---

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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

# FORM 20-F

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

# OR

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

# For the fiscal year
ended December 31, 2005

# OR

|o | TRANSACTION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

# For the transition
period from _____________ to ____________

# OR

|o | SHELL COMPANY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

# Date of event requiring
this shell company report _____________

# Commission file number
0-30820

# TIKCRO TECHNOLOGIES
LTD.(Exact name of
Registrant as specified in its charter andtranslation of Registrants name into
English)

# ISRAEL(Jurisdiction of incorporation or organization)

# 126 Yigal Allon
Street, Tel Aviv 67443, Israel (Address of principal
executive offices)



|Securities registered or to be registered pursuant to Section 12(b) of the Act:
|-------------------------------------------------------------------------------
|
|
|
|
|Title of each class                                                            

# None



---

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Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, par value NIS 0.10 per share (Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None (Title of Class)

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

# 23,726,401 Ordinary
Shares, par value NIS 0.10 per share

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.

o Yes     xNo

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

x Yes    o  No

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer   o              Accelerated filer   o           Non-accelerated filer x

Indicate by check mark which
financial statement item the Registrant has elected to follow.

Item 17 o    Item 18 x

If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

x Yes    o  No

2

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|         |                                                       |   
|-------- | ----------------------------------------------------- | --
|
|
|
|
|PART 1.  |                                                       | 1 
|ITEM 1.  | Identify of Directors, Senior Management and Advisors | 1 
|ITEM 2.  | Offer Statistics and Expected Timetable               | 1 
|ITEM 3.  | Key Information                                       | 1 
|A.       | Selected Financial Data                               | 1 
|B.       | Capitalization and Indebtedness                       | 3 
|C.       | Reasons for the offer and use of proceeds             | 3 
|D.       | Risk Factors                                          | 4 
|ITEM 4.  | Information on the Company                            | 8 
|A.       | History and Development of the Company                | 8 
|B.       | Business Overview                                     | 9 
|C.       | Organizational Structure                              | 9 
|D.       | Property, Plants and Equipment                        | 9 
|ITEM 4A. | Unresolved Staff Comments                             | 9 
|ITEM 5.  | Operating and Financial Review and Prospects          | 9 
|A.       | Operating Results                                     | 9 
|B.       | Liquidity and Capital Resources                       | 15
|C.       | Research and Development, Patents and Licenses        | 16
|D.       | Trend Information                                     | 16
|E.       | Off-balance Sheet Arrangements                        | 16
|F.       | Tabular Disclosure of Contractual Obligations         | 16
|ITEM 6.  | Directors, Senior Management and Employees            | 16
|A.       | Directors and Senior Management                       | 16
|B.       | Compensation                                          | 17
|C.       | Broad Practices                                       | 18
|D.       | Employees                                             | 23
|E.       | Share Ownership                                       | 24

2

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|         |                                                            |   
|-------- | ---------------------------------------------------------- | --
|
|
|
|
|ITEM 7.  | Major Shareholders and Related Party Transactions          | 24
|A.       | Major Shareholders                                         | 24
|B.       | Related Party Transactions                                 | 25
|C.       | Interests of Experts and Counsel                           | 25
|ITEM 8.  | Financial Information                                      | 25
|A.       | Consolidated Statements and other Financial Information    | 25
|B.       | Significant Changes                                        | 25
|ITEM 9.  | The Offer and Listing                                      | 26
|A.       | Offer and Listing Details                                  | 26
|B.       | Plan of Distribution                                       | 27
|C.       | Markets                                                    | 27
|D.       | Selling Shareholders                                       | 27
|E.       | Dilution                                                   | 27
|F.       | Expenses of the Issue                                      | 27
|ITEM 10. | Additional information                                     | 27
|A.       | Share Capital                                              | 27
|B.       | Memorandum and Articles of Association                     | 28
|C.       | Material Contracts                                         | 33
|D.       | Exchange Controls                                          | 33
|E.       | Taxation                                                   | 33
|F.       | Dividends and Paying Agents                                | 41
|G        | Statement by Experts                                       | 41
|H.       | Documents On Display                                       | 41
|I.       | Subsidiary Information                                     | 42
|ITEM 11. | Quantitative and Qualitative Disclosures about Market Risk | 42
|ITEM 12. | Description of Securities other than Equity Securities     | 42

3

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|          |                                                                              |   
|--------- | ---------------------------------------------------------------------------- | --
|
|
|
|
|PART 2.   |                                                                              | 42
|ITEM 13.  | Defaults, Dividend Averages and Delinquencies                                | 42
|ITEM 14.  | Material Modifications to the Rights of Security Holders and Use of Proceeds | 42
|ITEM 15.  | Controls and Procedures                                                      | 43
|ITEM 16A. | Audit Committee Financial Expert                                             | 43
|ITEM 16B. | Code of Ethics                                                               | 43
|ITEM 16C. | Principal Accountant Fees and Services                                       | 43
|ITEM 16D  | Exemptions from Listing Standards for Audit Committees                       | 44
|ITEM 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 44
|PART 3.   |                                                                              | 44
|ITEM 17.  | Financial Statements                                                         | 44
|ITEM 18.  | Financial Statements                                                         | 44
|ITEM 19.  | Exhibits                                                                     | 45

4

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# PART 1

Unless the context otherwise
requires, Tikcro, us, we and our refer to
Tikcro Technologies Ltd., an Israeli company, and its subsidiaries.

Statements in this Annual Report
concerning our business outlook or future economic performance; anticipated revenues,
expenses or other financial items; and statements concerning assumptions made or
expectations as to any future events, conditions, performance or other matters, are
forward-looking statements as that term is defined under the United States
Federal Securities Laws. In some cases, you can identify forward-looking statements by our
use of words such as expect, anticipate, believe,
intend, plan, seek and estimate and
similar expressions. Forward-looking statements are subject to risks, uncertainties and
other factors which could cause actual results to differ materially from those stated in
such statements. Factors that could cause or contribute to such differences include, but
are not limited to, those set forth under Risk Factors and elsewhere in this
Annual Report as well as our reports on Form 6-K submitted to the Securities and Exchange
Commission.

|ITEM 1. |  | Identity of Directors, Senior Management and Advisors
|------- |  | -----------------------------------------------------

Not applicable

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

Not applicable.

|ITEM 3. |  | Key Information
|------- |  | ---------------

# A. Selected Financial
Data

We were formed in December 1999 to
receive substantially all of the assets and liabilities of the semiconductor chip business
of our former parent, Orckit Communications Ltd., in accordance with the terms of a plan
of separation. Under this plan, Tikcro received substantially all of Orckits
semiconductor chip business, including the business of Silicon Value (S.V.) Ltd., a
company which Orckit acquired prior to consummation of the plan and whose business we sold
in April 2001. The spin-off was consummated on June 30, 2000.

We have derived the following
selected financial data from the financial statements of Tikcro, which have been prepared
in accordance with generally accepted accounting principles in the United States. The
results of operations of the ASIC business of Silicon Value, which we sold in April 2001,
are reflected only in the line item called loss from discontinued operations.
You should read the selected consolidated financial data together with Item 5
Operating and Financial Review and Prospects and our consolidated financial
statements included elsewhere in this Annual Report.

1

---

---

In April 2003, we sold substantially
all of our assets and liabilities to STMicroelectronics (other than financial
indebtedness) pursuant to an asset purchase agreement, which is described below under
Item 10.C Additional Information  Material Contracts. Since then, our
plan of operation has been to explore the best course of action for Tikcro, including to
attempt to merge or effect a business combination with a domestic or foreign, private or
public operating entity in a new area of operations. Accordingly, the data presented
below are not indicative of our future operating results or financial position.

|                                                          | Years Ended December 31,
|--------------------------------------------------------- | ------------------------
|
|
|
|
|Statement of Operations Data:                             |                         
|Revenues                                                  |                         
|                                                          |                         
|Research and development expenses and development         |                         
|services costs                                            |                         
|Less - royalty-bearing grants                             |                         
|                                                          |                         
|Research and development expenses, net and development    |                         
|services costs, net                                       |                         
|Selling, marketing, general and administrative expenses . |                         
|Impairment of property and equipment                      |                         
|                                                          |                         
|Amortization of deferred stock compensation(1)            |                         
|                                                          |                         
|Operating loss                                            |                         
|Other expenses                                            |                         
|Other income                                              |                         
|Financial income (expense), net                           |                         
|                                                          |                         
|Net income (loss) from continuing operations              |                         
|                                                          |                         
|Income (loss) from discontinued operations(2)             |                         
|                                                          |                         
|Net income (loss)                                         |                         
|                                                          |                         
|                                                          |                         
|Basic net earnings (loss) per share from continuing       |                         
|operations                                                |                         
|                                                          |                         
|Basic net earnings (loss) per share from discontinued     |                         
|operations                                                |                         
|                                                          |                         
|                                                          |                         
|Basic net earnings (loss) per share                       |                         
|                                                          |                         
|Diluted net earnings (loss) per share from continuing     |                         
|operations                                                |                         
|                                                          |                         
|Diluted net earnings (loss) per share from discontinued   |                         
|operations                                                |                         
|                                                          |                         
|Diluted net earnings (loss) per share                     |                         
|                                                          |                         
|Number of shares used in computing basic net earnings     |                         
|(loss) per share                                          |                         
|                                                          |                         
|Number of shares used in computing diluted net earnings   |                         
|(loss) per share                                          |                         
|                                                          |                         

2

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| | (1) | Amortization
of deferred stock compensation related to the following operating           expenses:
research and development expenses, net and development services costs,           net of
$1,338, $387, $47, $0 and $0 for the years ended December 31, 2001, 2002,           2003,
2004 and 2005, respectively; and selling, marketing, general and           administrative
expenses of $914, $248, $724, $0 and $0 for the years ended           December 31, 2001,
2002, 2003, 2004 and 2005, respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | For
the year 2001, this item includes goodwill amortization in the amount of           $2,259
and impairment of property and equipment in the amount of $823.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | *) | Represents
an amount lower than $0.01.
| | -- | --------------------------------------

|                                                     | December 31,
|---------------------------------------------------- | ------------
|
|
|
|
|Balance Sheet Data:                                  |             
|Cash and cash equivalents and short term investments |             
|Working capital                                      |             
|Total assets                                         |             
|Shareholders equity (deficiency)                     |             

# B. Capitalization and
Indebtedness

Not
applicable.

C.
          Reasons for the offer and use of proceeds

Not
applicable.

3

---

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# D. Risk Factors

We believe that the occurrence of
any one or some combination of the following factors could have a material adverse effect
on our business, financial condition and results of operations.

We have sold our business and
currently conduct no business activities.

In April 2003, we sold substantially
all of our assets and liabilities (other than financial indebtedness) to
STMicroelectronics. Since then, our plan of operation has been to evaluate the best course
of action for Tikcro, including to attempt to merge or effect a business combination with
a domestic or foreign, private or public operating entity in a new area of operations.
Other than activities relating to attempting to locate such a candidate and activities
relating to the investment of our funds, we do not currently conduct any operations.

We may not be successful in
identifying and evaluating suitable business opportunities or in consummating a business
combination.

We do not have an agreement or
understanding with respect to engaging in a business combination with a specific entity.
We expect to incur expenses in the course of this evaluation, whether or not such
evaluation results in a business combination. There can be no assurance that we will be
successful in identifying and evaluating suitable business opportunities or in
consummating a business combination. No particular industry or specific business within an
industry has been selected for a target company. Accordingly, we may enter into a business
combination with a business entity having no significant operating history, losses,
limited or no potential for immediate earnings, limited assets, negative net worth or
other negative characteristics. In the event that we complete a business combination, the
success of our operations will be dependent upon the management of the target company and
numerous other factors beyond our control. There is no assurance that we will be able to
negotiate a business combination on terms favorable to us, or at all.

We may be deemed an
investment company under the Investment Company Act of 1940.

Following the sale of our business to
STMicroelectronics in April 2003 and the investment of the cash proceeds of the sale, we
may be deemed an investment company under the Investment Company Act of 1940,
unless we qualify for an exemption. The likelihood of being deemed to be an investment
company increases over time if we do not enter into a business combination or develop an
operating business. If we are deemed an investment company, we could be found to be in
violation of the Investment Company Act of 1940. A violation of that law could subject us
to material adverse consequences.

Our shareholders may be subject to
dilution of the value of our shares upon a business combination.

A business combination normally will
involve the issuance of a significant number of additional shares. Depending upon the
value of the assets acquired in such business combination, the per share value of our
ordinary shares may increase or decrease, perhaps significantly.

4

---

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# We may need additional
financing following a business combination.

If we consummate a business
combination, we may need to raise funds through a public or private financing. We may be
unable to obtain additional financing on acceptable terms or at all.

# We may face tax
liabilities relating to our asset sales.

We havegenerated a
significantamount of income from the sale of the ASIC business of Silicon Value
and our various agreements with STMicroelectronics. Based on our assessment and that of
our tax advisors, we believe that we have fully satisfied all tax due in relation with
these transactions. The tax authorities may not agree with our view. Any such disagreement
and subsequent tax dispute could result in tax liabilities in amounts which we currently
can not estimate.

# We might lose money from
our investments.

We plan to invest the majority of our
cash on hand in a variety of financial instruments. If the obligor of any of the
instruments we hold default or undergo a reorganization in bankruptcy, we may lose
all or a portion of our investment.  This will harm our financial condition. 
For information on the types of our investments as of December 31, 2005, see Item 11
 Quantitative and Qualitative Disclosures About Market Risk  Interest
Rate Risk Management.

Risks relating to our
incorporation in Israel

Our incorporation in Israel may
limit our ability to find a target for a merger or other business combination.

We are incorporated under the laws of
Israel. A state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Political, economic and military conditions might deter
potential targets from effecting a business combination with an Israeli company.

It may be difficult to enforce a
U.S. judgment against us, our officers and directors or to assert U.S. securities law
claims in Israel.

Service of process upon our directors
and officers named herein may be difficult to effect within the United States because some
of these people reside outside the United States. Any judgment obtained in the United
States against us or these individuals or entities may not be enforceable within the
United States.

There is doubt as to the
enforceability of civil liabilities under the Securities Act and the Securities Exchange
Act in original actions instituted in Israel. However, subject to specified time
limitations, Israeli courts may enforce a U.S. final executory judgment in a civil matter,
provided that:

| |  | adequate
 service of process  has been  effected  and the  defendant  has had a  reasonable
                opportunity to be heard;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

5

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| |  | the
judgment and its enforcement  are not contrary to the law,  public policy,  security or
                sovereignty of the State of Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  was  obtained  after due process  before a court of  competent  jurisdiction
                according to the rules of private international law prevailing in Israel;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  was not obtained by  fraudulent  means and does not conflict  with any other
                valid judgment in the same matter between the same parties;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 U.S. court; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. court is not prohibited from enforcing the judgments of Israeli courts.
| | - | --------------------------------------------------------------------------------

If a foreign judgment is enforced by
an Israeli court, it generally will be payable in new Israeli shekels, which can then be
converted into non-Israeli currency and transferred out of Israel. The usual practice in
an action to recover an amount in non-Israeli currency is for the Israeli court to render
judgment for the equivalent amount in new Israeli shekels at the rate of exchange on the
date of payment, but the judgment debtor also may make payment in non-Israeli currency.
Pending collection, the amount of the judgment of an Israeli court stated in new Israeli
shekels ordinarily will be linked to the Israel Consumer Price Index plus interest at the
annual rate (set by Israeli law) prevailing at that time. Judgment creditors bear the risk
of unfavorable exchange rates.

