**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  
 **FORM
        20-F**
 
 
 (Mark
        One)
 **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, 2006
 
 OR
  **o TRANSITIONAL
        REPORT PURSUANT TO
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 
 OR
  **o SHELL
        COMPANY REPORT PURSUANT TO
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**
 **For
        the transition period from ____________to ___________.**
 
 Commission
        file number **000-51310**
 
 **XTL
        BIOPHARMACEUTICALS LTD.**
 (Exact
        name of registrant as specified in its charter)
 
 Israel
 (Jurisdiction
        of incorporation or organization)
 
 750
        Lexington Avenue, 20 th Floor
 New
        York,
        New York 10022
 (Address
        of principal executive offices)
 
 **Securities
        registered or to be registered pursuant to Section 12(b) of the
        Act:**
 American
        Depositary Shares,
 each
        representing ten Ordinary Shares, par value NIS 0.02
 (Title
        of
        Class)
  **Securities
        registered or to be registered pursuant to Section 12(g) of the
        Act:**
 **None.**
 
 **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act:**
 None.
 
 **Indicate
        the number of outstanding shares of each of the issuer's classes of capital
        or
        common stock as of the close of the period covered by the annual report.**
  4,333,047
        American Depositary
        Shares            
                              
220,124,349 Ordinary Shares
   
  **Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.**
  Yes o No ý
  **If
        this report is an annual or transition report, indicate by check mark if
        the
        registrant is not required to file reports pursuant to Section 13 or 15(d)
        of
        the Securities Exchange Act of 1934.**
  Yes o No ý
  **Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days.**
  Yes ý No o
  **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).
        (C** heck
        one):
  Large
                  accelerated filer£
              Accelerated
                  filerý
              Non-accelerated
                  filer£
  **Indicate
        by check mark which financial statement item the registrant has elected to
        follow.**
  Item 17 o Item 18 ý
  **Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).**
  Yes o No ý
   
  **XTL
        BIOPHARMACEUTICALS LTD.**
 **ANNUAL
        REPORT ON FORM 20-F**
 
 **TABLE
        OF CONTENTS**
 
 **Page**SPECIAL
                  CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
              1**PART
                  I**ITEM
                  1
              Identity
                  of Directors, Senior Management and Advisers
              2ITEM
                  2
              Offer
                  Statistics And Expected Timetable
              2ITEM
                  3
              Key
                  Information
              2ITEM
                  4
              Information
                  on the Company
              18ITEM
                  4A
              Unresolved
                  Staff Comments
              33ITEM
                  5
              Operating
                  and Financial Review and Prospects
              33ITEM
                  6
              Directors,
                  Senior Management and Employees
              46ITEM
                  7
              Major
                  Shareholders and Related Party Transactions
              55ITEM
                  8
              Financial
                  Information
              55ITEM
                  9
              The
                  Offer and Listing
              56ITEM
                  10
              Additional
                  Information
              58ITEM
                  11
              Quantitative
                  And Qualitative Disclosures About Market Risk
              75ITEM
                  12
              Description
                  of Securities other than Equity Securities
              76**PART
                  II**ITEM
                  13
              Defaults,
                  Dividend Arrearages and Delinquencies
              77ITEM
                  14
              Material
                  Modifications to the Rights of Security Holders and Use of
                  Proceeds
              77ITEM
                  15
              Controls
                  and Procedures
              77ITEM
                  16
              Reserved
              77ITEM
                  16A
              Audit
                  Committee Financial Expert
              77ITEM
                  16B
              Code
                  of Ethics
              77ITEM
                  16C
              Principal
                  Accountant Fees And Services
              77ITEM
                  16D
              Exemptions
                  From The Listing Standards For Audit Committees
              78ITEM
                  16E
              Purchases
                  Of Equity Securities By The Issuer And Affiliated
                  Purchasers
              78**PART
                  III**ITEM
                  17
              Financial
                  Statements
              79ITEM
                  18
              Financial
                  Statements
              79ITEM
                  19
              Exhibits
              79SIGNATURES
              
              80
 
 This
        annual report on Form 20-F contains trademarks and trade names of XTL
        Biopharmaceuticals Ltd., including our name and logo.
 
 i
   **SPECIAL
        CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
        matters discussed in this report, including matters discussed under the caption
        “Management’s Discussion and Analysis of Financial Condition and Results of
        Operations,” may constitute forward-looking statements for purposes of the
        Securities Act of 1933, as amended, or the Securities Act, and the Securities
        Exchange Act of 1934, as amended, or the Exchange Act, and involve known
        and
        unknown risks, uncertainties and other factors that may cause our actual
        results, performance or achievements to be materially different from the
        future
        results, performance or achievements expressed or implied by such
        forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,”
“believe,” “seek,” “estimate,” and similar expressions are intended to identify
        such forward-looking statements. Our actual results may differ materially
        from
        the results anticipated in these forward-looking statements due to a variety
        of
        factors, including, without limitation, those discussed under “Item 3. Key
        Information-Risk Factors,” “Item 4.- Information on the Company,” “Item 5.
        Operating and Financial Review and Prospects,” and elsewhere in this report, as
        well as factors which may be identified from time to time in our other filings
        with the Securities and Exchange Commission, or the SEC, or in the documents
        where such forward-looking statements appear. All written or oral
        forward-looking statements attributable to us are expressly qualified in
        their
        entirety by these cautionary statements.
  The
        forward-looking statements contained in this report reflect our views and
        assumptions only as of the date this report is signed. Except as required
        by
        law, we assume no responsibility for updating any forward-looking statements.
      
 1
  **PART
        I**
 
 *Unless
        the context requires otherwise, references in this report to “XTL,” “we,” “us”
and “our” refer to XTL Biopharmaceuticals Ltd. and our wholly-owned
        subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development, Inc. We have
        prepared our consolidated financial statements in United States, or US, dollars
        and in accordance with US generally accepted accounting principles, or US
        GAAP.
        All references herein to "dollars" or "$" are to US dollars, and all references
        to "Shekels" or "NIS" are to New Israeli Shekels.*
  **ITEM
        1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**
  Not
        applicable
   **ITEM
        2. OFFER STATISTICS AND EXPECTED TIMETABLE**
  Not
        applicable
   **ITEM
        3. KEY INFORMATION**
  **Selected
        Financial Data**
  The
        table
        below presents selected statement of operations and balance sheet data for
        the
        fiscal years ended and as of December 31, 2006, 2005, 2004, 2003 and 2002.
        We
        have derived the selected financial data for the fiscal years ended December
        31,
        2006, 2005, and 2004, and as of December 31, 2006 and 2005, from our audited
        consolidated financial statements, included elsewhere in this report and
        prepared in accordance with US GAAP. We have derived the selected financial
        data
        for fiscal years ended December 31, 2003 and 2002 and as of December 31,
        2004,
        2003 and 2002, from audited financial statements not appearing in this report,
        which have been prepared in accordance with US GAAP. You should read the
        selected financial data in conjunction with “Item 5. Operating and Financial
        Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial
        Statements.”
  
 2
  **Year
                    Ended December 31,****2006**
                
                **2005**
                
                **2004**
                
                **2003**
                
                **2002****(In
                    thousands, except share and per share amounts)****Statements
                    of Operations Data:**RevenuesReimbursed
                    out-of-pocket expenses
                
                $
                --
                
                $
                2,743
                
                $
                3,269
                
                $
                --
                
                $
                --License
                
                
                454
                
                
                454
                
                
                185
                
                
                --
                
                
                --454
                
                
                3,197
                
                
                3,454
                
                
                --
                
                
                --Cost
                    of RevenuesReimbursed
                    out-of-pocket expenses
                
                
                --
                
                
                2,743
                
                
                3,269
                
                
                --
                
                
                --License
                    (with respect to royalties)
                
                
                54
                
                
                54
                
                
                32
                
                
                --
                
                
                --54
                
                
                2,797
                
                
                3,301Gross
                    Margin
                
                
                400
                
                
                400
                
                
                153
                
                
                --
                
                
                --Research
                    and developmentResearch
                    and development costs
                
                
                10,229
                
                
                7,313
                
                
                11,985
                
                
                14,022
                
                
                13,231Less
                    participations
                
                
                --
                
                
                --
                
                
                --
                
                
                3,229
                
                
                7510,229
                
                
                7,313
                
                
                11,985
                
                
                10,793
                
                
                13,156In-process
                    research and development
                
                
                --
                
                
                1,783
                
                
                --
                
                
                --
                
                
                --General
                    and administrative
                
                
                5,576
                
                
                5,457
                
                
                4,134
                
                
                3,105
                
                
                3,638Business
                    development costs
                
                
                641
                
                
                227
                
                
                810
                
                
                664
                
                
                916Operating
                    loss
                
                
                (16,046
                )
                
                (14,380
                )
                
                (16,776
                )
                
                (14,562
                )
                
                (17,710
                )Other
                    income (expense)Financial
                    and other income, net
                
                
                1,141
                
                
                443
                
                
                352
                
                
                352
                
                
                597Taxes
                    on income
                
                
                (227
                )
                
                (78
                )
                
                (49
                )
                
                (78
                )
                
                (27
                )Loss
                    for the period
                
                $
                (15,132
                )
                $
                (14,015
                )
                $
                (16,473
                )
                $
                (14,288
                )
                $
                (17,140
                )Loss
                    per ordinary shareBasic
                    and diluted
                
                $
                (0.08
                )
                $
                (0.08
                )
                $
                (0.12
                )
                $
                (0.13
                )
                $
                (0.15
                )Weighted
                    average shares outstanding
                
                
                201,737,295
                
                
                170,123,003
                
                
                134,731,766
                
                
                111,712,916
                
                
                111,149,292
 
 **As
                  of December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  thousands)****Balance
                  Sheet Data:**Cash,
                  cash equivalents, bank deposits andtrading
                  and marketable securities
              
              $
              25,347
              
              $
              13,360
              
              $
              22,924
              
              $
              22,262
              
              $
              35,706Working
                  capital
              
              
              22,694
              
              
              11,385
              
              
              20,240
              
              
              19,967
              
              
              33,396Total
                  assets
              
              
              26,900
              
              
              15,151
              
              
              25,624
              
              
              24,853
              
              
              38,423Long-term
                  obligations
              
              
              738
              
              
              1,493
              
              
              2,489
              
              
              1,244
              
              
              1,017Total
                  shareholders’ equity
              
              
              22,760
              
              
              11,252
              
              
              19,602
              
              
              20,608
              
              
              34,830
   3
  **Risk
        Factors**
 
 *Before
        you invest in our ordinary shares or American Depositary Receipts representing
        American Depositary Shares, which we refer to in this report as ADRs, you
        should
        understand the high degree of risk involved. You should carefully consider
        the
        risks described below and other information in this report, including our
        financial statements and related notes included elsewhere in this report,
        before
        you decide to purchase our ordinary shares or ADRs. If any of the following
        risks actually occur, our business, financial condition and operating results
        could be adversely affected. As a result, the trading price of our ordinary
        shares or ADRs could decline and you could lose part or all of your
        investment.*
 
