market is
forecast to grow from $145 billion in 1999 to over $7.0 trillion in 2004. In
the intensely competitive global business environment, businesses have
increasingly adopted the internet to streamline their business processes and
make their employees more productive.

Growing Importance of Customer Service

Companies that sell products have always recognized the importance of
product maintenance and support services. As a result, the sale of a product
has always engendered a commitment to respond to a customer call for
maintenance and support for that product. Traditionally, the division that
provides maintenance and support services often is not integrated with other
divisions in the organization that are involved with the product sales cycle.

Today, organizations increasingly stress, and their customers increasingly
demand, high-quality service as a major factor in distinguishing a product.
This focus on quality results in increased customer loyalty and a reduction in
customer churn and creates a competitive advantage in the marketplace. In fact,
in

many organizations, service is replacing products as a primary focus and
customers' perception of the quality of service is considered a matter of
primary importance. This is due to a number of trends, including:

. competition in the global marketplace;

. shrinking profit margins from the manufacture and sale of products;

. increasing complexity and commoditization of products, including
personal computers; and

. importance of customer retention due to the costs of new customer
acquisition.

The Challenges of Providing Customer Service

The process of providing service is a combination of numerous, complex
processes distributed across a wide service community of interacting
constituents. This service community includes customers, service organization
employees like call center operators, field engineers, warehouse managers and
contract administrators, as well as third-party suppliers and vendors. The
members of this community each play an important role in the service delivery
process. For instance, the service delivery process is often performed on a
pre-set schedule or is initiated by end-users contacting customer support call
centers or help desks. These call centers or help desks field customer calls,
dispatch and direct responses to calls and allocate resources between various
customer requests for service. Effective dispatch from call centers requires
communication with field service personnel, mainly service engineers, and
tracking of repairs in process and spare parts inventories. When engineers or
warehouse managers see that replenishment of inventory is required, service
organizations contact third-party vendors to procure additional parts.
Alternatively, many service organizations are streamlining their parts and
repair processes by outsourcing parts inventory and repair to their vendors.
Throughout this process, the service organization must be able to effectively
manage many other matters, including contract administration, entitlement,
tracking, shipping, repair depot operations, pricing and invoicing. For global
organizations with widely dispersed service communities, the challenges of
managing the service delivery process are heightened further by the need to
manage and coordinate service delivery for remote and geographically dispersed
customers over various time zones, with revenues and costs incurred in many
local currencies.

Shortcomings of the Traditional Approach to Service Delivery

The traditional process of creating or renewing service contracts
typically begins with a contract requisition and continues to customer
administration, contract administration and back to the customer in multiple
iterations. The delays caused by this process negatively impact customer
satisfaction and contract renewal rates. Service organizations handle requests
for service based on these contracts in a reactionary, fragmented structure
involving serial and rigid procedures that can create unnecessary delays and
inefficiencies. This approach attempts to solve the immediate customer needs
with only those resources available at that particular time and fails to
consider how attending to a particular request for service will impact the rest
of the organization. Therefore, customer service is provided in an inefficient
manner and does not allow real-time collaboration among many different
constituents of the service community. This approach offers limited real-time
visibility to end-users and the rest of the service community on the progress
being made on a request for service.

The Internet and the Wireless Internet as a Medium for Customer Service and
Support

The internet has made it possible to deploy applications that reach all
employees in an organization and to connect the organization to corporate
partners, vendors and service providers. A new business model is emerging under
which companies will manage and control their customer service delivery using
the internet. The growth in the use of the internet has caused a trend towards
active customer involvement and collaboration in the customer service process.
The ability to conduct sophisticated business transactions in a point-and-click
self-help environment has also raised customer expectations: customers now
expect quick, timely and comprehensive solutions to their problems. Likewise,
businesses have become increasingly aware of the advantages of managing supply
chains and transacting with third-party suppliers and vendors over the internet
and are using this ability as a strategic tool to increase revenues and improve
profitability.

According to IDC, spending on collaborative service and support technologies
within the services industry is expected to grow from $2.7 billion in 1999 to
$8.7 billion in 2003. IDC defines collaborative service and support technology
as the core enabling technology of the emerging internet-based, interactive
e-service and support world, which is growing rapidly in strategic and tactical
importance.

While customer interactions and business transactions conducted over the
internet have grown significantly, they are not likely to replace more
traditional means of managing and controlling the service community. For
example, many organizations continue to rely on older systems and applications
and telephone-based call centers to provide customer service. Rather than
replacing systems that support existing service delivery operations, companies
are actively seeking ways to extend the life of their existing but often
outdated solutions by integrating their internal traditional service management
applications, databases and forms of customer interaction with innovative
internet-based interfaces to their service communities. While the internet has
the potential to enable personalized and collaborative customer service,
companies have been limited by available software applications. These
applications are generally HTML conversions of existing client/server service
management applications that typically restrict customer service to a
predefined transaction available in a generic form to all customers. Existing
products, originally designed for an organization's internal use, generally
fail to provide the flexibility, functionality and scalability required for
conducting business over the internet.

Wireless devices, like cellular phones, personal digital assistants, and
other mobile computing devices, have always been in use in the area of service
delivery. Recently, the abundance of information and applications on the
internet have caused the internet and wireless technology to converge, creating
the wireless internet. We believe that the wireless internet creates a new and
better way to manage service delivery resources, including engineers,
technicians and spare parts, and thus creates higher quality service delivery.
The wireless internet allows the workforce in the field to access information
and applications in a continuous manner. This in turn means that information
about the service delivery, such as the technician's whereabouts, the estimated
time the technician will arrive at the customer site, the status of a part
order or customer entitlements, can be updated in real time from a mobile or
wireless device and forwarded to the customer using the internet.

To realize the potential of the internet to reshape business processes in
the service industry, companies must be able to offer customer service through
a single internet solution. This solution must be configured on the basis of
pre-determined business processes, service knowledge and databases and allow
universal access to all members of the service community through web browsers,
cellular telephones, personal digital assistants and other wireless devices.

The ViryaNet Solution

We provide business-to-business internet solutions for service
communities. Our Service Hub is a single integrated internet-based platform
through which the service organization of a company, together with its
customers, partners, vendors and suppliers, collaborate in real-time in one
service community. This collaboration takes place on the basis of built-in
knowledge of service functionalities, databases and business processes to
enable the cost-effective delivery of high-quality service.

Our Service Hub benefits service communities in the following ways:

Real-Time Management and Collaboration of the Entire Service Community

Service Hub integrates the business processes of all members of the
service community, including customers, the service organization and its
employees, third-party vendors and suppliers. For instance, our internet-based
solution was designed to enable organizations to increase the efficiency and
connectivity of field personnel on a real-time basis. It allows field personnel
equipped only with wireless communications devices to be connected to the
organization when located at a remote site. By enabling real-time

collaboration between all members of the service community, Service Hub
streamlines the service delivery process while offering opportunities for novel
and improved business processes and creating new revenue streams, including
personalization techniques to segment customers based on their individual
profiles or roles in the service community.

Increased Efficiency and Evaluation of Quality of Service

Service Hub's universal access makes all relevant service information
visible to each member of the service community. This allows the service
operation to be handled in an efficient manner, improving the use of all of the
service resources available. Service Hub covers the entire range of the service
delivery cycle, from contract quotation and signing, to implementation of
services under the contract and to billing. Service Hub facilitates an on-going
evaluation of the service process by offering a series of key performance
indicators that continuously measure various aspects of the service operations
on the basis of parameters tailored by the company.

Rapid Deployment of an Internet-Based Solution While Preserving Investments in
Existing Systems

Service Hub allows organizations to quickly and efficiently turn their
complex existing service management applications into an internet-based
solution, without disrupting existing operations and processes. Service Hub's
interoperability with existing service applications, databases and enterprise
resource
planning systems allows organizations to set up their internet-based service
platforms without the long delays and significant expenses that normally result
from a replacement of existing systems. Using our solution, after enabling an
immediate internet-based service delivery management system, organizations are
able to gradually update and replace their existing service systems according
to their own priorities.

Scalability and Flexibility

Service Hub is designed to be highly scalable, enabling organizations to
interact with large numbers of customers, suppliers and vendors through the
internet and other platforms, including cellular telephones and wireless
devices. Service Hub's flexibility and open architecture allows companies to
independently determine their business processes and work flow and to integrate
Service Hub with their existing service applications, customer service
management applications, customer relationship management applications, data
warehouses, enterprise resource planning applications and web sites.

Enabling Management of Service Operations on a Global Scale

Our solutions enable service delivery on a global or nationwide scale.
Service Hub is designed to allow customer service professionals to efficiently
manage, monitor and improve all aspects of service delivery in the context of
complex global service contracts. Our customers can do this across many
geographic locations of all members of the service community despite time zone
or currency differences.

Strategy

Our objective is to become the leading global provider of business-to-
business internet-based solutions for service communities. Key elements of our
strategy include:

Maintain Technological Leadership of our Internet-Based Solutions for Service
Communities

We believe that we have established ourselves as a technology leader in
providing internet-based solutions for a broad range of service applications
and have filed a patent application covering some of our technologies for
creating and supporting service communities on the internet. We intend to
continue to enhance our internet-based solutions by incorporating new advances
in internet technology. We place considerable emphasis on research and
development to improve and expand the functionality of our technology and to
develop new applications. We believe that our future success will depend upon
our ability to maintain our technological leadership, to enhance our existing
products and to introduce new commercially viable products addressing the needs
of our customers on a timely basis.

Build on Our Expertise in Service Management Solutions

Through our extensive experience in developing software products for the
management of service operations, we have gathered significant expertise in
understanding the specific needs of service organizations and their manner of
operation. We have gathered substantial knowledge in designing business
processes and workflow for a wide variety of service organizations. We intend
to continue to build on many of the solutions and concepts that were embedded
in our enterprise software products as we enhance our existing products and
develop new internet-based products.

Continue to Support Open Architecture

We will continue to develop products with an open architecture which
conforms to emerging industry standards and enables integration and
interoperability with other applications. For example, our internet-based
solution uses the XML standard for the description of data, which facilitates
integration between different applications. Our open architecture enables our
customers to exchange large volumes of different types of data, information,
ideas and knowledge regardless of their information technology infrastructures,
systems or software. We believe that the flexibility offered by our open
architecture enables companies to manage their service community more
efficiently and to reduce costs.

Expand Our Market Share by Focusing on Selected Industries

We intend to focus our marketing efforts on three primary industries: high
technology, telecommunications, utilities and industrial automation. We believe
that these industries often have extensive service commitments for relatively
complex products and place significant importance on customer satisfaction, and
are more likely to use the internet for their business operations. We employ
people with expertise in these industries to both market to and support our
clients in these industries.

Extend Strategic Relationships with Third Parties, Including Application
Service Providers

We intend to expand our marketing and implementation capacity by entering
into relationships with third parties, including systems integrators and
vendors of complementary products. 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, devote more resources to making
additional sales and reduce the cost of each sale. We also intend to expand our
distribution capability by offering some of our products through application
service providers, who may offer Service Hub to customers on a subscription
basis, allowing customers to reduce their initial costs.

Products

ViryaNet Service Hub

Service Hub, which was introduced in the fourth quarter of 1999, is a
business-to-business internet platform for service communities. Each component
of Service Hub shares a consistent, easy-to-use, browser-based graphical user
interface. The components share a common underlying technology architecture and
a common data model which allows them to work together and share information.
The components are also universally accessible, allowing employees to work
anywhere using desktop or mobile computers, mobile telephones, personal digital
assistants or other handheld devices.

Service Hub contains a built-in service model that determines rules under
which service processes are implemented and enables the different members of
the service community to collaborate and share information on service related
matters such as management of service contracts, entitlement tracking,
availability of service or spare parts, inventories, shipping, call dispatch
and tracking, administration of filed service personnel, repair depot
operations, pricing and invoicing.

Service Hub contains the following key elements:

[Graphic of computer screen in upper left-hand corner; graphic of personal
digital assistant in center of left-hand side; graphic of cellular phone in
lower left-hand corner.
Box with three columns in center. Text in top of left-hand column reads
"Service Portal" with an arrow pointing to graphic of computer screen. Text in
bottom of left-hand column reads "mService Gateway" with an arrow pointing to
graphics of hand-held device and cellular phone.
Text in center column reads from top: "Service Suite," "Service Process,"
"Service Intelligence," and "Service Engine."
Text in right-hand column reads: "Integration Server."
Text in upper right hand corner reads: "External Web Applications, Markets,
Sites." Text in center of right-hand side reads "Enterprise Applications,
Customer Relationship Management (CRM), Enterprise Resource Planning
(ERP)." Text in lower right-hand corner reads: "Data Warehouses."]

Service Portal

Service Portal is a personalized gateway that allows internal users as
well as customers, field employees and external partners, suppliers and vendors
to interface with Service Hub using the internet. Service Portal, when used
with the other components of Service Hub, allows users to access service
information in real time, share documents, collaborate with other users and
obtain service. Service Portal is designed to be seamlessly integrated with
other corporate portals of an organization. Service Portal allows the creation
of users' profiles and includes a registration process that enables Service Hub
to categorize the user and determine for security and efficiency purposes the
scope of access and use of the system that is permitted for that user. Commonly
used internet-based collaboration capabilities, including chat, forums and
customer feedback are facilitated through Service Portal. Using a standard
browser, each user can configure a customized display of active monitors,
graphs and notification queues. A user can subscribe to a variety of
information sources from enterprise knowledge bases and receive updates on a
timely basis.

mService Gateway

mService Gateway provides mobile users, like field engineers, with remote
access to Service Hub and its applications and data. With mService Gateway,
field engineers can acknowledge being dispatched to a customer service location
through a variety of mobile devices like PalmOS and WindowsCE personal digital
assistants, web-enabled phones, and I-mode Docomo phones that are dominant in
Japan. Once dispatched, engineers can view their work orders, report work that
they have done on service requests, create part activity reports, create new
tasks to be performed in the context of a request, request that assistance be
provided to complete the new tasks and create new service requests. These
actions can be sent to the Service Hub through the mService Gateway if the
mobile device has an internet connection. If the device has no immediately-
available internet connection, the transactions can be stored locally and
transferred to the Service Hub through the mService Gateway the next time the
device is connected to the internet. Through our arrangement with AvantGo, a
provider of mobile infrastructure software and services, we will resell the
AvantGo Enterprise product integrated with mService Gateway. This bundled
solution is designed to enable field service technicians to remotely process
data from a wide range of enterprise applications using a variety of wireless
and remote devices that support the AvantGo browser.

Service Suite

We also provide a suite of enterprise applications for managing service
delivery, which enables service organizations to automate many of the processes
required for service fulfillment. These applications include:

. WorkForce Management, which enables the efficient management of
service company employee resources;

. Service Contract, which provides comprehensive and flexible contract
management;

. Depot Repair, which manages high volume depot repair operations; and

. Service Supply Chain, which manages the service logistics
infrastructure.

Each module within Service Suite can be installed independently or with
other elements of Service Hub. These modules were designed to work in either a
traditional client/server environment or an internet architecture.

Service Process

Service Process allows the customer to define business processes and
workflows that facilitate the interaction between the user and the various
service applications and databases. With Service Process, users can view
relevant information, initiate service calls, track the progress of a service
call, order parts and receive periodic reports. Service Process is based on our
extensive knowledge of commonly used service business processes. Service
Process includes workforce management, management of service level agreements,
customer self-service, automation of repair returns and auction-based
procurement and replenishment. One of the modules within Service Process,
Mobile FE, works with the wireless support of mService Gateway to extend
workforce management to mobile field engineers using wireless devices like
mobile computers and mobile telephones.

Service Intelligence

Service Intelligence allows users to analyze service operations and
facilitates the production of related reports. Service Intelligence is based on
a collection of key performance indicators that track data on the basis of
criteria like financial trends, service performance, service rates, revenue and
cost per product type. It further allows companies to define their own
performance indicators, monitors and reports, and create graphs and charts. For
each key performance indicator and monitor, a user can determine the data
thresholds that the system must control and the alerts or messages that the
system must send out to appropriate members of the service community.

Service Engine

Service Engine contains the shared business definitions and rules used by
Service Suite, Service Process and Service Intelligence.

Integration Server

Integration Server uses application program interfaces that integrate
Service Hub with the customer's other applications, including enterprise
resource planning applications, customer relationship management applications,
data warehouses and other commonly used service applications. Through
Integration Server, users of Service Hub can directly access applications and
databases required to provide comprehensive customer service.

Products Under Development

We are in the process of adding functionality to our Service Hub products
to better accommodate two strategic goals for the future:

. Improving support for application service providers to allow the
service organization of multiple companies to be deployed from a
single Service Hub installation. This functionality has been designed
and will be implemented later in 2000. We expect that this effort will
not require significant development resources before its commercial
release.

. Extending our concept of managing service communities to service
trading web sites. These trading web sites will enable vendors to bid
for services and parts in auctions. It is our intent to integrate
services from those sites into our customer's business processes, as
well as participate in the formation of service web trading
communities. This functionality has been designed and we expect to
implement it in the first half of 2001. We expect that this effort
will not require significant development resources prior to its
commercial release.

Professional Services and Maintenance

Professional Services

We believe that the availability of effective professional services is an
important factor in achieving widespread market acceptance. We provide a broad
range of professional services, consulting, training, application
implementation and project management to customers implementing our solutions.
Professional services are aimed at both generating additional revenues and
ensuring successful implementation of our technology. Professional services can
be purchased separately or as part of an overall application implementation and
deployment project.

We intend to migrate a portion of our implementation activities to third
parties, including systems integrators. We believe that this will allow us to
increase our margins while providing the appropriate level of service to an
expanding customer base.

Maintenance

We offer our customers annual maintenance contracts providing for upgrades
and new versions of our products for an additional fee. Our standard
maintenance contract extends for one year. We believe that a high level of
customer support is important to the successful marketing and sale of our
products. We believe that effective technical support during product evaluation
as well as after the product is sold has substantially contributed to product
acceptance and customer satisfaction and will continue to do so in the future.
Our in-house technical support group provides product evaluation and post-sale
support.

Clients

Service Suite

Since its introduction in 1998, we have licensed our Service Suite
applications to a number of organizations for use in various aspects of
managing service delivery operations. Customers of our Service Suite products
include:

. Computeraid

. EMC Corporation

. GE Medical Systems

. Granada Business Systems

. NTL

. Sun Microsystems

Many of these clients have purchased multiple modules of Service Suite and
all have paid license and service fees in excess of $500,000 for our software
as of June 30, 2000.

Service Hub

Since its introduction in the fourth quarter of 1999, Service Hub has been
licensed by BGE Home Products, Broadwing, CapRock, ITC Deltacom, Picus, Symbol
and Teraoka Seiko. We have also signed letters of intent to license Service Hub
to an additional five customers. The following summaries illustrate how
ITC Deltacom, Symbol and Teraoka Seiko are implementing Service Hub. Each
company reviewed its summary for accuracy, but you should not interpret these
summaries as endorsements by any of these companies of our products or
services.

ITC Deltacom

ITC Deltacom, a full-service telecommunications provider serving business
customers throughout the southeastern United States, is implementing Service
Hub to create operational efficiencies and increase customer satisfaction.
ITC Deltacom has implemented the contract administration, workforce management
and service supply chain modules of Service Suite, along with parts of Service
Hub required for internet access. By using Service Hub technology, ITC Deltacom
is integrating several of its existing applications, including systems
provisioning, customer relationship management and accounting. Service Hub can
also make data from our Service Suite modules accessible over the internet and
allow ITC Deltacom's 250 field engineers to access call information through an
internet connection from their laptops. ITC Deltacom is also engaged in a pilot
program to manage field engineers through handheld devices connected to our
Mobile FE product over the internet.

Symbol Technologies

Symbol Technologies is a provider of wireless and internet-based mobile
data management systems and services installed at more than 45,000 customer
locations worldwide. Symbol provides its customer base with a broad-based
package for support called SymbolCare. Symbol chose Service Hub to upgrade its
existing systems, particularly in the areas of parts logistics and repair, and
serve as the technology platform for delivering this service over the internet.
Symbol's application will use mService Gateway to enable its approximately 75
field representatives to log information about parts, expenses and calls made
on customers. SymbolCare over the internet, called MySymbolCare, is in the
process of being tested at six customer and partner locations. Symbol plans to
implement this application for its base of 5,500 customers and partners. Using
Service Hub, Symbol will be able to integrate information from third-party call
centers and financial applications, as well as from the supply chain and repair
center modules of our Service Suite that Symbol previously purchased from us.
Service Hub's interfaces to Symbol's existing applications will allow these
applications to be phased out in a gradual fashion rather than forcing an
abrupt and costly conversion. Using Service Hub, Symbol expects to reduce the
number of call center requests, improve management of spare parts and increase
field workforce efficiency.

Teraoka Seiko

Teraoka Seiko, a Japanese manufacturer of tracking and point-of-sale
devices and weighing scales focused on the supermarket industry, has over 200
field engineers in 40 centers in Japan and services 80,000 pieces of equipment.
Teraoka also works with a global network of third-party distributors that sell
and service Teraoka's products outside of Japan. Teraoka Seiko decided to
replace its existing system with Service Suite to support its service business
and increase service revenues, engineer productivity and customer satisfaction.
Teraoka Seiko implemented two of Service Suite's modules, WorkForce Management
and Service Contract. In the future, Teraoka Seiko plans to implement Supply
Chain and Repair Depot. These implementations included interfaces with Teraoka
Seiko's accounting and database systems. Teraoka Seiko is in the process of
implementing our Service Hub to manage its community of field engineers as well

as the field engineers of its global network of third-party distributors and
vendors. This field engineering solution will provide field engineers with a
call reporting utility to enable field engineers to issue accurate invoices on
site by using wireless devices. Teraoka Seiko also plans to offer to third-
party vendors an internet-based parts ordering system to facilitate faster and
less costly parts shipments.

Sales and Marketing

We target companies in the high technology, telecommunications, utilities
and industrial automation industries that have extensive service commitments
and complex products, strong commitments to customer satisfaction and an
internet presence. Due to the relative immaturity of our market, we have a
number of different marketing programs to increase our market presence and
awareness of the benefits our products provide. We also emphasize and use a
variety of lead generation programs.