Provisions of Israeli law may
delay, prevent or make more difficult a merger or other business combination.

Provisions of Israeli corporate law
may have the effect of delaying, preventing or making more difficult a merger with, or
acquisition of, us. The Israeli Companies Law generally provides that a merger be approved
by the board of directors and a majority of the shares present and voting on the proposed
merger. For purposes of the shareholder vote, unless a court rules otherwise, the merger
will not be deemed approved if a majority of the shares not held by the other party to the
merger (or by any person who holds 25% or more of the shares or the right to appoint 25%
or more of the directors of the other party or its general manager) have voted against the
merger. Upon the request of any creditor of a party to the proposed merger, a court may
delay or prevent the merger if it concludes that there is a reasonable concern that, as a
result of the merger, the surviving company will be unable to satisfy the obligations of
the surviving company. Finally, a merger may not be completed unless at least (i) 50 days
have passed since the filing of a merger proposal signed by both parties with the Israeli
Registrar of Companies and (ii) 30 days have passed since the merger was approved by the
shareholders of each merging company.

6

---

---

The Companies Law also 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 25% or greater shareholder of the
company, unless there is already another 25% or greater shareholder of the company.
Similarly, an acquisition of shares must be made by means of a tender offer if as a result
of the acquisition the purchaser would become a 45% or greater shareholder of the company,
unless there is already a 45% or greater shareholder of the company. In any event, if as a
result of an acquisition of shares the acquirer will hold more than 90% of a
companys shares, the acquisition must be made by means of a tender offer for all of
the shares.

Finally, Israel tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign
company, less favorably than U.S. tax laws. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares for shares
in another corporation, to taxation prior to the sale of the shares received in such
stock-for-stock swap.

Risks relating to the
market for our ordinary shares

Holders of our ordinary shares who
are U.S. residents face income tax risks.

There is a high likelihood that we
were properly classified for U.S. federal income tax purposes as a passive foreign
investment company, or PFIC, for 2005. Our classification as a PFIC could result in a
reduction in the after-tax return to the U.S. holders of our ordinary shares, thus causing
a reduction in the value of our shares, and could trigger the application of certain
United States tax reporting requirements. For U.S. federal income tax purposes, we are
treated as a PFIC for any tax year in which either:

| | 75%
or more of our gross income is passive in nature, or
|- | --------------------------------------------------------

| | on
average for such tax year, 50% or more of our assets (by value or, if we so elect in
certain circumstances, by adjusted tax basis) produce, or are held for the production of,
passive income.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For this purpose, passive income
includes dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. As a result of our
relatively substantial cash and investment assets, there is a high likelihood that we were
properly classified as a PFIC for 2005 under the asset test. We could also be classified
as a PFIC for 2006. A separate determination must be made each year as to whether we are a
PFIC. As a result, our PFIC status may change.

Highly complex rules apply to U.S.
holders of our ordinary shares if we are treated as a PFIC for U.S. federal income tax
purposes for any year during the U.S. holders holding period. Accordingly, U.S.
holders are urged to consult their tax advisors regarding the application of these tax
rules.

U.S.
          residents should carefully read Item 10.E Taxation  United States
          Federal Income Tax Consequences for a more complete discussion of the U.S.
          federal income tax risks related to owning and disposing of our ordinary shares
          and the consequences of PFIC status.

7

---

---

# The delisting of our
ordinary shares may reduce their liquidity.

On December 19, 2001, our ordinary
shares were delisted from the Nasdaq National Market and subsequently from the Tel Aviv
Stock Exchange. Our ordinary shares currently are quoted on the OTC Bulletin Board, an
electronic quotation medium regulated by the National Association of Securities Dealers.
The market for shares quoted on the OTC Bulletin Board is typically less liquid than that
for shares quoted on the Nasdaq National Market. This could make it more difficult for our
shareholders to sell their shares at desired prices and amounts.

# Two shareholders may be
able to control us.

Izhak Tamir and Eric Paneth,
directors of Tikcro, each beneficially own approximately 13.3% of our outstanding ordinary
shares and are our largest shareholders. Currently, Messrs. Paneth and Tamir are not party
to a shareholders agreement. However, if Messrs. Paneth and Tamir act together, there is a
high likelihood that they effectively would have the power to control the outcome of all
matters submitted for the vote of our shareholders, including the election of directors
and the approval of significant change in control transactions. Their combined equity
interest in us may have the effect of making certain transactions more difficult and may
result in delaying, deferring or preventing a change in control of Tikcro unless approved
by one or both of them.

Our shareholder bonus rights plan
may delay, prevent or make more difficult a hostile acquisition of Tikcro, which could
depress our share price.

In September 2005, we adopted a
shareholder bonus rights plan pursuant to which share purchase bonus rights were
distributed to our shareholders. These rights generally will be exercisable and
transferable apart from our ordinary shares only if a person or group acquires beneficial
ownership of 15% or more of our ordinary shares, or commences a tender or exchange offer
upon consummation of which that person or group would hold such a beneficial interest.
Once these rights become exercisable and transferable, the holders of rights, other than
the person or group triggering their transferability, will be generally entitled to
purchase our ordinary shares at a discount from the market price. The rights will expire
on December 31, 2015. While these rights remain outstanding, they may make an acquisition
of us more difficult and result in delaying or preventing a change in control of Tikcro.

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

A. History and Development of the Company

We were incorporated on December 14,
1999 under the laws of the State of Israel. We are governed by the Israeli Companies Law,
5759-1999. In September 2003, we changed our name from Tioga Technologies Ltd.
to Tikcro Technologies Ltd. Our principal executive offices are located at 126
Yigal Allon Street, Tel Aviv, Israel and our telephone number is (972-3) 694-8648.

8

---

---

# Principal Capital
Expenditures

Our principal capital expenditures to
date have been the purchase of equipment and other fixed assets used in our business.
These purchases totaled $10,000 in 2003 and $0 in 2004 and 2005.

# B. Business Overview

Our historical business was the
design, development and marketing of DSL chips used by manufacturers of telecommunications
equipment.

Upon the sale of our business to
STMicroelectronics in April 2003, we ceased the operations of our business as conducted
prior thereto. Since then, our plan of operation has been to explore the best course of
action for Tikcro, including to attempt to merge or effect a business combination with a
domestic or foreign, private or public operating entity in a new area of operations. We
may also invest a portion of our funds in one or more smaller investments. In addition to
the cash and cash equivalents that we hold, we believe that there are perceived benefits
to being a reporting company with a class of publicly-traded securities which
may be attractive to certain entities.

We may enter into a definitive
agreement with a wide variety of businesses without limitation as to their industry or
revenues. It is not possible at this time to predict when, if ever, we will enter into a
business combination with any such company or what will be the industry, operating
history, revenues, future prospects or other characteristics of any such company.

# C. Organizational
Structure

We do not have significant
subsidiaries.

# D. Property, Plants and
Equipment

We do not have any material fixed
assets.

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

Not applicable.

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

# A. Operating Results

Our operating and financial review
and prospects should be read in conjunction with our financial statements, accompanying
notes thereto and other financial information appearing elsewhere in this Annual Report.

9

---

---

# Overview

We were formed as a private Israeli
company in December 1999. Prior to our separation from Orckit, our business was operated
as a division of Orckit. Our historical business was the design, development and marketing
of DSL chips used by manufacturers of telecommunications equipment, and the vast majority
of our chip sales were to Orckit.

In February 2002, we entered into
three strategic agreements with STMicroelectronics. Pursuant to a technology transfer
agreement, we granted STMicroelectronics certain co-ownership rights in our existing
intellectual property in the DSL field and ownership rights over our products, including
certain products still under development and our rights under certain design wins.
Pursuant to a development, marketing and services agreement, we provided research and
development and marketing services to STMicroelectronics through April 2003. Pursuant to a
one-year option agreement, we granted to STMicroelectronics the right to acquire our
business. STMicroelectronics exercised its option and acquired our business in April 2003
pursuant to an asset purchase agreement. In January 2004, we reached an agreement with
STMicroelectronics that settled certain reciprocal financial claims, including with
respect to an escrow account which had been established under the asset purchase
agreement. In April 2005, the remaining amount under escrow was paid to us.

As a result of these agreements, from
February 2002 through April 2003 our activities consisted primarily of research and
development and marketing services provided to STMicroelectronics. During this period,
substantially all of our revenue derived from STMicroelectronics.

Following the sale of our business to
STMicroelectronics in April 2003, our plan of operation has been to explore the best
course of action for Tikcro, including to attempt to merge or effect a business
combination with a domestic or foreign, private or public operating entity in a new area
of operations. Accordingly, the financial information presented herein is not indicative
of our future operating results or financial position.

In 2003, we generated net income of
$12.0 million. Our net income in 2003 includes $12.8 million in other income.

In 2004, we generated only financial
income, which was lower than our expenses, resulting in a net loss of $211,000.

In 2005, we generated only financial income,
which exceeded our expenses, resulting in net income of $4,000.

# Application of Critical
Accounting Policies and Estimates

We prepare our consolidated financial
statements in conformity with accounting principles generally accepted in the United
States. These accounting principles require management to make certain estimates,
judgments and assumptions based upon the information available at the time they are made,
historical experience and various other factors believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. Management evaluates its estimates
and judgments on an on-going basis. Some of those judgments can be subjective and complex,
and consequently actual results may differ from those estimates.

10

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The Company is also subject to risks
and uncertainties that may cause actual results to differ from estimates and assumptions,
such as changes in the economic environment, competition, foreign exchange, taxation and
governmental programs. Certain of these risks, uncertainties and assumptions are discussed
in Item 3.D  Risk Factors. To facilitate the understanding of our
business activities, described below are certain accounting policies that are relatively
more important to the portrayal of our financial condition and results of operations and
that require managements subjective judgments. We base our judgments on past
experience and various other assumptions that are believed to be reasonable under the
circumstances. Please refer to Note 2 to our consolidated financial statements included in
this Annual Report for a summary of all of our significant accounting policies

Revenue recognition

Prior to entering into the agreements
with STMicroelectronics in February 2002, we derived our revenues from continuing
operations mostly from royalties and sales of products to Orckit. In 2001, following the
amendment of our product supply agreement, we recognized our royalty revenues as net
revenues without cost of goods sold. Revenues under our agreements with Orckit were
recognized at the time of shipment as reported to us by Orckit.

Revenues from sales of products were
recognized when persuasive evidence of an agreement exists, delivery occurred, the fee was
fixed and determinable and collectibility was probable.

Revenues from research and
development services were recognized at the time they were rendered.

Marketable Securities

SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, and Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) 59, Accounting for Noncurrent Marketable Equity
Securities, provide guidance on determining when an investment is other-than-temporarily
impaired. Investments are reviewed quarterly for indicators of other-than-temporary
impairment. This determination requires significant judgment. In making this judgment, we
evaluate, among other factors, the duration and extent to which the fair value of an
investment is less than its cost, the financial health of the investee, and our intent and
ability to hold the investment. Investments with such an indicator are further evaluated
to determine the likelihood of a significant adverse effect on the fair value and amount
of the impairment as necessary. If market, industry and/or investee conditions
deteriorate, we may incur future impairments.

11

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# Results of Operations

The table below sets forth, for the
periods indicated, financial data which we believe to be significant in analyzing our
results of operations.

|                                               | Years Ended December 31,
|---------------------------------------------- | ------------------------
|
|
|
|
|Statement of Operations Data:                  |                         
|Revenues                                       |                         
|Research and development expenses and          |                         
|development services costs                     |                         
|Less royalty-bearing grants                    |                         
|                                               |                         
|Research and development expenses, net and     |                         
|development services costs, net                |                         
|Selling, marketing, general and administrative |                         
|expenses                                       |                         
|Amortization of deferred stock compensation    |                         
|Operating loss                                 |                         
|Other income                                   |                         
|Financial income (expense), net                |                         
|                                               |                         
|Net income (loss)                              |                         
|                                               |                         

12

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The table below sets forth, for the
period indicated,* financial data, expressed as a percentage of total revenues, which we
believe to be significant in analyzing our results of operations.

|                                                                           | 2003
|-------------------------------------------------------------------------- | ----
|
|
|
|
|Revenues:                                                                  |     
|Research and development expenses, net and development services costs, net |     
|Selling, marketing, general and administrative expenses                    |     
|Amortization of deferred stock compensation                                |     
|Operating loss                                                             |     
|Other income                                                               |     
|Financial expense, net                                                     |     
|                                                                           |     
|Net income                                                                 |     
|                                                                           |     

---

*No data is presented for 2004 and
2005 because we had no revenues in those years.

Revenues.In 2003, we had revenues
from development and marketing services of $2.7 million under our agreement with
STMicroelectronics, which was in effect from February 2002 to April 2003.

Research and development
expenses, net and development costs, net.Research and development expenses
consisted primarily of salaries and other personnel-related expenses, consultant
expenses, equipment and software depreciation, supplies, overhead expenses and other
expenses related to the design and development of our products. Our research and
development costs were expensed as incurred. The elimination of research and
development expenses in 2004 and 2005 was the result of the transfer on April 28,
2003 of all employees in connection with the sale of our business to
STMicroelectronics.

Selling, marketing, general and
administrative expenses.In 2005 and 2004, we incurred only general and administrative
expenses, which consisted primarily of professional fees and management fees
paid to Orckit. In 2003, selling, marketing, general and administrative expenses
consisted primarily of salaries and other personnel-related expenses for sales and
marketing personnel, executive, accounting and administrative personnel, professional
fees and other general corporate expenses.

Other Income.Other income consists
of income generated from STMicroelectronics. In 2003, we had $12.8 million of other
income, which consists of payments under the asset purchase agreement signed with
STMicroelectronics in April 2003.

13

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Financial income (expenses), net.Financial income consists primarily of interest on marketable securities and bank
deposits. In 2003, financial expense consisted mainly of interest on the loan
received from Orckit during the second half of 2000, which was partly repaid in 2003.

Net income (loss).In 2003, we
generated net income of $12.0 million, primarily as a result of a capital gain in the
amount of $12.8 million in connection with our asset sale to STMicroelectronics.

In 2004,  we had a net loss of
$211,000,  primarily as a result of our general and  administrative  expenses in the
amount of $351,000, which were partly offset by financial income in the amount of
$140,000.

In 2005,  we had net income of
$4,000,  primarily  as a result of financial  income in the amount of  $237,000,  which
was partly offset by our general and administrative expenses in the amount of $233,000.

Impact of Inflation, Devaluation and
Fluctuation of Currencies on Results of Operations Liabilities and Assets

A devaluation  of the new Israeli
 shekel in relation to the U.S.  dollar would have the effect of  decreasing  the dollar
value of our assets in new  Israeli  shekels  to the  extent the  underlying  value is
new  Israeli  shekel-based.  Such a devaluation  also would have the effect of reducing
the U.S. dollar amount of any of our liabilities  which are payable in new Israeli
shekels (unless such payables are linked to the U.S. dollar).

Most of our revenues  were
 denominated  in dollars and our expenses in new Israeli  shekels.  Our expenses in new
Israeli shekels  were  principally  payroll.  Our  results of  operations  were
 adversely  affected by  increases  in the rate of inflation in Israel when such
 increases are not offset by a  corresponding  devaluation of the new Israeli shekel
against the U.S.  dollar.  We do not presently  engage in any hedging or other
 transactions  intended to manage risks relating to foreign currency exchange rate
fluctuations.