 **Risks
        Related to Our Business**
  ***We
        have incurred substantial operating losses since our inception. We expect
        to
        continue to incur losses in the future and may never become profitable.***
  You
        should consider our prospects in light of the risks and difficulties frequently
        encountered by development stage companies. We have incurred operating losses
        since our inception and expect to continue to incur operating losses for
        the
        foreseeable future. As of December 31, 2006, we had an accumulated deficit
        of
        approximately $114.9 million. We have not yet commercialized any of our drug
        candidates or technologies and cannot be sure we will ever be able to do
        so.
        Even if we commercialize one or more of our drug candidates or technologies,
        we
        may not become profitable. Our ability to achieve profitability depends on
        a
        number of factors, including our ability to complete our development efforts,
        obtain regulatory approval for our drug candidates and technologies and
        successfully commercialize them.
  ***If
        we are unable to successfully complete our clinical trial programs for our
        drug
        candidates, or if such clinical trials take longer to complete than we project,
        our ability to execute our current business strategy will be adversely affected.***
  Whether
        or not and how quickly we complete clinical trials is dependent in part upon
        the
        rate at which we are able to engage clinical trial sites and, thereafter,
        the
        rate of enrollment of patients. Patient enrollment is a function of many
        factors, including the size of the patient population, the proximity of patients
        to clinical sites, the eligibility criteria for the study and the existence
        of
        competitive clinical trials. If we experience delays in identifying and
        contracting with sites and/or in patient enrollment in our clinical trial
        programs, we may incur additional costs and delays in our development programs
        and may not be able to complete our clinical trials on a cost-effective basis.
  ***If
        third parties on which we rely for clinical trials do not perform as
        contractually required or as we expect, we may not be able to obtain regulatory
        approval for or commercialize our products.***
  We
        depend
        on independent clinical investigators, contract research organizations and
        other
        third-party service providers to conduct the clinical trials of our drug
        candidates and technologies and expect to continue to do so. We rely heavily
        on
        these parties for successful execution of our clinical trials, but we do
        not
        control many aspects of their activities. Nonetheless, we are responsible
        for
        confirming that each of our clinical trials is conducted in accordance with
        the
        general investigational plan and protocol. Our reliance on these third parties
        that we do not control does not relieve us of our responsibility to comply
        with
        the regulations and standards of the US Food and Drug Administration, or
        the
        FDA, relating to good clinical practices. Third parties may not complete
        activities on schedule or may not conduct our clinical trials in accordance
        with
        regulatory requirements or the applicable trial’s plans and protocols. The
        failure of these third parties to carry out their obligations could delay
        or
        prevent the development, approval and commercialization of our products or
        result in enforcement action against us.
   4
  ***If
        the clinical data related to our drug candidates and technologies do not
        confirm
        positive early clinical data or preclinical data, our corporate strategy
        and
        financial results will be adversely impacted.***
  All
        of
        our drug candidates and technologies are in preclinical or clinical stages.
        Specifically, a clinical trial with Bicifadine for neuropathic pain indications
        is pending commencement, XTL-2125 and XTL-6865 are currently in a Phase I
        clinical trial and one of our programs under development, DOS, has not yet
        been
        tested in humans. In order for our candidates to proceed to later stage clinical
        testing, they must show positive preclinical or clinical data. While Bicifadine,
        XTL-6865 and XTL-2125 have shown promising preclinical data and Bicifadine
        has
        shown promising clinical data in the treatment of acute pain prior to it
        being
        in-licensed to us, preliminary results of pre-clinical or clinical tests
        do not
        necessarily predict the final results, and promising results in pre-clinical
        or
        early clinical testing might not be obtained in later clinical trials. Drug
        candidates in the later stages of clinical development may fail to show the
        desired safety and efficacy traits despite having progressed through initial
        clinical testing. Any negative results from future tests may prevent us from
        proceeding to later stage clinical testing which would materially impact
        our
        corporate strategy and our financial results may be adversely impacted.
  ***We
        have limited experience in conducting and managing clinical trials necessary
        to
        obtain regulatory approvals.*** ***If
        our drug candidates and technologies do not receive the necessary regulatory
        approvals, we will be unable to commercialize our products.***
  We
        have
        not received, and may never receive, regulatory approval for commercial sale
        for
        any of our products. We currently do not have any drug candidates or
        technologies pending approval with the FDA or with regulatory authorities
        of
        other countries. We will need to conduct significant additional research
        and
        human testing before we can apply for product approval with the FDA or with
        regulatory authorities of other countries. Pre-clinical testing and clinical
        development are long, expensive and uncertain processes. Satisfaction of
        regulatory requirements typically depends on the nature, complexity and novelty
        of the product and requires the expenditure of substantial resources. Regulators
        may not interpret data obtained from pre-clinical and clinical tests of our
        drug
        candidates and technologies the same way that we do, which could delay, limit
        or
        prevent our receipt of regulatory approval. It may take us many years to
        complete the testing of our drug candidates and technologies, and failure
        can
        occur at any stage of this process. Negative or inconclusive results or medical
        events during a clinical trial could cause us to delay or terminate our
        development efforts.
  Clinical
        trials also have a high risk of failure. A number of companies in the
        pharmaceutical industry, including biotechnology companies, have suffered
        significant setbacks in clinical trials, even after achieving promising results
        in earlier trials. If we experience delays in the testing or approval process
        or
        if we need to perform more or larger clinical trials than originally planned,
        our financial results and the commercial prospects for our drug candidates
        and
        technologies may be materially impaired. In addition, we have limited experience
        in conducting and managing the clinical trials necessary to obtain regulatory
        approval in the US and abroad and, accordingly, may encounter unforeseen
        problems and delays in the approval process.
  Even
        if
        regulatory approval is obtained, our products and their manufacture will
        be
        subject to continual review, and there can be no assurance that such approval
        will not be subsequently withdrawn or restricted. Changes in applicable
        legislation or regulatory policies, or discovery of problems with the products
        or their manufacture, may result in the imposition of regulatory restrictions,
        including withdrawal of the product from the market, or result in increased
        costs to us.
  ***Because
        we license some of our proprietary technologies from third-parties, some
        of
        these third-parties could prevent us from licensing our drug candidates.***
 