Due to the comprehensiveness of our solutions, our sales cycles have
generally been three to twelve months. We expect the sales cycle for Service
Hub to be three to six months or less due to our belief that the decision
period for implementing business-to-business internet solutions is shorter than
the decision period for enterprise software applications. Some of our sales are
made through a request for proposals process conducted by the potential client.
This also contributes to the lead time involved in our sales and marketing
process.

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, advertising and business management
consulting. As of June 30, 2000, we employed 47 sales and marketing personnel.
The majority of our sales personnel operate through our United States
subsidiary and the balance operate through our United Kingdom and Japan
subsidiaries. Our United Kingdom subsidiary is responsible for sales and
marketing in Europe.

Although the majority of our sales have resulted from using our own
marketing lead generation and direct sales, we have recently entered into
several marketing partnership agreements with Akili, Cap Gemini Ernst & Young,
Stonebridge, MetaSolv and Symbol. Cap Gemini Ernst & Young, Akili and
Stonebridge provide consulting and implementation services to
telecommunications companies; MetaSolv provides order management and service
fulfillment solutions to telecommunications companies; and Symbol provides
handheld computers and scanner devices to the retail and industrial markets.
Cap Gemini Ernst & Young is not affiliated with Ernst & Young LLP, for
accounting independence purposes. 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 identified by them. 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 and devote more resources to making
additional sales and reduce the cost of each sale.

We also intend to explore and establish indirect channels through
relationships with additional resellers who offer complementary products as
well as application service providers. Resellers will be primarily used to sell
special versions of our product configured for specific market targets, to be
combined with their complementary products. Application service providers will
be used to provide our product to customers who wish to avoid the high initial
cost of our product combined with the required hardware platforms and
infrastructure investments and prefer a monthly rental or subscription billing
process provided by application service providers. We believe that this
application service provider channel will be effective for reaching segments of
the market for which the higher costs of a direct sales channel are not
appropriate. Indirect reseller sales are expected to begin in the third quarter
of 2000, and application service provider sales are expected in the fourth
quarter of 2000.

We have created an alliances and partnership team to serve as an
intermediary between us and our business partners, including systems
integrators, complementary product vendors and application service providers.

Technology

Advanced Software Technologies

Service Hub uses a number of advanced software technologies to provide our
products with the capability of handling complex, large-volume, global service
management assignments. For example, the use of rule-based technology allows us
and our customers to incorporate complex business rules into the service
delivery management process and to administer complex global service contracts
through a single tool. This eliminates the need to modify system code to
reflect evolving business rules or the application of complex contractual
terms. Similarly, the use of data extraction techniques enables us and our
customers to extract useful data from tracking systems and allows the software
to assist in decision making and strategic planning.

Industry Standards

We base our modules on leading infrastructure software, including IBM's
WebSphere application server with its advanced workload management, high
throughput and performance, scalability, and fault tolerance capabilities. We
believe that conforming to industry standards not only ensures that we have the
best possible architectures but also that we can benefit from and reuse widely
available internet-centric components. By conforming to industry standards, we
ensure that we provide an open architecture which enables us to interface our
products with our clients' existing service management systems. It also allows
our clients to use a broad range of hardware platforms and a variety of network
and operating system environments. The technology within Service Hub is
designed to make it fully accessible using any number of devices including web
browsers, personal digital assistants and mobile telephones. This is possible
due to a design that separates the presentation layer from the underlying
application logic. This universal access is an intrinsic core technology of
Service Hub.

Software Architecture

Our software is organized in four tiers. The first tier, the database, has
been designed to be scalable in large customer installations and ensures
support for high transaction volumes and global operations. The second tier,
the business object layer, is an object-oriented packaging of the service
entities that are used for the business processes and for implementing service
communities. The third tier, the communications layer, is based on the XML
framework, allowing features encapsulated within the object model to be
accessed by external systems or exported as XML documents. The final tier, the
presentation layer, allows business functions to be used in multiple formats
including HTML browsers, wireless devices or desktop software, using a single
code.

Intellectual Property Rights

We consider our technology to be proprietary and have filed a patent
application covering some of our technologies for creating and supporting
service communities on an internet platform. In general, we have relied on a
combination of technical leadership, trade secret, copyright and trademark law
and nondisclosure agreements to protect our unpatented proprietary know-how.
Our proprietary technology incorporates processes, methods, algorithms and
software that we believe are not easily copied. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of our products
or to obtain and use information that we regard as proprietary. We believe
that, because of the rapid pace of technological change in the industry, patent
and copyright protection are less significant to our competitive position than
factors such as the knowledge, ability and experience of our personnel, new
product development and ongoing product maintenance and support.

Competition

The market for internet-based solutions to manage service organizations is
relatively new and immature. However, with the rapid growth of the internet and
its use for business processes, this market is expected to evolve and develop
quickly. We face competition from different markets and segments. This market
is also fragmented and stratified.

Our competitors include companies in various sectors of the internet
business-to-business market as well as in the broader customer relationship
management software market, including:

. the market for internet-based customer support and customer service
solutions, including companies like E.piphany, mySAP and Kana;

. the market for enterprise based service management software solutions,
including companies like Clarify and Siebel Systems; and

. the market for enterprise resource planning solutions, including
companies like Oracle, PeopleSoft and SAP.

Competitors may also include companies offering other business-to-business
applications over the internet, vendors of new internet application deployment
products, portal vendors and system integrators. Because it is a logical
extension of their corporate and product strategies to penetrate our sector, we
also believe that other companies in the internet sector and in the customer
relationship management software sector will seek to penetrate our market both
by developing their own solutions and by acquiring companies already operating
in the field.

Companies have for many years developed their own in-house automated
client/server service management applications. As a result, our prospective
Service Suite clients will often decide against purchasing and implementing
externally developed and produced enterprise solutions.

Increased competition from any of the competitors, or from new
competitors, could detract from our market share. Many of our competitors are
large, publicly-traded corporations with significantly greater resources than
us and are likely to enjoy substantial competitive advantages, including:

. longer operating histories;

. greater financial, technical, marketing and other resources;

. greater name recognition;

. larger installed base of clients;

. well-established relationships with our current and potential clients;
and

. extensive knowledge of the internet or the service delivery chain
management industry.

We believe that competition in our field is, to a large extent, based upon
the functionality of the products, accessibility to all relevant users, as well
as the ability to integrate with other products and display global or
nationwide capabilities. We expect that competition will increase as a result
of consolidations in the industry.

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 scientists and client 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.

As of June 30, 2000, we employed 64 people in our research and development
efforts in our offices in Jerusalem, Israel. Our research and development
expenditures for 1997, 1998, 1999 and the six months ended June 30, 2000 were
$3.4 million, $5.3 million, $6.9 million and $3.4 million. We will continue to
devote substantial resources to research and development. Part of our funding
for research and development activity has in the past come from various Israeli
government programs.

Employees

As of June 30, 2000, we had 85 employees in Israel, 80 in the United
States, 17 in the United Kingdom and 7 in Japan. Of our 189 employees, 64 were
engaged in research and development, 47 in sales, marketing and business
development, 47 in professional services and technical support and 31 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, the United
Kingdom and Japan. Compliance with these laws has not been a material burden
for us. As the number of our employees increases over time, our compliance with
these regulations could become more burdensome.

Facilities

We do not own any real property. Our administrative, engineering and
development facilities occupy approximately 16,950 square feet and are located
in Jerusalem, Israel. The premises are leased under a lease agreement which
will terminate on December 31, 2002. However, we have a right to terminate the
lease agreement before that date by providing six month's prior written notice
before specified dates. The annual rent for the facility is approximately
$265,000.

Our subsidiaries occupy, in the aggregate, approximately 22,629 square
feet in the United States, the United Kingdom and Japan under leases expiring
at various dates through 2005 with a total annual rent of approximately
$224,000. We entered into a lease for approximately 13,807 square feet of
office space in Southborough, Massachusetts and we relocated our United States
headquarters there in May 2000. This lease expires in 2005 with a total annual
rent of approximately $331,000. We believe that these facilities are adequate
to serve our current needs. However, when we expand our operations in the
future, we will need additional space in Israel and abroad.

Legal Proceedings

In December 1999, our former vice president of marketing and sales filed
an action in Israel against us and our chief executive officer seeking damages
in the amount of up to $1,364,000. The former employee alleges wrongful denial
of his right to exercise options, loss of compensation, including options to
purchase shares granted to him by his previous employer, severance payment and
other social benefits, as well as damage to his reputation.

In March 2000, we filed a counter action against the former employee
seeking damages in the amount of approximately $970,000. We alleged that the
former employee has acted in bad faith, breached his fiduciary duty and did not
perform his duties as required.

We are unable to determine with any certainty the ultimate outcome of the
litigation and its effect on our business, financial condition and results of
operations. We intend to vigorously defend this action.

MANAGEMENT

The following table describes information about our executive officers and
directors as of June 30, 2000.

Executive Officers and Directors

Name Age Position
- ---- --- --------

Samuel I. HaCohen................... 43 Chief Executive Officer and Chairman of
the Board of Directors
Ethan Allen......................... 53 President and Chief Operating Officer
Vladimir Morgenstern................ 42 Executive Vice President, Corporate
Program and Director
Yoram Bibring....................... 42 Chief Financial Officer
Ron Ben-Natan....................... 33 Senior Vice President and Chief
Technology Officer
Winfried A. Burke................... 51 Senior Vice President of Worldwide
Marketing, Strategy and Business
Development
Amnon Shoham........................ 43 Director
Jay B. Morisson..................... 52 Director
Steven N. Baloff.................... 44 Director
Lawrence W. Hambly.................. 53 Director
Hillel Milo......................... 49 Director

Samuel I. HaCohen co-founded ViryaNet in March 1988 and has since then
served as our president, chief executive officer and as a director. Before co-
founding ViryaNet, Mr. HaCohen held senior systems management positions in
John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem. Mr. HaCohen holds
a BS degree in computer science and statistics from the Hebrew University of
Jerusalem and has completed all course work for an MSc degree in statistics.

Ethan Allen has served as our president and chief operating officer since
February 2000. From April 1998 to January 2000 he served as senior vice
president of the aviion server division of Data General Inc., an information
technology company. From November 1990 through 1998 he served as vice president
for worldwide professional and customer service division of Data General, Inc.
Mr. Allen holds a BS in business from Norwich University, a MS in education
from Boston College and an MBA from Babson College.

Vladimir Morgenstern co-founded ViryaNet with Mr. HaCohen. Since November
1999 Mr. Morgenstern has served as our executive vice president, corporate
program. He served as our technical manager and chief technology officer from
March 1988 until November 1999 and became a director in July 1999. Before co-
founding ViryaNet, Mr. Morgenstern also held senior systems management
positions in John Bryce Systems Ltd. and the Hadassah Hospital, Jerusalem.
Mr. Morgenstern holds a BSc degree in physics from Vilnius University in
Lithuania and has completed all course work for a MSc degree in applied
mathematics.

Yoram Bibring has served as our chief financial officer since April 1999.
From December 1998 until April 1999, Mr. Bibring provided financial management
services to various companies, including ViryaNet. From February 1998 to
November 1998, Mr. Bibring served as chief financial officer of Americash Inc.,
an operator of a nationwide ATM network in the United States. From January 1990
to September 1995, Mr. Bibring served as the chief financial officer of Geotek
Communications, a wireless communications solution provider, and from October
1995 to January 1998, he was president of Geotek Communications' international
division. Geotek Communications filed for bankruptcy in June 1998. Before 1990,
Mr. Bibring worked in various public accounting firms in Israel and the United
States. Mr. Bibring holds a degree in accounting and economics from the
Tel Aviv University and is a certified public accountant in both Israel and the
United States.

Ron Ben-Natan has served as our chief technology officer since November
1999 and has served as senior vice president of engineering since February
2000. From June 1998 to November 1999, Mr. Ben-Natan served as our vice
president product development. From July 1995 to June 1998, Mr. Ben-Natan
served as the chief technology officer of Entity Object Technology, a company
he co-founded, which was a software consulting company. Mr. Ben-Natan holds a
Ph.D. in computer sciences from the Hebrew University of Jerusalem.

Winfried A. Burke has served as our senior vice president of worldwide
marketing since joining us in October 1999. From January 1999 until October
1999, Mr. Burke served as vice president of sales and marketing for ViewSoft.
From July 1997 until December 1998, Mr. Burke served as general manager of
North American operations and vice president of worldwide channels and
strategic alliances at Gentia Software. From August 1994 until July 1997,
Mr. Burke was a merger and acquisition consultant. From 1991 until 1994,
Mr. Burke served as vice president of sales and marketing for Oberon Software.
Mr. Burke has also held various positions in product management, marketing and
sales at Prime Computer, Apollo, Sequoia and Wang. He began his career as a
software engineer at the Massachusetts Institute of Technology Instrumentation
Laboratory, Draper Laboratory, where he worked on the Apollo and Space Shuttle
projects, followed by software development assignments at the Massachusetts
Institute of Technology Lincoln Laboratory and Data General. Mr. Burke holds a
BS in computer science from the Massachusetts Institute of Technology.

Amnon Shoham has served as one of our directors since 1996. Mr. Shoham is
the managing director of Cedar (Israel) Financial Advisors Ltd., a position he
has held since 1997. From 1993 to 1997, Mr. Shoham served as a managing partner
of Star Ventures in Israel. Mr. Shoham serves as a director on the board of
directors of Jacada Ltd., a software company.

Jay B. Morisson has served as one of our directors since 1996.
Dr. Morisson is the founder and managing general partner of Newbury Ventures,
Inc., a United States venture capital firm established in 1992. Dr. Morisson is
a general partner of Jerusalem Pacific Ventures (1994), L.P., one of our
shareholders. Before 1992, Dr. Morisson held a number of positions with
Govett & Co. Ltd. and European International Fund Management Company including
the positions of chief financial officer and president of its venture capital
subsidiary. Dr. Morisson serves as a director of Fundtech Ltd., a software
company, Jacada Ltd., a software company, and of several privately held
technology companies. He holds undergraduate and masters degrees in operational
research from Ohio State University and a doctorate in business administration
from the Haas School of Business at the University of California at Berkeley.

Steven N. Baloff has served as one of our directors since 1996. Mr. Baloff
has served as a managing director and general partner of Advanced Technology
Ventures, a United States venture capital firm, since 1996. Before joining
Advanced Technology Ventures, from 1989 to 1995 Mr. Baloff served as president
and chief executive officer of Worldview Systems Corp., an electronic travel
industry information service.

Lawrence W. Hambly has served as one of our directors since 1998. Since
1993, Mr. Hambly has served as president of the enterprise services division
and corporate quality officer of Sun Microsystems, Inc. Mr. Hambly serves as a
member of Sun's executive management group. From 1990 to 1993, Mr. Hambly
served as vice president of worldwide marketing of computer systems and as
corporate executive officer. From 1988 to 1990, Mr. Hambly served as president
of Federal Systems. Before joining Sun, Mr. Hambly served in field sales, sales
management and engineering positions with Symbolics, Data General, General
Research, Logicon and Rockwell International.

Hillel Milo has served as one of our directors since June 2000. Since
1995, he has been the chief executive officer of Clal Venture Capital Fund
Limited Partnership. In 1997, he co-founded Infinity Venture Capital Fund
Limited Partnership and served as its chief executive officer until June 1999.
From 1993 to 1994, Mr. Milo was the co-founder and the general partner of the
Walden Israel venture capital fund. Previously, Mr. Milo served as a director
and executive officer in a privately-owned European financial and

industrial investment company. Mr. Milo serves on the board of directors of
Breezecom, a manufacturer of wireless access products, and Radvision, a
developer of internet and network based communications products. Mr. Milo has a
BA degree in mechanical engineering and an MA degree in management science from
the University of Alabama.

Board of Directors

Our articles of association, to be adopted before the completion of this
offering, 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
described below, holds office until the next annual general meeting of the
shareholders.

Committees

Our board of directors has formed an audit committee, an executive
committee and a compensation committee. The audit committee exercises the
powers of the board of directors for our accounting, reporting and financial
control practices. Our executive committee is responsible for managing our
daily operations and acting on behalf of our board of directors in exigent
circumstances. Our compensation committee sets the annual compensation for our
executive officers and, to the extent permitted under the companies law,
administers our option plans. Messrs. Morisson, Shoham, Baloff and Milo are
members of our audit committee. Messrs. HaCohen, Shoham, Morisson and Baloff
are members of our executive committee. Messrs. Shoham, Morisson and Baloff are
members of our compensation committee.

Independent Directors

Upon the completion of this offering, our ordinary shares will be listed
for quotation on the Nasdaq National Market and we will be subject to the rules
of the Nasdaq National Market applicable to quoted companies. Under the Nasdaq
rules, we are required 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. Morisson, Shoham and Baloff meet
the independence standard of the Nasdaq rules.

External Directors

Israeli Companies Law

We are subject to the provisions of the new Israeli Companies Law, 5759-
1999, which became effective on February 1, 2000 and supersedes most of the
provisions of the Israeli Companies Ordinance, New Version, 5743-1983.

Who May Be Appointed

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 two external directors. 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 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.

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. Until the lapse of two years from
termination of office, a company may not engage an 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:

. 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

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

However, the board of directors of companies whose shares are traded
outside Israel may determine that a director, who was appointed before February
1, 2000 and complies with the non-affiliation requirements of an external
director, will be designated as an external director. Messrs. Shoham and
Morisson are designated as the external directors.

Term of Service

The initial term of an external director is three years and may be
extended 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.

Audit Committee

Nasdaq Rules and Israeli Companies Law

Under the Nasdaq rules, we are required to form an audit committee
consisting of at least three independent directors, all of whom are financially
literate and one of whom has accounting or related financial management
expertise. The responsibilities of the audit committee under the Nasdaq rules
include evaluating the independence of a company's outside auditors. Our
current audit committee complies with the Nasdaq rules. 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 audit committee
must 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 someone who provides services
to the company on a regular basis.

Role of Audit Committee

The role of the audit committee is to examine flaws in the business
management of the company in consultation with the internal auditor and the
company's independent accountants, and suggest appropriate course of action.
The approval of the audit committee is required to engage in specified actions
and transactions with office holders, controlling shareholders and third
parties in which office holders and controlling shareholders have an interest.

Conflicts of Interest

An audit committee 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 was present at the meeting in which an approval was granted. Our external
directors are members of our audit committee.

Internal Auditor

Under the companies law, the board of directors must also appoint an
internal auditor nominated by the audit committee. The role of the internal
auditor is to examine whether the company's actions comply with the law and
orderly business procedure. Under the companies law, the internal auditor may
not be an interested party, an office holder, or a relative of an interested
party or an office holder, nor may the internal auditor be the company's
independent accountant or its representative. We intend to appoint an internal
auditor to comply with the companies law after this offering.

Approval of Specified Related Party Transactions Under Israeli Law

The companies law imposes a duty of care and a duty of loyalty on all
office holders of a company, including directors and executive officers. The
duty of care requires an office holder to act with the level of care which a
reasonable office holder in the same position would have acted under the same
circumstances.

An office holder under the companies law includes any director, general
manager, chief executive officer or any other managers directly subordinate to
the general manager or the chief executive officer, and any person who serves
in a similar position regardless of title.

Each person listed in the table under Directors and Executive Officers
above, is an office holder. Under the companies law, the board of directors
must approve all compensation arrangements of office holders who are not
directors. Director's compensation arrangements also require audit committee
approval before board approval and shareholder approval.

The companies law requires that an office holder of a company disclose to
the company any personal interest that he may have and all related material
information known to him about any existing or proposed transaction by the
company. The office holder is required to make this disclosure within a
reasonable time before the discussion of the proposed transaction and no later
than the first meeting of the board of directors at which the proposed
transaction is discussed. Once an office holder complies with these disclosure
requirements, the board of directors may approve a transaction between the
company and an office holder, or a third party in which an office holder has a
personal interest, unless the articles of association provide otherwise.
A transaction that is adverse to the company's interest cannot be approved.
If the transaction is an extraordinary transaction, both the audit committee
and the board of directors must approve the transaction. Under specific
circumstances, shareholder approval may also be required.

Under the companies law, the disclosure requirements which apply to an
office holder also apply to a controlling shareholder of a public company.
A controlling shareholder includes a shareholder that holds 25% or more of the
voting rights in a public company if no other shareholder owns more than 50% of
the voting rights in the company.

Exculpation, Insurance and Indemnification of Directors and Officers

Under the companies law, an Israeli company may not exempt an office
holder from liability for a breach of his duty of loyalty, but may exempt in
advance an office holder from his liability to the company, in whole or in
part, for a breach of his duty of care.

Office Holder Insurance

Our articles of association provide that, subject to the provisions of the
companies law, we may enter into a contract for the insurance of the liability
of any of our office holders for acts which he performed in his capacity as an
office holder in relation to:

. a breach of his duty of care to us or to another person;

. a breach of his duty of loyalty to us, provided that the office holder
acted in good faith and had reasonable cause to assume that his act
would not prejudice our interests; or

. a financial liability imposed upon him in favor of another person.

Indemnification of Office Holders

Our articles of association provide that we may indemnify an office holder
against:

. a financial liability imposed on him 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 capacity as an office
holder; and

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

. reasonable litigation expenses relating to an act performed in his
capacity as an office holder, including attorneys' fees, expended by
the office holder or charged to him by a court in a criminal
proceeding from which he was acquitted, or a criminal proceeding in
which he 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.

Limitations on Insurance and Indemnification

The companies law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for
any monetary liability incurred as a result of:

. a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;

. a breach by the office holder of his duty of care if the breach was
done intentionally or recklessly;

. any act or omission done with the intent to derive an illegal personal
benefit; or

. any fine levied against the office holder.

Under the companies law, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and
our board of directors and, in specified circumstances, by our shareholders.

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. Before this offering, we intend to obtain directors
and officers liability insurance for the benefit of our office holders.