The  following  table  presents
 information  about the rate of inflation in Israel,  the rate of  devaluation  of the
new Israeli shekel against the U.S. dollar, and the rate of inflation of Israel adjusted
for the devaluation:

14

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|Years Ended
December 31, | Israeli Inflation
Rate | Israeli Devaluation Rate | Israel Inflation Adjusted
for Devaluation
|------------------------ | ---------------------- | ------------------------ | -----------------------------------------
|
|
|
|
|2001                     |                        |                          |                                          
|2002                     |                        |                          |                                          
|2003                     |                        |                          |                                          
|2004                     |                        |                          |                                          
|2005                     |                        |                          |                                          

# B. Liquidity and Capital
Resources

In 2003, substantially all of our
revenues and other income arose from our agreements with STMicroelectronics, including the
sale of our business to STMicroelectronics in April 2003.

In addition, in February 2003, the
District Court of Tel Aviv approved our application for the repurchase of our ordinary
shares at an aggregate price of up to $2.0 million. In 2003 and 2004, we repurchased
4,341,154 ordinary shares at an aggregate price of $1.1 million.

We had working capital of $10.0million as of December 31, 2003, $9.7million as of December 31, 2004 and $9.7
million as of December 31, 2005.

In 2003, we had net income of $12.0
million and we used $98,000 in our operations. In 2004, we had a net loss of $211,000 and
we generated $1.3 million of cash from operations. In 2005, we had net income of $4,000
and we generated $47,000 of cash from operations.

We generated net cash from investing
activities of $3.6 million in 2003, we used $1.8 million in 2004, and generated $750,000
in 2005.

In 2003, we had a negativecash flow from financing activities of $8.2 million, principally due to the repayment
of $7.0 million of the loan from Orckit. In 2004 and 2005, we did not have any cash flow
from financing activities.

# Government Grants

Under the Law for the Encouragement
of Industrial Research and Development, 1984, or the R&D Law, research and development
programs which meet specified criteria and are approved by a governmental committee of the
Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the
Government of Israel are eligible for grants of up to 50% of the projects
expenditure, as determined by the research committee, in exchange for the payment of
royalties from the sale of products developed in accordance with the program.

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In 2003, 2004 and 2005, we recognized
grants from the Office of the Chief Scientist in the amount of approximately $ 400,000, $0
and $0, respectively.

Our agreements with
STMicroelectronics were approved by the Office of the Chief Scientist. This approval was
conditioned upon the undertaking of STMicroelectronics to comply with the provisions of
the R&D Law and to pay to the Office of the Chief Scientist royalties on the sale of
the purchased products that are based on our funded intellectual property.

# C. Research and
Development, Patents and Licenses

As a result of the agreements with
STMicroelectronics, from February 2002 through April 2003 our activities consisted
primarily of research and development services provided to STMicroelectronics. Following
the sale of our business to STMicroelectronics in April 2003, we conduct no research and
development activities.

Our gross research and development
expenditures were $2.2 million in 2003 and $0 in 2004 and 2005.

D.
          Trend Information

None.

E.
          Off-Balance Sheet Arrangements

We have no off-balance sheet
arrangements.

# F. Tabular Disclosure of
Contractual Obligations

As of December 31, 2005, we had no
contractual obligations of the type required to be disclosed in this section.

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

# A. Directors and Senior
Management and Employees

The following table lists our current
directors and senior managers as of May 31, 2006:

|Name         | Age | Position                                         
|------------ | --- | -------------------------------------------------
|
|
|
|
|Izhak Tamir  | 53  | Chairman of the Board and Chief Executive Officer
|Harel Kodesh | 47  | External Director                                
|Eric Paneth  | 56  | Director                                         
|Irit Gal     | 54  | External Director                                

16

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The business experience of each of
our directors and executive officers is as follows:

Izhak Tamir has served as
Chairman of our Board of Directors since January 2000 and as our Chief Executive Officer
since August 2003. He has served as President and a Director of Orckit since its founding
in 1990. Mr. Tamir has served as a Director of Gilat Satellite Networks Ltd. and of Scopus
Video Networks since 2005. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc.,
in San Diego, California. From 1985 until 1987, he was vice president of A.T.
Communication Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a senior
engineer in the Israeli Government. Mr. Tamir holds an engineering degree from the Israel
Institute of Technology, commonly known as the Technion, and an M.B.A. from Tel Aviv
University.

Harel Kodeshhas served as one
of our Directors since June 2000. Since July 2003, Mr. Kodesh has served as Chief Product
Officer for Amdocs, a worldwide leader in billing and customer care systems. From 2000 to
2003, he served as President and Chief Executive Officer of Wingcast Corporation, a joint
venture between Ford Motor Corporation and Qualcomm Inc. that offers telematics services
to people on the move. From 1992 to 2000, he served in a variety of technical and
managerial roles at Microsoft Corporation, most recently as Vice President of the
productivity appliance division and, prior to that time, as Vice President of the
information appliances division. Mr. Kodesh holds a B.S. degree in Computer Engineering
and an M.S. degree in Electrical Engineering, both from the Technion.

Eric Paneth has served as one
of our Directors since January 2000 and served as our President from February 2000 to June
2000. Mr. Paneth has also served as Chairman of the Board of Directors and Chief Executive
Officer of Orckit since its founding in 1990. From 1975 until 1983, Mr. Paneth was a
senior engineer in the Israeli Government, and from 1985 to 1990, was a technical
department head in the Israeli Government. From 1983 until 1985, he was employed by
Linkabit Inc. in San Diego, California. Mr. Paneth holds an advanced engineering degree
from the Technion.

Irit Galhas served as one of
our external directors since August 2003. Since September 2002, she has served as an
Associate at Stanford University, California, Office of Technology Licensing. Prior to
that, she served as a director and a manager for investments and strategic relations of
ZettaLight, an optical communications company. From May 2000 to February 2002, she served
as Vice President of Runway Telecom Ventures, an Israeli-based venture capital fund
founded by Alcatel and others. From June 1999 to 2000, she served as Vice President for
marketing and business development of Ceramight Composites, which operates in the area of
ceramic composites. From 1997 to 1999, she served as a manager with PricewaterhouseCoopers
in the areas of business development and corporate finance for technology companies. 
Ms. Gal holds B.S. and M.S. degrees in Chemical Engineering from the Technion and an M.A.
degree in Economics from Queens College of the City University of New York.

There are no family relationships
between any director or senior manager. There are no arrangements or understandings
between any director or senior manager and any other person pursuant to which the director
or senior manager was selected.

# B. Compensation

The aggregate direct remuneration,
including fringe benefits commonly provided by companies in Israel, paid or accrued by us
to all persons as a group (four persons) who served in the capacity of director or
executive officer in the year ended December 31, 2005, was approximately $18,000.

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# C. Board Practices

Israeli
Companies Law

We are subject to the provisions of
the new Israeli Companies Law, 5759-1999, and the regulations adopted thereunder.

Board
of Directors

According to the Companies Law and
our articles of association, the oversight of the management of our business is vested in
our board of directors. The board of directors may exercise all powers and may take all
actions that are not specifically granted to our shareholders. As part of its powers, our
board of directors may cause us to borrow or secure payment of any sum or sums of money
for our purposes, at times and upon terms and conditions as it thinks fit, including the
grant of security interests in all or any part of our property. Our board of directors may
consist of not less than three nor more than 15 directors and as of the date hereof,consists of four directors, including our external directors.

According to the Companies Law, a
companys chairman of the board may not serve as its chief executive officer, unless
otherwise approved by the shareholders for periods of up to three years. The required
shareholder approval is a majority of the shares voted on the matter, provided that at
least two-thirds of the shares of non-controlling shareholders voted in favor or no more
than 1% of the shares of non-controlling shareholders voted against. At the shareholder
meeting held in August 2003, our shareholders resolved to allow Mr. Tamir, our chairman,
to serve also as our chief executive officer for a period of up to three years. Mr. Tamir
did not receive any compensation for serving in such office during 2003, 2004 or 2005.

Our directors are elected at annual
meetings of our shareholders by a vote of the holders of a majority of the ordinary shares
voting thereon. Generally, our directors hold office until the next annual meeting of
shareholders following the annual meeting at which they were elected. Directors may be
removed earlier from office by resolution passed at a general meeting of our
shareholders.Pursuant to the Israeli Companies Law, external directors are elected
by shareholders for a three-year term and may be re-elected by shareholders for an
additional three-year term.

Unless otherwise unanimously decided
by our directors, a quorum at a meeting of the board of directors is constituted by the
presence of a majority of the directors then in office who are lawfully entitled to
participate in the meeting, but not less than two directors. A resolution proposed at a
meeting of the board of directors is deemed adopted if approved by a majority of the
directors present and voting on the matter.

There are no arrangements or
understandings between us and any of our directors for benefits upon termination of
service.

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External
Directors

Qualifications
of External Directors

Under the Companies Law, companies
incorporated under the laws of Israel whose shares are listed for trading on a stock
exchange or have been offered to the public in or outside of Israel are required to
appoint at least two external directors. The Companies Law provides that 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 an 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 its controlling entity.
| | - | ------------------------------------------------------------------

The term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

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

| |  | control;
and
| | - | ------------

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

The Companies Law defines the term
office holder of a company to include a director, the chief executive officer,
the chief business manager, a vice president and any officer that reports directly to the
chief executive officer.

Pursuant to an amendment to the
Companies Law, effective as of April 19, 2006, (1) each external director must have either
accounting and financial expertise or professional qualifications 
(as such terms are defined in regulations promulgated under the Companies Law) and (2) at
least one of the external directors must have accounting and financial
expertise. These requirements will apply to us upon the election of one or more
external directors. No person can serve as an external director if the persons
position or other business creates, or may create conflict of interests with the
persons responsibilities as an external director or may otherwise interfere with the
persons ability to serve 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.

19

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Election
Of External Directors

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

| |  | at
least one third of the shares of non-controlling  shareholders voted at the meeting vote
in favor of the               election; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------

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

The initial term of an external
director is three years and may be extended for an additional three years. External
directors may be removed from office only by the same percentage of shareholders as is
required for their election, or by a court, and then only if the external directors cease
to meet the statutory qualifications for their appointment or if they violate their duty
of loyalty to the company. Each committee of a companys board of directors is
required to include at least one external director, except for the audit committee which
is required to include all the external directors. Irit Gal commenced her first term as an
External Director on August 28, 2003, and Harel Kodesh commenced his second term as an
External Director on September 28, 2003.

Audit
Committee

Under the Companies Law, our board of
directors is required to appoint an audit committee, comprised of at least three directors
including all of the external directors, but excluding:

| |  | the
chairman of the board of directors; and
| | - | -------------------------------------------

| |  | a
controlling shareholder or a relative of a controlling shareholder and any director
employed by the company or who provides services to the company on a regular basis.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The role of the audit committee is to
examine flaws in the management of the companys business, in consultation with the
internal auditor and the companys independent accountants, suggest remedial action
and to approve specified related party transactions. Our audit committee consists of our
two external directors and one additional director, Eric Paneth.

We have adopted an audit committee
charter, which sets forth the powers and responsibilities of our audit committee. Our
audit committee assists the board of directors in fulfilling its responsibility for
oversight of the quality and integrity of our accounting, auditing and financial reporting
practices and financial statements and the independence qualifications and performance of
our independent auditors. Our audit committee also has the authority and responsibility to
oversee our independent auditors, to recommend for shareholder approval the appointment
and, where appropriate, replacement of our independent auditors and to pre-approve audit
engagement fees and all permitted non-audit services and fees. Our audit committee also
serves as our qualified legal compliance committee, responsible for investigating reports,
made by attorneys appearing and practicing before the SEC in representing us, of perceived
material violations of U.S. federal or state securities laws, breaches of fiduciary duty
or similar violations by us or any of our agents.

20

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Approval
of Interested Party Transactions

The approval of the audit committee
is required to effect specified actions and transactions with office holders, controlling
shareholders and entities in which they have a personal interest. An audit committee may
not approve an action or a transaction with related parties or with its office holders
unless at the time of approval the two external directors are serving as members of the
audit committee and at least one of whom was present at the meeting in which an approval
was granted.

Internal
Auditor

Our board of directors has appointed
an internal auditor. Under the Companies Law, the role of the internal auditor is to
examine, among other things, 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 any of the foregoing, nor may the
internal auditor be the companys independent accountant or its representative. The
Companies Law defines the term interested party to include a person who holds
5% or more of the companys outstanding share capital or voting rights, a person who
has the right to appoint one or more directors or the general manager, or any person who
serves as a director or as the general manager.

Approval
of Specified Related Party Transactions Under Israeli Law

Fiduciary
Duties of Office Holders

The Companies Law imposes a duty of
care and a duty of loyalty on all office holders of a company. The duty of care requires
an office holder to act with the level of care with which a reasonable office holder in
the same position would have acted under the same circumstances. The duty of care includes
a duty to use reasonable means to obtain:

| |  | information
on the advisability of a given action brought for his approval or performed by him by
virtue of his position; and
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The duty of loyalty of an office
holder includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his duties in the company and
the performance of his other duties or his personal affairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from  exploiting  any business  opportunity of the company to receive a personal gain for
himself or               others; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------

21

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| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his position as an office holder.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Disclosure
of Personal Interest of an Office Holder

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, in connection with any existing or
proposed transaction by the company. The disclosure is required to be made promptly and in
any event no later than the board of directors meeting in which the transaction is first
discussed. If the transaction is an extraordinary transaction, the office holder must also
disclose any personal interest held by:

| |  | the
office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of these people; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which he has the right to appoint at least one director or the
general manager.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Companies Law, an
extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact of the company's profitability, assets or liabilities.
| | - | -----------------------------------------------------------------------------------------------

Once an office holder complies with
the above disclosure requirement, 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. A transaction that is adverse to the companys interest may not be
approved.

If the transaction is an
extraordinary transaction, approval of both the audit committee and the board of directors
is required. Under specific circumstances, shareholder approval may also be required. A
director who has a personal interest in a transaction that is considered at a meeting of
the board of directors or the audit committee generally may not be present at this meeting
or vote on this matter, unless a majority of the members of the board of directors or the
audit committee, as the case may be, has a personal interest in the matter. If a majority
of members of the board of directors have a personal interest therein, shareholder
approval is also required.

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Disclosure
of Personal Interests of a Controlling Shareholder

Under the Companies Law, the
disclosure requirements that apply to an office holder also apply to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who has the
ability to direct the activities of a company, including, for this purpose, a shareholder
that owns 25% or more of the voting rights if no other shareholder owns more than 50% of
the voting rights, but excluding a shareholder whose power derives solely from his or her
position on the board of directors or any other position with the company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the engagement of a controlling shareholder as an office holder or
employee, require the approval of the audit committee, the board of directors and the
shareholders of the company in that order. The shareholder approval must be by a majority
of the shares voted on the matter, provided that either:

| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and who vote on the matter vote in favor thereof; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
shareholders who have no personal interest in the transaction who vote against the
transaction do not represent more than one percent of the voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Shareholders generally have the right
to examine any document in the companys possession pertaining to any matter that
requires shareholder approval.

# D. Employees

As a result of the sale of our
business to STMicroelectronics in April 2003 and the transfer or resignation of our
employees, since May 31, 2003, we have no employees (other than Izhak Tamir, our Chief
Executive Officer). As of December 31, 2002, we had 67 employees, 66 based in Israel and
one in the United States, of whom 57 employees were engaged in research and development,
none in sales and marketing and 10 in management, administration and operations.