 We
        do not
        own all of our drug candidates and technologies. We have licensed the patent
        rights to some of our drug candidates and/or the technologies on which they
        are
        based from others. Specifically, we have licensed Bicifadine from Dov
        Pharmaceutical, Inc., or DOV, who in turn licensed it from Wyeth
        Pharmaceuticals, Inc., or Wyeth. In addition, we have licensed XTL-2125 from
        B&C Biopharm Co. Ltd., we have licensed the two human monoclonal antibodies
        comprising XTL-6865 from Stanford University and DRK-Blutspendedienst
        Baden-Wurttemberg, and we have licensed certain other Hepatitis C virus,
        or HCV,
        compounds from VivoQuest Inc., or VivoQuest. We have also licensed the Trimera
        technology that was used in the development of XTL-6865, XTL-2125 and HepeX-B
        from the Yeda Research and Development Company Ltd., which we refer to as
        Yeda.
        These license agreements require us to meet development or financing milestones
        and impose development and commercialization due diligence requirements on
        us.
        In addition, under these agreements, we must pay royalties on sales of products
        resulting from licensed drugs and technologies and pay the patent filing,
        prosecution and maintenance costs related to the licenses. While we have
        the
        right to defend patent rights related to our licensed drug candidates and
        technologies, we are not obligated to do so. In the event that we decide
        to
        defend our licensed patent rights, we will be obligated to cover all of the
        expenses associated with that effort. If we do not meet our obligations in
        a
        timely manner or if we otherwise breach the terms of our agreements, our
        licensors could terminate the agreements, and we would lose the rights to
        our
        drug candidates and technologies. For a further discussion on our license
        agreements, the patent rights related to those licenses, and the expiration
        dates of those patent rights, see “Item 4. Information on the Company - Business
        Overview - Intellectual Property and Patents” and “Item 4. Information on the
        Company - Business Overview - Licensing Agreements and Collaborations,” below.
        In addition, see “- Risks Related to Our Intellectual Property,” below regarding
        potential issues related to the use of patents owned by
        third-parties.
   5
  In
        addition, under the terms of our license agreement with Yeda, we are required
        to
        obtain their approval under the license in order to grant sub-licenses to
        collaborative partners to develop or commercialize XTL-6865, XTL-2125 and
        HepeX-B. The requirement of obtaining these approvals, and any conditions
        that
        Yeda may impose upon such approvals, could have the effect of delaying or
        impeding our ability to enter into agreements with collaborative partners
        or
        result in our having to accept terms and conditions that might not be favorable
        to us. For a discussion of further required approvals, see “- Risks Relating to
        Operations in Israel,” below regarding potential restrictions from the Office of
        the Chief Scientist regarding the manufacture of XTL-6865, XTL-2125 and HepeX-B
        outside the State of Israel.
  ***If
        we do not establish or maintain drug development and marketing arrangements
        with
        third parties, we may be unable to commercialize our drug candidates and
        technologies into products.***
  We
        are an
        emerging company and do not possess all of the capabilities to fully
        commercialize our drug candidates and technologies on our own. From time
        to
        time, we may need to contract with third parties to:
  ·
              assist
                  us in developing, testing and obtaining regulatory approval for
                  some of
                  our compounds and technologies;·
              manufacture
                  our drug candidates; and·
              market
                  and distribute our products.
  We
        can
        provide no assurance that we will be able to successfully enter into agreements
        with such third-parties on terms that are acceptable to us. If we are unable
        to
        successfully contract with third parties for these services when needed,
        or if
        existing arrangements for these services are terminated, whether or not through
        our actions, or if such third parties do not fully perform under these
        arrangements, we may have to delay, scale back or end one or more of our
        drug
        development programs or seek to develop or commercialize our drug candidates
        and
        technologies independently, which could result in delays. Further, such failure
        could result in the termination of license rights to one or more of our drug
        candidates and technologies. Moreover, if these development or marketing
        agreements take the form of a partnership or strategic alliance, such
        arrangements may provide our collaborators with significant discretion in
        determining the efforts and resources that they will apply to the development
        and commercialization of our products. Accordingly, to the extent that we
        rely
        on third parties to research, develop or commercialize our products, we are
        unable to control whether such products will be scientifically or commercially
        successful.
  For
        example, in June 2004, we announced the completion of a license agreement
        with
        Cubist Pharmaceuticals, Inc., or Cubist, for the worldwide development and
        commercialization of HepeX-B. Under this agreement, we were responsible for
        certain clinical and product development activities of HepeX-B through August
        2005, at the expense of Cubist. Thereafter, we transferred full responsibility
        for completing the development of HepeX-B to Cubist. In July 2006, Cubist
        announced that it has decided not to make any further investment in the HepeX-B
        program, while it evaluates its strategic options for HepeX-B, including
        the
        sub-licensing of the product. Accordingly, at this time there can be no
        assurance that the drug candidate will be further developed in the future,
        that
        any such development would be successful, or that we will receive any proceeds
        from the sales of HepeX-B.
  ***If
        our products fail to achieve market acceptance, we will never record meaningful
        revenues.***
  Even
        if
        our products are approved for sale, they may not be commercially successful
        in
        the marketplace. Market acceptance of our product candidates will depend
        on a
        number of factors, including:
  ·
              perceptions
                  by members of the health care community, including physicians,
                  of the
                  safety and efficacy of our products;·
              the
                  rates of adoption of our products by medical practitioners and
                  the target
                  populations for our products;·
              the
                  potential advantages that our products offer over existing treatment
                  methods or other products that may be developed;·
              the
                  cost-effectiveness of our products relative to competing products;·
              the
                  availability of government or third-party payor reimbursement for
                  our
                  products;·
              the
                  side effects or unfavorable publicity concerning our products or
                  similar
                  products; and·
              the
                  effectiveness of our sales, marketing and distribution efforts.
   6
  Because
        we expect sales of our products to generate substantially all of our revenues
        in
        the long-term, the failure of our products to find market acceptance would
        harm
        our business and could require us to seek additional financing or other sources
        of revenue.
  ***If
        the third parties upon whom we rely to manufacture our products do not
        successfully manufacture our products, our business will be harmed.***
  We
        do not
        currently have the ability to manufacture for ourselves the compounds that
        we
        need to conduct our clinical trials and, therefore, rely upon a limited number
        of manufacturers to supply our drug candidates. We have no experience in
        manufacturing compounds for clinical or commercial purposes and do not have
        any
        manufacturing facilities. We rely upon, and intend to continue to rely upon,
        third parties to manufacture our drug candidates for use in clinical trials
        and
        for future sales. In order to commercialize our products, such products will
        need to be manufactured in commercial quantities while adhering to all
        regulatory and other requirements, all at an acceptable cost. We may not
        be able
        to enter into future third-party contract manufacturing agreements on acceptable
        terms, if at all.
  We
        expect
        to continue to rely on contract manufacturers and other third parties to
        produce
        sufficient quantities of our drug candidates for use in our clinical trials.
        See
“Item 4. Information on the Company - Business Overview - Supply and
        Manufacturing,” below. We believe that our existing manufacturing arrangements
        with these parties will be adequate to satisfy our current clinical supply
        needs
        for XTL-2125 and XTL-6865, and that our agreement with DOV provides us with
        access to sufficient inventory to satisfy our current clinical supply needs
        for
        Bicifadine. If our contract manufacturers or other third parties, such as
        DOV,
        fail to deliver our product candidates for clinical use on a timely basis,
        with
        sufficient quality, and at commercially reasonable prices, and we fail to
        find
        replacement manufacturers, we may be required to delay or suspend clinical
        trials or otherwise discontinue development and production of our drug
        candidates.
  Our
        contract manufacturers are required to produce our drug candidates in strict
        compliance with current good manufacturing practices, or cGMP, in order to
        meet
        acceptable standards for our clinical trials. If such standards change, the
        ability of contract manufacturers to produce our drug candidates on the schedule
        we require for our clinical trials may be affected. In addition, contract
        manufacturers may not perform their obligations under their agreements with
        us
        or may discontinue their business before the time required by us to successfully
        produce and market our drug candidates. Any difficulties or delays in our
        contractors’ manufacturing and supply of drug candidates could increase our
        costs, cause us to lose revenue or make us postpone or cancel clinical trials.
  In
        addition, our contract manufacturers will be subject to ongoing periodic,
        unannounced inspections by the FDA and corresponding foreign governmental
        agencies to ensure strict compliance with, among other things, current good
        manufacturing practices, in addition to other governmental regulations and
        corresponding foreign standards. We will not have control over, other than
        by
        contract, third-party manufacturers’ compliance with these regulations and
        standards. No assurance can be given that our third-party manufacturers will
        comply with these regulations or other regulatory requirements now or in
        the
        future.
  In
        the
        event that we are unable to obtain or retain third-party manufacturers, we
        will
        not be able to commercialize our products as planned. If third-party
        manufacturers fail to deliver the required quantities of our products on
        a
        timely basis and at commercially reasonable prices, our ability to develop
        and
        deliver products on a timely and competitive basis may be adversely impacted
        and
        our business, financial condition or results of operations will be materially
        harmed.
  ***If
        our competitors develop and market products that are less expensive, more
        effective or safer than our products, our commercial opportunities may be
        reduced or eliminated.***
  The
        pharmaceutical industry is highly competitive. Our commercial opportunities
        may
        be reduced or eliminated if our competitors develop and market products that
        are
        less expensive, more effective or safer than our products. Other companies
        have
        drug candidates in various stages of pre-clinical or clinical development
        to
        treat diseases for which we are also seeking to discover and develop drug
        candidates. For a discussion of these competitors and their drug candidates,
        see
“Item 4. Information on the Company - Business Overview - Competition,” below.
        Some of these potential competing drugs are further advanced in development
        than
        our drug candidates and may be commercialized earlier. Even if we are successful
        in developing safe, effective drugs, our products may not compete successfully
        with products produced by our competitors, who may be able to more effectively
        market their drugs.
   7
  Our
        competitors include pharmaceutical companies and biotechnology companies,
        as
        well as universities and public and private research institutions. In addition,
        companies that are active in different but related fields represent substantial
        competition for us. Many of our competitors have significantly greater capital
        resources, larger research and development staffs and facilities and greater
        experience in drug development, regulation, manufacturing and marketing than
        we
        do. These organizations also compete with us to recruit qualified personnel,
        attract partners for joint ventures or other collaborations, and license
        technologies that are competitive with ours. As a result, our competitors
        may be
        able to more easily develop products that could render our technologies or
        our
        drug candidates obsolete or noncompetitive.
  ***If
        we lose our key personnel or are unable to attract and retain additional
        personnel, our business could be harmed.***
  As
        of
        February 28, 2007, we had 33 full-time employees. To successfully develop
        our
        drug candidates and technologies, we must be able to attract and retain highly
        skilled personnel. The retention of their services cannot be guaranteed.
        In
        particular, if we lose the services of Michael S. Weiss, our Chairman, or
        Ron
        Bentsur, our Chief Executive Officer, our ability to continue to execute
        on our
        business plan could be materially impaired. Our agreement with Mr. Weiss
        provides that he may terminate his agreement with us upon 30 days’ prior written
        notice if he is not re-elected as Chairman of our Board, his fees for service
        as
        Chairman are reduced by more than 10%, we breach any material term of his
        agreement, or there is a change of control or reorganization of our company.
        Our
        agreement with Mr. Bentsur provides that he may terminate his agreement with
        us
        upon 30 days’ prior written notice if he is no longer the highest ranking member
        of our company’s management team, his annual base salary is reduced by more than
        10% (except where we have made similar reductions in the base salary of senior
        management throughout our company), we breach any material term of his
        agreement, or there is a change of control or reorganization of our company.
        We
        do not maintain a key man life insurance policy covering either Mr. Weiss
        or Mr.
        Bentsur.
  ***Any
        acquisitions we make may dilute your equity or require a significant amount
        of
        our available cash and may not be scientifically or commercially successful.***
  As
        part
        of our business strategy, we may effect acquisitions to obtain additional
        businesses, products, technologies, capabilities and personnel. If we make
        one