Management Employment Agreements

We have entered into employment agreements with Messrs. HaCohen, Allen,
Morgenstern, Bibring and Burke. These employment agreements contain various
provisions, including provisions relating to assignment of intellectual
property rights to us, non-competition and confidentiality and are in effect
until terminated by either party upon advance notice of 30 or 60 days or under
specified circumstances under the terms of the particular agreement. We have
also entered into executive incentive bonus plans with these executives. These
plans provide for quarterly bonus payments upon achievement by us of targeted
levels in specific business performance categories.

Compensation of Directors and Officers

The aggregate remuneration we paid for the year ended December 31, 1999 to
our directors and executive officers as a group was $803,000 in salaries, fees,
commissions and bonuses. This amount does not include payments to Mr. Allen,
who was not an employee in 1999. This amount includes $157,000 set aside or
accrued to provide for pension, retirement or similar benefits provided to our
directors and executive officers.

Our directors who are not executive officers do not receive compensation
for their service on the board of directors or any board committee. However,
all non-management directors are reimbursed for their expenses for each board
meeting attended.

As of July 31, 2000, options to purchase 2,618,000 ordinary shares granted
to our directors and executive officers under our option plans were
outstanding. The weighted average exercise price of these options was $4.32 per
share. Of these options, options to purchase 1,105,081 ordinary shares are
exercisable or will become exercisable within 60 days of July 31, 2000.

Option Plans

We maintain four option plans, the 1996 option plan, the 1997 option plan,
the 1998 option plan and the 1999 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 Option Plan

In 1996, we adopted the 1996 option plan and reserved 1,400,000 ordinary
shares for issuance to employees. As of July 31, 2000, options to purchase
1,177,920 ordinary shares were outstanding under the 1996 option plan. In 2000,
the 17,740 additional ordinary shares that were available for grants of
additional options were transferred to the 1999 option plan. The exercise price
of options granted under the 1996 option plan range from $0.61 to $1.00.

The 1997 Option Plan

In 1997, we adopted the 1997 option plan and reserved options to purchase
an aggregate of 500,000 ordinary shares. As of July 31, 2000, options to
purchase 214,650 ordinary shares were outstanding under the 1997 option plan.
In 2000, the 230,125 additional ordinary shares that were available for grants
of additional options were transferred to the 1999 option plan. The exercise
price of the options granted under the 1997 option plan is $2.30.

The 1998 Option Plan

In 1998, we adopted the 1998 option plan and reserved options to purchase
an aggregate of 1,500,000 ordinary shares to employees. As of July 31, 2000,
options to purchase 846,125 ordinary shares were outstanding under the 1998
option plan. In 2000, the 646,625 additional ordinary shares that were
available for grants of additional options were transferred to the 1999 option
plan. The exercise price of the options granted under the 1998 option plan
range from $1.00 to $3.90.

The 1999 Option Plan

In 1999, we adopted the 1999 option plan and reserved options to purchase
an aggregate of 3,000,000 ordinary shares to employees and transferred an
additional 894,490 ordinary shares to the 1999 option plan from the 1996 option
plan, the 1997 option plan and the 1998 option plan. As of July 31, 2000,
options to purchase 3,630,855 ordinary shares were outstanding under the 1999
option plan and 260,885 additional ordinary shares were available for grants of
additional options. The exercise price of the options granted under the 1999
option plan range from $3.20 to $12.00.

Administration of Our Option Plans

Our option plans are administered by the board of directors. Under the
option plans, options to purchase our ordinary shares may be granted to our
officers, directors, employees or consultants or our subsidiaries. Under the
option plans, the exercise price of options shall be determined by the
committee but may not be less than NIS 0.1. The vesting schedule of the options
is also determined by the committee but generally the options vest over a four
year period. Each option granted under the option plans is exercisable until
seven years from the date of the grant of the option. The 1996 option plan, the
1997 option plan, the 1998 option plan and the 1999 option plan will expire on
December 31, 2005, 2006, 2007 and 2008.

RELATED PARTY TRANSACTIONS

Preferred Shares Financing

Series A and Series B Preferred Shares. In October 1996, we issued and
sold an aggregate of 2,500,000 of our series A preferred shares at a price of
$2.00 per share. Investors owning ten percent or more of our shares who
purchased shares in that transaction and the number of shares each purchased
include:

Number of Series A
Investor Preferred Shares Purchased
-------- --------------------------

The Star Group................................... 687,500
Advanced Technology Ventures Group............... 687,500
The Clal Group................................... 437,500

We issued warrants to purchase an aggregate of 785,420 series A preferred
shares to these investors at an exercise price of $3.00 per share.

In December 1996, we converted 500,000 series A preferred shares held by
the Advanced Technology Ventures Group into 500,000 series B non-voting
preferred shares. Warrants to purchase 216,670 series A preferred shares issued
to Advanced Technology Ventures Group were converted into warrants to purchase
216,670 series B non-voting preferred shares. In April 1997, 150,000 series A
preferred shares held by Advanced Technology Ventures were converted into
150,000 series B non-voting preferred shares and 77,460 ordinary shares held by
the Gilde Group were converted into 77,460 series A preferred shares.

Series C-1 Preferred Shares. In March and April 1998, we issued and sold
an aggregate of 3,205,128 of our series C-1 preferred shares at a price of
$3.90 per share. These shares included 794,871 shares issued to shareholders
who invested in ViryaNet in August and November 1997. We agreed to issue shares
to those investors as part of a subsequent equity financing. The first equity
financing to occur after those investments was the series C-1 preferred
financing. Investors owning ten percent or more of our shares who purchased
series C-1 preferred shares in March and April 1998 and the number of shares
each purchased include:

Number of Series C-1
Investor Preferred Shares Purchased
-------- --------------------------

The Star Group................................... 367,206
Advanced Technology Ventures Group............... 169,614
The Clal Group................................... 374,635
GE Capital Equity Holdings....................... 641,026

We issued warrants to purchase 3,077, 4,103 and 6,666 series C-1 preferred
shares to the Star Group, Advanced Technology Ventures and the Clal Group.
The exercise price of these warrants is NIS 0.10 per share. We also issued a
warrant to GE Capital Equity Holdings, Inc. to purchase 512,820 series C-1
preferred shares at an exercise price of $3.90 per share. GE Capital exercised
its warrant in whole in September 1998.

Series C-2 Preferred Shares. In June 1999, we sold an aggregate of
1,739,132 of our series C-2 preferred shares. 1,022,610 of these shares were
sold to existing shareholders and 716,522 of these shares were sold to
Eucalyptus Ventures L.P. and its affiliates, Access Technology Partners, L.P.
and Chase Securities Inc. and its affiliates at a purchase price of $5.75 per
share. We issued warrants to these shareholders and investors enabling them to
purchase up to 347,826 of our series C-2 preferred shares at a purchase price
of $5.75 per share. The warrants contain a cashless exercise feature and may be
exercised until the earlier of five years of the date of issuance, a merger of
ViryaNet, or the sale of all or substantially all of our issued share capital.
Investors owning ten percent or more of our shares and officers who purchased
series C-2 preferred shares in June 1999 and the number of shares each
purchased include:

Number of Series C-2
Investor Preferred Shares Purchased
-------- --------------------------

Samuel HaCohen................................... 17,390
Advanced Technology Ventures Group............... 139,190
The Clal Group................................... 366,020
GE Capital Equity Holdings....................... 364,420

We issued warrants to purchase an aggregate of 177,404 series C-2
preferred shares to these investors and officers. The exercise price of each of
these warrants is $5.75. We loaned Mr. HaCohen $100,000 to purchase his series
C-2 preferred shares.

Convertible Debentures Financing

In February and March 2000, some of our shareholders loaned ViryaNet an
aggregate of $5 million. These convertible loans converted into the convertible
debentures issued later in April 2000 as described below. These shareholders
were also issued warrants to purchase up to an aggregate of 124,999 ordinary
shares at an exercise price of $6.27 per share. The warrants may be exercised
until the earlier of 5 years from the date of issuance, a merger of ViryaNet or
the sale of all or substantially all of our shares or assets. In April 2000, we
issued convertible debentures to three additional investors in an aggregate
amount of $11.0 million.

All of the convertible debentures bear annual interest rates at the London
interbank offered rate plus 2%. The convertible debentures are automatically
convertible into ordinary shares upon the completion of this offering at a
conversion price per share reflecting a discount of 40% to 50% of the price per
share in this offering, depending on the timing of the offering. If this
offering is completed by December 20, 2000, the discount will be 40% and we
will be required to issued to these investors and those investors who provided
loans as described in the preceding paragraph, 2,431,917 of our ordinary shares
reflecting an implied price per share of $6.60.

Relationship with Sun Microsystems

In September 1995, we entered into a software license agreement with Sun
Microsystems, Inc. Sun Microsystems holds a warrant to purchase 300,000 of our
series A preferred shares at an exercise price of $2 per share. Mr. Lawrence W.
Hambly who is a member of our board of directors, serves as the president of
the enterprise services division and corporate quality officer of Sun
Microsystems. We granted Sun Microsystems a non-exclusive license to use our
products identified in the license and we provided Sun Microsystems with a copy
of the software and related source documentation for the licensed products.
We granted Sun Microsystems a non-transferable and non-exclusive, irrevocable
and perpetual license to use, copy, modify and create derivative works of the
software. Sun Microsystems may terminate the agreement upon 90 days' prior
notice if Sun Microsystems considers the termination to be necessary to protect
Sun Microsystems' interests or upon 30 days' prior notice if we materially
breach the agreement. Following termination of the agreement, Sun Microsystems
is entitled to retain the then current software for the licensed products but
has agreed it will not use that software to compete with us.

As part of a December 1998 amendment to the agreement, we were engaged by
Sun Microsystems to develop and implement a software quoting system. All
components other than some third-party software embedded in the quote software
will be delivered by us to Sun Microsystems.

Relationship with General Electric

In April 1998, we entered into a share purchase agreement with GE Capital
Equity Holdings, Inc., a subsidiary of General Electric. GE Capital Equity
Holdings, Inc. acquired series C-1 preferred shares representing approximately
6% of our then outstanding shares for $2.5 million and received a warrant to
acquire 512,820 additional series C-1 preferred shares at an aggregate exercise
price of $2 million. In September 1998, General Electric exercised its warrant.

In June 1998, we entered into an agreement for software license and
support with GE Medical Systems., a division of General Electric. Under this
agreement, we granted GE Medical a perpetual non-exclusive license to use our
products identified in the agreement. In December 1998, we entered into an
amendment to the software license agreement with GE Medical under which we
licensed an additional product to them. In November 1999, GE Medical notified
us of its intention not to further deploy our products. In December 1999, we
entered into an agreement with GE under which GE paid us outstanding
receivables of $1.5 million. Under the terms of the agreement we are obligated
to provide GE, until December 31, 2001, with maintenance and support services
including future upgrades and enhancements of specified products. We issued to
GE Medical warrants to purchase 50,000 of our ordinary shares at an exercise
price of $5.75 per share.

In March 1999, we entered into a license agreement with GE Power, a
subsidiary of General Electric, under which we granted GE Power a non-exclusive
right and license to use our products identified in the agreement. We are
required to provide GE Power with support and maintenance services. Neither we
nor GE Power may assign our rights under the agreement. A merger,
consolidation, combination or restructuring by us, the transfer of more than
20% of our share capital or the sale of all or substantially all of our assets
would be considered an assignment under the terms of the license agreement.

In June 1999, we sold shares of series C-2 preferred shares and related
warrants to GE Capital Equity Holdings as described above.

Other Clients

From June 1999 through July 31, 2000, we issued to some of our clients
warrants to purchase an aggregate of 385,000 ordinary shares. The exercise
price of these warrants ranges from $5.75 to $12.00 per share. Warrants to
purchase 50,000 ordinary shares will expire upon the completion of this
offering and the remaining warrants to purchase 335,000 ordinary shares expire
on dates ranging from January 2002 to January 2003.

PRINCIPAL SHAREHOLDERS

The following table summarizes information about the beneficial ownership
of our outstanding ordinary shares as of July 31, 2000 for:

. each person or group that we know owns more than 10% of our ordinary
shares; and

. all of our directors and executive officers as a group.

We determine beneficial ownership of shares under the rules of the
Securities and Exchange Commission and includes 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 31, 2000. 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 17,436,760 ordinary shares
outstanding as of July 31, 2000 and 21,936,760 ordinary shares outstanding
immediately following the completion of this offering. These numbers assume the
conversion of all outstanding preferred shares and convertible debentures into
ordinary shares and the exercise of warrants to acquire ordinary shares which
expire upon the completion of this offering.

Unless otherwise indicated, the address of each shareholder is c/o
ViryaNet, Inc., 2 Willow Street, Southborough, Massachusetts 01745-1027.

Ordinary Shares Ordinary Shares
Beneficially Owned Beneficially Owned
Before the Offering After the Offering
----------------------- ---------------------
Name and Address Number Percent Number Percent
- ---------------- ------------ ---------- ----------- ---------

SVM Star Ventures Management GmbH
No. 3 (1)......................... 2,016,719 11.6% 2,016,719 9.2%
Possartsrassa 9
D-81679 Munich, Germany

Advanced Technology Ventures IV
L.P. (2).......................... 2,090,507 12.0 2,090,507 9.5
485 Ramona Street, Suite 200
Palo Alto, CA 94301
United States

GE Capital Equity Holdings, Inc.
(3)............................... 1,746,337 9.9 1,746,337 7.9
120 Long Ridge Road
Stamford, CT 06927
United States

The Clal Group (4)................. 2,881,434 16.4 2,881,434 13.1
Kiriat Atidim
Ramat Hachayal
P.O. Box 61581, Tel Aviv 58177,
Israel

All executive officers and
directors as a group
(ten people) (5) (6).............. 7,934,168 41.8 7,934,168 33.8

- ------------------
(1) Includes:

. 436,857 ordinary shares and warrants to purchase 659 ordinary shares
exercisable within 60 days of July 31, 2000 held by STAR Management of
Investments (1993) Limited Partnership;

. 351,900 ordinary shares and warrants to purchase 531 ordinary shares
exercisable within 60 days of July 31, 2000 held by SVE STAR Ventures
Enterprises No. III, a German civil law partnership (with limitation of
liability);

. 29,425 ordinary shares and warrants to purchase 45 ordinary shares
exercisable within 60 days of July 31, 2000 held by SVE STAR Ventures
Enterprises No. IIIA, a German civil law partnership (with limitation of
liability);

. 154,841 ordinary shares and warrants to purchase 234 ordinary shares
exercisable within 60 days of July 31, 2000 held by SVM STAR Ventures
Managementgesellschaft GmbH Nr. 3 & Co. Beteiligungs KG;

. 687,413 ordinary shares and warrants to purchase 1,038 ordinary shares
exercisable within 60 days of July 31, 2000 held by SVE STAR Ventures
Enterprises No. V, a German civil law partnership (with limitation of
liability); and

. 353,206 ordinary shares and warrants to purchase 570 ordinary shares
exercisable within 60 days of July 31, 2000 held by SVM STAR Ventures
Management GmbH No. 3. SVM STAR Ventures Management GmbH No. 3 has the
sole power to vote or direct the vote of the ordinary shares held by the
STAR entities and is therefore considered the beneficial owner of the
shares beneficially held by SVE STAR Ventures Enterprises No. III,
SVE STAR Ventures Enterprises No. IIIA, SVM STAR Ventures Management
gesellschaft GmbH No. 3 & Co. Beteiligungs KG, and SVE STAR Ventures
Enterprises No. V. SVM STAR Venture Capital Management Ltd. has the sole
power to vote or direct the vote of the ordinary shares held by
STAR Management of Investments (1993) Limited Partnership and is
therefore considered the beneficial owner of the shares beneficially
held by STAR Management of Investments (1993) Limited Partnership.
Dr. Meir Barel is the principal shareholder and sole director of SVM
STAR Ventures Management GmbH No. 3 and SVM STAR Venture Capital
Management Ltd., and accordingly may be deemed to be the beneficial
owner of all of the ordinary shares beneficially held by the Star
entities, but Dr. Barel disclaims beneficial ownership of such ordinary
shares except to the extent of any pecuniary interest therein.

(2) Includes warrants to purchase 47,964 ordinary shares exercisable within
60 days of July 31, 2000 held by Advanced Technology Ventures IV L.P.

(3) Includes warrants to purchase 86,657 ordinary shares exercisable within
60 days of July 31, 2000 held by GE Capital Equity Holdings, Inc. and
warrants to purchase 50,000 ordinary shares exercisable within 60 days of
July 31, 2000 held by GE Medical.

(4) Includes:

. 725,134 ordinary shares and warrants to purchase 15,833 ordinary shares
exercisable within 60 days of July 31, 2000 held by Clal Venture Capital
Fund L.P.;

. 776,320 ordinary shares and warrants to purchase 15,833 ordinary shares
exercisable within 60 days of July 31, 2000 held by Clalit Capital Fund
L.P.;

. 637,555 ordinary shares and warrants to purchase 36,602 ordinary shares
exercisable within 60 days of July 31, 2000 held by Clal Industries and
Investments Ltd.; and

. 637,555 ordinary shares and warrants to purchase 36,602 ordinary shares
exercisable within 60 days of July 31, 2000 held by Clal Electronics
Industries Ltd.

(5) Includes:

. options and warrants to purchase 1,105,081 ordinary shares held by all
executive officers and directors, which are exercisable within 60 days
of July 31, 2000;

. 2,042,543 ordinary shares and warrants to purchase 47,964 ordinary
shares which are exercisable within 60 days of July 31, 2000 held by
Advanced Technology Ventures, which Mr. Baloff, the managing director
and general partner of Advanced Technology Ventures, may be considered
to beneficially own, but disclaims beneficial ownership;

. 1,101,793 ordinary shares and warrants to purchase 8,814 ordinary shares
which are exercisable within 60 days of July 31, 2000 held by Jerusalem
Pacific Ventures (1994), L.P., which Dr. Morisson, the fund manager of
Jerusalem Pacific Ventures may be considered to beneficially own, but
disclaims beneficial ownership;

. 300,000 ordinary shares held by Sun Microsystems which Mr. Hambly, an
officer of Sun Microsystems, may be considered to beneficially own, but
disclaims beneficial ownership; and

. 2,776,564 ordinary shares and warrants to purchase 104,870 ordinary
shares which are exercisable within 60 days of July 31, 2000 which
Mr. Milo, the managing partner of Clal Venture Capital Fund L.P., may be
considered to beneficially own but disclaims beneficial ownership.

(6) Does not include an aggregate of 37,500 ordinary shares which may be
acquired immediately before this offering from two of our executive
officers under an option agreement executed in 1998.

DESCRIPTION OF SHARE CAPITAL

Description of Shares

The following is a summary of the material provisions of our share
capital. This description reflects the adoption of our amended and restated
articles of association before the completion of this offering. This summary is
not complete and should be read with our memorandum of association and articles
of association, a copy of each of which has been filed as an exhibit to the
registration statement of which this prospectus forms a part.

Our authorized share capital consists of 35,000,000 ordinary shares, NIS
0.1 par value per share, of which 21,936,760 ordinary shares will be issued and
outstanding at the conclusion of this offering, 22,611,760 ordinary shares if
the underwriters' over-allotment option is exercised in full. Par value is an
assigned amount used to compute the accounting value of our shares on our
balance sheet and has no relation to market value.

Description of Ordinary Shares

All of our issued and outstanding ordinary shares are, and the ordinary
shares offered in this offering when issued and paid for will be duly
authorized and validly issued, fully paid and non-assessable. The ordinary
shares do not have preemptive rights. Neither our memorandum of association or
articles of association, nor the laws of the State of Israel restrict in any
way the ownership or voting of ordinary shares by non-residents of Israel,
except for subjects of countries which are in a state of war with Israel.

Dividend and Liquidation Rights

We may declare a dividend to be paid to the holders of ordinary shares
according to their rights and interests in our profits. If we liquidate, after
satisfying liabilities to creditors, our assets will be distributed to the
holders of ordinary shares in proportion to their holdings. This right may be
affected by the grant of preferential dividend or distribution rights to the
holders of a class of shares with preferential rights that may be authorized in
the future. The board of directors may declare interim dividends and the final
dividend for any fiscal year only out of retained earnings, or earnings derived
during the two most recent years, whichever is higher. Under the companies law,
the declaration of a dividend does not require the approval of the shareholders
of the company, unless the company's articles of association require otherwise.
Our articles of association provide that our board of directors may declare and
pay dividends without any further action of our shareholders.

Voting, Shareholder Meetings and Resolutions

Holders of ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. These voting rights may be
affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future. The
quorum required for an ordinary meeting of shareholders consists of at least
two shareholders present in person or by proxy who hold or represent between
them at least 33% of the issued share capital. A meeting adjourned for lack of
a quorum generally is adjourned to the same day in the following week at the
same time and place or any time and place as the directors designate in a
notice to the shareholders. At the reconvened meeting the required quorum
consists of any two shareholders present in person or by proxy.

An ordinary resolution requires approval by the holders of a majority of
the voting rights represented at the meeting in person, by proxy or by written
ballot, and voting on the resolution.

Under the companies law, unless otherwise provided in the articles of
association or applicable law, all resolutions of the shareholders require a
simple majority and all shareholders meetings require prior notice of at least
21 days.

Under the companies law, a shareholder has a duty to act in good faith
towards the company in which he holds shares and towards other shareholders and
to refrain from abusing his power in the company including voting in the
general meeting of shareholders on:

. any amendment to the articles of association;

. an increase of the company's authorized share capital;

. a merger; or

. approval of some of the acts and transactions which require
shareholder approval.

A shareholder has the general duty to refrain from depriving rights of
other shareholders. Any controlling shareholder, any shareholder who knows that
it possesses the power to determine the outcome of a shareholder vote and any
shareholder that, under the provisions of the articles of association, has the
power to appoint an office holder in the company, is under a duty to act in
fairness towards the company. The companies law does not describe the substance
of this duty.

Transfer of Shares

Fully paid ordinary shares are issued in registered form and may be freely
transferred under our articles of association unless the transfer is restricted
or prohibited by another instrument.