23

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# E. Share Ownership

As of May 31, 2006, Messrs. Eric
Paneth and Izhak Tamir, each, directly or through a wholly owned company, owns 2,965,105
ordinary shares and options to purchase 220,000 of our ordinary shares at NIS 0.10 per
share, which is the par value of the ordinary shares. The options are fully vested and
will expire on the earlier of ten years following the date of grant and six months
following termination of the holders directorship. Accordingly, each of Messrs.
Paneth and Tamir beneficially owns approximately 13.3% of our ordinary shares. Except for
Messrs. Paneth and Tamir, none of our executive officers or directors beneficially owns 1%
or more of our outstanding ordinary shares.

Share Option Plans

We have two share option plans
pursuant to which options may be granted to our directors, officers, employees,
consultants and contractors. These share option plans are administered by our board of
directors, which determines the optionees, dates of grant and the exercise price of
options. Unless otherwise decided by our board of directors, options granted under the
share option plans are non-assignable except by the laws of descent. Under the share
option plans, the grantee is responsible for all personal tax consequences of the grant
and the exercise thereof. The plan adopted in 2003 allows us to grant options to qualified
persons pursuant to the capital gains route under Section 102 of the Israeli
Income Tax Ordinance.

As of May 31, 2006, we had
outstanding options to purchase a total of 640,000 ordinary shares. All of these options
are held by our directors.

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

A. Major Shareholders

The following table sets forth
certain information regarding the beneficial ownership of our ordinary shares as of May
31, 2006 (unless otherwise specified), by each person who is known to own beneficially
more than 5% of the outstanding ordinary shares. The voting rights of all major
shareholders are the same as for all other shareholders.

|Identity of Person or Group          | Amount Owned | Percent of Class(1)
|------------------------------------ | ------------ | -------------------
|
|
|
|
|Eric Paneth(2)                       |              |                    
|Izhak Tamir(2)                       |              |                    
|Steven N. Bronson(3)                 |              |                    
|Eugene Oshinsky and Rosa Oshinsky(4) |              |                    

---

|(1) | Based
on 23,726,401 ordinary shares outstanding on May 31, 2006.
|--- | ----------------------------------------------------------------

|(2) | Includes
220,000 ordinary shares issuable upon the exercise of options that are
               exercisable currently or within the next 60 days.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on a Schedule 13D/A filed on May 26, 2006.
|--- | ------------------------------------------------

|(4) | Based
on a Schedule 13G filed on January 6, 2006. The ordinary shares are held
               directly by RAM Capital Management Trust #01, a Massachusetts trust.
Eugene                Oshinsky and Rosa Oshinsky, as trustees, are deemed to have
beneficial ownership                of the ordinary shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

24

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As of June 19, 2006, there were 71
holders of record of our ordinary shares in the United States who collectively held
approximately 78.6% of our outstanding ordinary shares. The number of record holders in
the United States is not representative of the number of beneficial holders nor is it
representative of where such beneficial holders are resident since many of these ordinary
shares were held of record by brokers or other nominees.

# B. Related Party
Transactions

Relationship between
Tikcro and Orckit

Tikcro and Orckit, except as
otherwise contemplated in the agreement referred to below, operate independently of one
another as separate public companies.

We believe that the agreement
described below has been entered into on terms similar to terms that would be obtained
from independent third parties.

Services
Agreement

On July 1, 2003, Tikcro signed a
Services Agreement with Orckit for administrative services, including bookkeeping and
office services, as well as for certain services related to the evaluation of prospective
opportunities for a business combination. Total fees to Orckit for such services in 2003
and 2004 were $25,000 per quarter. In 2005 the fees were reduced to $18,000 per quarter
and in 2006 the fees were further reduced to $12,000.

# C. Interests of Experts
and Counsel

Not
applicable.

|ITEM 8. |  | Financial Information
|------- |  | ---------------------

# A. Consolidated
Statements and other Financial Information

See
financial statements under Item 18.

Legal
Proceedings

We
have no material legal proceedings.

# B. Significant Changes

None.

25

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

A. Offer and Listing Details

Our ordinary shares are currently
quoted on the OTC Bulletin Board, an electronic quotation medium regulated by the National
Association of Securities Dealers, under the symbol TKCRF. The OTC Bulletin Board
typically has lower liquidity than the Nasdaq National Market.

The following table sets forth, for
the periods indicated, the high and low sales prices of our ordinary shares as reported on
the Nasdaq National Market or the OTC Counter Bulletin Board.

|Calendar Year | Price Per Share
|------------- | ---------------
|
|
|
|
|2001          |                
|2002          |                
|2003          |                
|2004          |                
|2005          |                

|Calendar Period | Price Per Share
|--------------- | ---------------
|
|
|
|
|2004            |                
|First Quarter   |                
|Second Quarter  |                
|Third Quarter   |                
|Fourth Quarter  |                
|2005            |                
|First Quarter   |                
|Second Quarter  |                
|Third Quarter   |                
|Fourth Quarter  |                
|2006            |                
|First Quarter   |                

26

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|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2005           |                
|December       |                
|2006           |                
|January        |                
|February       |                
|March          |                
|April          |                
|May            |                

# B. Plan of Distribution

Not applicable

# C. Markets

Our ordinary shares are quoted on the
OTC Bulletin Board under the symbol TKCRF.

# D. Selling Shareholders

Not applicable.

# E. Dilution

Not applicable.

# F. Expenses of the Issue

Not applicable.

|ITEM 10. |  | Additional Information
|-------- |  | ----------------------

# A. Share Capital

Not applicable.

27

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# B. Memorandum and
Articles of Association

# Objects and Purposes

We were organized under Israeli law
on December 14, 1999 as a private company, and on June 30, 2000 became a public company.
Our registration number with the Israeli registrar of companies is 51-286883-7. Our object
is to engage, directly or indirectly, in any lawful undertaking or business whatsoever,
including, without limitation, as stipulated in section 2 of our memorandum of
association, which was filed with the Israeli registrar of companies.

# Transfer of Shares and
Notices

Fully paid ordinary shares may be
freely transferred pursuant to our articles of association unless the transfer is
restricted or prohibited by another instrument. Unless otherwise prescribed by law,
shareholders of record are entitled to at least 21 calendar days prior notice of any
general shareholders meeting.

The ownership or voting of our
ordinary shares by non-residents of Israel, except with respect to citizens of countries
which are in a state of war with Israel, is not restricted in any way by our memorandum of
association or articles of association or by the laws of the State of Israel.

# Dividend and Liquidation
Rights

Our board of directors is authorized
to declare dividends, subject to applicable law. Dividends may be paid only out of profits
and other surplus, as defined in the Companies Law, as of the end of the most recent
financial statements or as accrued over a period of two years, whichever is higher.
Alternatively, if we do not have sufficient profits or other surplus, then permission to
effect a distribution can be granted by order of an Israeli court. In any event, a
distribution is permitted only if there is no reasonable concern that the dividend will
prevent us from satisfying our existing and foreseeable obligations as they become due.

In the event of our liquidation,
after satisfaction of liabilities to creditors, our assets will be distributed to the
holders of ordinary shares in proportion to their respective holdings. Dividend and
liquidation right may be affected by the grant of preferential dividends or distribution
rights to the holders of a class of shares with preferential rights that may be authorized
in the future.

# Voting,
Shareholders 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. No cumulative voting is permitted.

28

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We have two types of general
shareholders meetings: the annual general meetings and extraordinary general meetings.
These meetings may be held either in Israel or in any other place the board of directors
determines. An annual general meeting must be held in each calendar year, but not more
than 15 months after the last annual general meeting. Our board of directors may convene
an extraordinary meeting, from time to time, at its discretion and is required to do so
upon the request of any two directors, at least 25% of the directors, or shareholders
holding at least 5% of our ordinary shares. 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 25% of the outstanding voting shares unless otherwise
required by applicable rules. 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 chairman may designate with the consent of the holders of a majority of the
voting power represented at the meeting and voting on the matter adjourned. At such
reconvened meeting the required quorum consists of any two members present in person or by
proxy.

Under the Companies Law and our
articles of association, all resolutions of the shareholders require a simple majority of
the shares present, in person or by proxy, and voting on the matter.

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.

# Duties of Shareholders

Under the Companies Law, each and
every shareholder has a duty to act in good faith in exercising his rights and fulfilling
his obligations towards us and other shareholders and to refrain from abusing his power in
Tikcro, such as in voting in the general meeting of shareholders on the following matters:

| |  | any
amendment to the articles of association;
| | - | ---------------------------------------------

| |  | an
increase of our authorized share capital;
| | - | --------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
 of  certain  actions  and  transactions  which  require  shareholder
                  approval.
| | - | ----------------------------------------------------------------------------------------------------------

In addition, each and every
shareholder has the general duty to refrain from depriving other shareholders of their
rights.

Furthermore, any controlling
shareholder, any shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote and any shareholder that, pursuant to the provisions of the
articles of association, has the power to appoint or to prevent the appointment of an
office holder in Tikcro or any other power toward Tikcro is under a duty to act in
fairness towards us. The Companies Law does not describe the substance of this duty of
fairness.

29

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Mergers
and Acquisitions under Israeli Law; Anti-takeover Provisions

The Companies Law includes provisions
that allow a merger transaction and requires that each company that is a party to a merger
have the transaction approved by its board of directors and a vote of the majority of its
shares. For purposes of the shareholder vote, unless a court rules otherwise, the merger
will not be deemed approved if a majority of the shares held by parties other than the
other party to the merger, or by any person who holds 25% or more of the shares or the
right to appoint 25% or more of the directors of the other party, vote against the merger.
Upon the request of a creditor of either party of 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. In addition, a merger may not be completed unless at
least (i) 50 days have passed from the time that a proposal of the merger has been filed
with the Israeli Registrar of Companies by each merging company and (ii) 30 days have
passed since the merger was approved by the shareholders of each merging company.

The Companies Law also provides that
an acquisition of shares of a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would become a 25% or greater shareholder of the
company and there is no existing 25% or greater shareholder in the company. An acquisition
of shares of 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% or greater shareholder of the company and
there is no existing 45% or greater shareholder in the company. This requirement does not
apply if the acquisition (i) occurs in the context of a private placement by the company
that received shareholder approval, (ii) was from a 25% shareholder of the company and
resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45%
shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the
company. The tender offer must be extended to all shareholders, but the offeror is not
required to purchase more than 5% of the companys outstanding shares, regardless of
how many shares are tendered by shareholders. The tender offer may be consummated only if
(i) at least 5% of the companys outstanding shares will be acquired by the offeror
and (ii) the number of shares tendered in the offer exceeds the number of shares whose
holders objected to the offer.

If as a result of an acquisition of
shares the acquirer will hold more than 90% of a companys outstanding shares, the
acquisition must be made by means of a tender offer for all of the outstanding shares. If
as a result of a full the tender offer the acquirer would own more than 95% of the
outstanding shares, then all the shares that the acquirer offered to purchase will be
transferred to it. The law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender offer. If
as a result of a full tender offer the acquirer would own 95% or less of the outstanding
shares, then the acquirer may not acquire shares that will cause his shareholding to
exceed 90% of the outstanding shares.

Finally, Israeli tax law treats
stock-for-stock acquisitions between an Israeli company and a foreign company less
favorably than does U.S. tax law. For example, Israeli tax law may, under certain
circumstances, subject a shareholder who exchanges his ordinary shares for shares in
another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.

Our articles of association provide
that our board of directors may, at any time in its sole discretion, adopt protective
measures to prevent or delay a coercive takeover of Tikcro, including, without limitation,
the adoption of a shareholder rights plan. In September 2005, our board of directors
adopted a shareholder bonus rights plan pursuant to which share purchase bonus rights were
distributed on September 26, 2005 at the rate of one right for each of our ordinary shares
held by shareholders of record as of the close of business on that date.

30

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The rights plan is intended to help
ensure that all of our shareholders are able to realize the long-term value of their
investment in Tikcro in the event of a potential takeover which does not reflect the full
value of Tikcro and is otherwise not in the best interests of Tikcro and its shareholders.
The rights plan is also intended to deter unfair or coercive takeover tactics.

Each right initially will entitle
shareholders to buy one-half of one of our ordinary shares for $2.50. The rights generally
will be exercisable and transferable apart from our ordinary shares only if a person or
group becomes an acquiring person by acquiring beneficial ownership of 15% or
more of our ordinary shares, subject to certain exceptions set forth in the rights plan,
or commences a tender or exchange offer upon consummation of which such person or group
would become an acquiring person. Subject to certain conditions described in
the rights plan, once the rights become exercisable, the holders of rights, other than the
acquiring person, will be entitled to purchase ordinary shares at a discount from the
market price.

The rights will expire on December
31, 2015 and are generally redeemable by our board of directors, at $0.01 per right, at
any time until the tenth business day following public disclosure that a person or group
has become an acquiring person.

# Modification of Class
Rights

Our articles of association provide
that the rights attached to any class (unless otherwise provided by the terms of that
class), such as voting, rights to dividends and the like, may be varied by a shareholders
resolution, subject to the sanction of a resolution passed by the holders of a majority of
the shares of that class at a separate class meeting.

# Indemnification,
Exculpation and Insurance of Office Holders

Exculpation
of Office Holders

Under the Companies Law, an Israeli
company may not exempt an office holder from liability for breach of his duty of loyalty,
but may exempt in advance an office holder from liability to the company, in whole or in
part, for a breach of his duty of care (except in connection with distributions), provided
the articles of association of the company allow it to do so. Our articles of
associationallow us to exempt our office holders to the fullest extent permitted
by law.

Insurance
of Office Holders

Our articles of association provide
that, subject to the provisions of the Companies Law, we may enter into an insurance
contract which would provide coverage for any monetaryliability incurred byany of our office holders, with respect to an act performed in the capacity of an
office holder for:

31

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| |  | 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

The Companies Law provides that a
company may indemnify an office holder against the following obligations and expenses
imposed on the office holder with respect to an act performed in the capacity of an office
holder, provided the articles of association of the company allow it to do so:

| |  | a
financial obligation imposed on him in favor of another person by a court judgment,
including a compromise judgment or an arbitrators award approved by the court; such
indemnification may be approved (i) after the liability has been incurred or (ii) in
advance, provided that our undertaking to indemnify is limited to events that our board
of directors believes are foreseeable in light of our actual operations at the time of
providing the undertaking and to a sum or criterion that our board of directors
determines to be reasonable under the circumstances.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (A) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (B) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court in connection with:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | proceedings
we institute against him or that are instituted on our behalf or by another person;
| | - | -----------------------------------------------------------------------------------------------

| |  | a
criminal charge from which he is acquitted; or
| | - | ------------------------------------------------

| |  | a
criminal proceeding in which he is convicted of an offense that does not require proof of
criminal intent.
| | - | ------------------------------------------------------------------------------------------------------------

We intend to amend our articles of
association to conform to recent amendments made to these provisions of the Companies Law.

32

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Limitations
on Exculpation, Insurance and Indemnification

The Companies Law provides that a
company may not exculpate or indemnify an office holder, or 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, with respect to insurance
coverage or indemnification, 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,
exculpation of, indemnification of, and procurement of insurance coverage for, our office
holders must be approved by our audit committee and our board of directors and, if the
beneficiary is a director, by our shareholders.

Our articles of associations also
provide that, subject to the provisions of applicable law, we may procure insurance for or
indemnify any person who is not an office holder, including without limitation, any of our
employees, agents, consultants or contractors.