        or more significant acquisitions in which the consideration includes our
        ordinary shares or other securities, your equity in us may be significantly
        diluted. If we make one or more significant acquisitions in which the
        consideration includes cash, we may be required to use a substantial portion
        of
        our available cash.
  Acquisitions
        also involve a number of operational risks, including:
  ·
              difficulty
                  and expense of assimilating the operations, technology and personnel
                  of
                  the acquired business;·
              our
                  inability to retain the management, key personnel and other employees
                  of
                  the acquired business;·
              our
                  inability to maintain the acquired company’s relationship with key third
                  parties, such as alliance partners;·
              exposure
                  to legal claims for activities of the acquired business prior to
                  the
                  acquisition;·
              the
                  diversion of our management’s attention from our core business; and·
              the
                  potential impairment of substantial goodwill and write-off of in-process
                  research and development costs, adversely affecting our reported
                  results
                  of operations.
  In
        addition, the basis for completing the acquisition could prove to be
        unsuccessful as the drugs or processes involved could fail to be scientifically
        or commercially viable. In addition, we may be required to pay third parties
        substantial transaction fees, in the form of cash or ordinary shares, in
        connection with such transactions.
  If
        any of
        these risks occur, it could have an adverse effect on both the business we
        acquire and our existing operations.
   8
  ***We
        face product liability risks and may not be able to obtain adequate insurance.***
  The
        use
        of our drug candidates and technologies in clinical trials, and the sale
        of any
        approved products, exposes us to liability claims. Although we are not aware
        of
        any historical or anticipated product liability claims against us, if we
        cannot
        successfully defend ourselves against product liability claims, we may incur
        substantial liabilities or be required to cease clinical trials of our drug
        candidates and technologies or limit commercialization of any approved products.
  We
        believe that we have obtained sufficient product liability insurance coverage
        for our clinical trials. We intend to expand our insurance coverage to include
        the commercial sale of any approved products if marketing approval is obtained;
        however, insurance coverage is becoming increasingly expensive. We may not
        be
        able to maintain insurance coverage at a reasonable cost. We may not be able
        to
        obtain additional insurance coverage that will be adequate to cover product
        liability risks that may arise. Regardless of merit or eventual outcome,
        product
        liability claims may result in:
  ·
              decreased
                  demand for a product;·
              injury
                  to our reputation;·
              inability
                  to continue to develop a drug candidate or technology;·
              withdrawal
                  of clinical trial volunteers; and·
              loss
                  of revenues.
  Consequently,
        a product liability claim or product recall may result in material
        losses.
  **Risks
        Related to Our Financial Condition**
  ***If
        we are unable to obtain additional funds on terms favorable to us, or at
        all, we
        may not be able to continue our operations.***
  We
        expect
        to use, rather than generate, funds from operations for the foreseeable future.
        We currently have an average projected burn rate of approximately $1.2 million
        per month in 2007 (excluding a $7.5 million payment made to DOV in January
        2007,
        pursuant to a license agreement). Based on our current business plan, we
        believe
        that we have sufficient resources to fund our operations for approximately
        the
        next 12 months; however, the actual amount of funds that we will need will
        be
        determined by many factors, some of which are beyond our control. These factors
        include:
  ·
              the
                  progress of our development activities;·
              the
                  progress of our research activities;·
              the
                  number and scope of our development programs;·
              our
                  ability to establish and maintain current and new licensing or
                  acquisition
                  arrangements;·
              our
                  ability to achieve our milestones under our licensing arrangements;·
              the
                  costs involved in enforcing patent claims and other intellectual
                  property
                  rights; and·
              the
                  costs and timing of regulatory approvals.
  We
        may
        seek additional capital through a combination of public and private equity
        offerings, debt financings and collaborative, strategic alliance and licensing
        arrangements. We have
        made
        no determination at this time as to the amount, method or timing of any such
        financing. Such
        additional financing may not be available when we need it .
        If we
        are unable to obtain additional funds on terms favorable to us or at all,
        we may
        be required to cease or reduce our operating activities or sell or license
        to
        third parties some or all of our technology. If we raise additional funds
        by
        selling ordinary shares or other securities, the ownership interests of our
        shareholders will be diluted. If we need to raise additional funds through
        the
        sale or license of our drug candidates or technology, we may be unable to
        do so
        on terms favorable to us.
   9
  ***We
        are likely to be subject to taxation in the US, which could significantly
        increase our tax liability in the US for which we may not be able to apply
        the
        net losses accumulated in Israel.***
  The
        residency of the Chairman of our Board of Directors and our Chief Executive
        Officer in the US, as well as other less significant contacts we have with
        the
        US could likely lead to a determination by the US Internal Revenue Service
        that
        we currently have a "permanent establishment" in the US, which began in 2005.
        As
        a result, any income attributable to such permanent establishment in the
        US
        would be subject to US corporate income tax. If this is the case, we may
        not be
        able to utilize any of the accumulated Israeli loss carryforwards reflected
        on
        our balance sheet as of December 31, 2006 since these losses were all
        accumulated under Israeli tax laws. However, we would be able to utilize
        losses
        attributable to the US permanent establishment to offset such US taxable
        income.
        As of December 31, 2006, we estimate that these U.S. net operating loss
        carryforwards are approximately $15.2 million. These losses can be carried
        forward twenty years to offset future US taxable income. US corporate tax
        rates
        are higher than those to which we are subject in the State of Israel, and
        if we
        are subject to US corporate tax, it would have a material adverse effect
        on our
        results of operations.
  **Risks
        Related to Our Intellectual Property**
  ***If
        we are unable to adequately protect our intellectual property, third parties
        may
        be able to use our technology, which could adversely affect our ability to
        compete in the market.***
  Our
        commercial success will depend in part on our ability and the ability of
        our
        licensors to obtain and maintain patent protection on our drug products and
        technologies and successfully defend these patents and technologies against
        third-party challenges. As part of our business strategy, our policy is to
        actively file patent applications in the US and internationally to cover
        methods
        of use, new chemical compounds, pharmaceutical compositions and dosing of
        the
        compounds and composition and improvements in each of these. See “Item 4.
        Information on the Company - Business Overview - Intellectual Property and
        Patents,” below regarding our patent position with regard to our product
        candidates. Because of the extensive time required for development, testing
        and
        regulatory review of a potential product, it is possible that before we
        commercialize any of our products, any related patent may expire or remain
        in
        existence for only a short period following commercialization, thus reducing
        any
        advantage of the patent.
  The
        patent positions of pharmaceutical and biotechnology companies can be highly
        uncertain and involve complex legal and factual questions. No consistent
        policy
        regarding the breadth of claims allowed in biotechnology patents has emerged
        to
        date. Accordingly, the patents we use may not be sufficiently broad to prevent
        others from practicing our technologies or from developing competing products.
        Furthermore, others may independently develop similar or alternative
        technologies or design around our patented technologies. The patents we use
        may
        be challenged or invalidated or may fail to provide us with any competitive
        advantage. Moreover, in certain parts of the world, such as in China, western
        companies are adversely affected by poor enforcement of intellectual property
        rights. See “Item 4. Information on the Company - Business Overview - License
        Agreements and Collaborations,” below regarding our license of Ab65, a component
        of XTL-6865.
  Generally,
        patent applications in the US are maintained in secrecy for a period of
        18 months or more. Since publication of discoveries in the scientific or
        patent literature often lag behind actual discoveries, we are not certain
        that
        we were the first to make the inventions covered by each of our pending patent
        applications or that we were the first to file those patent applications.
        We
        cannot predict the breadth of claims allowed in biotechnology and pharmaceutical
        patents, or their enforceability. Third parties or competitors may challenge
        or
        circumvent our patents or patent applications, if issued. If our competitors
        prepare and file patent applications in the US that claim compounds or
        technology also claimed by us, we may choose to participate in interference
        proceedings declared by the United States Patent and Trademark Office to
        determine priority of invention, which could result in substantial cost,
        even if
        the eventual outcome is favorable to us. While we have the right to defend
        patent rights related to the licensed drug candidates and technologies, we
        are
        not obligated to do so. In the event that we decide to defend our licensed
        patent rights, we will be obligated to cover all of the expenses associated
        with that effort.
  We
        also
        rely on trade secrets to protect technology where we believe patent protection
        is not appropriate or obtainable. Trade secrets are difficult to protect.
        While
        we require our employees, collaborators and consultants to enter into
        confidentiality agreements, this may not be sufficient to adequately protect
        our
        trade secrets or other proprietary information. In addition, we share ownership
        and publication rights to data relating to some of our drug candidates and
        technologies with our research collaborators and scientific advisors. If
        we
        cannot maintain the confidentiality of this information, our ability to receive
        patent protection or protect our proprietary information will be at risk.
   10
  Specifically,
        we intend to apply for patent protection for each new monoclonal antibody
        produced. Such patents may include claims relating to novel human monoclonal
        antibodies directed at targets for which other human monoclonal antibodies
        already exist, or at targets which are protected by patents or patent
        applications filed by third parties. No assurance can be given that any such
        patent application by a third-party will not have priority over patent
        applications filed by us.
  Several
        groups are attempting to produce and patent a chimeric mouse with human tissue.
        To the extent any patents issued to other parties claiming, in general,
        mouse-human chimeras, the risk increases that the potential products and
        processes of our or our future strategic partners may give rise to claims
        of
        patent infringement.
  We
        plan
        to use the recombinant production of antibodies in Chinese Hamster Ovary
        cells,
        or CHO cells, in the development and production of some of our products.
        Patents
        relating to this method of antibody production are owned by third-parties.
        We
        are also aware that third parties have patent protection covering hepatitis
        C
        antigens and antibodies, which will be needed in order to commercialize
        XTL-6865. If we or our collaborative partners are unable to license such
        patent
        rights on commercially acceptable terms, the ability to develop, manufacture
        and
        sell these products could be impaired. Further, royalties payable to third
        parties may reduce the payments we will receive from our licensees or
        development partners.
  We
        plan
        to pursue patent protection in the US and in certain foreign countries relating
        to our development and commercialization of Bicifadine. Bicifadine and its
        acid
        addition salts, including Bicifadine HCl, are disclosed in US Pat. Nos.
        4,231,935, issued November 4, 1980, and 4,196,120, issued April 1, 1980,
        now
        expired. Currently, we are the exclusive licensee of one issued patent and
        multiple patent applications filed by DOV relating to Bicifadine. See "Item
        4.
        Informationon the Company —Business
        Overview
— Intellectual Property and Patents." However, we cannot guarantee the
        scope of protection of any issued patents, or that such patents will survive
        a
        validity or enforceability challenge, or that any pending patent applications
        will issue as patents.
  Under
        the
        terms of the license agreements between DOV and Wyeth and between DOV and
        us
        relating to Bicifadine, Wyeth has retained limited rights in the Wyeth patent
        rights, certain DOV patent rights, and know-how to make and develop Bicifadine
        for the “treatment or amelioration of vasomotor symptoms caused by or occurring
        in relation to or in connection with menopause or other female hormonal
        fluctuations” (“the Wyeth Retained Field”). Under the terms of the DOV/Wyeth
        agreement, Wyeth can only develop Bicifadine for use in the Wyeth Retained
        Field
        in collaboration with DOV, and under the license agreement between DOV and
        XTL,
        DOV will not conduct research or development with Wyeth for the use of
        Bicifadine in the Wyeth Retained Field.
  Certain
        of the Wyeth patent rights and DOV patent rights may claim overlapping subject
        matter which may result in the declaration of an interference proceeding
        before
        the United States Patent and Trademark Office (USPTO). If an interference
        is
        declared, Wyeth and DOV have agreed to meet and attempt to amicably resolve
        such
        interference with the goal of having a US patent issue to the assignee of
        the
        first inventor of the invention claimed by such conflicting claims. In the
        event
        of an interference, we cannot predict whether Wyeth and DOV will be able
        to
        reach agreement, or, if not, which party would prevail in such a
        proceeding.
 