Modification of Class Rights

Under our articles of association, the rights attached to any class unless
otherwise provided by the terms of the class including voting, rights to
dividends and the like, may be varied by adoption of the necessary amendment to
the articles of association, provided that the affected shareholders approve
the change by a class meeting in which a simple majority of the voting power of
the class represented at the meeting and voting on the matter approves the
change.

Election of Directors

Our ordinary shares do not have cumulative voting rights in the election
of directors. As a result, the holders of ordinary shares that represent more
than 50% of the voting power represented at a shareholders meeting have the
power to elect most of our directors.

Registration Rights

We have granted registration rights to some of our shareholders and
warrant holders and to all our holders of convertible debentures. Assuming this
offering is completed before December 20, 2000 and the conversion of all
outstanding convertible debentures and preferred shares, holders of 15,889,688
ordinary shares and warrants to purchase 764,563 ordinary shares have the right
in some circumstances to register their ordinary shares for sale if we at any
time propose to register any of our securities for sale. Holders of 15,839,688
ordinary shares and warrants to purchase 504,563 ordinary shares will have,
following this offering, the right in some circumstances to require us to
register their ordinary shares for resale to the public provided that the
aggregate price to the public will be at least $5 million, or $1 million if the
registration is filed on Form F-3. We will not be required to complete more
than six of these registrations.

Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law

Mergers

The companies law includes provisions that allow a merger transaction, and
requires that each company that is party to a merger approve the transaction by
its board of directors and a vote of the majority of its shares, present and
voting on the proposed merger, at a shareholders' meeting called on at least
21 days' prior notice. In determining whether a majority has approved the
merger, shares held by the other party to the merger or any person holding at
least 25% of the other party to the merger are excluded from the vote.

The companies law does not require court approval of a merger other than
in specified situations. However, upon the request of a creditor of either
party to the proposed merger, the court may delay or prevent the merger if it
concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any
of the parties to the merger. A merger may not be completed unless at least
70 days have passed from the time that a proposal for approval of the merger
has been filed with the Israeli registrar of companies.

Tender Offers

The companies law also provides that an acquisition of shares in a public
company on the open market must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 25% shareholder of the
company. The rule does not apply if there is already another 25% shareholder of
the company. Similarly, the companies law provides that an acquisition of
shares in a public company must be made by means of a tender offer if, as a
result of the acquisition, the purchaser would become a 45% shareholder of the
company, unless there is a 50% shareholder of the company. These rules do not
apply if the acquisition is made by way of a merger as opposed to a tender
offer. Regulations adopted under the companies law provide that these tender
offer requirements do not apply to companies whose shares are listed for
trading outside of Israel if, according to the law in the country in which the
shares are traded, including the rules and regulations of the stock exchange on
which the shares are traded, there is either a limitation on acquisition of any
level of control of the company, or the acquisition of any level of control
requires the purchaser to do so by means of a tender offer to the public.
The companies law also provides that if following any acquisition of shares,
the acquirer holds 90% or more of the company's shares or of a class of shares,
the acquisition must be made by means of a tender offer for all of the target
company's shares or all the shares of the class, as applicable. An acquirer who
wishes to eliminate all minority shareholders must do so by way of a tender
offer and acquire 95% of all shares not held by or for the benefit of the
acquirer before the acquisition. If, however, the tender offer to acquire 95%
is not successful, the acquirer may not acquire shares tendered if by doing so
the acquirer would own more than 90% of the shares of the target company.

Tax Rules

Israeli tax law treats specified acquisitions, including a stock-for-stock
swap between an Israeli company and a foreign company, less favorably than does
United States federal tax law.

Transfer Agent and Registrar

The transfer agent and registrar for our ordinary shares is American Stock
Transfer & Trust Company, New York, New York.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and assuming this offering is completed
before December 20, 2000, we will have outstanding 21,936,760 ordinary shares.
This assumes the issuance of ordinary 4,500,000 shares in this offering,
conversion of all shares of preferred shares and convertible debentures into
ordinary shares, exercise of warrants that expire upon the completion of this
offering and no exercise of options or other warrants. Of these ordinary
shares, the 4,500,000 ordinary shares sold in this offering will be freely
tradable without restriction. However, if shares are purchased by a person that
controls us, such as an officer, director or significant shareholder, their
sales of ordinary shares would be subject to the limitations and restrictions
that are described below.

Outstanding Shares

The remaining 17,436,760 ordinary shares, assuming conversion of all
preferred shares and convertible debentures held by existing shareholders as of
July 31, 2000 and exercise of warrants that expire on the closing of this
offering, were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. Of these ordinary shares,
17,396,260 ordinary shares will be subject to lock-up agreements described
below on the effective date of the offering. Upon expiration of the lock-up
agreements 180 days after the effective date or with the prior written consent
of Chase Securities Inc., ordinary shares will become eligible for sale,
subject in most cases to the limitations of Rules 144 and 701. Holders of stock
options and warrants could exercise their options and warrants and sell the
shares issued upon exercise as described below under Outstanding Warrants and
Options. The 17,436,760 ordinary shares are eligible for sale in the public
market:

Ordinary
Shares Which
Become
Eligible
Date for Sale Comment
------------------------ ------------ -------

Upon effectiveness...... 4,500,000 Ordinary shares sold in the offering
90 days after 40,500 Ordinary shares saleable under Rules 144
effectiveness.......... and 701 that are not subject to the lock-up
180 days after 14,964,343 Lock-up released; ordinary shares will
effectiveness.......... become saleable subject, in some cases, to
volume limitations
At various times after 2,431,917 Ordinary shares will become saleable at
180 days after various times subject, in some cases, to
effectiveness.......... volume limitations

Outstanding Warrants and Options

As of July 31, 2000, there were a total of 839,619 ordinary shares that
could be issued upon exercise of outstanding warrants. 799,619 of these shares
are subject to lock-up agreements or other restrictions on exercise or resale.
As of July 31, 2000, there were a total of 5,869,550 ordinary shares subject to
outstanding options under our stock plans, 2,487,886 of which were vested.
However, 1,927,416 of these shares are subject to lock-up agreements. Promptly
after the completion of the offering, we intend to file registration statements
on Form S-8 under the Securities Act to register all of the ordinary shares
issued or reserved for future issuance under our option plans. After the
effective dates of the registration statements on Form S-8, ordinary shares
purchased upon exercise of options granted under our 1996 stock option plan,
1997 stock option plan, 1998 stock option plan and 1999 stock option plan
generally would be available for resale in the public market.

Lock-ups

Our officers, directors and most of our shareholders have agreed not to
sell or dispose of any of their ordinary shares for a period of 180 days after
the date of this prospectus. Chase Securities Inc., however, may in its sole
discretion, at any time and in most cases without notice, release all or any
portion of the shares subject to lock-up agreements.

Rule 144

In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned ordinary shares for at least
one year would be entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of:

. 1% of the number of ordinary shares then outstanding, which will equal
approximately 219,368 shares immediately after the effective date of
this offering; or

. the average weekly trading volume of the ordinary shares on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 for the sale.

Sales under Rule 144 are also subject to other requirements for the manner
of sale, notice filing and the availability of current public information about
us.

Rule 701

In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us under a compensatory stock
or option plan or other written agreement before the effective date of the
offering is entitled to resell these ordinary shares 90 days after the
effective date of this offering in reliance on Rule 144, without having to
comply with some of the restrictions contained in Rule 144, including the
holding period.

The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Securities Exchange Act of 1934, along
with the ordinary shares acquired upon exercise of these options including
exercises after the date of this prospectus. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this prospectus, may be
sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one year minimum holding period holding requirement.

Following this offering the holders of 15,839,688 ordinary shares and of
warrants exercisable for 504,563 ordinary shares will have rights to require us
to register their shares for future sale.

UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

The following discussion describes the material United States federal
income tax consequences to you from the purchase, ownership, and disposition of
our ordinary shares acquired in this offering. 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 prospectus, 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 you
based on your 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 you,

. own, directly, indirectly or through attribution 10% or more of our
shares by vote or value;

. are a broker-dealer, insurance company, tax-exempt organization, or
financial institution;

. hold ordinary shares as part of an integrated investment comprised of
ordinary shares and one or more other positions; or

. have 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. 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. If you are not a United States holder, or if you
hold shares other than ordinary shares, or if you did not acquire your ordinary
shares in this offering, this discussion does not apply to you.

For purposes of this discussion, you are a United States holder if you
hold ordinary shares and if you are:

. 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 are advised to consult your own tax advisor about the specific tax
consequences to you of the purchase, ownership and disposition of the ordinary
shares acquired in this offering. In particular, you should be aware that this
summary is not a comprehensive description of all the tax considerations that
may be relevant to your decision to purchase our ordinary shares.

Distributions

We have never paid dividends, and do not intend to pay dividends in the
future. In general, and subject to the passive foreign investment company rules
discussion in this prospectus, 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
prospectus 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, you may be unable to claim a foreign tax
credit for Israeli withholding tax imposed on the excess amount unless, subject
to applicable limitations, you have 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 or 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.

Sale, Exchange or Other Disposition

Subject to the passive foreign investment company rules 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 39.6% of
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 believe that we were not a
personal holding company in 1999. We cannot assure you that either test will
not be satisfied in 2000 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 taxable day of
the corporation's taxable year, or, if earlier, the last day on which it is
classifiable as a foreign personal holding company. 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 believe that we were not
a foreign personal holding company in 1999. We cannot assure you that we will
not qualify as a foreign personal holding company in 2000 or future years
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 believe that we
were not a foreign investment company in 1999. We cannot assure you that we
will not become a foreign investment company in 2000 or future years 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.

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

We believe that in 1999 we were not a passive foreign investment company
and expect that we also will not be a passive foreign investment company in
2000. However, 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 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. Therefore, we cannot assure you that we will not become a
passive foreign investment company.

Backup Withholding and Information Reporting

United States holders generally are subject to information reporting
requirements on dividends paid in the United States on ordinary shares. Under
existing regulations, dividends generally are not subject to backup
withholding. United States holders generally are subject to information
reporting and backup withholding at a rate of 31% on proceeds paid from the
disposition of ordinary shares unless the United States holder provides
internal revenue service Form W-9 or establishes an exemption.

Treasury regulations generally effective January 1, 2001 may alter the
information reporting and backup withholding rules. You should consult your tax
advisors concerning the effect, if any, of these treasury regulations on an
investment in our ordinary shares. 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, with special reference to their effect on us, and Israeli
government programs benefiting us. This section also contains a discussion of
Israeli tax consequences to you if you acquire ordinary shares in the offering.
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.

You are urged to consult your own tax advisors about the Israeli or other
tax consequences of the purchase, ownership and disposition of our ordinary
shares, including, in particular, the effect of any foreign, state or local
taxes.

General Corporate Tax Structure

The general corporate tax rate in Israel is 36%. However, the effective
tax rate payable by a company which 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, marketable securities, capital gains,
interest and dividends, is derived from an industrial enterprise owned by our
company. 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 itself
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.

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.

We have three approved enterprise programs under the capital investments
law, which entitle us to some tax benefits. The tax benefit period for these
programs has not yet begun. We have elected to participate in a government
grant approved enterprise program and have received grants from the investment
center. Income derived from the government grant approved enterprise program is
subject to a reduced tax rate of 10% to 25% (depending on the percentage of
foreign investment in the company) for a period of seven years starting on the
first year in which we generate taxable income from the approved enterprise.
We have elected to participate in two additional alternative benefit programs.
Income derived from our alternative benefit programs is exempt from tax for a
period of ten years, starting in the first year in which we generate taxable
income from the approved enterprise.

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 an additional 15% of the amount after company tax 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 in

respect of 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 Israeli government has discussed reducing the benefits available to
companies under the capital investments law. The termination or substantial
reduction of any of the benefits available under the capital investments law
could materially impact the cost of future investments by us.

Each application to the investment center is reviewed separately, and a
decision about whether or not to approve the application is based on the then
prevailing criteria in the capital investments law, on the specific objectives
of the applicant company in the application and on financial criteria of the
applicant company. We cannot assure you that any application will be approved.
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. We believe that our approved
enterprise programs operate in compliance with all of these conditions and
criteria.

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 inflationary adjustments law allows foreign-invested companies, which
maintain their accounts in dollars in compliance with regulations published by
the Israeli minister of finance to deviate from the principles of the
inflationary adjustments law. These companies may either base their tax returns
on their operating results as reflected in the dollar financial statements or
adjust their tax returns based on exchange rate changes rather than changes in
the Israeli consumer price index. For these purposes, a foreign-invested
company is a company more than 25% of whose share capital and of whose combined
share and loan capital is held by persons who are not residents of Israel.
A company that elects to measure its results for tax purposes based on the
dollar exchange rate cannot change that election for a period of three tax
years following the election. We believe that we qualify as a foreign
investment company within the meaning of the inflationary adjustment law. We
have not yet elected to measure our results for tax purposes based on the
dollar exchange rate, but may do so in the future, during a 30-day period in
the beginning of each tax year.

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.

Some of our research and development programs have been approved by the
chief scientist 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 not approved, may be deducted, for tax
purposes, in 3 equal installments during a 3-year period.

Committee on the Reform of Taxes on Income

On May 7, 2000, the Israeli government approved the recommendations of the
public committee on the reform of taxes on income, to broaden the categories of
taxable income and to change the tax rates imposed on employment income.

The committee recommended to:

. impose an estate and gift tax;

. impose a tax upon capital gains at a rate of up to 25% for
individuals, including capital gains derived from the sale of shares
in Israeli publicly traded companies;

. impose a tax upon all income of Israeli residents regardless of the
territorial source of income;

. increase the tax rate from zero to 10% on the exempt period under the
alternative package of benefits for approved enterprises under the Law
for the Encouragement of Capital Investments, 1959; and

. cancel the preferred benefits granted to companies with foreign
investment.

To be enacted as legislation, a draft bill incorporating the principles of
the report must be approved by the knesset, and the substance of the
recommendations could undergo significant revision during that process. If
implemented, the recommendations might result in the imposition of Israeli
capital gains taxes on non-Israeli residents if they are not eligible for an
exemption under a relevant tax treaty.

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 imposes a capital gains tax on the sale of securities and
other capital assets. The regular rate applicable to corporations is 36% and
the maximum rate applicable to individuals is 50%. Under current law, however,
sales of our ordinary shares offered by this prospectus are exempt from Israeli
capital gains tax for so long as:

. the shares are quoted on Nasdaq or listed on a stock exchange in a
designated country like the United States; and

. we qualify as an industrial company or industrial holding company.

These exemptions do not apply to corporations that are subject to the
Inflationary Adjustments Law--1984. In general, most corporations are subject
to this law.

A nonresident of Israel who receives interest, dividend or royalty income
derived from or accrued in Israel, from which tax was withheld at the source,
is generally exempt from the duty to file tax returns in Israel on this income,
provided the income was not derived from a business conducted in Israel by the
nonresident during an accrued period of more than 180 days in the relevant tax
year and the nonresident does not have any other non-passive income from
sources within Israel.

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 our outstanding voting shares 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.

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.

Israel has no estate or gift tax, but a 10% estate and gift tax has been
proposed.

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 and
previous taxable years 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 current and prior taxable years 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 is 15%.

CONDITIONS IN ISRAEL

We are incorporated under the laws of the State of Israel, and
substantially all of our research and development and significant executive
facilities are located in Israel. We are directly affected by political,
economic and military conditions in Israel. Our operations would be materially
adversely affected if major hostilities involving Israel should occur or if
trade between Israel and its present trading partners should be curtailed.

Political Conditions

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 has existed, varying in degree and intensity, between Israel and the
Arab countries. This has led to security and economic problems in Israel. In
1979, however, a peace treaty between Israel and Egypt was signed under which
full diplomatic relations were established. Economic relations remain very
limited.

Beginning in 1993, a joint Israeli-Palestinian declaration of principles
and several agreements were signed by Israel and the Palestine Liberation
Organization outlining interim Palestinian self-government arrangements. Since
then, Israel has transferred the civil administration of the Gaza Strip, the
major towns and villages of the West Bank and other territories in the West
Bank to the Palestinian Self-Rule Authority, the Israeli army has withdrawn
from these areas and some powers and governmental responsibilities have been
transferred to the Palestinian Authority.

In October 1994, Israel and Jordan signed a peace treaty, which provides
for the start of full diplomatic relations between the two countries, including
the exchange of ambassadors and consuls. This treaty also expresses the mutual
desire of the parties for economic cooperation and calls for both parties to
lift economic barriers and discrimination against the other and to act jointly
towards the removal of any economic boycotts by third parties.

There are no peace treaties between Israel and Syria or Lebanon and
material progress has not been achieved in peace talks between Israel and Syria
or between Israel and Lebanon.

Despite the progress towards peace between Israel, its Arab neighbors and
the Palestinians, several countries, companies and organizations continue to
participate in a boycott of Israeli firms. We do not believe that the boycott
has had a material adverse effect on our business. However, restrictive laws,
policies or practices directed towards Israel or Israeli businesses may have an
adverse impact on the expansion of our business.

Army Service

Generally, all male adult citizens and permanent residents of Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days of
military reserve duty annually. Additionally, all of these residents are
subject to being called to active duty at any time under emergency
circumstances. Many of our officers and employees are obligated to perform
annual reserve duty. While 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 conditions should change,
and we cannot predict the effect on us of any expansion or reduction of these
obligations.

Economic Conditions

Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, on occasion, intervened in
various sectors of the economy, employing fiscal and monetary policies, import
duties, foreign currency restrictions and control

of wages, prices and foreign currency exchange rates. In 1998, the Israeli
currency control regulations were liberalized significantly to allow Israeli
residents to deal in foreign currency and non-residents of Israel to freely
purchase and sell Israeli currency and assets. The Israeli government has
periodically changed its policies in all these areas. There are no Israeli
currency control restrictions on remittances of dividends on the ordinary
shares or the proceeds from the sale of the ordinary shares. However, under
Israeli law currency controls can be imposed by administrative action at any
time. Israeli residents are also required to file reports pertaining to
specified types of actions or transactions.

The Israeli government's monetary policy contributed to relative price and
exchange rate stability in the last few years, despite fluctuating rates of
economic growth and a high rate of unemployment. We cannot assure you that the
Israeli government will be successful in its attempts to keep prices and
exchange rates stable. Price and exchange rate instability may have a material
adverse effect on us.

Trade Agreements

Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a member of the World Trade Organization
and is a signatory to the General Agreement on Trade in Services, which
provides for reciprocal lowering of trade barriers among its members.

In 1985, Israel and the United States entered into an agreement to
establish a free trade area. The free trade area has eliminated all tariff and
some non-tariff barriers on most trade between the two countries. Israel became
associated with the European Economic Community, now known as the European
Union, in a 1975 free trade agreement which confers advantages on Israeli
exports to most European countries and obligates Israel to lower its tariffs on
imports from those countries over a number of years. In November 1995 Israel
entered into a new agreement with the European Union, which includes
redefinement of rules of origin and other improvements, like providing for
Israel to become a member of the research and technology programs of the
European Union. In September 1992, Israel signed a free trade agreement with
the European Free Trade Association whose members include Switzerland, Norway,
Iceland and Liechtenstein. The agreement became effective on January 1, 1993,
and establishes a free-trade zone between Israel and the other members.

Israel has also established commercial and trade relations with a number
of the other nations, including Russia, China, India, Turkey and other nations
in Asia and Eastern Europe.

ENFORCEABILITY OF CIVIL LIABILITIES

Service of Process

Service of process upon us and our directors and officers and the Israeli
experts named in this prospectus, substantially all of whom reside outside the
United States, may be difficult to obtain within the United States. Since
substantially all of our assets and a significant number of our directors and
officers and the Israeli experts named in this prospectus are located outside
the United States, any judgment obtained in the United States against us or our
directors, officers or Israeli experts under the civil liability provisions of
the federal securities laws of the United States may not be collectible within
the United States.

Enforceability of Civil Liabilities

We have been informed by our legal counsel in Israel, Meitar, Liquornik,
Geva & Co., that there is doubt concerning the enforceability of civil
liabilities under United States securities laws in original actions instituted
in Israel. However, subject to time limitations, Israeli courts may enforce
United States final executory judgments in civil matters, including a monetary
or compensatory judgment in a non-civil matter obtained after due process
before a court of competent jurisdiction. The rules of private international
law prevailing in Israel do not prohibit the enforcement of judgment of Israeli
courts, provided that:

. the judgment is enforceable in the state in which it was given;

. adequate service of process has been made and the defendant has had a
reasonable opportunity to present his arguments and evidence;

. the judgment and the enforcement of the judgment are not contrary to
the law, public policy, security or sovereignty of the state of
Israel;

. the judgment was not obtained by fraud and does not conflict with any
other valid judgment in the same matter between the same parties; and

. an action between the same parties in the same matter is not pending
in any Israeli court at the time the lawsuit is instituted in the
foreign court.

Agent for Service of Process

We have irrevocably appointed ViryaNet, Inc., our wholly-owned subsidiary,
as our agent to receive service of process in any action against us in any
federal court or state court in the State of New York arising out of this
offering or any purchase or sale of securities through this offering. We have
not given our consent for any agent to accept service of process for any other
claim. These appointments are irrevocable, provided that we shall have the
right to appoint a successor agent for service, if the successor is acceptable
to the representatives of the underwriters, in their reasonable judgment.

Currency

Foreign judgments enforced by Israeli courts will generally be payable in
Israeli currency and will be freely convertible into dollars or other foreign
currency and may be transferred out of Israel.

The usual practice in an action before an Israeli court to recover an
amount in a non-Israeli currency is for the Israeli court to render judgment
for the equivalent amount in Israeli currency at the rate of exchange in force
on the date of the judgment. Under existing Israeli law, a foreign judgment
payable in foreign currency may be paid in Israeli currency at the rate of
exchange of the foreign currency on the date of payment. Pending collection,
the amount of the judgment of an Israeli court stated in Israeli currency
ordinarily will be linked to the Israeli consumer price index plus interest at
the annual statutory rate set by Israeli regulations at that time. Judgment
creditors must bear the risk of unfavorable exchange rates fluctuations.