# C. Material Contracts

In September 2005, we entered into a
bonus rights agreement with a trustee on behalf of our shareholders, which is summarized
above under Item 10.B Mergers and Acquisitions under Israeli Law;
Anti-Takeover Provisions and is incorporated by reference as an exhibit to this
Annual Report.

# D. Exchange Controls

There are currently no Israeli
currency control restrictions on payments of dividends or other distributions with respect
to our ordinary shares or the proceeds from the sale of the shares, except for the
obligation of Israeli residents to file reports with the Bank of Israel regarding certain
transactions. However, legislation remains in effect pursuant to which currency controls
can be imposed by administrative action at any time.

# E. Taxation

The following is a general summary
only and should not be considered as income tax advice or relied upon for tax planning
purposes. Holders of our ordinary shares should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any foreign, state
or local taxes.

33

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# United States Federal
Income Tax Consequences

The following is a summary of certain
material U.S. federal income tax consequences arising from the purchase, ownership and
disposition of our ordinary shares that are relevant to shareholders who are U.S.
holders, as defined below. This summary is based upon current law, including the
United States Internal Revenue Code of 1986, as amended (the Code), Treasury
regulations promulgated thereunder, administrative pronouncements and judicial decisions
relating thereto, and the current U.S-Israeli treaty relating to taxes on income and
capital gains, all of which are subject to change or differing interpretations, possibly
on a retroactive basis. This summary is limited to U.S. federal income tax law, and does
not consider estate or gift tax consequences, U.S. state or local tax consequences, or
taxation under the laws of any other jurisdiction. This summary is further limited to U.S.
holders that hold our shares as capital assets within the meaning of Section 1221 of the
Code, and does not address all aspects of U.S. federal income taxation that may be
relevant to U.S. holders in light of their particular circumstances (e.g., persons who
acquired our shares as compensation) or to certain types of U.S. holders subject to
special treatment under the U.S. federal income tax laws, such as dealers in securities or
currencies, tax-exempt plans and organizations, regulated investment companies, life
insurance companies, banks, other financial institutions, U.S. holders who own, directly,
indirectly or constructively, 10% or more of our voting shares, U.S. holders holding our
shares as part of a straddle, hedge or conversion
transaction, or certain individuals who are former citizens or former long-term
residents of the United States. Accordingly, shareholders are urged to consult with their
own tax advisors to determine the tax consequences applicable to their individual
situations.

The U.S. federal income tax treatment
of a partner in a partnership (or other entity classified as a partnership for U.S.
federal income tax purposes) that holds our ordinary shares generally will depend on such
partners particular circumstances and on the activities of the partnership. Partners
in such partnerships should consult their own tax advisors.

For purposes of the following
discussion, a U.S. holder is a beneficial owner of our ordinary shares that
is, for U.S. federal income tax purposes:

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

| |  | a
 corporation,  or other entity  taxable as a  corporation  for U.S.  federal  income tax
 purposes,  created or          organized in or under the laws of the United States or of
any state or the District of Columbia;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate or trust the income of which is subject to U.S. federal income taxation regardless
of its source; or
| | - | --------------------------------------------------------------------------------------------------------------

| |  | a
trust if (i) the  administration  of the trust is subject to the primary  supervision  of
a court in the United          States and one or more U.S.  persons  have the  authority
to control all  substantial  decisions of the          trust or (ii) the trust has a
valid election in effect under  applicable U.S.  Treasury  regulations to          be
treated as a U.S. person.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Sale or Exchange of Our
Shares

A U.S. holders sale or exchange
of our shares generally will result in the recognition of capital gain or loss by such
U.S. holder in an amount equal to the difference between the amount realized and the U.S.
holders tax basis in our shares sold, although a portion of any gain may be
recharacterized as ordinary income under the PFIC rules, discussed below. Gain or loss
realized on the sale of our shares will be long-term capital gain or loss if the U.S.
holders holding period for our shares is more than one year at the time of the sale
or exchange; otherwise such gain or loss will be short-term capital gain or loss.
Long-term capital gains of individuals are currently subject to U.S. federal income tax at
preferential rates. Short-term capital gains are taxed at rates applicable to ordinary
income. The deductibility of capital losses is subject to limitations. In general, unless
a U.S. holder is subject to the Israeli capital gains tax on the sale or exchange of our
shares as discussed below, any capital gain recognized by a U.S. holder upon such sale or
exchange will be treated as U.S. source income for U.S. foreign tax credit purposes.

Treatment of Dividend
Distributions

For U.S. federal income tax purposes,
subject to the PFIC rules, discussed below, the gross amount of any distribution,
including the amount of any Israeli taxes withheld therefrom, paid to a U.S. holder with
respect to our shares will be included in his, her or its ordinary income to the extent
that the dividends are paid out of our current or accumulated earnings and profits, as
determined based on U.S. federal income tax principles. These dividends will not be
eligible for the dividends received deduction allowed to U.S. corporations under Section
243 of the Code. Because we expect to be treated as a PFIC, as discussed below, we do not
expect that our dividends will eligible to be treated as qualified dividend
income, which is subject to tax at reduced rates for shareholders that are
individuals, estates or trusts.

Distributions in excess of our
current and accumulated earnings and profits will be treated first as a non-taxable return
of the U.S. holders tax basis in our shares to the extent thereof and then as a gain
from the sale of our shares.

Dividends paid in new Israeli
shekels, including the amount of any Israeli taxes withheld therefrom, will be includable
in income in a U.S. dollar amount based on the exchange rate at the time of their receipt.
Any gain or loss resulting from currency fluctuations during the period from the date a
dividend is paid to the date such payment is converted into U.S. dollars generally will be
treated as ordinary income or loss.

Dividends paid to a U.S. holder with
respect to our shares will be treated as foreign source dividend income for U.S. foreign
tax credit limitation purposes. At the election of a U.S. holder, any Israeli withholding
tax imposed on such dividends will be eligible for credit against such U.S. holders
U.S. federal income tax liability, subject to the general conditions and limitations
imposed on foreign tax credits. However, a credit generally will not be available to the
extent the Israeli rate of tax on such dividends exceeds the U.S. rate of tax thereon. A
credit also will not be available to the extent the U.S. holder has not held the shares
with respect to which the dividend is paid for at least 16 days of the 31 day period
beginning on the date which is 15 days before the ex-dividend date or to the extent such
U.S. holder is under an obligation to make related payments with respect to substantially
similar or related property. Any days during which a U.S. holder has substantially
diminished its risk of loss on our shares are not counted toward meeting the 16-day
holding period required by the statute. A U.S. holder not electing to claim a credit for
foreign taxes generally will be entitled to a deduction for any withholding taxes imposed
on dividends.

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The calculation of allowable foreign
tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the
availability of deductions for foreign taxes paid involve the application of
rules that depend on a U.S. holders particular circumstances, and also may be
complicated by the application of the PFIC rules, discussed below. Accordingly, U.S.
holders should consult their own tax advisors regarding their eligibility for foreign tax
credits or deductions.

Passive Foreign
Investment Company Status

Generally, we will be classified as a
passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any
tax year if, in such tax year, either (i) 75% or more of our gross income is passive
in nature, or (ii) on average for such tax year, 50% or more of our assets (by value or,
if we so elect in certain circumstances, by adjusted tax basis) produce or are held for
the production of passive income. We believe we did not satisfy either of the above tests
for PFIC status in 2002. However, it is highly likely that we were properly classified as
a PFIC in 2003 and 2004, and we believe it is likely that we will be properly classified
as a PFIC in 2005.

If we are treated as a PFIC for U.S.
federal income tax purposes for any portion of the period in which a U.S. holder owns our
ordinary shares, then, as to such U.S. holder who does not make a QEF Election (as
described below):

Excess distributions by us will be
taxed in a special way. Excess distributions are amounts received by a U.S.
holder with respect to our stock in any taxable year that exceed 125% of the average
distributions received by such U.S. holder from us in the shorter of either the three
previous years or such U.S. holders holding period for ordinary shares before the
present taxable year. Excess distributions must be allocated ratably to each day that a
U.S. holder has held our stock. A U.S. holder must include in its gross income for the
current taxable year, as ordinary income, amounts allocated to the current taxable year or
to a prior tax year in which we were not a PFIC. A U.S. holder must pay tax on amounts
allocated to each prior taxable year in which we were a PFIC at the highest rate in effect
for that year on ordinary income plus an interest charge at the rate applicable to tax
deficiencies.

The entire amount of gain that is
realized by a U.S. holder upon the sale or other disposition of our shares will be treated
in the same manner as an excess distribution and would be subject to tax as described
above, at ordinary income rates.

The tax basis in shares of our stock
that were acquired from a decedent who was a U.S. holder will not receive a step-up to
fair market value as of the date of the decedents death but will instead be equal to
the decedents basis, if lower.

36

---

---

A U.S. holder who beneficially owns
shares of a PFIC must file Form 8621 (Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund) with the U.S. Internal Revenue Service,
generally by attaching the form to a timely filed U.S. federal income tax return for each
tax year in which he, she or it recognizes gain on a direct or indirect disposition of
PFIC stock, receives certain direct or indirect distribution from a PFIC or is making an
election reportable on the form.

For any tax year in which we are
determined to be a PFIC, a U.S. holder may elect to treat our shares as an interest in a
qualified electing fund (a QEF Election), in which case the U.S. holder will
be required to include in income currently his, her or its proportionate share of our
ordinary earnings and net capital gain in years in which we are a PFIC regardless of
whether distributions of such earnings and gain are actually distributed to such U.S.
holder, but any gain subsequently recognized upon the sale by such U.S. holder of our
shares generally will be taxed as capital gain and the denial of the basis step-up at
death described above will not apply. A QEF election, once made, will apply with respect
to the electing U.S. holders holding of our shares in all subsequent taxable years.

The PFIC rules also provide a
mark-to-market election for certain PFIC stock as an alternative to a QEF
Election. However, the mark-to-market election generally applies only to stock that is
traded on certain qualified exchanges. Because of the delisting of our shares from the
Nasdaq National Market and the Tel Aviv Stock Exchange, U.S. holders generally will not be
able to make a mark-to-market election with respect to our stock.

U.S.
          holders, especially U.S. holders of our ordinary shares as of January 1, 2003,
          should consult their own tax advisors regarding the eligibility, manner and
          advisability of making a QEF Election or a mark-to-market election if we are
          treated as a PFIC.

Information Reporting and
Backup Withholding

Any dividends paid on our shares, and
payments of the proceeds of a sale of our shares, paid within the United States or through
certain U.S.-related financial intermediaries are subject to information reporting and may
be subject to backup withholding at the rate of 28% unless (i) the payor is entitled to,
and does in fact, presume the U.S. holder of our shares to be a corporation or other
exempt recipient or (ii) the U.S. holder provides a taxpayer identification number on a
properly completed Form W-9 and certifies that no loss of exemption from backup
withholding has occurred. The amount of any backup withholding will be allowed as a credit
against a U.S. holders U.S. federal income tax liability and may entitle the U.S.
holder to a refund, provided that the U.S. holder files a timely federal income tax return
and furnishes the required information to the Internal Revenue Service.

# Israeli Tax
Considerations

The following is a summary of the
principal tax laws applicable to companies in Israel, with special reference to their
effect on us. This section also contains a discussion of certain Israeli tax consequences
to persons acquiring ordinary shares. This summary does not discuss all the acts of
Israeli tax law that may be relevant to a particular investor in light of his or her
personal investment circumstances or to certain types of investors subject to special
treatment under Israeli law, such as traders in securities or persons that own, directly
or indirectly, 10% or more of our outstanding voting share capital. To the extent that the
discussion is based on new tax legislation which has not been subject to judicial or
administrative interpretation, there can be no assurance that the views expressed in this
discussion will be accepted by the tax authorities or the courts. The discussion should
not be construed as legal or professional tax advice and is not exhaustive of all possible
tax considerations.

37

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Potential investors are urged to
consult their own tax advisors as to the Israeli or other tax consequences of the
purchase, ownership and disposition of ordinary shares, including, in particular, the
effect of any foreign, state or local taxes.

General Corporate Tax
Structure

Generally, Israeli companies are
subject to Corporate Tax on taxable income at the rate of 34% for the 2005 tax year.
Following an amendment to the Israeli Income Tax Ordinance [New Version], 1961 (the
Tax Ordinance), which came into effect on January 1, 2006, the corporate tax
rate is scheduled to decrease as follows: 31% for the 2006 tax year, 29% for the 2007 tax
year, 27% for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year
and thereafter. Israeli companies are generally subject to capital gains tax at a rate of
25% for capital gains (other than gains deriving from the sale of listed securities)
derived after January 1, 2003.

Stamp Duty

The Israeli Stamp Duty on Documents
Law, 1961 (the Stamp Duty Law), provides that any document (or part thereof)
that is signed in Israel or that is signed outside of Israel and refers to an asset or
other thing in Israel or to an action that is executed or will be executed in Israel, is
subject to a stamp duty, generally at a rate of between 0.4% and 1% of the value of the
subject matter of such document. De facto, it has been common practice in Israel not to
pay such stamp duty unless a document is filed with a governmental authority. An amendment
to the Stamp Duty Law that came into effect on June 1, 2003, determines, among other
things, that stamp duty on most agreements shall be paid by the parties that signed such
agreement, jointly or severally, or by the party that undertook under such agreement to
pay the stamp duty. As a result of the aforementioned amendment to the Stamp Duty Law, the
Israeli tax authorities have approached many companies in Israel and requested disclosure
of all agreements signed by such companies after June 1, 2003, with the aim of collecting
stamp duty on such agreements.

Under an order published in December
2005, the said requirement to pay stamp duty was cancelled with respect to documents
signed on or after January 1, 2006.

Taxation Under
Inflationary Conditions

The Income Tax (Inflationary
Adjustments) 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 deductions
and adjustments 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.

38

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The Israeli Income Tax Ordinance and
regulations promulgated thereunder allow Foreign-Invested Companies, which
maintain their accounts in U.S. dollars in compliance with the regulations published by
the Israeli Minister of Finance, to base their tax returns on their operating results as
reflected in the dollar financials statements or to adjust their tax returns based on
exchange rate changes rather than changes in the Israeli CPI, in lieu of the principles
set forth by the Inflationary Adjustments Law. For these purposes, a Foreign-Invested
Company is a company, more than 25% of whose share capital, in terms of rights to profits,
voting and appointment of directors, 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 years following the election. We believe that we qualify as a Foreign
Investment Company within the meaning of the Inflationary Adjustments Law. We have not yet
elected to measure our results for tax purposes based on the U.S. dollar exchange rate,
but may do so in the future.

Capital Gains Tax on
Sales of Our Ordinary Shares

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

Provisions of Israeli tax law may
treat a sale of securities listed on a stock exchange differently than the sale of other
securities. In the past, the Israeli Tax Authority (ITA) has indicated that it
does not recognize the OTC Bulletin Board as a stock exchange for purposes of
the Tax Ordinance. However, the current position of the ITA is to view securities quoted
on the OTC Bulletin Board as listed on a stock exchange where such securities
were previously delisted from a stock exchange (such as the Nasdaq National
Market or the Tel Aviv Stock Exchange), such as our ordinary shares.