 In
        addition to patent protection, we may utilize certain regulatory marketing
        exclusivities for our drug candidates, including New
        Drug
        Product Exclusivity as provided by the Federal Food, Drug, and Cosmetic Act
        under section 505(c)(3)(E) and 505(j)(5)(F). Exclusivity provides the holder
        of
        an approved new drug application limited protection from new competition
        in the
        marketplace for the innovation represented by its approved drug product.
        This
        limited protection precludes approval of certain 505(b)(2) applications or
        certain abbreviated new drug applications (ANDAs) for prescribed periods
        of
        time. Some exclusivity provisions also provide protection from competition
        by
        delaying the submission of 505(b)(2) applications and ANDAs for certain periods
        of time. Exclusivity is available for new chemical entities (NCEs), which
        by
        definition are innovative, and for significant changes in already approved
        drug
        products, such as a new use.
  We
        may
        also utilize orphan drug regulations to provide market exclusivity for certain
        of our drug candidates. The orphan drug regulations of the FDA provide
        incentives to pharmaceutical and biotechnology companies to develop and
        manufacture drugs for the treatment of rare diseases, currently defined as
        diseases that exist in fewer than 200,000 individuals in the US, or, diseases
        that affect more than 200,000 individuals in the US but that the sponsor
        does
        not realistically anticipate will generate a net profit. Under these provisions,
        a manufacturer of a designated orphan drug can seek tax benefits, and the
        holder
        of the first FDA approval of a designated orphan product will be granted
        a
        seven-year period of marketing exclusivity for such FDA-approved orphan product.
        We believe that certain of the indications for our drug candidates will be
        eligible for orphan drug designation. However, we cannot guarantee that any
        drug
        candidates will qualify, and, if any do qualify, that we will be the holder
        of
        the first FDA approval of such qualifying drug candidates.
   11
  ***If
        DOV declares bankruptcy, they may choose to repudiate their license agreement
        with Wyeth which could prevent us from pursuing the development of Bicifadine,
        and would have a material adverse impact on our financial
        condition.***
  In
        January 2007, we entered into a license agreement with DOV covering certain
        patent rights associated with the drug candidate Bicifadine. Some of the
        patent
        rights covered by that agreement are in turn under license to DOV by Wyeth.
        DOV
        is currently in default under certain of its corporate indebtedness. DOV
        is
        negotiating with the holders of that debt to restructure the obligations
        and
        payments due, but to date, to our knowledge, they have not reached an agreement.
        There is a possibility that DOV will be forced to declare bankruptcy whether
        or
        not they reach an agreement with the holders of their debt. If they do so,
        they
        can under the relevant bankruptcy laws refuse to abide by the terms of their
        license agreement with Wyeth and they can repudiate the agreement thereby
        putting their rights, and as a result our rights, to some of the patents
        covering Bicifadine in question. While we can and will take action in any
        DOV
        bankruptcy to protect our rights under our agreement with DOV, we cannot
        control
        any action of DOV with regard to their agreements with Wyeth. We have undertaken
        to enter into a standby license agreement with Wyeth which would become
        effective if DOV in any way repudiated their agreement with Wyeth. While
        we
        believe this will reduce the risk described above, there can be no assurance
        we
        will be able to successfully complete an agreement with Wyeth on terms
        satisfactory to us.
  ***Litigation
        or third-party claims of intellectual property infringement could require
        us to
        spend substantial time and money defending such claims and adversely affect
        our
        ability to develop and commercialize our products.***
  Third
        parties may assert that we are using their proprietary technology without
        authorization. In addition, third parties may have or obtain patents in the
        future and claim that our products infringe their patents. If we are required
        to
        defend against patent suits brought by third parties, or if we sue third
        parties
        to protect our patent rights, we may be required to pay substantial litigation
        costs, and our management’s attention may be diverted from operating our
        business. In addition, any legal action against our licensors or us that
        seeks
        damages or an injunction of our commercial activities relating to the affected
        products could subject us to monetary liability and require our licensors
        or us
        to obtain a license to continue to use the affected technologies. We cannot
        predict whether our licensors or we would prevail in any of these types of
        actions or that any required license would be made available on commercially
        acceptable terms, if at all.
  In
        addition, there can be no assurance that our patents or patent applications
        or
        those licensed to us will not become involved in opposition or revocation
        proceedings instituted by third parties. If such proceedings were initiated
        against one or more of our patents, or those licensed to us, the defense
        of such
        rights could involve substantial costs and the outcome could not be
        predicted.
  Competitors
        or potential competitors may have filed applications for, may have been granted
        patents for, or may obtain additional patents and proprietary rights that
        may
        relate to compounds or technologies competitive with ours. If patents are
        granted to other parties that contain claims having a scope that is interpreted
        to cover any of our products (including the manufacture thereof), there can
        be
        no assurance that we will be able to obtain licenses to such patents at
        reasonable cost, if at all, or be able to develop or obtain alternative
        technology.
  In
        addition, we use or have used certain technology in our DOS program for the
        development of novel hepatitis C small molecule inhibitors that may or may
        not
        be covered by third party patents. In response to a request by a third party,
        we
        are currently evaluating certain patents to determine whether or not we may
        be
        required to enter into a license under such patents. In the event that we
        do not
        license the patent rights, and such third party makes a claim of patent
        infringement, we may be required to pay substantial litigation costs, and
        our
        management’s attention may be diverted from operating our business. In addition,
        any legal action against us that seeks damages or an injunction relating
        to the
        affected activities could subject us to monetary liability and/or require
        us to
        discontinue the affected technologies or obtain a license to continue use
        thereof.
  **Risks
        Related to Our Ordinary Shares and ADRs**
  ***Our
        ADRs are traded in small volumes, limiting your ability to sell your ADRs
        that
        represent ordinary shares at a desirable price, if at
        all.***
  The
        trading volume of our ADRs has historically been low. Even if the trading
        volume
        of our ADRs increases, we can give no assurance that it will be maintained
        or
        will result in a desirable stock price. As a result of this low trading volume,
        it may be difficult to identify buyers to whom you can sell your ADRs and
        you
        may be unable to sell your ADRs at an established market price, at a price
        that
        is favorable to you, or at all. A low volume market also limits your ability
        to
        sell large blocks of our ADRs at a desirable or stable price at any one time.
        You should be prepared to own our ordinary shares and ADRs
        indefinitely.
  12
  ***Our
        stock price can be volatile, which increases the risk of litigation and may
        result in a significant decline in the value of your investment.***
  The
        trading price of the ADRs representing our ordinary shares is likely to be
        highly volatile and subject to wide fluctuations in price in response to
        various
        factors, many of which are beyond our control. These factors include:
  ·
              developments
                  concerning our drug candidates;·
              announcements
                  of technological innovations by us or our competitors;·
              introductions
                  or announcements of new products by us or our competitors;·
              announcements
                  by us of significant acquisitions, strategic partnerships, joint
                  ventures
                  or capital commitments;·
              changes
                  in financial estimates by securities analysts;·
              actual
                  or anticipated variations in interim operating results;·
              expiration
                  or termination of licenses, research contracts or other collaboration
                  agreements;·
              conditions
                  or trends in the regulatory climate and the biotechnology and
                  pharmaceutical industries;·
              changes
                  in the market valuations of similar companies; and·
              additions
                  or departures of key personnel.
  In
        addition, equity markets in general, and the market for biotechnology and
        life
        sciences companies in particular, have experienced extreme price and volume
        fluctuations that have often been unrelated or disproportionate to the operating
        performance of companies traded in those markets. These broad market and
        industry factors may materially affect the market price of our ordinary shares
        or ADRs, regardless of our development and operating performance. In the
        past,
        following periods of volatility in the market price of a company’s securities,
        securities class-action litigation has often been instituted against that
        company. Such litigation, if instituted against us, could cause us to incur
        substantial costs to defend such claims and divert management’s attention and
        resources even if we prevail in the litigation, all of which could seriously
        harm our business.
  ***Future
        issuances of our ordinary shares could depress the market for our ordinary
        shares and ADRs.***
  Future
        issuances of a substantial number of our ordinary shares, or the perception
        by
        the market that those issuances could occur, could cause the market price
        of our
        ordinary shares or ADRs to decline or could make it more difficult for us
        to
        raise funds through the sale of equity in the future. We believe that we
        have
        the cash necessary to fund our operations for the next 12 months; however,
        prior
        to the end of that period it will be necessary for us to return to the capital
        markets through the sale of ADRs or ordinary shares.
  Also,
        if
        we make one or more significant acquisitions in which the consideration includes
        ordinary shares or other securities, your portion of shareholders' equity
        in us
        may be significantly diluted. For example, pursuant to a license agreement
        with
        DOV, XTL Development licensed the worldwide rights for Bicifadine, a serotonin
        and norepinephrine reuptake inhibitor. Under the agreement, XTL Development,
        upon achievement of certain milestones, will make payments of up to $126.5
        million to DOV over the life of the license. We may elect to issue up to
        an
        additional $121.5 million in ordinary shares to DOV in lieu of cash for such
        milestone payments. In addition, XTL Development committed to pay a third
        party
        a transaction advisory fee in the form of stock appreciation rights in an
        amount
        equivalent to 3% of our fully diluted ordinary shares at the close of the
        transaction, which are locked up for one year after the close of the
        transaction, and an additional 7% of our fully diluted ordinary shares at
        the
        close of the transaction, which vest following the first to occur of successful
        Phase III clinical trial results or the acquisition of our company. Payment
        of
        the stock appreciation rights by us can be satisfied, at our discretion,
        in cash
        and/or by issuance of our ordinary shares. Pursuant to a license agreement
        with
        VivoQuest, Inc., or VivoQuest, a privately held biotechnology company based
        in
        the US, we licensed (in all fields of use) certain intellectual property
        and
        technology related to VivoQuest’s HCV program. Pursuant to the license
        agreement, we may elect to issue up to an additional $34.6 million in ordinary
        shares to VivoQuest in lieu of cash upon achievement of certain milestones.
        In
        the future, we may enter into additional arrangements with other third-parties
        permitting us to issue ordinary shares in lieu of certain cash payments.
   13
  ***Our
        ordinary shares and ADRs trade on more than one market, and this may result
        in
        price variations.***
  Our
        ordinary shares are traded on the London Stock Exchange and the Tel Aviv
        Stock
        Exchange and ADRs representing our ordinary shares are quoted on the Nasdaq
        Global Market. Trading in our securities on these markets is made in different
        currencies and at different times, including as a result of different time
        zones, different trading days and different public holidays in the US, Israel
        and the United Kingdom. Consequently, the effective trading prices of our
        shares
        on these three markets may differ. Any decrease in the trading price of our
        shares on one of these markets could cause a decrease in the trading price
        of
        our shares on the other market.
  ***Holders
        of our ordinary shares who are US residents may be required to pay additional
        income taxes.***
  There
        is
        a risk that we will be classified as a passive foreign investment company
        (“PFIC”) for certain tax years. If we are classified as a PFIC, a US holder of
        our ordinary shares or ADRs representing our ordinary shares will be subject
        to
        special federal income tax rules that determine the amount of federal income
        tax
        imposed on income derived with respect to the PFIC shares. We will be a PFIC
        if
        either 75% or more of our gross income in a tax year is passive income or
        the
        average percentage of our assets (by value) that produce or are held for
        the
        production of passive income in a tax year is at least 50%. The risk that
        we
        will be classified as a PFIC arises because under applicable rules issued
        by the
        US Internal Revenue Service, (“IRS”), cash balances, even if held as working
        capital, are considered to be assets that produce passive income. Therefore,
        any
        determination of PFIC status will depend upon the sources of our income and
        the
        relative values of passive and non-passive assets, including goodwill. A
        determination as to a corporation’s status as a PFIC must be made annually. We
        believe that we were likely not a PFIC for the taxable years ended December
        31,
        2004 and 2005. However, we believe that we were a PFIC for the taxable year
        ended December 31, 2006. Although such a determination is fundamentally factual
        in nature and generally cannot be made until the close of the applicable
        taxable
        year, based on our current operations, we believe that there is a significant
        likelihood that we will be classified as a PFIC in the 2007 taxable year
        and
        possibly in subsequent years.
  In
        view
        of the complexity of the issues regarding our treatment as a PFIC, US
        shareholders are urged to consult their own tax advisors for guidance as
        to our
        status as a PFIC. For further discussion of tax consequences of being a PFIC,
        see US Federal Income Tax Considerations - Tax Consequences If We Are A Passive
        Foreign Investment Company,” below.
  ***Provisions
        of Israeli corporate law may delay, prevent or affect a potential acquisition
        of
        all or a significant portion of our shares or assets and therefore depress
        the
        price of our ordinary shares.***
  Israeli
        corporate law regulates acquisitions of shares through tender offers. It
        requires special approvals for transactions involving significant shareholders
        and regulates other matters that may be relevant to these types of transactions.
        The provisions of Israeli law may delay or prevent an acquisition, or make
        it
        less desirable to a potential acquirer and therefore depress the price of
        our
        shares. Further, Israeli tax considerations may make potential transactions
        undesirable to us or to some of our shareholders.
  Israeli
        corporate law provides that an acquisition of shares in a public company
        must be
        made by means of a tender offer if, as a result of such acquisition, the
        purchaser would become a 25% or greater shareholder of the company. This
        rule
        does not apply if there is already another 25% or greater shareholder of
        the
        company. Similarly, Israeli corporate law provides that an acquisition of
        shares
        in a public company must be made by means of a tender offer if, as a result
        of
        the acquisition, the purchaser's shareholdings would entitle the purchaser
        to
        over 45% of the shares in the company, unless there is a shareholder with
        45% or
        more of the shares in the company. These requirements do not apply if, in
        general, the acquisition (1) was made in a private placement that received
        the
        approval of the company’s shareholders; (2) was from a 25% or greater
        shareholder of the company which resulted in the purchaser becoming a 25%
        or
        greater shareholder of the company, or (3) was from a 45% or greater shareholder
        of the company which resulted in the acquirer becoming a 45% or greater
        shareholder of the company. These rules do not apply if the acquisition is
        made
        by way of a merger. Regulations promulgated under Israeli corporate law provide
        that these tender offer requirements do not apply to companies whose shares
        are
        listed for trading outside of Israel if, according to the law in the country
        in
        which the shares are traded, including the rules and regulations of the stock
        exchange or which the shares are traded, either:
  ·
              there
                  is a limitation on acquisition of any level of control of the company;
                  or·
              the
                  acquisition of any level of control requires the purchaser to do
                  so by
                  means of a tender offer to the
                  public.
  Finally,
        in general, Israeli tax law treats specified acquisitions less favorably
        than
        does US tax law. See “Item 10. Additional Information - Taxation - Israeli Tax
        Considerations,” below.
   14
  ***Our
        ADR holders are not shareholders and do not have shareholder
        rights.***
  The
        Bank
        of New York, as depositary, executes and delivers our ADRs on our behalf.
        Each
        ADR is a certificate evidencing a specific number of ADSs. Our ADR holders
        will
        not be treated as shareholders and do not have the rights of shareholders.
        The
        depositary will be the holder of the shares underlying our ADRs. Holders
        of our
        ADRs will have ADR holder rights. A deposit agreement among us, the depositary
        and our ADR holders, and the beneficial owners of ADRs, sets out ADR holder
        rights as well as the rights and obligations of the depositary. New York
        law
        governs the deposit agreement and the ADRs. Our shareholders have shareholder
        rights. Israeli law and our Articles of Association, or Articles, govern
        shareholder rights. Our ADR holders do not have the same voting rights as
        our
        shareholders. Shareholders are entitled to our notices of general meetings
        and
        to attend and vote at our general meetings of shareholders. At a general
        meeting, every shareholder present (in person or by proxy, attorney or
        representative) and entitled to vote has one vote on a show of hands. Every
        shareholder present (in person or by proxy, attorney or representative) and
        entitled to vote has one vote per fully paid ordinary share on a poll. This
        is
        subject to any other rights or restrictions which may be attached to any
        shares.
        Our ADR holders may instruct the depositary to vote the ordinary shares
        underlying their ADRs, but only if we ask the depositary to ask for their
        instructions. If we do not ask the depositary to ask for the instructions,
        our
        ADR holders are not entitled to receive our notices of general meeting or
        instruct the depositary how to vote. Our ADR holders will not be entitled
        to
        attend and vote at a general meeting unless they withdraw the ordinary shares
        from the depository. However, our ADR holders may not know about the meeting
        enough in advance to withdraw the ordinary shares. If we ask for our ADR
        holders’ instructions, the depositary will notify our ADR holders of the
        upcoming vote and arrange to deliver our voting materials and form of notice
        to
        them. The depositary will try, as far as practical, subject to the provisions
        of
        the deposit agreement, to vote the shares as our ADR holders instruct. The
        depositary will not vote or attempt to exercise the right to vote other than
        in
        accordance with the instructions of the ADR holders. We cannot assure our
        ADR
        holders that they will receive the voting materials in time to ensure that
        they
        can instruct the depositary to vote their shares. In addition, there may
        be
        other circumstances in which our ADR holders may not be able to exercise
        voting
        rights.
  Our
        ADR
        holders do not have the same rights to receive dividends or other distributions
        as our shareholders. Subject to any special rights or restrictions attached
        to a
        share, the directors may determine that a dividend will be payable on a share
        and fix the amount, the time for payment and the method for payment (although
        we
        have never declared or paid any cash dividends on our ordinary stock and
        we do
        not anticipate paying any cash dividends in the foreseeable future). Dividends
        may be paid on shares of one class but not another and at different rates
        for
        different classes. Dividends and other distributions payable to our shareholders
        with respect to our ordinary shares generally will be payable directly to
        them.
        Any dividends or distributions payable with respect to ordinary shares will
        be
        paid to the depositary, which has agreed to pay to our ADR holders the cash
        dividends or other distributions it or the custodian receives on shares or
        other
        deposited securities, after deducting its fees and expenses. Our ADR holders
        will receive these distributions in proportion to the number of shares their
        ADSs represent. In addition, there may be certain circumstances in which
        the
        depositary may not pay to our ADR holders amounts distributed by us as a
        dividend or distribution. See the risk factor “- There are circumstances where
        it may be unlawful or impractical to make distributions to the holders of
        our
        ADRs,” below.
  ***There
        are circumstances where it may be unlawful or impractical to make distributions
        to the holders of our ADRs.***
  The
        deposit agreement with the depositary allows the depositary to distribute
        foreign currency only to those ADR holders to whom it is possible to do so.
        If a
        distribution is payable by us in New Israeli Shekels or Pounds Sterling,
        the
        depositary will hold the foreign currency it cannot convert for the account
        of
        the ADR holders who have not been paid. It will not invest the foreign currency
        and it will not be liable for any interest. If the exchange rates fluctuate
        during a time when the depositary cannot convert the foreign currency, our
        ADR
        holders may lose some of the value of the distribution.
  The
        depositary is not responsible if it decides that it is unlawful or impractical
        to make a distribution available to any ADR holders. This means that our
        ADR
        holders may not receive the distributions we make on our shares or any value
        for
        them if it is illegal or impractical for the depository to make such
        distributions available to them.
   15
  **Risks
        Relating to Operations in Israel**
  ***Conditions
        in the Middle East and in Israel may harm our
        operations.***
  Certain
        of our research and development facilities and some of our suppliers are
        located
        in Israel. Political, economic and military conditions in Israel directly
        affect
        our operations. Since the establishment of the State of Israel in 1948, a
        number
        of armed conflicts have taken place between Israel and its Arab neighbors,
        as
        well as incidents of civil unrest, military conflicts and terrorist actions.
        There has been a significant increase in violence since September 2000, which
        has continued with varying levels of severity through to the present. This
        state
        of hostility has caused security and economic problems for Israel. To date,
        we
        do not believe that the political and security situation has had a material
        adverse impact on our business, but we cannot give any assurance that this
        will
        continue to be the case. Any hostilities involving Israel or the interruption
        or
        curtailment of trade between Israel and its present trading partners could
        adversely affect our operations and could make it more difficult for us to
        raise
        capital.
  Our
        commercial insurance does not cover losses that may occur as a result of
        events
        associated with the security situation in the Middle East. Although the Israeli
        government currently covers the reinstatement value of direct damages that
        are
        caused by terrorist attacks or acts of war, we cannot assure you that this
        government coverage will be maintained. Any losses or damages incurred by
        us
        could have a material adverse effect on our business. Any armed conflicts
        or
        political instability in the region would likely negatively affect business
        conditions and could harm our results of operations.
  Further,
        in the past, the State of Israel and Israeli companies have been subjected
        to an
        economic boycott. Several countries still restrict business with the State
        of
        Israel and with Israeli companies. These restrictive laws and policies may
        have
        an adverse impact on our operating results, financial condition or the expansion
        of our business.
  ***Our
        results of operations may be adversely affected by inflation and foreign
        currency fluctuations.***
  We
        generate all of our revenues and hold most of our cash, cash equivalents,
        bank
        deposits and marketable securities in US dollars. While a substantial amount
        of
        our operating expenses are in US dollars (approximately 90% in 2006), we
        incur a
        portion of our expenses in New Israeli Shekels. In addition, we also pay
        for
        some of our services and supplies in the local currencies of our suppliers.
        As a
        result, we are exposed to the risk that the US dollar will be devalued against
        the New Israeli Shekel or other currencies, and as result our financial results
        could be harmed if we are unable to guard against currency fluctuations in
        Israel or other countries in which services and supplies are obtained in
        the
        future. Accordingly, we may in the future enter into currency hedging
        transactions to decrease the risk of financial exposure from fluctuations
        in the
        exchange rates of currencies. These measures, however, may not adequately
        protect us from the adverse effects of inflation in Israel. In addition,
        we are
        exposed to the risk that the rate of inflation in Israel will exceed the
        rate of
        devaluation of the New Israeli Shekel in relation to the dollar or that the
        timing of any devaluation may lag behind inflation in Israel.
  ***The
        Office of the Chief Scientist may refuse to approve the manufacture of some
        of
        our product candidates outside the State of Israel.***
 