UNDERWRITING

Purchasers of Our Ordinary Shares. The underwriters, Chase Securities
Inc., Salomon Smith Barney Inc. and Dain Rauscher Incorporated have each agreed
with us, subject to the terms and conditions of the underwriting agreement, to
purchase our ordinary shares in the amount listed here:

Number of
Underwriter Shares
----------- ---------

Chase Securities Inc....................
Salomon Smith Barney Inc................
Dain Rauscher Incorporated..............
---------
Total................................... 4,500,000
=========

Conditions to the Underwriters' Obligations. The underwriting agreement
provides that the obligations of the underwriters are subject to specified
conditions, including the absence of any material adverse change in our
business and the receipt of certificates, opinions and letters from us, our
counsel and independent auditors. The underwriters are committed to purchase
all ordinary shares offered in this prospectus if any shares are purchased.

Pricing of the Ordinary Shares. The underwriters propose to offer the
ordinary shares directly to the public at the public offering price on the
cover page of this prospectus and to dealers at that price less a concession
not in excess of $ per share. The underwriters may allow and the dealers
may reallow a concession not in excess of $ per share to other dealers.
After the public offering of the shares, the underwriters may change the
offering price, concession and reallowance to dealers. The representatives of
the underwriters have informed us that the underwriters do not intend to
confirm discretionary sales in excess of 5% of the ordinary shares offered by
this prospectus.

The Underwriters' Option to Purchase More Ordinary Shares. We have granted
to the underwriters an option, exercisable during the 30-day period after the
date of this prospectus, to purchase up to 675,000 additional ordinary shares
at the public offering price, less the underwriting discount shown on the cover
page of this prospectus. If the underwriters exercise this option, each
underwriter will have an obligation to purchase approximately the same
percentage of additional ordinary shares that the number of ordinary shares to
be purchased by it shown in the table listing the underwriters represents as a
percentage of the 4,500,000 ordinary shares offered by this prospectus. We will
be obligated to sell ordinary shares to the underwriters if the option is
exercised. The underwriters may exercise this option only to cover over-
allotments of ordinary shares offered in this prospectus.

Underwriting Discounts and Commissions. This table shows the per share and
total underwriting discounts and commissions that we will pay to the
underwriters. These amounts are shown assuming both no exercise and full
exercise of the underwriters' over-allotment option to purchase additional
ordinary shares:

No Full
Exercise Exercise
-------- --------

Per Share...................... $ $
Total.......................... $ $

Other Conditions to the Underwriters' Obligations. The offering of the
ordinary shares is made for delivery when, as and if accepted by the
underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.

Shareholder Lock-up Agreements. Each of our executive officers and
directors and most of our other holders of our securities have agreed during
the period of 180 days after the effective date of this prospectus, subject to
specified exemptions, not to offer to sell, contract to sell, or sell, dispose
of, loan, pledge or grant any rights concerning any ordinary shares or any
options or warrants to purchase any ordinary shares, or any securities
convertible into or exchangeable for ordinary shares owned as of the date of
this prospectus or acquired afterwards directly by those holders or concerning
which they have the power of disposition, without the prior written consent of
Chase Securities Inc. However, Chase Securities Inc. may, in its sole
discretion and at any time, without notice, release all or any portion of the
securities subject to lock-up agreements.

Our Lock-up Agreement. We have agreed that, during the 180-day lock-up
period referred to above, we will not, without the prior written consent of
Chase Securities Inc., subject to some exceptions, consent to the disposition
of any shares held by shareholders subject to lock-up agreements before the
expiration of the lock-up period, or issue, sell, contract to sell or dispose
of, any ordinary shares, any options or warrants to purchase any ordinary
shares or any securities convertible into, exercisable for or exchangeable for
ordinary shares other than our sale of shares in this offering, the issuance of
our shares upon the exercise of outstanding options or warrants, and the
issuance of options under existing stock option and incentive plans, provided
that those options do not vest before the expiration of the lock-up period, and
the issuance of warrants to customers. We may issue ordinary shares in any
acquisition of, or strategic relationship with, another company if the terms of
the issuance provided that such ordinary shares shall not be resold before the
expiration of the lock-up period.

Factors in Pricing Our Shares in the Offering. Before this offering, there
has been no public market for our ordinary shares. The initial public offering
price for the ordinary shares will be determined through negotiation between us
and the representatives of the underwriters. Factors to be considered in the
negotiation include:

. prevailing market conditions;

. our financial information;

. market valuations of other companies that we and the representatives
of the underwriters believe to be comparable to us;

. estimates of our business potential; and

. the present state of our development.

Market Stabilization Activities. We have been advised by the
representatives that, under Regulation M under the Securities Act, some persons
participating in the offering may engage in transactions, including syndicate
covering transactions, stabilizing bids or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the
ordinary shares at a level above that which might otherwise prevail in the open
market.

A syndicate covering transaction is a bid for or the purchase of ordinary
shares on behalf of the underwriters to reduce a syndicate short position
incurred by the underwriters from the offering. The underwriters may create a
syndicate short position by making short sales of the issuer's ordinary shares
and may purchase the issuer's ordinary shares on the open market to cover
syndicate short positions created by short sales. Short sales involve the sale
by the underwriters of a greater number of ordinary shares than they are
required to purchase in the offering. Short sales can be either covered or
naked. Covered short sales are

sales made in an amount not greater than the underwriters' over-allotment
option to purchase additional shares from us in the offering. Naked short sales
are sales in excess of the over-allotment option. A naked short position is
more likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the ordinary shares in the open market after
pricing that could adversely affect investors who purchase in the offering.
If the underwriters create a syndicate short position, they may choose to
reduce or cover this position by either exercising all or part of the over-
allotment option to purchase additional shares from us or by engaging in
syndicate covering transactions. The underwriters may close out any covered
short position by either exercising their over-allotment option or purchasing
shares in the open market. The underwriters must close out any naked short
position by purchasing shares in the open market. In determining the source of
shares to close out the covered short position, the underwriters will consider
the price of shares available for purchase in the open market as compared to
the price at which they may purchase shares through the over-allotment option.

A stabilizing bid is a bid for or the purchase of shares of common stock
on behalf of the underwriters for the purpose of fixing or maintaining the
price of our common stock. A penalty bid is an arrangement that permits the
representatives to reclaim the selling concession from an underwriter or a
syndicate member that is purchased by the representatives in a syndicate
covering transaction and therefore has not been effectively placed by the
underwriter or syndicate member.

We have been advised by the representatives that these transactions may
happen on the Nasdaq National Market and, if begun, may be discontinue at any
time. Similar to other purchase activities, these activities may have the
effect of raising or maintaining the market price of our ordinary shares or
preventing or retarding a decline in the market price of our ordinary shares.
As a result, the price of our ordinary shares may be higher than the price that
might otherwise exist in the open market.

Offering Expenses. We estimate that our share of the total expenses of
this offering, excluding underwriting discounts and commissions, will be
approximately $2,285,000.

Indemnification. We have agreed to indemnify the underwriters against
liabilities, including liabilities under the Securities Act, and to contribute
to payments the underwriters may be required to make for these liabilities.

Directed Shares Program and Rights to Purchase Shares in the Offering.
At our request, the underwriters have reserved up to six percent of the
ordinary shares to be sold in this offering to be offered for sale, exclusive
of the shares subject to the over-allotment option, at the initial public
offering price, to our directors, officers, employees, business associates and
persons related to, or affiliated with, these persons. The number of shares of
ordinary shares available for sale to the public in this offering will be
reduced if these individuals and entities purchase the reserved shares. Any
reserved shares that are not purchased by these persons will be offered by the
underwriters to the public on the same basis as the other shares in this
offering.

Offers and Sales in Israel. The underwriters have agreed that:

. they will offer or sell our ordinary shares in Israel to potential
purchasers limited to a number and type that shall not require the
publication of a prospectus under Israeli law;

. they will deliver to us the names and addresses of these potential
purchasers within seven days of the completion of this offering; and

. they will obtain representations from these potential purchasers who
purchase our ordinary shares that they are purchasing our ordinary
shares for investment purposes only, and not for the purposes of
resale.

Underwriter's Ownership. The following table summarizes the share capital
owned by an underwriter and its affiliates as of July 31, 2000:

Number of
Number of Shares
Shares Subject
Beneficially to
Owner Owned Warrants
----- ------------ ---------

Chase Securities Inc. and persons associated with
it................................................ 77,727 15,055
Access Technology Partners, L.P.................... 342,780 66,385
Eucalyptus Ventures, L.P. and persons associated
with it........................................... 445,501 86,239

Access Technology Partners, L.P. is a fund of outside investors that is
managed by a subsidiary of Chase Securities Inc. and Eucalyptus Ventures L.P.
is a fund of outside investors that is managed by an affiliate of Chase
Securities Inc.

LEGAL MATTERS

Meitar, Liquornik, Geva & Co., Ramat-Gan, Israel, will represent us
concerning the validity of ordinary shares offered by us and other Israeli
legal matters relating to this offering. Testa, Hurwitz & Thibeault, LLP,
Boston, Massachusetts, will represent us concerning United States legal matters
relating to this offering. Herzog, Fox & Neeman, Tel-Aviv, Israel, will
represent the underwriters concerning Israeli legal matters relating to this
offering. Brobeck, Phleger & Harrison LLP, New York, New York, will represent
the underwriters concerning United States legal matters relating to this
offering. Some employees and former employees in Meitar, Liquornik, Geva & Co.
hold in the aggregate options to purchase 267,000 ordinary shares.

EXPERTS

Kost, Forer & Gabbay, a member of Ernst & Young International, independent
auditors, have audited our consolidated financial statements at December 31,
1998 and 1999, and for each of the three years in the period ended December 31,
1999, as described in their report. We have included our financial statements
in the prospectus and in the registration statement in reliance on the report
of Kost, Forer & Gabbay, a member of Ernst & Young International, given on
their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

The Commission

We have filed a registration statement on Form F-1 under the Securities
Act for the ordinary shares offered by us. The registration statement contains
additional information that is not required to be included in this prospectus
under the Securities and Exchange Commission's rules. You should refer to the
registration statement and its exhibits. For copies of actual contracts or
documents referred to in this prospectus, you should refer to the exhibits
attached to the registration statement. The registration statement, including
the exhibits and schedules, and the reports and other information filed by us
with the Commission under the Exchange Act can be inspected without charge at
the public reference facility maintained by the Commission at:

Room 1024
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549

Copies of this material may be obtained by mail from the public reference
section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.

Periodic Reporting in the United States

Upon completion of this offering, we will be subject to the informational
requirements of the Exchange Act and will file periodic reports and other
information with the Commission. As a foreign private issuer, we will be exempt
from the rules under the Exchange Act requiring disclosure and procedural
requirements for proxy solicitations, and our officers, directors and principal
shareholders will be exempt from the reporting and short swing profit recovery
provisions contained in Section 16 of the Exchange Act, for their purchases and
sales of ordinary shares. We will not be required under the Exchange Act to
file periodic reports and financial statements with the Securities and Exchange
Commission as frequently or as promptly as United States companies whose
securities are registered under the Exchange Act. However, we intend to furnish
our shareholders with annual reports containing financial statements which will
be audited

and reported on, with an opinion expressed, by an independent public accounting
firm in Israel, prepared under United States GAAP, as well as quarterly reports
containing unaudited financial information for the first three quarters of each
year.

Public Reporting in Israel

We file reports with the Israeli registrar of companies about our
registered address, registered capital, shareholders of record and the number
of shares held by each, the identity of our directors and details about
security interests on our assets. We must also file with the registrar of
companies our articles of association. The information filed with the registrar
of companies is available to the public. Our shareholders are also entitled to
review and receive copies of all minutes of meetings of shareholders.
Shareholders wishing to review or receive copies of minutes of shareholders may
contact Mr. Alon Tabak, Adv., General Counsel, ViryaNet Ltd., 5 Kiryat Hamada
Street, Science Based Industries Campus, P.O. Box 23052, Har Hotzvim, Jerusalem
91230, Israel, telephone number: (972-2) 5811462 and by facsimile at (972-3)
5815507.

VIRYANET LTD.

CONSOLIDATED FINANCIAL STATEMENTS
IN U.S. DOLLARS

INDEX

Page
---------

Report of Independent Auditors........................................ F-2
Consolidated Balance Sheets........................................... F-3--F-4
Consolidated Statements of Operations................................. F-5
Statements of Changes in Shareholders' Equity (Deficiency)............ F-6
Consolidated Statements of Cash Flows................................. F-7--F-8
Notes to Consolidated Financial Statements............................ F-9--F-27

F-1

REPORT OF INDEPENDENT AUDITORS

To the shareholders of
VIRYANET LTD.

We have audited the accompanying consolidated balance sheets of ViryaNet
Ltd. and its subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, changes in shareholders' deficiency and
cash flows for each of the three years in the period ended December 31, 1999.
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 conducted our audits in accordance with generally accepted auditing
standards in the 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above,
present fairly, in all material respects, the consolidated financial position
of ViryaNet Ltd. and its subsidiaries as of December 31, 1998 and 1999, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles in the United States.

Tel-Aviv, Israel
February 21, 2000 KOST FORER & GABBAY
A Member of Ernst & Young
except for Note 14, International
as to which the date is April 11,
2000

F-2

VIRYANET LTD.

CONSOLIDATED BALANCE SHEETS

December 31,
------------- June 30,
1998 1999 2000
------ ------ -----------
(Unaudited)
(U.S. dollars in
thousands)
-------------------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 554 $1,886 $ 5,286
Restricted cash (Note 3)........................... -- 96 --
Marketable securities.............................. 881 -- --
Trade receivables (net of allowance for doubtful
accounts--$20 in 1998 and $28 in 1999)............ 1,427 2,755 2,194
Unbilled receivables............................... 2,567 708 1,504
Other accounts receivable and prepaid expenses
(Note 4).......................................... 1,143 902 1,386
------ ------ -------
Total current assets............................. 6,572 6,347 10,370
------ ------ -------
SEVERANCE PAY FUND................................... 633 854 829
------ ------ -------
PROPERTY AND EQUIPMENT, NET (Note 5)................. 1,433 1,491 1,685
------ ------ -------
$8,638 $8,692 $12,884
====== ====== =======

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

F-3

VIRYANET LTD.

CONSOLIDATED BALANCE SHEETS

Pro forma
December 31, shareholders'
---------------- June 30, equity as of
1998 1999 2000 June 30, 2000
------- ------- -------- -------------
(Unaudited)
(U.S. dollars in thousands, except
share data)
-----------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit (Note 6)... $ 185 $ 5,283 $ 91
Current maturities of long-term
loans (Note 8)................... 51 11 --
Trade payables.................... 1,617 1,303 2,103
Deferred revenues................. 3,195 7,150 3,913
Other accounts payable and accrued
expenses (Note 7)................ 3,866 3,905 4,785
------- ------- -------
8,914 17,652 10,892
------- ------- -------
LONG-TERM LIABILITIES:
Long-term loans (Note 8).......... 11 -- --
Convertible debentures (Note 16).. -- -- 15,492
Accrued severance pay............. 1,165 1,595 1,680
------- ------- -------
1,176 1,595 17,172
------- ------- -------
COMMITMENTS AND CONTINGENT
LIABILITIES (Note 9)
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital--Preferred shares of
NIS 0.1 par value--(Note 10)
Authorized: 11,000,000 shares as
of December 31, 1998, 13,100,000
shares as of December 31, 1999
and 16,100,000 shares as of
June 30, 2000;
Issued and outstanding; 8,407,255
shares as of December 31, 1998
and 10,146,387 shares as of
December 31, 1999 and June 30,
2000;............................
Issued and outstanding pro-forma:
0 shares as of June 30, 2000;
aggregated liquidation preference
of $39,381,000 as of December 31,
1999 and $39,242,000 as of
June 30, 2000.................... 251 294 294 --
Ordinary shares--of NIS 0.1 par
value--(Note 10)
Authorized: 9,000,000 shares as of
December 31, 1998, 6,900,000
shares as of December 31, 1999
and 18,900,000 shares as of
June 30, 2000;
Issued and outstanding: 2,625,140
shares as of December 31, 1998
2,700,640 shares as of
December 31, 1999 and 2,715,140
as of June 30, 2000..............
Issued and outstanding pro forma:
17,405,510 shares as of June 30,
2000............................. 102 103 107 512
Additional paid-in capital.......... 26,121 37,728 40,095 78,571
Deferred stock compensation......... (260) (603) (1,547) (1,547)
Accumulated deficit................. (27,666) (48,077) (54,129) (70,638)
------- ------- ------- -------
Total shareholders' equity
(deficiency)................... (1,452) (10,555) (15,180) $ 6,898
------- ------- ------- =======
$ 8,638 $ 8,692 $12,884
======= ======= =======

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

F-4

VIRYANET LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

Six months ended
Year ended December 31, June 30,
-------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- ---------- --------- ----------
(Unaudited)
(U.S. dollars in thousands, except share and per
share data)
-------------------------------------------------------

Revenues (Note 12a and
b):
Software licenses..... $ 1,067 $ 1,801 $ 4,269 $ 1,612 $ 6,963
Maintenance and
services............. 12,400 11,724 11,533 5,476 4,457
--------- --------- ---------- --------- ----------
Total revenues...... 13,467 13,525 15,802 7,088 11,420
--------- --------- ---------- --------- ----------
Cost of revenues:
Software licenses..... 106 146 952 548 409
Maintenance and
services............. 8,817 9,709 9,978 4,914 3,476
--------- --------- ---------- --------- ----------
Total cost of
revenues........... 8,923 9,855 10,930 5,462 3,885
--------- --------- ---------- --------- ----------
Gross profit............ 4,544 3,670 4,872 1,626 7,535
--------- --------- ---------- --------- ----------
Operating expenses:
Research and
development, net
(Note 12c)........... 3,443 5,322 6,865 3,202 3,372
Sales and marketing... 3,329 8,862 13,537 7,614 7,423
General and
administrative....... 2,403 2,602 3,518 1,688 1,798
Amortization of
deferred stock
compensation (1)..... 12 250 798 235 576
--------- --------- ---------- --------- ----------
Total operating
expenses........... 9,187 17,036 24,718 12,739 13,169
--------- --------- ---------- --------- ----------
Operating loss.......... (4,643) (13,366) (19,846) (11,113) (5,634)
Financial income
(expenses), net (Note
12d)................... (85) 234 (565) (271) (418)
--------- --------- ---------- --------- ----------
Net loss................ $ (4,728) $ (13,132) $ (20,411) $ (11,384) $ (6,052)
========= ========= ========== ========= ==========
Preferred shares deemed
dividend............... $ (116) $ (61) $ (303) $ -- $ --
--------- --------- ---------- --------- ----------
Net loss to shareholders
of Ordinary shares..... $ (4,844) $ (13,193) $ (20,714) $ (11,384) $ (6,052)
========= ========= ========== ========= ==========
Pro forma net loss
(unaudited)............ $ (20,714) $ (22,516)
========== ==========
Basic and diluted net
loss per share......... $ (1.91) $ (5.16) $ (7.74) $ (4.27) $ (2.24)
========= ========= ========== ========= ==========
Weighted average number
of shares used in
computing basic and
diluted net loss per
share.................. 2,536,808 2,554,654 2,676,212 2,668,890 2,704,621
========= ========= ========== ========= ==========
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (1.73) $ (1.60)
========== ==========
Weighted average number
of shares used in
computing pro forma
basic and diluted net
loss per share
(unaudited)............ 11,953,033 14,066,966
========== ==========
(1) Stock based
compensation relates to
the following:
Cost of revenues...... -- -- $ 16 -- $ 29
Research and
development, net..... -- -- 391 -- --
Sales and marketing... -- $ 120 39 $ 22 75
General and
administrative....... $ 12 130 352 213 472
--------- --------- ---------- --------- ----------
Total............... $ 12 $ 250 $ 798 $ 235 $ 576
========= ========= ========== ========= ==========

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

F-5

VIRYANET LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)

Additional Total
paid-in capital Deferred shareholders'
Preferred Ordinary Preferred Ordinary and receipts on stock Accumulated equity
shares shares shares shares account of shares compensation deficit (deficiency)
---------- --------- --------- -------- ----------------- ------------ ----------- -------------
(share data) (U.S. dollars in thousands, except share data)

Balance as of
January 1, 1997........ 4,524,280 2,594,980 $143 $104 $11,126 $ -- $ (9,806) $ 1,567
Receipts on account of
shares................. -- -- -- -- 3,100 -- -- 3,100
Issuance of warrants... -- -- -- -- 118 -- -- 118
Conversion of Ordinary
shares................. 77,460 (77,460) 3 (3) -- -- -- --
Deferred stock
compensation........... -- -- -- -- 12 (12) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- 12 -- 12
Net loss............... -- -- -- -- -- -- (4,728) (4,728)
---------- --------- ---- ---- ------- ------- -------- --------
Balance as of
December 31, 1997...... 4,601,740 2,517,520 146 101 14,356 -- (14,534) 69
Issuance of Ordinary
shares, net............ -- 46,870 -- * -- -- -- --
Issuance of Preferred
shares, net............ 3,717,950 -- 103 -- 11,036 -- -- 11,139
Exercise of stock
options, net........... -- 148,315 -- 3 95 -- -- 98
Conversion of Ordinary
shares................. 87,565 (87,565) 2 (2) -- -- -- --
Investors relationship
type of expenses....... -- -- -- -- 124 -- -- 124
Deferred stock
compensation........... -- -- -- -- 510 (510) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- 250 -- 250
Net loss............... -- -- -- -- -- -- (13,132) (13,132)
---------- --------- ---- ---- ------- ------- -------- --------
Balance as of
December 31, 1998...... 8,407,255 2,625,140 251 102 26,121 (260) (27,666) (1,452)
Issuance of Preferred
shares, net............ 1,739,132 -- 43 -- 9,796 -- -- 9,839
Receivables on account
of shares.............. -- -- -- -- (100) -- -- (100)
Exercise of stock
options, net........... -- 75,500 -- 1 72 -- -- 73
Issuance of warrants... -- -- -- -- 500 -- -- 500
Deferred stock
compensation........... -- -- -- -- 1,141 (1,141) -- --
Compensation related to
warrants to bank....... -- -- -- -- 198 -- -- 198
Amortization of
deferred stock
compensation........... -- -- -- -- -- 798 -- 798
Net loss............... -- -- -- -- -- -- (20,411) (20,411)
---------- --------- ---- ---- ------- ------- -------- --------
Balance as of
December 31, 1999...... 10,146,387 2,700,640 294 103 37,728 (603) (48,077) (10,555)
Exercise of stock
options, net........... -- 14,500 -- 4 53 -- -- 57
Compensation related to
warrants to investors
of convertible loans... -- -- -- -- 505 -- -- 505
Compensation related to
warrants to bank....... -- -- -- -- 254 -- -- 254
Compensation related to
warrants to third
party.................. -- -- -- -- 35 -- -- 35
Deferred stock
compensation........... -- -- -- -- 1,520 (1,520) -- --
Amortization of
deferred stock
compensation........... -- -- -- -- -- 576 -- 576
Net loss............... -- -- -- -- -- -- (6,052) (6,052)
---------- --------- ---- ---- ------- ------- -------- --------
Balance as of June
30, 2000 (unaudited)... 10,146,387 2,715,140 $294 $107 $40,095 $(1,547) $(54,129) $(15,180)
========== ========= ==== ==== ======= ======= ======== ========