Generally, up until the 2006 tax
year, capital gains tax was imposed on Israeli residents at a rate of 15% on real gains
derived on or after January 1, 2003 from the sale of shares in, among others, Israeli
companies publicly traded on a recognized stock exchange. This tax rate was contingent
upon the shareholder not claiming a deduction for financing expenses in connection with
such shares (in which case the capital gain was taxed at a rate of 25%), and did not apply
to: (i) the sale of shares to a relative (as defined in the Tax Ordinance); (ii) the
sale of shares by dealers in securities who are taxed at corporate tax rates for
corporations and at marginal tax rates of up to 49% for individuals; (iii) the sale of
shares by shareholders that report in accordance with the Inflationary Adjustments Law,
who were taxed at corporate tax rates for corporations and at marginal tax rates of up to
49% for individuals; or (iv) the sale of shares by shareholders who acquired their
shares prior to the issuers initial public offering (that may be subject to a
different tax arrangement).

39

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As of January 1, 2006, the tax rate
applicable to capital gains derived from the sale of shares, whether listed on a stock
market or not, is 20% for Israeli individuals, unless such shareholder claims a deduction
for financing expenses in connection with such shares, in which case the gain will
generally be taxed at a rate of 25%. Additionally, if such shareholder is considered a
significant shareholder at any time during the 12-month period preceding such
sale (i.e., such shareholder holds directly or indirectly, including jointly with others,
at least 10% of any means of control in the company) the tax rate will be 25%. Israeli
companies are subject to the corporate tax rate on capital gains derived from the sale of
shares, unless such companies were not subject to the Inflationary Adjustments Law (or
certain regulations) at the time of publication of the aforementioned amendment to the Tax
Ordinance, in which case the applicable tax rate is 25%. However, the different tax rates
may not apply to dealers in securities and shareholders who acquired their shares prior to
an initial public offering.

The tax basis of shares acquired
prior to January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a request may be made
to the tax authorities to consider the actual adjusted cost of the shares as the tax basis
if it is higher than such average price.

Non-Israeli residents are exempt from
Israeli capital gains tax on any gains derived from the sale of shares of Israeli
companies publicly traded on a recognized stock exchange outside of Israel, provided that
such capital gains are not derived from a permanent establishment in Israel, that such
shareholders are not subject to the Inflationary Adjustments Law and that such
shareholders did not acquire their shares prior to the issuers initial public
offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues
or profits of such non-Israeli corporation, whether directly or indirectly.

In some instances where our
shareholders may be liable to Israeli tax on the sale of their ordinary shares, the
payment of the consideration may be subject to the withholding of Israeli tax at the
source.

Pursuant to the Convention between
the Government of the United States of America and the Government of Israel with Respect
to Taxes on income, as amended, known as the U.S.-Israel Tax Treaty, the sale, exchange or
disposition of ordinary shares by a person who holds the ordinary shares as a capital
asset and who qualifies as a resident of the United States within the meaning of the
treaty and who is entitled to claim the benefits afforded to a resident by the treaty will
not be subject to Israeli capital gains tax. This exemption does not apply if: (i) the
treaty U.S. resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the twelve-month period preceding the applicable sale,
exchange or disposition, subject to specific conditions, or (ii) the capital gains from
such sale, exchange or disposition can be allocated to a permanent establishment in
Israel. In these cases, the sale, exchange or disposition would be subject to Israel tax,
to the extent applicable, as mentioned above. However, under the U.S.-Israel Tax Treaty,
the treaty U.S. resident would be permitted to claim a credit for the capital gains tax
paid in Israel against the U.S. federal income tax imposed with respect to the applicable
sale, exchange or disposition, subject to the limitations in U.S. laws applicable to
foreign tax credits. The U.S.-Israel Tax Treaty does not relate to U.S. state or local
taxes.

40

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Tax
on Dividends

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, income tax is generally withheld at the source at the
following rates: (i) for dividends distributed prior to January 1, 2006  25%; (ii)
for dividends distributed on or after January 1, 2006  20%. A different rate may be
provided in a treaty between Israel and the shareholders country of residence. Under
the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary
shares who is a U.S. resident (as defined in the treaty) is 25%, and in certain
circumstances if such shareholder is a U.S. corporation holding at least 10% of our issued
voting power during the part of the tax year which precedes the date of payment of the
dividend as well as the previous tax year, the maximum Israeli tax on dividends paid to
such corporation is 12.5%.

A non-resident of Israel who receives
interest or dividend income derived from or accrued in Israel, from which tax was withheld
at the source, is generally exempted from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business conducted in
Israel by the taxpayer and the taxpayer has no other taxable sources of income in Israel.

Israel presently has no estate or
gift tax.

# F. Dividends and Paying
Agents

Not applicable.

# G. Statement by Experts

Not applicable.

# H. Documents On Display

We are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign
private issuers and fulfill the obligations with respect to such requirements by filing
reports with the Securities and Exchange Commission. You may read and copy any document we
file with the Securities and Exchange Commission without charge at the Securities and
Exchange Commissions public reference room at 100 F Street, N.E., Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference Branch of
the Securities and Exchange Commission at such address, at prescribed rates. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the
public reference room.

41

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As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and content of
proxy statements, and our officers, directors and principal shareholders are exempt from
the reporting and short-swing profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not 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.

# I. Subsidiary Information

Not applicable.

|ITEM 11. |  | Quantitative and Qualitative Disclosures about Market Risk
|-------- |  | ----------------------------------------------------------

# General

We are exposed to market risk,
including movements in interest rates and foreign currency exchange rates. Our primary
market risk exposure occurs because we generate most of our financial income in U.S.
dollars but incur some of our expenses in new Israeli shekels.

We do not presently engage in any
hedging or other transactions intended to manage risks relating to foreign currency
exchange rate or interest rate fluctuations. At December 31, 2005, we did not own any
market risk sensitive instruments. However, we may in the future undertake hedging or
other similar transactions or invest in market risk sensitive instruments if our
management determines that it is necessary to offset these risks.

# Interest Rate Risk
Management

As of December 31, 2005, we had $9.9
million of cash and short and long term investments, primarily all of which was linked to
the U.S. dollar.

|ITEM 12. |  | Description of Securities other than Equity Securities
|-------- |  | ------------------------------------------------------

Not applicable.

# PART 2

|ITEM 13. |  | Defaults, Dividend Averages and Delinquencies
|-------- |  | ---------------------------------------------

Not applicable.

|ITEM 14. |  | Material Modifications to the Rights of Security Holders and Use of Proceeds
|-------- |  | ----------------------------------------------------------------------------

For a discussion of our recently
adopted shareholder bonus rights plan, please refer to Item 10.B under the caption
  Mergers and Acquisitions under Israeli Law; Anti-Takeover Provisions of
this Annual Report.

42

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|ITEM 15. |  | Controls and Procedures
|-------- |  | -----------------------

We performed an evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
December 31, 2005. The evaluation was performed with the participation of our senior
management and under the supervision and with the participation of our principal executive
and financial officer. Based on this evaluation, our principal executive and financial
officer has concluded that our disclosure controls and procedures are effective to alert
them on a timely basis to material information required to be included in our periodic
reports with the Securities and Exchange Commission.

In addition, there were no changes in
our internal control over financial reporting that occurred during 2005 that have
materially affected, or that are reasonably likely to materially affect, our internal
control over financial reporting.

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

While all the members of our audit
committee are financially literate, our board of directors has not designated any of them
as an audit committee financial expert, as defined in the applicable
regulations. Since we currently have no business operations, our financial reporting
process is relatively simple. Accordingly, we believe that our current situation does not
justify the appointment of an audit committee financial expert.

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

Our board of directors has adopted a
Code of Ethics. We will provide a copy of our Code of Ethics free of charge to any person
who requests one. Such requests may be sent to our offices at 126 Yigal Allon Street, Tel
Aviv, Israel, Attention: Chief Executive Officer.

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

Audit
Fees

For 2004 and 2005, our independent
accountant was Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
These accountants billed the following fees to us for professional services in each of the
last two fiscal years:

|                   | Year Ended December 31,
|------------------ | -----------------------
|
|
|
|
|Audit Fees         |                        
|Audit-Related Fees |                        
|Tax Fees           |                        
|All Other Fees     |                        
|                   |                        
|Total              |                        
|                   |                        

43

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Audit Fees are the
aggregate fees billed for the audit of our annual financial statements. This category also
includes services that generally the independent accountant provides, consents and
assistance with and review of documents filed with the SEC. Audit-Related Fees
are the aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit and are not reported under Audit Fees. These fees
include mainly accounting consultations regarding the accounting treatment of matters that
occur in the regular course of business, implications of new accounting pronouncements and
other accounting issues that occur from time to time. Tax Fees are the
aggregate fees billed for professional services rendered for tax compliance, tax advice,
other than in connection with the audit. Tax compliance involves preparation of original
and amended tax returns, tax planning and tax advice.

Our Audit Committee has adopted a
pre-approval policy for the engagement of our independent accountant to perform certain
audit and non-audit services. Pursuant to this policy, which is designed to assure that
such engagements do not impair the independence of our auditors, the audit committee
pre-approves annually a catalog of specific audit and non-audit services in the categories
of Audit Service, Audit-Related Service, Tax Services and other services that may be
performed by our independent accountants and the maximum pre-approved fees that may be
paid as compensation for each pre-approved service in those categories. Any proposed
services exceeding the maximum pre-approved fees require specific approval by the Audit
Committee.

With respect to each pre-approved
service actually requested to be provided, an executive officer is required to notify the
Audit Committee in writing and state whether, in the executive officers view, the
provision of such service by the outside auditor would impair its independence.

The Audit Committee may delegate its
pre-approval authority to one or more of its members, subject to ratification by the
entire Audit Committee.

|ITEM 16D. |  | Exemptions from Listing Standards for Audit Committees
|--------- |  | ------------------------------------------------------

Not applicable.

|ITEM 16E. |  | Purchases Of Equity Securities by the Issuer and Affiliated Purchasers
|--------- |  | ----------------------------------------------------------------------

None.

# PART 3

|ITEM 17. |  | Financial Statements
|-------- |  | --------------------

We have responded to Item 18 in lieu
of this item.

|ITEM 18. |  | Financial Statements
|-------- |  | --------------------

The Financial Statements required by
this item are found at the end of this Annual Report, beginning on page F-1.

44

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|ITEM 19. |  | Exhibits
|-------- |  | --------

The exhibit lists required by this
Item is incorporated by reference to the Exhibit Index, which appears before the first
exhibit filed with this document.

SIGNATURE

The registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this Annual Report on its behalf.

| |  | TIKCRO TECHNOLOGIES LTD.By: /s/ Izhak Tamir
Izhak TamirChief Executive Officer
| |  | --------------------------------------------------------------------------------------------

Date: June 25, 2006

45

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Exhibit Index

|Exhibit No. |  | Exhibit
|----------- |  | -------

|1.1 |  | Memorandum
of Association (a)
|--- |  | -----------------------------

|1.2 |  | Amended
and Restated Articles of Association (a)
|--- |  | ------------------------------------------------

|1.3 |  | Bonus
Rights Agreement, dated as of September 12, 2005, between Tikcro Technologies Ltd.
                  and American Stock Transfer & Trust Company, as Rights Agent (c)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.8 |  | Share
Incentive Plan, as amended (b)
|--- |  | ------------------------------------

|4.17 |  | Tikcro 2003 Stock Option Plan (a)
|---- |  | ---------------------------------

|8 |  | List
of Subsidiaries (d)
|- |  | ------------------------

|12.1 |  | Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
                  17 to CFR 240.13a-14(a), as adopted pursuant toss.302 of the
Sarbanes-Oxley Act (d)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13.1 |  | Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
                  18 to U.S.C. 1350, as adopted Section 906 of the Sarbanes-Oxley Act of
2002 (d)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14.1 |  | Consent
of Independent Auditor (d)
|---- |  | ----------------------------------

|(a) | Incorporated
by reference to Tikcros Annual Report on Form 20-F for the                year
ended December 31, 2003 (File No. 0-30820).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

|(b) | Incorporated
by reference to Tikcros Registration Statement on Form S-8           (File No.
333-12904).
|--- | --------------------------------------------------------------------------------------------------------

|(c) | Incorporated
by reference to Tikcros Report on Form 6-K filed with the                Securities
and Exchange Commission on September 14, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Filed
herewith.
|--- | ---------------

46

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# TIKCRO TECHNOLOGIES
LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2005

# IN U.S. DOLLARS

# INDEX

|                                                           | Page      
|---------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm    | F-2       
|Consolidated Balance Sheets                                | F-3       
|Consolidated Statements of Operations                      | F-4       
|Statements of Changes in Shareholders' Equity (Deficiency) | F-5       
|Consolidated Statements of Cash Flows                      | F-6       
|Notes to Consolidated Financial Statements                 | F-7 - F-21



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# TIKCRO TECHNOLOGIES
LTD.

We
have audited the accompanying consolidated balance sheets of Tikcro Technologies Ltd.
(the Company) and its subsidiaries as of December 31, 2004 and 2005, and the
related consolidated statements of operations, changes in shareholders equity
(deficiency) and cash flows for each of the three years in the period ended
December 31, 2005. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
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 the Company and its
subsidiaries as of December 31, 2004 and 2005, and the consolidated results of their
operations and cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted in the
United States.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | /s/ KOST FORER GABBAY & KASIERER
|March 25, 2006   | A Member of Ernst & Young Global

F - 2

---

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|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
|---------------------------------------------
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands, except share data 

|                                                                                | December 31,
|------------------------------------------------------------------------------- | ------------
|
|
|
|
|ASSETS                                                                          |             
|                                                                                |             
|CURRENT ASSETS:                                                                 |             
|Cash and cash equivalents                                                       |             
|Marketable securities (Note 3)                                                  |             
|Due from STMicroelectronics Ltd (Note 1)                                        |             
|Other current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Total current assets                                                            |             
|                                                                                |             
|                                                                                |             
|Total assets                                                                    |             
|                                                                                |             
|                                                                                |             
|LIABILITIES AND SHAREHOLDERS' EQUITY                                            |             
|                                                                                |             
|CURRENT LIABILITIES:                                                            |             
|Related party - current account (Note 7)                                        |             
|Other current liabilities                                                       |             
|                                                                                |             
|                                                                                |             
|Total current liabilities                                                       |             
|                                                                                |             
|                                                                                |             
|COMMITMENTS AND CONTINGENT LIABILITIES (Note 4)                                 |             
|                                                                                |             
|SHAREHOLDERS' EQUITY (Note 5):                                                  |             
|Share capital:                                                                  |             
|Ordinary shares of NIS 0.1 par value - Authorized: 50,000,000 shares at         |             
|December 31, 2004 and 2005; Issued: 28,067,555 shares at December 31, 2004      |             
|and 2005; Outstanding: 23,726,401 shares at December 31, 2004 and 2005          |             
|Additional paid-in capital                                                      |             
|Less - treasury shares, at cost (4,341,154 Ordinary shares at December 31, 2004 |             
|and 2005)                                                                       |             
|Accumulated other comprehensive loss                                            |             
|Accumulated deficit                                                             |             
|                                                                                |             
|                                                                                |             
|Total shareholders' equity                                                      |             
|                                                                                |             
|                                                                                |             
|Total liabilities and shareholders' equity                                      |             
|                                                                                |             