 We
        have
        in the past participated in programs offered by the Office of the Chief
        Scientist under the Industry, Trade and Labor Ministry of Israel that supports
        research and development activities. Through December 31, 2006, we have received
        $7.3 million in grants from the Office of the Chief Scientist for several
        projects, including XTL-6865, HepeX-B and XTL-2125. Israeli law requires
        that
        the manufacture of products developed with government grants be carried out
        in
        Israel, unless the Office of the Chief Scientist provides a special approval
        to
        the contrary. This approval, if provided, is generally conditioned on an
        increase in the total amount to be repaid to the Office of the Chief Scientist
        to between 120% and 300% of the amount of funds granted. While we believe
        that
        the Office of the Chief Scientist does not unreasonably withhold approval
        if the
        request is based upon commercially justified circumstances and any payment
        obligations to the Office of the Chief Scientist are sufficiently assured,
        the
        matter is solely within its discretion. We cannot be sure that such approval,
        if
        requested, would be granted upon terms satisfactory to us or granted at all.
        Without such approval, we would be unable to manufacture any products developed
        by this research outside of Israel, which may greatly restrict any potential
        revenues from such products (see Item 5. “Operating and Financial Review and
        Prospects - Israeli Government Research and Development Grants”
below).
   16
 
 ***We
        may not continue to be entitled to certain tax benefits from the Israeli
        government.***
  We
        are
        entitled to receive certain tax benefits as a result of the Approved Enterprise
        status of our existing facilities in Israel. The Law for the Encouragement
        of
        Capital Investment, 1959, as amended, provides that a proposed capital
        investment in eligible facilities may, upon application to the Investment
        Center
        of the Ministry of Industry and Trade of the State of Israel, permit a company
        to recognize taxable income attributable to the Approved Enterprise subject
        to
        company tax at the maximum rate of 25% rather than the usual rate in 2007
        of 29%
        (2006 -- 31%). This usual rate is currently scheduled to decrease as follows:
        in
        2008 - 27%, 2009 - 26%, 2010 and after - 25%. For further discussion of these
        tax benefits, see “Item 10. Additional Information - Taxation - Israeli Tax
        Considerations,” below. To date we have not received any such tax benefits
        because we have not generated any taxable income to date. To maintain our
        eligibility for these tax benefits, we must meet certain reporting requirements
        and certain conditions that we have either obligated ourselves to meet or
        that
        are included in the Certificate of Approval from the Investment Center of
        the
        Ministry of Industry and Trade of the State of Israel. If we cease to become
        entitled to tax benefits, we may be required to pay repay corporate tax at
        the
        normal rate on all or part of the taxable income that we may generate from
        the
        eligible facilities in the future. We may, in the foreseeable future, cease
        to
        be entitled to the aforesaid tax benefits, as we may not in the future be
        in
        compliance with the Certificate of Approval from the Investment Center of
        the
        Ministry of Industry and Trade of the State of Israel due to a reduction
        in
        research and development activity in Israel.
  ***It
        may be difficult to enforce a US judgment against us, our officers or our
        directors or to assert US securities law claims in
        Israel.***
  Service
        of process upon us, since we are incorporated in Israel, and upon our directors
        and officers and our Israeli auditors, some of whom reside outside the US,
        may
        be difficult to obtain within the US. In addition, because substantially
        all of
        our assets and some of our directors and officers are located outside the
        US,
        any judgment obtained in the US against us or any of our directors and officers
        may not be collectible within the US. There is a doubt as to the enforceability
        of civil liabilities under the Securities Act or the Exchange Act pursuant
        to
        original actions instituted in Israel. Subject to particular time limitations
        and provided certain conditions are met, executory judgments of a US court
        for
        monetary damages in civil matters may be enforced by an Israeli court. For
        more
        information regarding the enforceability of civil liabilities against us,
        our
        directors and our executive officers, see “Item 10. Additional Information -
        Memorandum and Articles of Association - Enforceability of Civil Liabilities,”
below.