- ------------
* Less than $1,000

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

F-6

VIRYANET LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended
Year ended December 31, June 30,
--------------------------- -----------------
1997 1998 1999 1999 2000
------- -------- -------- -------- -------
(Unaudited)
(U.S. dollars in thousands)
----------------------------------------------

Cash flows from operating
activities:
Net loss....................... $(4,728) $(13,132) $(20,411) $(11,384) $(6,052)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation................. 418 555 758 319 386
Increase (decrease) in
accrued severance pay, net.. 132 135 209 205 110
Amortization of deferred
stock compensation.......... 12 250 798 235 576
Amortization of compensation
related to warrants to
bank........................ -- -- 198 70 153
Amortization of compensation
related to warrants to
investors of convertible
loans....................... -- -- -- -- 42
Amortization of compensation
related to warrants issued
to third party.............. -- -- -- -- 35
Investors relationship type
of expenses................. -- 124 -- -- --
Accrued interest related to
convertible debentures...... -- -- -- -- 51
Marketable securities, net... 784 1,133 881 572 --
Decrease (increase) in trade
receivables and unbilled
receivables................. 1,885 (2,154) 531 (718) (235)
Decrease (increase) in other
receivables and prepaid
expenses.................... (451) (335) 241 160 (484)
Increase (decrease) in trade
payables.................... 116 656 (314) (119) 800
Increase (decrease) in
deferred revenues........... 115 1,515 3,955 3,104 (3,237)
Increase (decrease) in other
payables and accrued
expenses.................... (159) 1,856 39 488 880
Others....................... 2 11 19 (3) --
------- -------- -------- -------- -------
Net cash used in operating
activities................ (1,874) (9,386) (13,096) (7,071) (6,975)
------- -------- -------- -------- -------
Cash flows from investing
activities:
Purchase of property and
equipment................... (803) (968) (923) (397) (580)
Proceeds from sale of
property and equipment...... 40 24 88 35 --
Restricted cash, net......... -- -- (96) -- 96
------- -------- -------- -------- -------
Net cash used in investing
activities................ $ (763) $ (944) $ (931) $ (362) $ (484)
======= ======== ======== ======== =======

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

F-7

VIRYANET LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months
ended
Year ended December 31, June 30,
--------------------------- ----------------
1997 1998 1999 1999 2000
------- -------- -------- ------- -------
(Unaudited)
(U.S. dollars in thousands)
---------------------------------------------

Cash flows from financing
activities:
Short-term bank credit, net... $ 526 $ (1,427) $ 5,098 $ 4,575 $(5,091)
Proceeds from issuance of
share capital and exercise of
stock options, net........... -- 11,562 9,812 6,485 57
Receipts on account of
shares....................... 2,775 -- -- -- --
Issuance of warrants.......... 118 -- 500 250 --
Proceeds from convertible
loans........................ 136 -- -- -- 15,904
Principal payment of long-term
loans........................ (651) (67) (51) (29) (11)
Principal payment of
shareholders' loans.......... (164) -- -- -- --
Issuance expenses related to
prior year................... (192) -- -- -- --
------- -------- -------- ------- -------
Net cash provided by
financing activities....... 2,548 10,068 15,359 11,281 10,859
------- -------- -------- ------- -------
Increase (decrease) in cash and
cash equivalents............... (89) (262) 1,332 3,848 3,400
Cash and cash equivalents at the
beginning of the period........ 905 816 554 554 1,886
------- -------- -------- ------- -------
Cash and cash equivalents at the
end of the period.............. $ 816 $ 554 $ 1,886 $ 4,402 $ 5,286
======= ======== ======== ======= =======
Supplemental disclosure of cash
flows activities:
Cash paid during the period
for:
Interest:..................... $ 218 $ 94 $ 237 $ 106 $ 154
======= ======== ======== ======= =======
Supplemental disclosure of non-
cash investing and financing
activities:
Receivables on account of
shares....................... $ 325 $ -- $ -- $ 3,295 $ --
======= ======== ======== ======= =======
Compensation related to
warrants to investors of
convertible loans............ $ -- $ -- $ -- $ -- $ 505
======= ======== ======== ======= =======
Compensation related to
warrants to bank............. $ -- $ -- $ -- $ -- $ 101
======= ======== ======== ======= =======

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

F-8

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:-- GENERAL

a. ViryaNet Ltd. (the "Company"), an Israeli corporation, develops,
markets and supports software products, which provide business-to-business
internet solutions and related services that enable service organizations and
their field engineers, customers, partners, vendors and suppliers to
collaborate in a single environment called a service community.

ViryaNet Ltd. has three wholly-owned subsidiaries: in the United States
("ViryaNet US") in the United Kingdom ("ViryaNet UK") and in Japan ("ViryaNet
Japan") (see also b. below).

Revenues derived from the Company's two largest customers represent 73%,
55%, 55% and 7% of the Company's revenues for 1997, 1998, 1999 and for the six
month period ended June 30, 2000 (unaudited), respectively.

The Company's sales are made in the United States, the United Kingdom and
Japan.

b. In March 1998, the Company established ViryaNet Japan. Until October
1999, the Company owned 95% of ViryaNet Japan. In October 1999, the Company
purchased the remaining 5% of the share capital of ViryaNet Japan in exchange
for a warrant to purchase 40,000 Ordinary shares of the Company at an exercise
price of $5.75. In connection with the acquisition, the Company recorded
goodwill in the amount of $100,000. Due to its immateriality, the goodwill was
fully amortized in 1999.

NOTE 2:-- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States.

a. Use of estimates:

The preparation of financial statements in conformity with 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.

b. Financial statements in United States dollars:

All of the Company's and ViryaNet US's sales are made in U.S. dollars
("dollars"). In addition, a substantial portion of the costs of the Company and
ViryaNet US are incurred in dollars. Since the dollar is the primary currency
in the economic environment in which the Company and its U.S. subsidiary
operate, the dollar is their functional and reporting currency. Accordingly,
monetary accounts maintained in currencies other than the dollar are remeasured
using the foreign currency exchange rate at balance sheet date. Operational
transactions and non-monetary balance sheet accounts are measured and recorded
at the rate in effect at the date of the transaction. The effects of foreign
currency remeasurement are reported in the statements of operations as
financial income or expenses, as appropriate.

The functional currency of ViryaNet UK and ViryaNet Japan has been
determined to be the local currency. Assets and liabilities are translated at
the year-end exchange rate and statement of operations items are translated at
the average rate prevailing during the period. The effect of the foreign
currency translation differences is immaterial and was included in the
statement of operations.

c. Principles of consolidation:

The consolidated financial statements include the accounts of ViryaNet
Ltd. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

F-9

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

d. Cash equivalents:

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

e. Marketable securities:

In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), the Company has classified its marketable debt into a trading category.
Under SFAS 115, marketable securities classified as trading securities are
stated according to the quoted market prices as of balance sheet date.

Gain and losses (realized and unrealized) related to trading securities as
well as interest on such securities are included as financial income, or
expenses as appropriate.

f. Property and equipment:

These assets 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 depreciation rates:

%
-----

Computers and software................................................ 25-33
Office furniture and equipment........................................ 6-25
Motor vehicles........................................................ 15

Leasehold improvements are depreciated over the related lease periods.

g. Income taxes:

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes". This
statement prescribes the use of the liability method whereby deferred tax asset
and liability account balances are determined based on the differences between
financial reporting and tax bases of 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 provides a valuation
allowance, if necessary, to reduce deferred tax assets to their estimated
realizable value.

h. Revenue recognition:

The Company generates revenues from licensing the rights to use its
software products directly to end-users. The Company also generates revenues
from sales of professional services, including consulting, customization,
integration, implementation, training and maintenance.

Revenues from software license that require significant customization,
integration and installation are recognized using contract accounting on a
percentage of completion method based on the relationship of actual costs
incurred to total costs estimated to be incurred over the duration of the
contract.

Revenues from other software license agreements are recognized, in
accordance with Statement Of Position (SOP) 97-2 "Software Revenue Recognition"
(as amended), when persuasive evidence of an agreement exists, delivery of the
software has occurred, the fee is fixed or determinable and collectibility is
probable.

When software arrangements involve multiple elements, revenue is allocated
to each element based on vendor-specific objective evidence ("VSOE") of the
relative fair values of each element in the

F-10

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

arrangement. The Company's VSOE used to allocate the sales price to
professional services and maintenance is based on the price charged when these
elements are sold separately. License revenues are recorded based on the
residual method, in accordance with SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with respect to certain transactions". Under the
residual method, revenue is recognized for the delivered elements when (1)
there is 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 SOP 97-2 as amended,
are satisfied. Under the residual method any discount in the arrangement is
allocated to the delivered element.

Service revenues which include fees for consulting, customization,
integration, implementation and training services, are recognized as work is
performed. Maintenance revenues are recognized ratably over the term of the
maintenance agreement, which, in most cases, is one year.

A provision for estimated losses on uncompleted contracts is recorded in
the period in which such losses are first identified, in the amount of the
estimated loss on the entire contract.

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

i. Research and development costs:

Research and development costs are charged to the statement of operations
as incurred.

Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
requires capitalization of certain software development costs, subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. The Company does not incur any material costs between the
completion of the working model and the point at which the product is ready for
general release. Therefore, through December 31, 1999, the Company has charged
all software development costs to research and development expenses, in the
period incurred.

j. Royalty-bearing grants:

Royalty-bearing grants from Binational Industrial Research and Development
Foundation ("BIRD-F") for funding of approved research projects are recognized
at the time the Company is entitled to such grants on the basis of the related
costs incurred (see Note 12c).

k. Concentrations of credit risk:

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted cash, marketable securities and trade receivables. The Company's
cash, cash equivalents and restricted cash are held on deposit with major banks
in Israel, the United States, the United Kingdom and Japan. Management believes
that the financial institutions that hold the Company's investments are
financially sound and accordingly, minimal credit risk exists with respect to
these deposits. The Company's trade receivables are derived from sales to large
and solid organizations located mainly in the United States and United Kingdom.
The Company performs ongoing credit evaluations of its customers and to date
has not experienced any material losses. Most of the Company's marketable
securities are Israeli Government debentures and, therefore, management
believes that minimal credit risk exists with respect to those marketable
securities.

F-11

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

l. Accounting for stock-based compensation:

The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") in accounting for
its employee stock options plans. Under APB 25, when the exercise price of the
Company's employee stock options equals or exceeds the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The pro forma disclosures required by SFAS 123 are provided in Note 10b.

The Company applies Financial Accounting Standards Board Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123") and ETIF 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 issued to non-employees.

m. Basic and diluted net loss per share:

Basic and diluted net loss per share is presented in accordance with SFAS
No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented.

Basic net loss per share has been calculated using the weighted-average
number of Ordinary shares outstanding during the period. Diluted net loss per
share is calculated based on the weighted average number of Ordinary shares
outstanding during each period, plus the weighted average number of dilutive
potential Ordinary shares considered outstanding during the period.

All convertible Preferred shares, outstanding stock options, and warrants
have been excluded from the calculation of the diluted net loss per Ordinary
share because all of these securities are anti-dilutive for all periods
presented. The total numbers of shares related to the outstanding options,
Preferred shares and warrants excluded from the calculations of diluted net
loss per share were 8,590,570, 13,430,880, 17,413,758 and 18,386,372, for the
years ended December 31, 1997, 1998 and 1999, and the six months ended June 30,
2000 (unaudited), respectively.

Basic and diluted pro forma net loss per share, as presented in the
statements of operations, has been calculated as described above and also gives
effect to the automatic conversion of the convertible Preferred shares and
convertible debentures that will convert upon the closing of an IPO (using the
as-if converted method) and one time financing expense of approximately $16.5
million that will be recorded upon the conversion of the convertible
debentures.

F-12

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table presents the calculation of pro forma basic and
diluted net loss per share (in thousands, except per share data):

Six months
Year ended ended
December 31, 1999 June 30, 2000
----------------- -------------
(Unaudited)
(U.S. dollars
in thousands, except per share
data)
-------------------------------

Net loss as reported........................... $(20,714) $ (6,052)
Financial expenses related to conversion of
convertible debentures and detachable warrants
(unaudited)................................... -- (16,514)
-------- --------
Pro forma net loss (unaudited)................. $(20,714) $(22,566)
======== ========
Pro forma:
Shares used in computing basic and diluted
net loss per share.......................... 2,676 2,705
Effect of assumed conversion of convertible
Preferred shares and convertible debentures
(unaudited)................................. 9,277 11,362
-------- --------
Shares used in computing pro forma basic and
diluted net loss per share (unaudited)...... 11,953 14,067
======== ========
Pro forma basic and diluted net loss per
share (unaudited)........................... $ (1.73) $ (1.60)
======== ========

n. Severance pay:

The Company's liability for severance pay is calculated pursuant to
Israeli 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, is fully
provided 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 include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The value
of the deposited funds are based on the cash surrendered value of these
policies, and include immaterial profits.

Severance expenses for the years ended December 31, 1997, 1998 and 1999
amounted to approximately $338,000, $734,000 and $1,070,000, respectively.

o. Fair value of financial instruments:

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

Cash and cash equivalents, restricted cash, marketable securities, trade
receivables and trade payables--The carrying amounts of these items
approximate their fair value due to the short-term maturity of such
instruments.

Short-term bank credit and long-term loans--The carrying amounts of the
Company's borrowing arrangements approximate their fair value. Fair values
were estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.

F-13

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

p. Future adoption of new accounting standard:

In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). This Statement establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. The Statement also requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000 and cannot be applied retroactively. The Company
does not expect that this new Statement will have any material impact on the
Company's consolidated balance sheets or results of operations.

On December 3, 1999, the staff of the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition
in Financial Statements". SAB 101 summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. SAB 101 shall be effective no later than the fourth
fiscal quarter of the fiscal year beginning after December 15, 1999. The
Company is currently evaluating the impact of this adoption on the financial
statements.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation--an Interpretation of APB Opinion No. 25". FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory; plan the accounting consequence of various modifications to
the terms of the previously fixed stock options or awards; and the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company does not expect the application of FIN 44 to have a material impact on
the Company's financial position or results of operations.

q. Unaudited pro forma shareholders' equity:

The Company's Preferred shares, convertible debentures and 2,112,066 of
the warrants will be automatically converted or exercised into Ordinary shares
upon completion of the Company's IPO. Pro forma shareholders' equity as of June
30, 2000, as adjusted for such conversions and exercises, is disclosed in the
balance sheet. Pro forma shareholders' equity also gives effect to one-time
financing expenses of approximately $16.5 million upon conversion of our
convertible debentures.

r. Unaudited information:

The financial statements include the unaudited consolidated balance sheet
as of June 30, 2000 and the related consolidated statements of operations,
changes in shareholders' equity (deficiency) and cash flows for the six month
periods ended June 30, 1999 and 2000. This unaudited information has been
prepared by the Company on the same basis as the audited annual consolidated
financial statements and, in management's opinion, reflects all adjustments
(consisting only of normal recurring accruals) necessary for a fair
presentation of the financial information, in accordance with generally
accepted accounting principles, for interim financial reporting, for the period
presented. Results for interim periods are not necessarily indicative of the
results to be expected for the entire year.

F-14

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 3:-- RESTRICTED CASH

The Company recorded a fixed charge on the short-term bank deposit in
order to secure a bank credit line.

NOTE 4:-- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

December 31,
-------------
1998 1999
------ ------
(U.S. dollars
in thousands)
-------------

Prepaid expenses............................................. $ 560 $ 534
Employees.................................................... 125 91
Government authorities....................................... 65 78
Other........................................................ 393 199
------ ------
$1,143 $ 902
====== ======

NOTE 5:-- PROPERTY AND EQUIPMENT

a. Cost:

Computers and software....................................... $2,065 $2,858
Office furniture and equipment............................... 628 707
Motor vehicles............................................... 323 170
Leasehold improvements....................................... 173 196
------ ------
3,189 3,931
------ ------
Accumulated depreciation:
Computers and software....................................... 1,272 1,890
Office furniture and equipment............................... 278 342
Motor vehicles............................................... 89 67
Leasehold improvements....................................... 117 141
------ ------
1,756 2,440
------ ------
Depreciated cost............................................ $1,433 $1,491
====== ======

b. As for charges, See Note 9c.

NOTE 6:-- SHORT-TERM BANK CREDIT

As of December 31, 1999, the Company had authorized credit lines from
several banks in the amount of $4,303,000, of which $303,000 is denominated in
NIS and bears interest at the rate of prime + 1% and $4,000,000 is denominated
in dollars and bears interest at LIBOR + 1.5%.

Subsequent to the balance sheet date, the Company obtained an additional
credit line from Bank Hapoalim with an availability of $2,000,000. (See also
Note 15a).

The weighted average interest rate on the credit lines as of December 31,
1999 and 1998 was approximately 8%.

As for charges, See Note 9c.

F-15

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 7:-- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

December 31,
-------------
1998 1999
------ ------
(U.S. dollars
in thousands)
-------------

Employees and payroll accruals............................... $2,423 $2,855
Accrued expenses............................................. 1,047 769
Other........................................................ 396 281
------ ------
$3,866 $3,905
====== ======

NOTE 8:-- LONG-TERM LOANS

Linkage terms and interest rates are as follows:

December 31,
Linked Average -------------------------------
Currency to interest rate 1998 1999
-------- -------- ------------- ------- -------
(U.S. dollars
in thousands)
-------------------------------

NIS Unlinked Prime $ 55 $ 11
U.S. dollar 8% 7 --
------- -------
$ 62 $ 11
======= =======
Aggregate maturities of long-term loans:
First year (current maturities)................... $ 51 $ 11
Second year....................................... 11 --
------- -------
$ 62 $ 11
======= =======

NOTE 9:-- COMMITMENTS AND CONTINGENT LIABILITIES

a. Royalty commitments:

Under the Company's research and development agreements with BIRD-F and
pursuant to applicable laws, the Company is required to pay royalties at the
rate of 3%-5% of sales of products developed with funds provided by BIRD-F,
up to an amount equal to 100%-150% of BIRD-F research and development grants
(linked to the dollar and to the U.S. Consumer Price Index) related to such
projects.

As of December 31, 1999, the Company had an outstanding contingent
obligation to pay royalties in the amount of $330,000.

b. Lease commitments:

The Company and its subsidiaries rent their facilities under various
operating lease agreements, which expire on various dates, the latest of which
is in 2005. The minimum rental payments under non-cancelable operating leases
are as follows:

Year ended
December 31
-------------
(U.S. dollars
in thousands)
-------------

2000.......................................................... $ 880
2001.......................................................... 780
2002.......................................................... 716
2003.......................................................... 460
2004.......................................................... 430
2005.......................................................... 97
------
$3,363
======

F-16

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Total rent expenses for the years ended December 31, 1997, 1998 and 1999
were approximately $449,000, $955,000 and $1,100,000 respectively.

c. Charges and guarantees:

Various computers and peripheral equipment and motor vehicles of the
Company are pledged as fixed charges in favor of various banks and financial
institutions. The Company also has a floating charge on all of its assets in
favor of a bank.

The Company obtained bank guarantees in the amount of $250,000 in order to
secure a bankcredit line.

d. Litigation:

In December 1999, the Company's former vice president of marketing and
sales filed an action against the Company and Company's Chief Executive Officer
seeking damages in the amount of approximately $1,364,000. The former employee
alleges wrongful denial of his right to exercise options, loss of compensation
including options to purchase shares granted to him by his previous employer,
severance payment and other social benefits as well as damage to his
reputation.

In March 2000, the Company filed a counter action against this former
employee seeking damages in the amount of approximately $970,000. The Company
alleged that the former employee has acted in bad faith, breached his fiduciary
towards Company and did not perform his duties as required.

The Company's management is unable to determine the ultimate outcome of
the litigation and its effect on the Company's business, operating results and
financial condition and therefore no amounts have been recorded.

NOTE 10:-- SHARE CAPITAL

a. Composition of share capital:

Authorized shares Issued and outstanding shares
--------------------- -----------------------------
December 31, December 31,
--------------------- -----------------------------
1998 1999 1998 1999
---------- ---------- -------------- --------------

Shares of NIS 0.1 par value:
Ordinary shares (1)......... 9,000,000 6,900,000 2,625,140 2,700,640
Preferred "A" shares (2).... 6,133,330 6,133,330 3,951,740 3,951,740
Preferred "B" shares (2).... 866,670 866,670 650,000 650,000
Preferred "C-1" shares (2).. 4,000,000 4,000,000 3,805,515 3,805,515
Preferred "C-2" shares (2).. -- 2,100,000 -- 1,739,132
---------- ---------- -------------- --------------
20,000,000 20,000,000 11,032,395 12,847,027
========== ========== ============== ==============

- ------------------
(1) The Ordinary shares confer upon the holders the right to receive notice to
participate and vote in general meetings of the Company, and the right to
receive dividends, if declared.