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

F - 3

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES   
|------------------------------------------------
|                                                
|CONSOLIDATED STATEMENTS OF OPERATIONS           
|                                                
|U.S. dollars in thousands, except per share data

|                                                                | Year ended December 31,
|--------------------------------------------------------------- | -----------------------
|
|
|
|
|Revenues:                                                       |                        
|                                                                |                        
|Development and marketing services (Note 1 and 7)               |                        
|                                                                |                        
|                                                                |                        
|Operating costs and expenses:                                   |                        
|Research and development expenses, net and development services |                        
|costs, net (Notes 1 and 2)                                      |                        
|Selling, marketing, general and administrative expenses         |                        
|Amortization of deferred stock compensation *)                  |                        
|                                                                |                        
|                                                                |                        
|Total operating costs and expenses                              |                        
|                                                                |                        
|                                                                |                        
|Operating loss                                                  |                        
|Other income (Note 1)                                           |                        
|Financial income (expenses), net (Note 9)                       |                        
|                                                                |                        
|                                                                |                        
|Net income (loss)                                               |                        
|                                                                |                        
|                                                                |                        
|Net earnings (loss) per share (Note 8):                         |                        
|                                                                |                        
|Basic net earnings (loss) per share                             |                        
|                                                                |                        
|                                                                |                        
|Diluted net earnings (loss) per share                           |                        
|                                                                |                        

|*) | Amortization
of deferred stock compensation in the year ended December 31, 2003,
               related to the following operating expenses: research and development
expenses,                net and development services costs net of $ 47 and selling,
marketing, general                and administrative expenses of $ 724.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**) | Less
than $ 0.01.
|--- | -----------------

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

F - 4

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
|                                                          
|U.S. dollars in thousands, except share data              

|                                         | OutstandingOrdinary shares | Additionalpaid-incapital | Deferredstockcompensation | Accumulatedothercomprehensiveloss | Treasuryshares | Accumulateddeficit | Totalcomprehensiveincome (loss) | Totalshareholders'equity
(deficiency)
|---------------------------------------- | -------------------------- | ------------------------ | ------------------------- | --------------------------------- | -------------- | ------------------ | ------------------------------- | -------------------------------------
|
|
|
|
|Balance at January 1, 2003               |                            |                          |                           | 25,025,436                        |                | $                  | 600                             |                                      
|                                         |                            |                         
|Exercise of stock options                |                            |                          |                           | 3,042,119                         |                |                    | 76                              |                                      
|Amortization of deferred stock           |                            |                         
|compensation related to repriced options |                            |                          |                           | -                                 |                |                    | -                               |                                      
|Purchase of Orckit's subordinated notes  |                            |                          |                           | -                                 |                |                    | -                               |                                      
|Purchase of treasury shares              |                            |                          |                           | (4,341,154                        | )              |                    | -                               |                                      
|Comprehensive income:                    |                            |                         
|Net income                               |                            |                          |                           | -                                 |                |                    | -                               |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|Total comprehensive income               |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                         
|Balance at December 31, 2003             |                            |                          |                           | 23,726,401                        |                |                    | 676                             |                                      
|                                         |                            |                         
|Comprehensive loss:                      |                            |                         
|Unrealized losses on available-for-sale  |                            |                         
|marketable securities                    |                            |                          |                           | -                                 |                |                    | -                               |                                      
|Net loss                                 |                            |                          |                           | -                                 |                |                    | -                               |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|Total comprehensive loss                 |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                         
|Balance at December 31, 2004             |                            |                          |                           | 23,726,401                        |                |                    | 676                             |                                      
|                                         |                            |                         
|Comprehensive income:                    |                            |                         
|Unrealized losses on available-for-sale  |                            |                         
|marketable securities                    |                            |                          |                           | -                                 |                |                    | -                               |                                      
|Net income                               |                            |                          |                           | -                                 |                |                    | -                               |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|Total comprehensive income               |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      
|                                         |                            |                         
|Balance at December 31, 2005             |                            |                          |                           | 23,726,401                        |                | $                  | 676                             |                                      
|                                         |                            |                          |                           |                                   |                |                    |                                 |                                      

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

F - 5

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
|---------------------------------------------
|                                             
|CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                                             
|U.S. dollars in thousands                    

|                                                                | Year ended December 31,
|--------------------------------------------------------------- | -----------------------
|
|
|
|
|Cash flows from operating activities:                           |                        
|                                                                |                        
|Net income (loss)                                               |                        
|Adjustments required to reconcile net income (loss) to net cash |                        
|provided by (used in) operating activities:                     |                        
|Depreciation                                                    |                        
|Realized losses on available-for-sale marketable securities     |                        
|Decrease in dues from STMicroelectronics Ltd.                   |                        
|Decrease (increase) in other current assets                     |                        
|Decrease in inventories                                         |                        
|Increase (decrease) in trade payables                           |                        
|Increase (decrease) in related party - current account          |                        
|Increase (decrease) in other current liabilities                |                        
|Accrued interest on marketable securities                       |                        
|Accrued severance pay, net                                      |                        
|Amortization of deferred stock compensation                     |                        
|Gain from sale of the Company's business                        |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) operating activities             |                        
|                                                                |                        
|                                                                |                        
|Cash flows from investing activities:                           |                        
|                                                                |                        
|Purchase of available - for - sale marketable securities        |                        
|Proceeds from realization of available-for-sale marketable      |                        
|securities                                                      |                        
|Purchase of property and equipment                              |                        
|Decrease in long-term lease deposits                            |                        
|Proceeds from sale of the Company's business                    |                        
|                                                                |                        
|                                                                |                        
|Net cash provided by (used in) investing activities             |                        
|                                                                |                        
|                                                                |                        
|Cash flows from financing activities:                           |                        
|                                                                |                        
|Proceeds from exercise of stock options                         |                        
|Purchase of Orckit's subordinated notes                         |                        
|Payment of long-term loan from a related party                  |                        
|Purchase of treasury shares                                     |                        
|                                                                |                        
|                                                                |                        
|Net cash used in financing activities                           |                        
|                                                                |                        
|                                                                |                        
|Increase (decrease) in cash and cash equivalents                |                        
|Cash and cash equivalents at the beginning of the year          |                        
|                                                                |                        
|                                                                |                        
|Cash and cash equivalents at the end of the year                |                        
|                                                                |                        
|                                                                |                        
|Supplemental disclosure of cash flows activities:               |                        
|                                                                |                        
|Cash paid during the year for interest                          |                        
|                                                                |                        
|                                                                |                        
|Cash paid (refunded) during the year for taxes                  |                        
|                                                                |                        

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

F - 6

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: |  | GENERAL
|------- | - | -------

| | Tikcro
Technologies Ltd. (the Company or Tikcro) was incorporated in
1999, under the laws of Israel. Tikcro had a wholly-owned subsidiary, Silicon Value (S.V.)
Ltd. (SVL), which has been voluntarily liquidated at the end of 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Currently
the Company has no business activities and it is pursuing investment opportunities.
| | ---------------------------------------------------------------------------------------------

| | On
January 30, 2000, the board of directors of Orckit Communications Ltd.
(Orckit) decided to execute a plan of separation (the plan or
the spin-off) under Section 350 of Israels Companies Law, pursuant to
which, Orckit was formally divided into two separate companies: (i) Tikcro (previously
Tioga) which would own substantially all of Orckits semiconductor chip
business, and (ii) Orckit itself, which continued to own and operate its telecom equipment
and other businesses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2002, the Company entered into three strategic agreements with STMicroelectronics
NV and its Israeli subsidiary STMicroelectronics Ltd. (collectively ST), a
technology transfer agreement, a development, marketing and services agreement and an
option agreement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the technology transfer agreement, the Company granted ST certain co-ownership rights
in its then existing intellectual property in the DSL field and ownership rights over its
products.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the development, marketing and services agreement (services agreement), the
Company was required to provide development and marketing services to ST in the DSL field
as determined by ST from time to time as detailed in this agreement. In consideration of
the performance of these services during the term of the agreement, ST paid the Company $
2,000 for every quarter in which the services were rendered, commencing January 15, 2002.
The services agreement was subsequently extended until April 28, 2003. The Company
recorded such fees as revenues (see also Note 7).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of these agreements, the Companys activities in year 2003 consisted
primarily of development and marketing services provided to ST. The Company did not
conduct its business as an independent DSL chip developer and manufacturer.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the abovementioned option agreement, Tikcro granted to ST the right to acquire
Tikcros business via a merger or a sale of Tikcros assets. On January 15,
2003, ST exercised its option. According to the exercise notice, ST elected to acquire
Tikcros business as an asset deal.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 1: |  | GENERAL (Cont.)
|------- | - | ---------------

| | On
April 28, 2003, the Company and ST entered into the asset purchase agreement. Under the
asset purchase agreement, ST acquired all of the Companys assets (the acquired
assets) in consideration of $ 12,000 and, in addition, it assumed all of its
liabilities other than the following liabilities: the Companys financial
indebtedness (including the debt to Orckit); the Companys liabilities towards its
subsidiaries and the subsidiaries liabilities to the Company; tax liabilities (other
than Value Added Tax, if any, which under the agreement is to be borne by ST); liabilities
towards the Office of Chief Scientist in Israels Ministry of Industry and Trade with
respect to the services agreement with ST and any other liability if actually known to the
Company but is not disclosed to ST in the asset purchase agreement or in the financial
statements as of April 28, 2003. With respect to the asset purchase agreement, the Company
recorded in 2003 the capital gain of $ 12,834 as other income.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
the closing of the asset purchase agreement, the Company ceased all its operations.
| | ----------------------------------------------------------------------------------------

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | a. | Basis
of presentation:
| | -- | ----------------------

| | The
consolidated financial statements have been prepared in accordance with United States
generally accepted accounting principles (U.S. GAAP).
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Use
of estimates:
| | -- | -----------------

| | The
preparation of the 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | The
revenues of the Company were generated in U.S. dollars (dollar). In addition,
a substantial portion of the Companys cash flow transactions is incurred in
dollars. The Companys management believes that the dollar is the currency of the
primary economic environment in which the Company and its subsidiaries operate. Thus, the
functional and reporting currency of the Company and its subsidiaries is the dollar.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Accordingly,
monetary accounts maintained in currencies other than the dollar are re-measured into
U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52, Foreign
Currency Translation (SFAS No. 52). All transaction gains and losses of
the re-measurement of monetary balance sheet items are reflected in the statements of
operations as financial income or expenses, as appropriate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements in 2003 and 2004 included the accounts of the Company
and its wholly-owned subsidiaries. Intercompany transactions and balances had been
eliminated upon consolidation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Cash
equivalents:
| | -- | -----------------

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

| | f. | Marketable
securities:
| | -- | ----------------------

| | Management
determines the classification of investments in marketable debt securities at the time of
purchase and reevaluates such designations as of each balance sheet date. At December 31,
2005, all marketable securities covered by Statement of Financial Accounting Standard No.
115, Accounting for Certain Investments in Debt and Equity Securities, (SFAS
No. 115) were designated as available-for-sale. Accordingly, these securities are
stated at fair value, with unrealized gains and losses reported in accumulated other
comprehensive income (loss), a separate component of shareholders equity. Realized
gains and losses on sales of investments, as determined on a specific identification
basis, are included in the consolidated statement of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Research
and development costs:
| | -- | -------------------------------

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

F - 9

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | h. | Royalty-bearing
grants:
| | -- | -----------------------

| | Royalty-bearing
grants from the Government of Israel for funding approved research and development
projects were recognized at the time the Company is entitled to such grants, on the basis
of the costs incurred and included as a reduction in research and development expenses.
Research and development grants recognized amounted to $ 394, $ 0 and $ 0
in 2003, 2004 and 2005, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Tikcros
agreements with STMicroelectronics were approved by the Office of the Chief Scientist.
This approval was conditioned upon the undertaking of STMicroelectronics to comply with
the provisions of the R&D Law and to pay to the Office of the Chief Scientist
royalties on the sale of the purchased products that are based on Tikcros funded
intellectual property.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
No. 109). This Statement prescribes the use of the liability method whereby
deferred tax assets and liability account balances are determined based on 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 provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. | Revenue
recognition:
| | -- | --------------------

| | In
2003, the Company generated its revenues mostly from development and marketing services.
Revenues from such services were recognized at the time they were rendered (see also Note
1).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | The
Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB No. 25) and FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation (FIN No. 44)
in accounting for its employee stock option plans. Under APB No. 25, when the exercise
price of the Companys share options is less than the market price of the underlying
shares on the date of grant, compensation expense is recognized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation (SFAS No. 148),
which amended certain provisions of SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation, effective as of the beginning of the
fiscal year. The Company continues to apply the provisions of APB No. 25 in accounting
for stock-based compensation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Under
SFAS No. 123, pro forma information regarding net income (loss) and net earnings (loss)
per share is required and has been determined as if the Company had accounted for its
employee options under the fair value method of that statement. The fair value for these
options was estimated at the date of grant using a Black-Scholes Option Valuation Model,
with the following weighted-average assumptions for 2003: expected volatility of 66%,
risk-free interest rates of 2%, dividend yield of 0% and a weighted-average expected life
of the option of three years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Net income (loss) as reported                   |                        
| | Add: Total stock based compensation - intrinsic |                        
| | value                                           |                        
| | Deduct: Total stock based compensation          |                        
| | determined under fair value based method for    |                        
| | all awards                                      |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma net income (loss)                     |                        
| |                                                 |                        
| |                                                 |                        
| | Basic net earnings (loss) per share as reported |                        
| |                                                 |                        
| |                                                 |                        
| | Diluted net earnings (loss) per shares as       |                        
| | reported                                        |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma basic net earnings (loss) per share   |                        
| |                                                 |                        
| |                                                 |                        
| | Pro forma diluted net earnings (loss) per share |                        
| |                                                 |                        

| | l. | Severance
pay:
| | -- | --------------

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

F - 11

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
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 Israels
Severance Pay Law or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial profits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 31, 2004 and 2005 the Company had no employees and accordingly no liability for
severance pay.
| | ----------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2003, 2004 and 2005 amounted to approximately $ 128,
$ 0 and $ 0, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | m. | Fair
value of financial instruments:
| | -- | ------------------------------------