17
  **ITEM
        4. INFORMATION ON THE COMPANY**
  **History
        and Development of** **XTL**
  We
        are a
        biopharmaceutical company engaged in the acquisition, development and
        commercialization of pharmaceutical products for the treatment of unmet medical
        needs, particularly the treatment of neuropathic pain and hepatitis C.
 
 Our
        lead
        compound is Bicifadine, a serotonin and norepineprine reuptake inhibitor
        that we
        are developing for the treatment of neuropathic pain, a chronic condition
        resulting from damage to peripheral nerves. We in-licensed Bicifadine from
        DOV
        in January 2007, and we expect to initiate a late-stage clinical trial with
        Bicifadine in the second half of 2007.
 
 We
        are
        also developing XTL-2125, a small molecule non-nucleoside, polymerase inhibitor
        for the treatment of patients with hepatitis C. XTL-2125 is presently in
        a Phase
        I clinical trial in patients with chronic hepatitis C, with clinical trial
        results expected in the second quarter of 2007. A second drug candidate in
        hepatitis C is XTL-6865, a combination of two monoclonal antibodies against
        the
        hepatitis C virus. XTL-6865 is currently in a Phase I clinical trial in patients
        with chronic hepatitis C, also known as HCV, with results expected shortly.
        Our
        third program in the hepatitis C area is the Diversity Oriented Synthesis,
        or
        DOS, program. This program is focused on the development of novel hepatitis
        C
        small molecule inhibitors. These compounds are presently in advanced stages
        of
        optimization. HepeX-B, a combination of two monoclonal antibodies against
        Hepatitis B, was licensed to Cubist Pharmaceuticals Inc., or Cubist, in June
        2004. In July 2006, Cubist announced that it has decided not to make any
        further
        investment in the HepeX-B program, while it evaluates its strategic options
        for
        HepeX-B, including the possible sub-licensing of the product to a third party.
  Our
        legal
        and commercial name is XTL Biopharmaceuticals Ltd. We were established as
        a
        private company limited by shares under the laws of the State of Israel on
        March
        9, 1993, under the name Xenograft Technologies Ltd. We re-registered as a
        public
        company on June 7, 1993, in Israel, and changed our name to XTL
        Biopharmaceuticals Ltd. on July 3, 1995. We commenced operations to use and
        commercialize technology developed at the Weizmann Institute, in Rehovot,
        Israel. Until 1999, our therapeutic focus was on the development of human
        monoclonal antibodies to treat viral, autoimmune and oncological diseases.
        Our
        first therapeutic programs focused on antibodies against the
        hepatiti s
        B
        virus, interferon - γ and the hepatitis C virus.
  Our
        ordinary shares are traded on the London Stock Exchange under the symbol
“XTL,”
and on the Tel Aviv Stock Exchange under the symbol “XTL.” Our ADRs are quoted
        on the Nasdaq Global Market under the symbol “ XTLB. ”
We
        operate under the laws of the State of Israel, under the Israeli Companies
        Act,
        the regulations of the United Kingdom Listing Authority, which governs our
        listing on the London Stock Exchange, and in the US, the Securities Act,
        the
        Exchange Act and the regulations of the Nasdaq Global Market.
  Our
        principal offices are located at 750 Lexington Avenue, 20th Floor, New York,
        New
        York 10022, and our telephone number is 212-531-5960. The principal offices
        of
        XTL Biopharmaceuticals, Inc., our wholly-owned US subsidiary and agent for
        service of process in the US, are located at 750 Lexington Avenue, 20th Floor,
        New York, NY 10022, and its telephone number is 212-531-5960. Our primary
        internet address is www.xtlbio.com. None of the information on our website
        is
        incorporated by reference into this annual report.
  On
        March
        22, 2006, we completed a private placement of 46,666,670 ordinary shares
        (equivalent to 4,666,667 ADRs) at $0.60 per share ($6.00 per ADR), together
        with
        warrants for the purchase of an aggregate of 23,333,335 ordinary shares
        (equivalent to 2,333,333.5 ADRs) at an exercise price of $0.875 ($8.75 per
        ADR).
        Total proceeds to us from this private placement were approximately $24.4
        million, net of offering expenses of approximately $3.6 million. The private
        placement closed on May 25, 2006. Since inception, we have raised net proceeds
        of approximately $128.7 million to fund our activities, including the net
        proceeds from our recent private placement.
  For
        the
        years ended December 31, 2006, 2005, and 2004 our capital expenditures were
        $21,000, $38,000 and $180,000, respectively. Our capital expenditures were
        primarily associated with the purchase of lab equipment for our research
        and
        development activities. There were no material divestitures during the years
        ended December 31, 2006, 2005 and 2004.
   18
  In
        January 2007, XTL Development, Inc., or XTL Development, our wholly-owned
        subsidiary, signed an agreement with DOV to in-license the worldwide rights
        for
        Bicifadine, a serotonin and norepinephrine reuptake inhibitor. XTL Development
        intends to develop Bicifadine for the treatment of neuropathic pain - a chronic
        condition resulting from damage to peripheral nerves. In accordance with
        the
        terms of the license agreement, XTL Development made an initial up-front
        payment
        of $7.5 million in cash. In addition, XTL Development will make milestone
        payments of up to $126.5 million, in cash and/or in our ordinary shares over
        the
        life of the license, of which up to $115 million will be due upon or after
        regulatory approval of the product. XTL Development is also obligated to
        pay
        royalties to DOV on net sales of Bicifadine. In connection with the license
        agreement, XTL Development has committed to pay a transaction advisory fee
        in
        the form of our stock appreciation rights in an amount equivalent to 3% of
        our
        fully diluted ordinary shares at the close of the transaction, vesting to
        a
        third party one year after the close of the transaction, and 7% of our fully
        diluted ordinary shares at the close of the transaction, vesting following
        the
        first to occur of successful Phase III clinical trial results or the acquisition
        of our company. Payment of the stock appreciation rights can be satisfied,
        at
        our discretion, in cash and/or by issuance of our ordinary shares. See “Item 10.
        Additional Information -Material Contracts.”
  **Business
        Overview**
  ***Introduction***
  We
        are a
        biopharmaceutical company engaged in the acquisition, development and
        commercialization of pharmaceutical products for the treatment of unmet medical
        needs, in particular the treatment of neuropathic pain and hepatitis C.
  Our
        lead
        compound is Bicifadine. We are developing Bicifadine for the treatment of
        neuropathic pain - a chronic condition resulting from damage to peripheral
        nerves. Bicifadine is a serotonin and norepinephrine reuptake inhibitor,
        or
        SNRI. Compared to the currently approved SNRI’s, Bicifadine has a unique ratio
        of serotonin versus norepinephrine reuptake inhibition, which is weighted
        toward
        norepinephrine reuptake inhibition, providing a strong scientific rationale
        for
        using Bicifadine for the treatment neuropathic pain indications. Prior to
        it
        being in-licensed to us, Bicifadine has been tested extensively in over 15
        clinical trials involving over 3,000 patients, and has been shown to be safe
        and
        generally well tolerated. Bicifadine was evaluated in various pain indications,
        including two large, randomized clinical trials (n=750 and n=540) in patients
        suffering from acute (non-neuropathic) pain, where Bicifadine demonstrated
        statistically significant efficacy. We intend to initiate a late-stage clinical
        trial with Bicifadine in neuropathic pain in the second half of 2007.
  