F-17

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(2) The Preferred shares ("A", "B" and "C") have the same rights as the
Ordinary shares (except for the Preferred "B" shares, which do not confer
voting rights). In addition, the shares are convertible into Ordinary
shares, have an aggregate preference in liquidation of $39,381,000 as of
December 31, 1999 and have veto rights in certain matters. The Preferred
shares are convertible, at the holders' option, or upon an IPO of the
Company, into Ordinary shares on a one-for-one basis.
(3) In June 1999, the Company converted 2,100,000 authorized Ordinary shares to
2,100,000 authorized Preferred "C-2" shares.

b. Stock options:

1. Under the Company's 1996, 1997, 1998 and 1999 Stock Option Plans (the
"Plans"), options may be granted to officers, directors, employees and
consultants of the Company or its subsidiaries.

2. Pursuant to the Plans, the Company reserved for issuance 1,400,000,
500,000, 1,500,000 and 3,000,000 Ordinary shares, respectively.

As of December 31, 1999, an aggregate to 158,935 Ordinary shares of the
Company were still available for future grant.

3. 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 1996, 1997, 1998 and 1999 option plans will
expire on December 31, 2005, 2006, 2007 and 2008, respectively. The exercise
price of the options granted under the plans may not be less than the nominal
value of the shares into which such options are exercised. The options vest
primarily over four years. Any options which are canceled or not exercised
before expiration become available for future grants.

A summary of the Company's share option activity (except options to
consultants) under the Plans is as follows:

Year ended December 31,
--------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of options price of options price of options price
---------- -------- ---------- -------- ---------- --------

Outstanding--beginning
of the year............ 1,404,320 $0.61 1,963,720 $1.10 2,869,970 $2.20
Granted................. 569,400 2.30 1,332,000 3.35 2,810,480 5.53
Exercised............... -- -- (148,315) 0.66 (75,500) 0.96
Forfeited............... (10,000) 1.05 (277,435) 0.81 (949,700) 3.21
--------- ----- --------- ----- --------- -----
Outstanding--end of the
year................... 1,963,720 $1.10 2,869,970 $2.20 4,655,250 $4.02
========= ===== ========= ===== ========= =====
Options exercisable..... 850,383 $0.79 1,335,901 $1.40 1,570,076 $2.74
========= ===== ========= ===== ========= =====

F-18

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The options outstanding as of December 31, 1999, have been separated into
ranges of exercise price, as follows:

Weighted
Options Weighted Options average
outstanding average Weighted exercisable exercise
as of remaining average at price of
December 31, contractual exercise December 31, exercisable
Exercise price 1999 life years price 1999 options
-------------- ------------ ----------- -------- ------------ -----------

$0.61-1.00...... 1,040,320 3.30 $0.65 684,365 $0.64
2.30............ 284,825 4.34 2.30 170,538 2.30
3.20-3.90....... 760,000 4.91 3.45 280,875 3.49
5.75............ 2,570,105 6.76 5.75 434,298 5.75
---------------- --------- ---- ----- --------- -----
$0.61-5.75...... 4,655,250 5.54 $4.02 1,570,076 $2.74
========= ==== ===== ========= =====

The Company recorded deferred compensation for options issued with an
exercise price below the fair value of the Ordinary shares, deferred
compensation is amortized and recorded as compensation expense ratably over the
vesting period of the option. Compensation expenses of approximately $12,000,
$104,000 and $618,000 were recognized during the years ended December 31, 1997,
1998 and 1999, respectively.

Under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), pro forma information regarding net loss and loss per share is required
for grants issued after December 1994, and has been determined as if the
Company had accounted for its employee share options under the fair value
method of SFAS No. 123. The fair value for these options was estimated at the
grant date using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997, 1998 and 1999: risk-free interest rates
of 6%, 5.5% and 5.75% respectively, dividend yields of 0% for each year,
volatility factors of the expected market price of the Company's Ordinary
shares of 0.5 for each year, and a weighted-average expected life of the
options of approximately 3.8, 3.5 and 3.4 years, respectively.

The weighted average fair values of options granted for the years ended
December 31, 1997, 1998 and 1999 were:

For exercise price on the grant date that:
--------------------------------------------------
Equals market Exceeds Is less than
price market price market price
----------------- --------------- ----------------
Year ended Year ended Year ended
December 31, December 31, December 31,
----------------- --------------- ----------------
1997 1998 1999 1997 1998 1999 1997 1998 1999
----- ----- ----- ---- ----- ---- ---- ----- -----

Weighted average exercise
prices.................... $2.30 $3.30 $5.75 $-- $3.90 $-- $-- $3.20 $4.18
===== ===== ===== === ===== === === ===== =====
Weighted average fair
values on grant date...... $0.98 $1.37 $2.74 $-- $1.12 $-- $-- $1.75 $3.04
===== ===== ===== === ===== === === ===== =====

Because changes in the subjective input assumptions can materially affect
the fair value estimate, it is management's opinion that the existing option
pricing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.

F-19

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pro forma information under SFAS No. 123 is as follows:

Year ended December 31,
---------------------------
1997 1998 1999
------- -------- --------
U.S. dollars in
thousands, except per
share data
---------------------------

Net loss as reported......................... $(4,844) $(13,193) $(20,714)
======= ======== ========
Pro forma net loss........................... $(4,981) $(13,491) $(21,079)
======= ======== ========
Pro forma basic and diluted net loss per
share....................................... $ (1.96) $ (5.28) $ (7.87)
======= ======== ========

4. Options issued to consultants:

a) The Company's outstanding options to consultants as of December 31,
1999, are as follows:

Options for Exercise
ordinary price per Options Exercisable
Issuance date shares share exercisable through
---------------------------- ----------- --------- ----------- -------------

December 1996............... 250,000 $1.00 250,000 (*)
March 1998.................. 5,000 $3.20 1,250 February 2002
September 1998.............. 40,000 $3.75 40,000 January 2001
November 1998............... 10,000 $3.75 5,000 December 2006
November 1998............... 45,000 $1.00 45,000 December 2006
November 1999............... 12,000 $5.75 12,000 November 2006
------- -------
Total..................... 362,000 353,250
======= =======

- ------------------
(*) The options are exercisable through December 2000. If not exercised, they
automatically renew for one additional year, each time, for up to seven
years, through December 2006. The exercise price will be increased by 6%
compounded each year.

b) The Company had accounted for its options to consultants under the
fair value method of SFAS No. 123 and EITF 96-18. The fair value for these
warrants was estimated using a Black-Scholes option-pricing model with the
following weighted-average assumptions for 1998 and 1999: risk-free
interest rates of 5.5% and 5.75% respectively, dividend yields of 0% for
each year, volatility factors of the expected market price of the Company's
Ordinary shares of 0.5 for each year, and a weighted-average expected life
of the options of approximately 3.5 and 2.1 years, respectively.

c) In connection with the granting of stock options to consultants, the
Company recorded deferred stock compensation totaling $261,000 through
December 31, 1999. Compensation expenses of approximately $0, $146,000 and
$80,000 were recognized during the years ended December 31, 1997, 1998 and
1999, respectively.

c. Warrants:

1. Warrants issued to investors:

a) As part of the investment agreement in 1996 the Company issued to
certain investors warrants to purchase 1,375,110 Series A Convertible
Preferred shares at an exercise price of $3.00 of which warrants to
purchase 216,670 shares were converted in December 1996 into warrants to
purchase 216,670 Series B Non-Voting Preferred shares. These warrants are
exercisable until an IPO.

b) As part of the investment agreement in February 1998, the Company
issued to the shareholders warrants to purchase 31,794 convertible Series
C-1 Preferred shares at an exercise price equal to the par

F-20

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

value of the shares. The Company recorded in 1998 investor relationship
type expenses in the amount of $124,000. This transaction was accounted for
according to EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features on Contingently Adjustable Conversion
Ratios" (EITF 98-5) and APB 14 "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants" ("APB 14"). The fair value of this
warrant was determined using the Black-Scholes pricing model, assuming a
risk free rate of 5.5%, a volatility factor of 0.5, dividend yields of 0%
and an expected life of two years. The warrants have no expiration date.

c) As part of the investment agreement in June 1999, the Company issued
to certain Series C-2 Preferred shares investors detachable warrants to
purchase 347,826 Series C-2 Preferred shares at an exercise price of $5.75.
The warrants contain a cashless exercise feature and expire upon the
earlier of June 2004 or a merger or sale of all or substantially all of the
Company's assets or issued and outstanding share capital. The cashless
exercise feature allows the holder to convert the warrant into ordinary
shares without the payment of any exercise price. The number of shares
issuable upon exercise is determined by subtracting the exercise price of
the warrant from the aggregate market value of the underlying shares, and
then dividing such amount by the market value of an ordinary share. The
Company recorded a deemed dividend at the amount of $303,000. This
transaction was accounted for according to EITF 98-5 and APB 14. The fair
value of this warrant was determined using the Black-Scholes pricing model,
assuming a risk free interest of 5.75%, a volatility factor of 0.5,
dividend yields of 0% and an expected life of warrants of six months.

2. Warrants issued for financing transactions:

In connection with a credit line from Bank Hapoalim, the Company issued
in March 1999 to a subsidiary of Bank Hapoalim, a warrant to purchase
ordinary shares of the Company having an aggregate market value at the date
of exercise of $1,250,000 in exchange for $1,000,000 in cash. The warrant
contains a cashless exercise feature where the Company will issue ordinary
shares having an aggregate market value of $250,000 at the time of exercise
and is exercisable until the earlier of March 31, 2002 or until an IPO. The
fair value of the warrant is approximately $250,000, which has been
accounted for as a cost of the line of credit and is amortized ratably over
a one year period. The Company recorded $198,000 in 1999 as compensation
expense and included these amounts in financial expenses.

3. Warrants issued to customers:

a) In 1996, the Company entered into software license agreements with
two customers, one of them a related party. In connection with these
agreements, the Company issued warrants expiring upon an IPO to purchase
300,000 and 100,000 ordinary shares at an exercise of $2.00 and $3.00 per
share, respectively. As of December 31, 1999, these warrants had not been
exercised. At the grant date, the fair value of these warrants was
estimated as $168,000 and was deducted from software revenues and amortized
over the period such related revenue was recognized (1996 and 1997). The
fair value of these warrants were determined using Black-Scholes pricing
model, assuming a risk free rate of 6.0%, a volatility factor of 0.5,
dividend yields of 0% and an expected life of the warrants of 5 years.

b) In 1999, the Company entered into software license agreements with
certain customers, one of them a related party. In connection with these
agreements, the Company issued warrants expiring three years from the date
of the agreements to purchase 150,000 Ordinary shares at an exercise price
of $5.75 per share, and warrants exercisable until the earlier of June 28,
2002 or an IPO, to purchase 50,000 Ordinary shares at an exercise price of
$5.75 in consideration of $125,000. As of December 31, 1999, the warrants
had not been exercised. At the grant date, the fair value of the warrants
was estimated as $500,000 of which $375,000 was deducted from software
revenues and amortized over the period such related revenue was recognized
(1998 and 1999). The fair value of these warrants was determined using

F-21

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

the Black-Scholes pricing model, assuming a risk free rate of 5.75%, a
volatility factor of 0.50, dividend yields of 0% and an expected life of
the warrants of 3 years. The Company recorded proceeds from issuance of
shares in the amount of $500,000.

d. Deemed dividend:

In 1997 and 1998 the Company converted 77,460 and 87,565 Ordinary shares,
respectively, to Preferred shares. Since the Company's Preferred shares have
preference rights, the Company recorded deemed dividend at the amount of
$116,000 and $61,000, respectively, which were calculated as the difference
between the fair value of the Preferred shares and the fair value of the
Ordinary shares at the date of conversion. The deemed dividend increases the
loss applicable to Ordinary shares in the calculation of basic and diluted net
loss per share for the years ended December 31, 1997 and 1998, without any
effect on total shareholders' equity (deficiency).

e. Dividends:

In the event that cash dividends are declared in the future, such
dividends will be paid in NIS. The Company does not intend to pay cash
dividends in the foreseeable future.

NOTE 11:-- TAXES ON INCOME

a. Tax benefits under the Law for the Encouragement of Capital Investments,
1959 (the "law"):

The Company's production facilities have been granted the status of an
"Approved Enterprise" under the law for three separate investment programs
which were approved in February 1989, March 1995 and April 1998.

According to the provisions of the law, income derived from the February
1989 program during a period of seven years from the year in which it first
earns taxable income is subject to reduced corporate tax of 10% - 25%,
depending on the percentage of the Company share capital held by foreign
residents.

According to the provisions of the law, the Company has elected for its
other two investment programs the "Alternative Track" (the waiver of grants in
return for a tax exemption). Accordingly, 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.

For the second investment program, the Company elected to enjoy a
Government guaranteed long-term loan plan along with the tax exemption. These
loans were repaid by the Company in January 1997.

As the Company currently has no taxable income, the benefits have not yet
commenced for all three programs.

The tax-exempt profits that will be earned by the Company's "Approved
Enterprises" can be distributed to shareholders, without tax liability to the
Company only upon the complete liquidation of the Company. If these retained
tax-exempt profits are distributed in a manner other than in the complete
liquidation of the Company, they would be taxed at the corporate tax rate
applicable to such profits as if the Company had not elected the alternative
track of benefits (currently 20% for an "Approved Enterprise"). The Company's
Board of Directors has determined that such tax exempted income will not be
distributed as dividends.

Should the Company fail to meet conditions stipulated by the law and in
the letter of approval, including making specified investments in fixed assets,
maintaining the development and production nature of its facilities, and
financing of at least 30% of the investment program through equity, it could be
subject to corporate tax in Israel at the regular corporate tax rate of 36% and
could be required to refund tax benefits already received at that time
(inclusive of interest and penalties).

F-22

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The period of tax benefits detailed above is limited to the earlier of 12
years from the commencement of production, or 14 years from receiving the
approval. Accordingly, the period of the benefit relating to these investment
programs will expire between 2003-2012.

The law also grants entitlement to claim accelerated depreciation on
equipment used by the "Approved Enterprise" during five tax years.

Should the Company derive income from sources other than from an "Approved
Enterprise" during the relevant period of benefits, such income will be taxed
at the regular corporate tax rate of 36%.

b. Tax benefits under the Israeli Law for the Encouragement of Industry
(Taxation), 1969:

The Company is an "industrial company" under the Law for the Encouragement
of Industry (Taxation), 1969 and, therefore, is entitled to certain tax
benefits, including accelerated rates of depreciation and deduction of public
offering expenses in three equal annual installments. The Company has not yet
utilized this tax benefit.

c. Measurement of results for tax purposes under the Income Tax Law
(Inflationary Adjustments), 1985:

Results for tax purposes are measured in real terms of earnings in NIS
after certain adjustments for increases in the Israeli Consumer Price Index
(CPI). As explained in Note 2b, the financial statements are presented in U.S.
dollars. The difference between the annual change in the CPI and in the
NIS/dollar exchange rate causes a difference between taxable income and the
pre-tax income presented 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.

d. Net operating loss carryforwards:

As of December 31, 1999, the Company had approximately $6,400,000 of
Israeli net operating loss carryforwards. The Israeli loss carryforwards have
no expiration date. The Company expects that during the period these tax losses
are utilized, its income would be substantially tax exempt. Accordingly, there
will be no tax benefit available from such losses and no deferred income taxes
have been included in these financial statements.

As of December 31, 1999, ViryaNet UK had accumulated losses for income tax
purposes, in the amount of approximately $10,800,000. The net operating loss
may be carried forward and offset against taxable income for an indefinite
period in the future.

As of December 31, 1999, ViryaNet Japan had accumulated losses for income
tax purposes, in the amount of approximately $1,200,000. The net operating loss
may be carried forward and offset against taxable income for 10 years, expiring
in the years 2008 and 2009.

As of December 31, 1999, ViryaNet US had a U.S. federal net operating loss
carryforwards for income tax purposes in the amount of approximately
$18,400,000, which may be carried forward and offset against taxable income for
15 years, expiring between 2009 and 2014.

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.

F-23

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

e. 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 liabilities and assets are as follows:

December 31,
--------------------------
1997 1998 1999
------- ------- --------
(U.S. dollars in
thousands)
--------------------------

US net operating loss carryforwards............. $ 855 $ 3,432 $ 6,440
UK net operating loss carryforwards............. 1,328 2,084 3,240
Japan, net operating loss carryforwards......... -- 525 432
Other reserve and allowances.................... 62 175 331
------- ------- --------
Total deferred tax assets....................... 2,245 6,216 10,443
Valuation allowance............................. (2,245) (6,216) (10,443)
------- ------- --------
Net deferred tax assets......................... $ -- $ -- $ --
======= ======= ========

ViryaNet UK, ViryaNet US and ViryaNet Japan have provided valuation
allowances on deferred tax assets resulting from tax loss carryforwards and
other temporary differences, since they have a history of losses over the past
years. Management currently believes that it is more likely than not that the
deferred tax regarding the loss carryforwards and other temporary differences
will not be realized.

f. Pre-tax loss:

Year ended December 31,
-------------------------
1997 1998 1999
------- -------- --------
(U.S. dollars in
thousands)
-------------------------

Domestic.......................................... $ 4,135 $ 6,774 $ 3,165
Foreign........................................... 593 6,358 17,246
------- -------- --------
$ 4,728 $ 13,132 $ 20,411
======= ======== ========

NOTE 12:--SELECTED STATEMENTS OF OPERATIONS DATA

a. Summary information about geographical destinations:

The Company manages its business on a basis of one reportable segment. See
Note 1a for a brief description of the Company's business.

The Company attributes revenues from external customers, on the basis of
the location of product sales.

F-24

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following presents total revenues and long-lived assets for the year
ended December 31, 1997, 1998 and 1999:

Year ended Year ended Year ended Six Months ended
December 31, 1997 December 31, 1998 December 31, 1999 June 30, 2000
------------------- ------------------- ------------------- -----------------
Long- Long- Long- Long-
Total lived Total lived Total lived Total lived
revenues assets revenues assets revenues assets revenues assets
--------- -------- --------- -------- --------- -------- --------- -------
(U.S. dollars in thousands)
-----------------------------------------------------------------------------
(unaudited)

Israel.................. $ -- $ 736 $ -- $ 844 $ -- $ 713 $ -- $ 777
United States........... 11,228 181 10,021 436 11,998 617 8,065 761
United Kingdom.......... 2,230 141 2,958 125 3,054 101 717 78
Japan................... 9 -- 546 28 750 60 2,638 69
--------- -------- --------- -------- --------- -------- -------- -------
$ 13,467 $ 1,058 $ 13,525 $ 1,433 $ 15,802 $ 1,491 $ 11,420 $ 1,685
========= ======== ========= ======== ========= ======== ======== =======

b. Major customers data; percentage of total revenues:

Year ended December 31,
----------------------- Six Months ended
1997 1998 1999 June 30, 2000
------- ------- ------- ----------------
%
----------------------------------------
(unaudited)
----------------

Customer A........................ 73 41 22 5
Customer B........................ -- 14 33 2
Customer C........................ 7 15 5 2
Customer D........................ 6 10 11 2
Customer E........................ -- -- 3 20
Customer F........................ -- -- -- 17
Customer G........................ -- -- 2 15
Customer H........................ -- -- 1 13

c. Research and development expenses:

Year ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
(U.S. dollars in
thousands)
-----------------------

Total cost........................ $ 3,443 $ 5,652 $ 6,865
Less--grants and participation.... -- 330 --
------- ------- -------
$ 3,443 $ 5,322 $ 6,865
======= ======= =======

F-25

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

d. Financial income (expenses):

Year ended December 31,
----------------------------
1997 1998 1999
--------- ------------------
(U.S. dollars in thousands)
----------------------------

Financial expenses:
Interest.................................. $ 185 $ 76 $ 340
Loss from marketable securities........... 51 189 --
Other expenses............................ 94 72 56
Foreign currency translation differences.. 91 -- 47
Amortization of deferred compensation of
options to Bank Hapoalim................. -- -- 198
-------- -------- ---------
421 337 641
-------- -------- ---------
Financial income:
Interest.................................. 336 296 69
Gain from marketable securities........... -- -- 7
Foreign currency translation differences.. -- 275 --
-------- -------- ---------
336 571 76
-------- -------- ---------
$ (85) $ 234 $ (565)
======== ======== =========

NOTE 13:--RELATED PARTY TRANSACTIONS

a. In September 1995, the Company entered into a sales software license
and development services agreement with Sun Microsystems Inc. ("SUN"). As part
of the agreement, SUN was granted a warrant to purchase 300,000 of the
Company's Preferred shares at an exercise price of $2.00 per share. The
Company accounted for these warrants in accordance with the requirements set
forth in FAS-123 which amounted to an expense of $168,000, which was deducted
from the revenues in 1996 and 1997. The fair value of this warrant was
determined using Black-Scholes pricing model assuming a risk free rate 6.0%, a
volatility factor 0.5, dividend yields of 0% and an expected life of the
warrant of 5 years. Such agreement was amended in December 1998. According to
this amendment, the Company provided additional software license sales and
development services.

The president of enterprise services of SUN is a member of the Company's
Board of Directors.

b. In April 1998, the Company signed a share purchase agreement with GE
Capital Equity Holdings Inc. ("GE"), a subsidiary of General Electric. As of
December 31, 1999, GE held 11.8% of the Company's outstanding shares. In June
1998, the Company entered into a software license and support agreement with
GE Medical Systems Inc., another subsidiary of General Electric. Under the
agreement the Company granted GE Medical a non exclusive license to use
certain of the Company's products. Pursuant to the amendment to

this agreement, the Company is obligated to provide GE, until December 31,
2001, with maintenance and support services including future upgrades and
enhancements. The Company also granted to GE 50,000 warrants at an exercise
price of $5.75, exercisable until December 2002. The Company accounted for
those warrants in accordance with the requirements set forth in FAS 123 which
amounted an expense of $125,000, which was deducted from the revenues in 1999.
The fair value of this warrant was determined using Black-Scholes pricing
model assuming a risk free rate 5.75%, a volatility factor of 0.5, dividend
yields of 0% and an expected life of the warrants of 3 years.