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

| | The
carrying amounts of cash and cash equivalents, other current assets and liabilities
approximate their fair value due to the short-term maturity of such instruments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value for marketable securities is based on quoted market price (see Note 3).
| | --------------------------------------------------------------------------------------

| | n. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net earnings (loss) per share are computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share are
computed based on the weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered outstanding during the year, in
accordance with Statement of Financial Accounting Standard No. 128, Earnings per
Share (SFAS No. 128).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total number of shares related to outstanding options, warrants and subordinated
convertible notes, excluded from the calculation of the diluted net earnings (loss) per
share, because they had anti-dilutive effect, for the years ended December 31, 2003, 2004
and 2005, were 0, 640,000 and 0, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Concentrations
of credit risks:
| | -- | -------------------------------

| | Financial
instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, and available-for-sale marketable debt
securities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Cash
and cash equivalents are invested in major banks in Israel and the U.S., mainly in U.S.
dollars. 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 investments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in corporate debentures
guaranteed by the U.S. government. Management believes that those companies are
financially sound, the portfolio is well diversified, and accordingly, minimal credit
risk exists with respect to these marketable securities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has no off-balance-sheet concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Treasury
shares:
| | -- | ----------------

| | The
Company repurchases its Ordinary shares from time to time on the open market and holds
such shares as treasury shares. The Company presents the cost of repurchased treasury
shares as a reduction in shareholders equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | Impact
of recently issued accounting standards:
| | -- | -----------------------------------------------

| | In
May 2005, the FASB issued Statement of Financial Accounting Standard No. 154 (SFAS
No. 154), Accounting Changes and Error Corrections, a replacement of
APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections. APB No. 20
previously required that most voluntary changes in accounting principles be recognized by
including in net income for the period of change the cumulative effect of changing to the
new accounting principle. SFAS No. 154 requires retroactive application to prior periodsfinancial
statements of a voluntary change in accounting principles unless it is impracticable.
SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No.
123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement
of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative.
The Company will adopt Statement 123(R) effective January 1, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Statement
123(R) permits public companies to adopt its requirements using one of two methods:
| | ---------------------------------------------------------------------------------------------

| | A
modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of Statement 123(R) for
all share-based payments granted after the effective date and (b) based on the
requirements of Statement 123 for all awards granted to employees prior to the effective
date of Statement 123(R) that remain unvested on the effective date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
company plans to adopt Statement 123(R) using the modified-prospective method.
| | ----------------------------------------------------------------------------------

| | As
permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options. In addition, non-compensatory
plans under APB 25 will be considered compensatory for FAS 123(R) purposes. Accordingly,
the adoption of Statement 123(R)s fair value method could have a significant impact
on the Companys result of operations, although it will have no impact on the
Company overall financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted
in the future. However, had the Company adopted Statement 123(R) in prior periods, the
impact of that standard would have approximated the impact of Statement 123 as described
in the disclosure of pro forma net income (loss) and earnings (loss) per share in Note 2
to the consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share Based
Payment (SAB 107). SAB 107 provides the SECs staff position
regarding the application of FAS 123(R) and contains interpretive guidance relating to
the interaction between FAS 123(R) and certain SEC rules and regulations, and also
provides the SEC staffs view regarding the valuation of share-based payment
arrangements for public companies. SAB 107 highlights the importance of disclosures made
relating to the accounting for share-based payment transactions. The Company is currently
reviewing the effect of SAB 107; however it does not believe that SAB 107 will have a
material effect on its financial position, results of operations or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
new standard will be effective for the Company in the first interim period beginning
after January 1, 2006.
| | ---------------------------------------------------------------------------------------------------------------

F - 14

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | The
following is a summary of available-for-sale marketable securities:
| | -----------------------------------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Available-for-sale:     |             
| | Corporate debentures *) |             
| |                         |             
| |                         |             

| | *) | The
expected maturities may differ from the contractual maturities because           debtors
may have the right to call or prepay obligations without penalties.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
unrealized losses as of December 31, 2005 were mainly caused by interest rate increases.
Based on the immateriality of the impairment and the ability of the Company to hold these
investments until recovery of their fair value, these investments were not considered to
be other than temporary impaired, as of December 31, 2005. In addition, the unrealized
losses are in continuous position for a period not more than twelve months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 4: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | Directors
and officers indemnification agreements:
| | --------------------------------------------------

| | The
Company, from time to time, has entered into indemnification agreements with several of
its directors and officers in which the Company undertakes to indemnify them, to the
fullest extent permitted by law, for acts taken or omitted by them in their respective
capacities as directors or officers of the Company or its subsidiaries. Pursuant to these
agreements, the obligations of the Company remain in effect even after the termination of
the directors and officers services to or employment with the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 5: |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | a. | Ordinary
shares:
| | -- | ----------------

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

| | b. | Stock
option plans:
| | -- | -------------------

| | 1. | Under
the Companys stock option plan (the plan) options may be
               granted to employees, officers, consultants and directors of the Company
or its                subsidiaries.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 5: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | 2. | As
of December 31, 2005, an aggregate of 7,375,589 of the Companys options
               are still available for future grant.
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
options granted generally become fully exercisable after three to four years
               and expire no later than 10 years from the approval date of the option
plan                under terms of grant. Any options, which are forfeited or cancelled
before                expiration, become available for future grants.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following is a summary of the Companys stock options granted:
| | ------------------------------------------------------------------

| |                       | Year ended December 31,
| | --------------------- | -----------------------
|
|
|
|
| | Outstanding at the    |                        
| | beginning of the year |                        
| | Granted               |                        
| | Exercised             |                        
| | Forfeited             |                        
| |                       |                        
| |                       |                        
| | Outstanding at the    |                        
| | end of the year       |                        
| |                       |                        
| |                       |                        
| | Exercisable options   |                        
| | at the end of the     |                        
| | year                  |                        
| |                       |                        

| | All
options granted during 2003, were at an exercise price that is equal to the fair value of
the stock at the grant date.
| | --------------------------------------------------------------------------------------------------------------------------

| | The
options outstanding as of December 31, 2005, have been separated into two exercise prices
as follows:
| | ---------------------------------------------------------------------------------------------------------

| | Exerciseprice | Optionsoutstandingas ofDecember 31,
2005 | Weighted
average
remaining
contractual
life (years) | Weighted
average
exercise
price | Options
exercisable
as of
December 31,
2005 | Weighted
average
exercise
price of
options
exercisable
| | ------------- | ---------------------------------------- | --------------------------------------------------- | ------------------------------- | ------------------------------------------- | ------------------------------------------------------
|
|
|
|
| | $  0.02       |                                          |                                                     |                                 | 440,000                                     |                                                       
| | $  0.29       |                                          |                                                     |                                 | 200,000                                     |                                                       
| |               |                                          |                                                     |                                 |                                             |                                                       
| |               |                                          |                                                     |                                 |                                             |                                                       
| |               |                                          |                                                    
| |               |                                          |                                                     |                                 | 640,000                                     |                                                       
| |               |                                          |                                                     |                                 |                                             |                                                       

| | Following
the assets purchase agreement, all outstanding options, other than the 640,000 options
mentioned above held by directors, were either exercised or forfeited.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 5: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | c. | In
April 2001, the Board of Directors of the Company resolved to reprice stock
          options of certain of its employees and employees of Orckit. The exercise price
          of the repriced stock options is NIS 0.10 which is the par value of the
Ordinary           shares. The Company had a new measurement date and consequently
recorded           deferred stock compensation of $ 3,374. During 2003, 2004 and
2005, $ 771,           $ 0 and $ 0, respectively was amortized to the statement
of           operations.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | In
March 2000, Orckit issued a $ 125,000 aggregate principal amount of its 5.75%
          convertible subordinated notes due in April 2005. Holders of the notes were
          entitled to convert each $ 1 principal amount of the notes into 11.7481
          Ordinary shares of Orckit (which is equivalent to a conversion price of $ 85.12
          per share) plus 11.7481 Ordinary shares of the Company. The conversion rates
          with respect to Orckit and the Company were subject to adjustment in certain
          circumstances, such as changes in the applicable companys capital
          structure or upon the issuance by the applicable company of stock dividends or
          certain cash distribution. During 2005 these notes were repaid by Orckit.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, Orckit repurchased a $ 75,312 principal amount of the notes. These notes were
convertible to 884,774 shares of the Company (the Companys average price 30 days
prior to that date was $ 0.27).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Orckit
agreed not to convert the notes for a total consideration of $ 249 that was paid to
Orckit by the Company during 2003.
| | -----------------------------------------------------------------------------------------------------------------------------

| | According
to EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock, the initial balance sheet
classification is based on the concept that contracts that require settlement in shares
are equity instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Therefore,
according to EITF 00-19, the $ 249 was reduced from the additional paid in capital and
classified as equity during 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | e. | In
February 2003, the Company obtained the required Israeli court approval for a
          share repurchase program.
| | -- | --------------------------------------------------------------------------------------------------------------------

| | The
program allows the Company to repurchase its Ordinary shares for an agreed consideration
of up to $ 2,000. The purchases will be made from time-to-time at the discretion of
management in open market purchases or in privately negotiated transactions. Purchases
will depend upon market conditions and may be discontinued at any time.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, the Company repurchased 4,341,154 of its shares (out of which
2,000,000 were purchased from employees) in consideration of $ 1,065 and are recorded as
Treasury shares that are presented at cost, and recorded as a reduction in shareholders
equity, during 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 5: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | f. | Shareholder
Bonus Rights Plan
| | -- | -----------------------------

| | On
September 12, 2005, the Companys Board of Directors adopted a Shareholder Bonus
Rights Plan (the Rights Plan) pursuant to which share purchase bonus rights
(the Right) were distributed on September 26, 2005, at the rate of one Right
for each of the Companys Ordinary shares held by shareholders of record as of the
close of business on that date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights Plan is intended to help ensure that all of the Companys shareholders are
able to realize the long-term value of their investment in the Company in the event of a
potential takeover which does not reflect the full value of the Company and is otherwise
not in the best interests of the Company and its shareholders. The Rights Plan is also
intended to deter unfair or coercive takeover tactics.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
right will entitle shareholders to buy one-half of one of the Companys ordinary
shares. The Rights generally will be exercisable and transferable apart from the Companys
Ordinary shares only if a person or group becomes an Acquiring Person by
acquiring beneficial ownership of 15% or more of the Companys Ordinary shares,
subject to certain exceptions set forth in the Rights Plan, or commences a tender or
exchange offer upon consummation of which such person or group would become an Acquiring
Person. Subject to certain conditions described in the Rights Plan, once the Rights
become exercisable, the holders of Rights, other than the Acquiring Person, will be
entitled to purchase Ordinary shares at a discount from the market price.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights will expire on December 31, 2015 and are generally redeemable by the Companys
board of directors, at $0.01 per Right, at any time until the tenth business day
following public disclosure that a person or group has become an Acquiring Person.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | TAXES ON INCOME
|------- | - | ---------------

| | a. | Tax
laws applicable to the Company:
| | -- | -----------------------------------

| | Income
Tax (Inflationary Adjustments) Law, 1985:
| | ------------------------------------------------

| | According
to the law, the results for tax purposes are measured based on the changes in the Israeli
CPI. The Company is taxed under this law.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | Capital
gains/losses:
| | ---------------------

| | Pursuant
to the provisions of the Law for Amendment of the Income Tax Ordinance (No. 132),
2003 (the reform law), tax at a reduced rate of 25% will apply on capital
gains accrued after January 1, 2003, instead of the regular tax rate. In case of the sale
of properties purchased before the adoption of the reform law, the reduced tax rate will
apply only to the portion of the profit which accrued after the adoption of the law, as
computed according to the law. Further, the reform law states that capital, losses
carried forward for tax purposes may be offset against capital gains indefinitely. The
reform law also provides for the possibility to offset capital losses from sales of
properties outside Israel against capital gains in Israel.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 6: |  | TAXES ON INCOME (Cont.)
|------- | - | -----------------------

| | b. | Tax
rates applicable to the income of the Company:
| | -- | --------------------------------------------------

| | Until
December 31, 2003, the regular tax rate applicable to income of companies (which are not
entitled to benefits due to approved enterprise, as described above) was 36%.
In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision),
2004 was passed by the Knesset (Israeli parliament) and on July 25, 2005,
another law was passed, the amendment to the Income Tax Ordinance (No. 147) 2005,
according to which the corporate tax rate is to be progressively reduced to the following
tax rates: 2004  35%, 2005  34%, 2006  31%, 2007  29%, 2008 27%,
2009  26%, 2010 and thereafter  25%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Deferred
taxes on income:
| | -- | -------------------------

| | Deferred
income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes, measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse, which was determined as 30% and 25%
as of December 31, 2004 and 2005, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Significant
components of the Companys deferred tax liabilities and assets are as follows:
| | -------------------------------------------------------------------------------------------

| |                                                  | December 31,
| | ------------------------------------------------ | ------------
|
|
|
|
| | Deferred tax assets:                             |             
| | Net operating loss and capital loss carryforward |             
| | Valuation allowance                              |             
| |                                                  |             
| |                                                  |             
| | Net deferred tax asset                           |             
| |                                                  |             

| | Management
currently believes that since the Company has a history of losses it is more likely than
not that the deferred tax assets regarding the loss carryforward will not be realized in
the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Net
operating losses carryforward:
| | -- | ----------------------------------

| | The
Company has accumulated operating losses for tax purposes as of December 31, 2005,
in the amount of approximately $ 22,000, which may be carried forward and offset against
taxable income in the future for an indefinite period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has accumulated capital losses of $ 93,000, which may be carried forward and
offset against capital gains. There is no assurance that the Israeli tax authorities will
accept such position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 6: |  | TAXES ON INCOME (Cont.)
|------- | - | -----------------------

| | f. | The
main reconciling item from the statutory tax rate of the Company to the
          effective tax rate is the non-recognition of tax benefits from accumulated net
          operating losses carryforward due to the uncertainty of the realization of such
          tax benefits.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Net
income (loss) from continuing operations consists of the following:
| | -- | -----------------------------------------------------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Domestic (Israel) |                        
| | Foreign           |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        

|NOTE 7: |  | RELATED PARTY TRANSACTIONS
|------- | - | --------------------------

| | The
balances with and the results of operations from transactions with related parties
(Orckit and ST), were as follows:
| | ------------------------------------------------------------------------------------------------------------------------

| |                 | December 31,
| | --------------- | ------------
|
|
|
|
| | Balances:       |             
| |                 |             
| | Current account |             
| |                 |             

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Transactions:                                       |                        
| |                                                     |                        
| | Revenues from development and marketing services to |                        
| | ST, Switzerland (see Note 1)                        |                        
| | Interest on long-term loan                          |                        
| | Administrative services *)                          |                        

| | *) | Orckit
provides the Company with certain administrative services.
| | -- | -----------------------------------------------------------------

F - 20

---

---

|TIKCRO TECHNOLOGIES LTD. AND ITS SUBSIDIARIES             
|----------------------------------------------------------
|                                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                
|                                                          
|U.S. dollars in thousands, except share and per share data

|NOTE 8: |  | BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE
|------- | - | -----------------------------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share.
| | --------------------------------------------------------------------------------------------------

| | a. | Numerator:
| | -- | ----------

| |                                               | Year ended December 31,
| | --------------------------------------------- | -----------------------
|
|
|
|
| | Numerator for basic and diluted net earnings  |                        
| | (loss) per share - income (loss) available to |                        
| | shareholders of Ordinary shares               |                        
| |                                               |                        

| | b. | Denominator:
| | -- | ------------

| |                                                 |  |  | 
| | ----------------------------------------------- |  |  | 
|
|
|
|
| | Denominator for basic net earnings (loss) per   |  |  | 
| | share - weighted average shares                 |  |  | 
| |                                                 |  |  | 
| | Effect of dilutive securities:                  |  | 
| | Employee stock options, Orckit's employee       |  | 
| | options, SVL's employee options and options     |  | 
| | to service providers                            |  |  | 
| | Convertible subordinated notes                  |  |  | 
| |                                                 |  |  | 
| |                                                 |  | 
| | Denominator for diluted net earnings (loss) per |  | 
| | share - adjusted weighted average shares,       |  | 
| | assumed conversions and exercise of options     |  | 
| | and warrants                                    |  |  | 
| |                                                 |  |  | 

| | *) | Antidilutive.
| | -- | -------------

|NOTE 9: |  | FINANCIAL INCOME (EXPENSES), NET
|------- | - | --------------------------------

| | Financial
expenses:
| | -------------------

| |                                          |  |  |  
| | ---------------------------------------- |  |  | -
|
|
|
|
| | Interest                                 |  |  | $
| | Foreign currency translation adjustments |  |  |  
| | Loss from sale of marketable securities  |  |  |  
| | Other                                    |  |  |  
| |                                          |  |  |  
| |                                          |  | 
| |                                          |  |  |  
| |                                          |  |  |  
| | Financial income:                        |  | 
| |                                          |  | 
| | Interest                                 |  |  |  
| |                                          |  |  |  
| |                                          |  | 
| |                                          |  |  | $
| |                                          |  |  |  

F - 21

---

---