F-26

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

c. The balances with and the revenues derived from these related parties
were as follows:

1. Balances with related parties:

December 31,
-------------
1998 1999
-------------
(U.S. dollars
in thousands)
-------------

Trade receivables:
Sun MicroSystems Inc.(*)................................... $ 54 $ 546
===== =======
GE Medical Systems Inc. (*)................................ $ 149 $ 1,083
===== =======
Deferred revenues:
Sun MicroSystems Inc. (*).................................. $ -- $ 289
===== =======
GE Medical Systems Inc. (*)................................ $ 951 $ 31
===== =======

------------------
(*) The balance is unlinked and bears no interest.

2. Revenues from related parties:

Year ended December 31,
-----------------------
1997 1998 1999
------- ------- -------
(U.S. dollars in
thousands)
-----------------------

Sun MicroSystems Inc............................... $ 9,845 $ 5,548 $ 3,553
======= ======= =======
GE Medical Systems Inc............................. $ -- $ 1,872 $ 5,251
======= ======= =======

d. On June 30, 1999, the Company issued to its shareholder and Chief
Executive Officer 17,390 Series C-2 Preferred Shares in consideration of
$100,000, which the Company loaned to this shareholder and will be repaid to
the Company not later than June 30, 2002 and will bear interest of 6.5% per
annum. The debt is secured by the shares.

NOTE 14:-- SUBSEQUENT EVENTS

a. In January 2000, the Company obtained an additional $2,000,000 credit
line for one year.

Dollar-denominated borrowings bear interest at an annual rate of LIBOR
plus 1.5%, and NIS-denominated credit lines from Bank Hapoalim bear interest of
prime plus 1%. The credit facility is secured by a floating charge on all of
the Company's assets.

In connection with this additional credit line, the Company issued to a
subsidiary of Bank Hapoalim, a warrant to purchase an additional 69,565
ordinary shares of the Company against payment of $400,000. The warrant
contains a cashless exercise feature and is exercisable until January 2003 or
an IPO, whichever is earlier.

The Company will record a compensation of approximately $202,000, which is
amortized ratably over a period of the line of credit. This transaction was
accounted 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
5.75%, a volatility factor of 0.5, dividend yields of 0% and an expected life
of the warrant of one year.

b. In February and March 2000, the Company entered into convertible loan
agreements with existing shareholders in the aggregate amount of approximately
$5.0 million. These convertible loans

F-27

VIRYANET LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

converted into convertible debentures issued in April 2000 as described below.
In April 2000, the Company entered into a convertible debenture agreement
("agreement") with additional investors in the aggregate amount of
approximately $11.0 million. The debentures are denominated in dollars and bear
annual interest at the rate of LIBOR +2%, payable quarterly, commencing in
April 2001.

The debentures are due in April 2003, and are convertible including
accrued but unpaid interest upon any of the events which are specified in the
agreement. The debentures shall be converted into the applicable number of
shares at the applicable conversion ratio. Conversion will occur on the earlier
of:

1. An IPO raising proceeds of at least $20 million ("Exit");

2. A liquidation event ("Exit"); and

3. A subsequent further investment in the share equity of the Company of
at least $10.0 million ("PPM").

In the event of an Exit, the debentures shall automatically convert into
Ordinary shares equal to the principal amount and the unpaid accrued interest,
divided by the Exit price discounted by 30%-50%, subject to the date of the
Exit.

In the event of a PPM, the debentures shall automatically convert into
Series C-2 Preferred shares equal to the principal amount and the unpaid
accrued interest, divided by the PPM price discounted by 25%-40%, subject to
the terms of the PPM.

The Company will record $16.0 million of financial expenses on the date
such exit or PPM event occurs, in accordance with EITF 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingent
Adjustable Conversion ratios".

In addition, the Company granted 124,999 warrants to the shareholders at
an exercise price equal to 95% of the conversion price per share in the event
of Exit or PPM. The warrants are exercisable upon the earlier of:

1. Five years from the date of issuance; and

2. A liquidation event.

In connection with these warrants, the Company will record financial
expenses of $505,000, which will be amortized ratably over the life period of
the convertible debentures. This transaction was accounted for according to APB
14. The fair value of these warrants was determined using the Black-Scholes
pricing model, assuming a risk free interest rate of 5.75%, a volatility factor
of 0.5, dividend yields of 0% and an expected life of six months.

c. In April 2000, the Company resolved to increase its authorized share
capital by NIS 1,500,000 which amount shall be divided into 12,000,000 Ordinary
shares of nominal NIS 0.1 par value each and 3,000,000 Series C-2 Preferred
shares of nominal NIS 0.1 par value each.

d. The Company resolved to increase the pool of 1999 Option Plan by
1,000,000 options over and above previous increases. The total pool for 1999
shall be 3,000,000 options.

F-28

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

4,500,000 Ordinary Shares
[LOGO OF VIRYANET]

----------------
PROSPECTUS

----------------

Chase H&Q

Salomon Smith Barney

Dain Rauscher Wessels

-------------
, 2000

-------------

You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, ordinary shares only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our ordinary shares.

No action is being taken in any jurisdiction outside the United States to
permit a public offering of the ordinary shares or possession or distribution
of this prospectus in any of those jurisdictions. Persons who come into
possession of this prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any restrictions related to
this offering and the distribution of this prospectus applicable to that
jurisdiction.

Until , 2000, 25 days after the date of this prospectus, all
dealers that buy, sell or trade in our ordinary shares, whether or not
participating in this offering, may be required to deliver a prospectus. All
dealers also have an obligation to deliver a prospectus when acting as
underwriters of their unsold allotments or subscriptions.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table lists all expenses, other than the underwriting
discounts and commissions, payable by the registrant in connection with the
sale of the securities being registered. All amounts shown are estimates.

SEC registration fee............................................ $ 20,000
NASD filing fee................................................. 7,000
Nasdaq National Market fees..................................... 22,500
Blue Sky qualification fees and expenses........................ 5,000
Israel stamp duty............................................... 570,000
Printing and engraving expenses................................. 300,000
Accountant's fees and expenses.................................. 250,000
Legal fees and expenses......................................... 700,000
Miscellaneous................................................... 410,500
----------
Total....................................................... $2,285,000
==========

Item 14. Indemnification of Directors and Officers.

Office Holder Insurance

. a breach of his duty of care to us or to another person;

. a breach of his duty of loyalty to us, provided that the office holder
acted in good faith and had reasonable cause to assume that his act
would not prejudice our interests; or

. a financial liability imposed upon him in favor of another person.

Indemnification of Office Holders

Our articles of association provide that we may indemnify an office holder
against:

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

. reasonable litigation expenses, relating to an act performed in his
capacity as an officer, including attorney's fees, expended by the
office holder or charged by a court in a criminal proceeding from
which he was acquitted, or a criminal proceeding in which he was
convicted for a criminal offense that does not require proof of
intent.

II-1

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 considers to be anticipated and limited in amount
determined by the board of directors to be reasonable under the
circumstances.

. authorization to indemnify retroactively an office holder.

Limitations on Insurance and Indemnification

The companies law provides that a company may not indemnify an office
holder nor enter into an insurance contract which would provide coverage for
any monetary liability incurred as a result of any of the following:

. a breach by the office holder of his duty of loyalty unless the office
holder acted in good faith and had a reasonable basis to believe that
the act would not prejudice the company;

. a breach by the office holder of his duty of care if the breach was
done intentionally or recklessly;

. any act or omission done with the intent to derive an illegal personal
benefit; or

. any fine levied against the office holder.

In addition, under the companies law, indemnification of, and procurement
of insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in some circumstances, by our
shareholders. 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 office holder to the maximum extent
permitted under the companies law. Before this offering, we intend to obtain
directors and officers liability insurance for the benefit of our office
holders.

II-2

Item 15. Recent Sales of Unregistered Securities.

Since January 1, 1997, we have issued and sold (without payment of any
selling commissions to any person) unregistered securities as described below.

Since January 1, 1997, we have issued options to our employees, directors,
officers, consultants and advisors to purchase an aggregate of 5,964,630
ordinary shares under the 1996 stock plan, the 1997 stock plan, the 1998 stock
plan and the 1999 stock plan exercisable at a weighted average price of $4.45
per share. From January 1, 1997 through July 31, 2000, options to purchase
269,565 shares had been exercised. The following table lists options granted
between January 1, 1997 and July 31, 2000.

Date Shares Price
---- --------- ------

April 16, 1997............................................. 150,000 $ 2.30
July 8, 1997............................................... 299,400 $ 2.30
October 13, 1997........................................... 120,000 $ 2.30
March 5, 1998.............................................. 469,500 $ 3.20
March 5, 1998.............................................. 200,000 $ 3.90
September 3, 1998.......................................... 567,500 $ 3.20
September 3, 1998.......................................... 40,000 $ 3.75
November 17, 1998.......................................... 110,000 $ 3.75
November 17, 1998.......................................... 45,000 $ 1.00
April 26, 1999............................................. 105,000 $ 1.00
June 30, 1999.............................................. 327,000 $ 5.75
June 30, 1999.............................................. 37,000 $ 3.75
June 30, 1999.............................................. 10,000 $ 3.20
November 1, 1999........................................... 2,013,480 $ 5.75
November 4, 1999........................................... 100,000 $ 5.75
December 15, 1999.......................................... 230,000 $ 5.75
January 10, 2000........................................... 515,000 $ 5.75
February 15, 2000.......................................... 65,000 $ 5.75
March 20, 2000............................................. 12,000 $12.00
July 17, 2000.............................................. 8,500 $ 5.75
July 17, 2000.............................................. 465,250 $11.00
July 17, 2000.............................................. 70,000 $ 8.00
July 17, 2000.............................................. 5,000 $10.00

In October 1996, we issued and sold series A preferred shares convertible
into an aggregate of 2,500,000 ordinary shares to various investors for a
purchase price of $2.00 per share. In addition, we issued to these investors,
to existing shareholders and one of our customers warrants to purchase series A
preferred shares convertible into an aggregate of 1,475,110 ordinary shares.
The exercise price of each of these warrants is $3.00. We also issued to Sun
Microsystems, Inc. warrants to purchase series A preferred shares convertible
into 300,000 ordinary shares. The exercise price of each of the Sun
Microsystems warrants is $2.00.

In December 1996, 500,000 series A preferred shares held by the Advanced
Technology Ventures Group were converted into 500,000 series B non-voting
preferred shares. In addition, warrants to purchase 216,670 series A preferred
shares issued to the Advanced Technology Ventures Group were converted into
warrants to purchase 216,670 series B non-voting preferred shares. In April
1997, 150,000 series A preferred shares held by Advanced Technology Ventures
were converted into 150,000 series B non-voting preferred shares.

In March 1998, we issued series C-1 preferred shares convertible into
2,564,104 ordinary shares at a purchase price of $3.90 per share to some of our
shareholders and a group of financial investors. Of the series C-1 preferred
shares, 794,871 shares were purchased by way of conversion of bridge
investments provided by some of our shareholders during 1997. In addition, we
issued to the shareholders who provided us with the bridge investments warrants
to purchase series C-1 preferred shares convertible into 31,794 ordinary shares
at an exercise price of NIS 0.1 per share.

II-3

In April 1998, we issued to a strategic investor series C-1 preferred
shares convertible into 641,026 ordinary shares at a purchase price of $3.90
per share. In addition, we issued to the strategic investor a warrant to
purchase series C-1 preferred shares convertible into 512,820 ordinary shares,
at an exercise price of $3.90 per share. In September 1998, the warrant was
exercised in whole by the strategic investor.

In March 1999, we issued to a subsidiary of Bank Hapoalim a warrant to
purchase 217,391 ordinary shares at an exercise price of $4.60 per ordinary
share. This warrant will expire upon the completion of this offering.

In June 1999, we sold an aggregate of 1,739,132 of our series C-2
preferred shares to some of our shareholders and a group of financial investors
at a purchase price of $5.75 per share. In addition, we issued warrants to
these shareholders and investors enabling them to purchase up to 347,826 of our
series C-2 preferred shares at a purchase price of $5.75 per share. The
warrants contain a cashless exercise feature and expire upon the earlier of 5
years from the date of issuance, a merger of our company or a sale of all or
substantially all of our shares or assets.

Between June 1999 and July 31, 2000, we issued warrants to purchase an
aggregate of 385,000 ordinary shares to customers at an exercise prices ranging
from $5.75 to $12.00 per ordinary share. Warrants to purchase 50,000 ordinary
shares will expire upon the completion of this offering and the remaining
warrants to purchase 335,000 ordinary shares expire on dates ranging from
January 2002 to January 2003.

In January 2000, we issued to a subsidiary of Bank Hapoalim a warrant to
purchase 69,565 ordinary shares at an exercise price of $5.75 per ordinary
share. This warrant will expire upon the completion of this offering.

In February and March 2000, some of our shareholders loaned our company an
aggregate of $5,000,000. These convertible loans converted into the convertible
debentures issued later in April described below. In addition, these
shareholders were issued warrants to purchase up to an aggregate of 124,999
ordinary shares at an exercise price of $6.27 per share. The warrants may be
exercised until the earlier of five years from the date of issuance, a merger
of our company or the sale of all or substantially all of our shares or assets.
In April 2000, we issued convertible debentures to three additional investors
in an aggregate amount of $11.0 million.

All of the convertible debentures bear annual interest at the London
interbank offered rate plus 2%. The convertible debentures are automatically
convertible into ordinary shares upon the completion of this offering at a
conversion price per share reflecting a discount of 40% to 50% of the price per
share in this offering, depending on the timing of the offering. If this
offering is completed by December 20, 2000, the discount will be 40% and we
will be required to issue to these investors, together with those shareholders
who provided loans as described in the preceding paragraph, 2,431,917 of our
ordinary shares reflecting a price per share of $6.60.

The securities referred to above were offered and sold under exemptions
from registration under Section 4(2) of the Securities Act. Each of the
transactions involved a private placement to a limited number of institutional
investors, venture capital firms, strategic investors, customers or other
investors. None of these transactions involved a general solicitation and each
was completed without brokers or placement agents.

II-4

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits.

Exhibit Sequential
Number Description of Document Page No.
------- ----------------------- ----------

1.1+ Form of Underwriting Agreement.............................
3.1+ Memorandum of Association of Registrant (English
translation) dated March 8, 1988..........................
Articles of Association of Registrant, dated April 11,
3.2+ 2000......................................................
3.3+ Form of Amended Articles of Association of Registrant......
4.1 Specimen of ordinary share certificate.....................
Form of Amended Articles of Association of Registrant
4.2+ (included at Exhibit 3.3).................................
Form of opinion of Meitar, Liquornik, Geva & Co. about the
5.1+ validity of the shares....................................
10.1+ 1996 stock option plan.....................................
10.2+ 1997 stock option plan.....................................
10.3+ 1998 stock option plan.....................................
10.4+ 1999 stock option plan.....................................
10.5+ The 2000 Amendment and Restatement to the Investors' Rights
Agreement among ViryaNet and the Investors dated April 5,
2000......................................................
10.6+ Form of warrant issued by ViryaNet to purchase series A
convertible preferred shares or their ordinary share
equivalents...............................................
10.7+ Form of warrant issued by ViryaNet to purchase series B
convertible preferred shares or their ordinary share
equivalents...............................................
10.8+ Form of warrant issued by ViryaNet to purchase series C-1
convertible preferred shares or their ordinary share
equivalents...............................................
10.9+ Form of warrant issued by ViryaNet to purchase series C-2
convertible preferred shares or their ordinary share
equivalents...............................................
10.10+ Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot)
Ltd. to purchase 217,391 ordinary shares..................
10.11+ Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot)
Ltd. to purchase approximately 69,565 ordinary shares.....
10.12+ Form of warrant issued by ViryaNet to customers prior to
July 1, 2000 to purchase ordinary shares..................
10.13+ Form of warrant issued by ViryaNet to certain shareholders
in connection with the convertible loan financing.........
10.14+ Lease for approximately 16,950 square feet of office space
in Jerusalem, Israel......................................
10.15 Lease for approximately 13,807 square feet in Southborough,
Massachusetts.............................................
10.16 Form of Indemnification Agreement entered into with
directors and officers of Company.........................
10.17 Form of warrant issued by ViryaNet to customers after
July 1, 2000 to purchase ordinary shares..................
21.1+ Subsidiaries of the Registrant.............................
23.1 Consent of Kost, Forer & Gabbay, a member of Ernst and
Young International.......................................
23.2+ Consent of Meitar, Liquornik, Geva & Co. (contained in
Exhibit 5.1)..............................................
23.3+ Consent of ITC Deltacom....................................
23.4+ Consent of Symbol Technologies.............................
23.5+ Consent of Teraoka Seiko...................................
24.1+ Powers of attorney (included on page II-6).................

- ------------------

+ Filed previously.

II-5

(b) Financial Statement Schedules.

II. Schedule of Valuation and Qualifying Accounts to Consolidated
Financial Statements of the Registrant

Item 17. Undertakings.

The undersigned registrant undertakes to provide to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

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

The undersigned registrant undertakes that:

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration statement as
of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.

II-6

SIGNATURES

Under the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto, duly authorized, in the City of Southborough, Massachusetts, on
August 25, 2000.

VIRYANET LTD.

By: /s/ Samuel I. HaCohen
----------------------------------
Samuel I. HaCohen
Chief Executive Officer

VIRYANET, INC.
Authorized U.S. Representative

By: /s/ Samuel I. HaCohen
----------------------------------
Samuel I. HaCohen
Chief Executive Officer

Under the requirements of the Securities Act of 1933, this Amendment No. 2
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Samuel I. HaCohen Chief Executive Officer, August 25, 2000
______________________________________ Director and Authorized
Samuel I. HaCohen United States
Representative (principal
executive officer)

/s/ Yoram Bibring* Chief Financial Officer August 25, 2000
______________________________________ (principal finance and
Yoram Bibring accounting officer)

/s/ Amnon Shoham* Director August 25, 2000
______________________________________
Amnon Shoham

II-7

Signature Title Date
--------- ----- ----

/s/ Jay B. Morisson* Director August 25, 2000
______________________________________
Jay B. Morisson

/s/ Steven N. Baloff* Director August 25, 2000
______________________________________
Steven N. Baloff

/s/ Lawrence W. Hambly* Director August 25, 2000
______________________________________
Lawrence W. Hambly

/s/ Hillel Milo* Director August 25, 2000
______________________________________
Hillel Milo

*By: /s/ Samuel I. HaCohen
- ---------------------------------
Samuel I. HaCohen

Attorney-in-Fact

II-8

SCHEDULE II--Valuation and Qualifying Accounts

Balance at Additions Balance
the beginning charged to at the end
Allowance for doubtful accounts of period expenses of period
- ------------------------------- ------------- ---------- ----------

Year ended December 31, 1999................ $20 $ 8 $28
=== === ===
Year ended December 31, 1998................ $20 -- $20
=== === ===
Year ended December 31, 1997................ $-- $20 $20
=== === ===

LIST OF EXHIBITS

Exhibit Sequential
Number Description of Document Page No.
------- ----------------------- ----------

1.1+ Form of Underwriting Agreement...........................
3.1+ Memorandum of Association of Registrant (English
translation) dated March 8, 1988........................
Articles of Association of Registrant, dated April 11,
3.2+ 2000....................................................
3.3+ Form of Amended Articles of Association of Registrant....
4.1 Specimen of ordinary share certificate...................
Form of Amended Articles of Association of Registrant
4.2+ (included at Exhibit 3.3)...............................
Form of opinion of Meitar, Liquornik, Geva & Co. about
5.1+ the validity of the shares..............................
10.1+ 1996 stock option plan...................................
10.2+ 1997 stock option plan...................................
10.3+ 1998 stock option plan...................................
10.4+ 1999 stock option plan...................................
10.5+ The 2000 Amendment and Restatement to the Investors'
Rights Agreement among ViryaNet and the Investors dated
April 5, 2000...........................................
10.6+ Form of warrant issued by ViryaNet to purchase series A
convertible preferred shares or their ordinary share
equivalents.............................................
10.7+ Form of warrant issued by ViryaNet to purchase series B
convertible preferred shares or their ordinary share
equivalents.............................................
10.8+ Form of warrant issued by ViryaNet to purchase series C-1
convertible preferred shares or their ordinary share
equivalents.............................................
10.9+ Form of warrant issued by ViryaNet to purchase series C-2
convertible preferred shares or their ordinary share
equivalents.............................................
10.10+ Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot)
Ltd. to purchase 217,391 ordinary shares................
10.11+ Warrant issued by ViryaNet to Hapoalim Nechasim (Menayot)
Ltd. to purchase approximately 69,565 ordinary shares...
10.12+ Form of warrant issued by ViryaNet to customers prior to
July 1, 2000 to purchase ordinary shares................
10.13+ Form of warrant issued by ViryaNet to certain
shareholders in connection with the convertible loan
financing...............................................
10.14+ Lease for approximately 16,950 square feet of office
space in Jerusalem, Israel..............................
10.15 Lease for approximately 13,807 square feet in
Southborough, Massachusetts.............................
10.16 Form of Indemnification Agreement entered into with
directors and officers of Company.......................
10.17 Form of warrant issued by ViryaNet to customers after
July 1, 2000 to purchase ordinary shares................
21.1+ Subsidiaries of the Registrant...........................
23.1 Consent of Kost, Forer & Gabbay, a member of Ernst and
Young International.....................................
23.2+ Consent of Meitar, Liquornik, Geva & Co. (contained in
Exhibit 5.1)............................................
23.3+ Consent of ITC Deltacom..................................
23.4+ Consent of Symbol Technologies...........................
23.5+ Consent of Teraoka Seiko.................................
24.1+ Powers of attorney (included on page II-6)...............
- ------------------
+ Filed previously.

Schedule
No.
--------

II Schedule of Valuation and Qualifying Accounts to
Consolidated Financial Statements of the Registrant.....