 We
        currently have three products/programs under development with respect to
        Hepatitis C:
  ·
              **XTL-2125**is
                  being developed for the treatment of hepatitis C. XTL-2125 is a
                  novel
                  orally-available non-nucleoside HCV RNA polymerase inhibitor. XTL-2125
                  has
                  demonstrated potent activity against the hepatitis C virus in several
                  pre-clinical systems. Investigational new drug application, or
                  IND,
                  enabling, good laboratory practice, or GLP, studies demonstrated
                  that
                  XTL-2125 has favorable oral pharmacokinetics and a good safety
                  profile in
                  multiple animal species. In May 2006, we announced the initiation
                  of a
                  Phase I, placebo-controlled, dose escalation trial of XTL-2125
                  in chronic
                  HCV patients. In January 2007, the Phase I clinical trial - as
                  originally
                  designed - was completed. As no dose limiting toxicities have been
                  encountered, we decided to add up to two additional higher dose
                  cohorts to
                  the study. We expect to announce results from this study in the
                  second
                  quarter of 2007. The compound was in-licensed by us from B&C Biopharm
                  Co., Ltd., a Korean drug development company.·
              **XTL-6865**is
                  also being developed for the treatment of hepatitis C. XTL-6865
                  (formerly
                  known as the HepeX-C program) is a combination of two fully human
                  monoclonal antibodies (Ab68 and Ab65) against the hepatitis C virus
                  E2
                  envelope protein. The antibodies comprising XTL-6865 are expected
                  to
                  “trap” the virus in the patient’s serum and prevent the infection of
                  healthy liver cells. A single antibody version of this product
                  was tested
                  in a pilot clinical program that included both Phase I and Phase
                  II
                  clinical trials. In April 2005, we submitted an IND to the FDA
                  in order to
                  commence a Phase Ia/Ib clinical trial for XTL-6865, the dual-antibody
                  product. In September 2005, we announced the initiation of a Phase
                  Ia
                  clinical trial with XTL-6865 in patients with chronic hepatitis
                  C. We
                  expect results from this trial shortly.·
              **DOS**is
                  a pre-clinical program focused on the development of novel hepatitis
                  C
                  small molecule inhibitors.  Compounds developed to date inhibit HCV
                  replication in a pre-clinical cell-based assay with potencies comparable
                  to clinical stage drugs. These compounds are presently in advanced
                  stages
                  of optimization.
   19
  In
        addition, HepeX-B, a combination of two monoclonal antibodies against hepatitis
        B, or HBV, was licensed to Cubist in June 2004. In July 2006, Cubist announced
        that it has decided not to make any further investment in the HepeX-B program,
        while it evaluates its strategic options for HepeX-B, including the possible
        sub-licensing of the product to a third party.
  To
        date,
        we have not received approval for the sale of any of our drug candidates
        in any
        market and, therefore, have not generated any commercial revenues from the
        sales
        of our drug candidates. Moreover, preliminary results of our pre-clinical
        or
        clinical tests do not necessarily predict the final results, and acceptable
        results in early preclinical or clinical testing might not be obtained in
        later
        clinical trials. Drug candidates in the later stages of clinical development
        may
        fail to show the desired safety and efficacy traits despite having progressed
        through initial clinical testing. We have received license and reimbursed
        out of
        pocket expense revenue pursuant to our agreement with Cubist with respect
        to
        HepeX-B, although HepeX-B has not yet been commercialized and may never be
        commercialized.
 
 ***Our
        Strategy***
 
 Under
        our
        current strategy, we plan to:
 
 ·
              develop
                  Bicifadine for the treatment of neuropathic pain;·
              continue
                  the clinical development of XTL-2125 and XTL-6865;·
              identify
                  clinical candidates from our DOS program and advance them into
                  clinical
                  development; and·
              seek
                  to in-license or acquire additional
                  candidates.
 
 ***Products
        Under Development***
  **Bicifadine**
  *Market
        Opportunity*
 
 We
        intend
        to develop Bicifadine for the treatment of neuropathic pain - a chronic
        condition resulting from damage to peripheral nerves. According to Datamonitor,
        there are over 15 million people suffering from neuropathic pain in the United
        States alone. With limited treatment options available, neuropathic pain
        represents a significant unmet medical need. According to Datamonitor, the
        global market for neuropathic pain drugs is expected to grow from $1.7 billion
        in 2005 to $5.5 billion by 2015.
  *Scientific
        Background*
  Bicifadine
        is a serotonin and norepinephrine reuptake inhibitor. Other members of the
        SNRI
        class include Cymbalta® (approved for depression and neuropathic pain), and
        Effexor® (approved only for depression). Both Cymbalta and Effexor have been
        shown to be efficacious in neuropathic pain. Activity on norepinephrine reuptake
        is thought to be necessary for anti-depressants to be effective in neuropathic
        pain. Compared to the currently approved SNRI’s, Bicifadine has a unique ratio
        of serotonin versus norepinephrine reuptake inhibition, which is weighted
        toward
        norepinephrine reuptake inhibition, providing a strong scientific rationale
        for
        using Bicifadine for the treatment neuropathic pain indications.
   20
  *Clinical
        Data*
  Four
        Phase I clinical trials and 14 Phase II clinical trials involving more than
        1,000 patients have been conducted with an immediate release, or IR, formulation
        of Bicifadine for the treatment of acute pain. In five exploratory double-blind,
        placebo-controlled Phase II clinical trials of the IR
        formulation, Bicifadine demonstrated a statistically significant reduction
        in pain versus placebo, in some cases with an outcome suggesting it might
        be
        comparable to or better than positive controls such as codeine. In addition
        to
        these trials with the IR formulation, eight Phase I clinical trials using
        the sustained release, or SR, formulation of Bicifadine have been conducted.
        SR
        is a formulation that generally permits less frequent daily dosing and improves
        tolerability. We intend to use the SR formulation in future clinical development
        and for commercial use of Bicifadine.
  In
        two
        additional larger (n=750 and n=540) single-dose, double-blind,
        placebo-controlled clinical trials with Bicifadine in the treatment of moderate
        to severe post-surgical acute dental pain, Bicifadine produced a highly
        statistically significant, dose-related reduction in pain compared to placebo,
        and which was comparable to a positive control arm (codeine or Tramadol).
        Both
        trials demonstrated Bicifadine to be safe and generally well-tolerated without
        producing any serious adverse events.
  In
        a
        Phase III double-blind, placebo-controlled, clinical trial (n=325) with
        Bicifadine in the treatment of moderate to severe acute pain following
        bunionectomy surgery, statistically significant increases in analgesia were
        measured as early as 30 minutes after administration and these effects were
        sustained for the balance of the eight-hour measurement period. In this study,
        Bicifadine was safe and generally well-tolerated. The complete assessment
        of the
        analgesic action of Bicifadine under repeat dosing conditions could not be
        fully
        elucidated due to the high level of “rescue” analgesic medication used in both
        the placebo and active drug groups.
  Due
        to
        the highly competitive nature of the market for acute pain drugs, and the
        FDA
        requirement to complete two repeat-dosing clinical trials in two different
        acute
        pain indications, no further studies in acute pain are planned.
  Bicifadine
        has been further evaluated in three Phase III trials in chronic lower back
        pain,
        or CLBP. The primary efficacy endpoint in these trials was the change in
        pain
        severity rating score between baseline and the end of dosing. In these trials,
        Bicifadine was safe and generally well tolerated, but did not show a
        statistically significant effect relative to placebo on the primary endpoint
        of
        the study at any of the doses tested.
  We
        believe that the failure of Bicifadine in the CLBP trials was a result of
        the
        inherent heterogeneity of the studied patient population (i.e. the varying
        causes of CLBP pain), uncontrolled physical activities in what is largely
        an
        activity-dependent pain indication, and a high placebo response.
  *Development
        Status*
  We
        believe that by re-directing the development of Bicifadine away from the
        novel
        indications in acute and chronic pain toward a proven area of efficacy of
        SNRI’s
        in the treatment of neuropathic pain, Bicifadine could be successfully developed
        for neuropathic pain, possibly offering a differentiated efficacy and safety
        profile based on the drug’s emphasis on norepinephrine reuptake
        inhibition.
  We
        intend
        to initiate a late-stage clinical trial with Bicifadine in neuropathic pain
        in
        the second half of 2007.
  **Products
        for the treatment of Hepatitis C**
  *Market
        Opportunity*
 
 We
        are
        developing several products for the treatment of hepatitis C. Chronic hepatitis
        C is a serious life-threatening disease which affects around 170 to 200 million
        people worldwide, according to a Datamonitor report from April 2005. We estimate
        that between eight to 10 million of these people reside in the US, Europe
        and
        Japan. According to the BioSeeker Group, 20% to 30% of chronic hepatitis
        patients will eventually develop progressive liver disease that may lead
        to
        decomposition of the liver or hepatocellular carcinoma (liver cancer). According
        to the National Digestive Diseases Information Clearing House, each year
        10,000
        to 12,000 people die from HCV in the US alone. The Centers for Disease Control,
        or CDC, predicts, that by the end of this decade, the number of deaths due
        to
        HCV in the US will surpass the number of deaths due to AIDS.
 
 According
        to the BioSeeker Group, the worldwide market for the treatment of chronic
        HCV in
        2003 was estimated at $3 billion and consists entirely of Interferon-based
        treatments. Interferon alpha was first approved for use against chronic
        hepatitis C in 1991. At present, the optimal regimen appears to be a 24 or
        48
        week course of the combination of Pegylated-Interferon and Ribavirin. In
        studies
        done at the St. Louis University School of Medicine, a 24 week course of
        this
        combination therapy yields a sustained response rate of approximately 40%
        to 45%
        in patients with genotype 1 (the most prevalent genotype in the western world
        according to the CDC) and a better sustained response with a 48 week
        course.
   21
 
 **XTL-2125**
 
 XTL-2125
        is a novel non-nucleoside HCV RNA polymerase inhibitor that is being developed
        for the treatment of chronic hepatitis C. XTL-2125’s ability to inhibit HCV
        replication was demonstrated in XTL's proprietary cell-based assay for HCV
        infectivity.  In addition, XTL-2125 was orally active in XTL’s proprietary
        Trimera mouse model. IND-enabling GLP studies demonstrated that XTL-2125
        has a
        favorable oral pharmacokinetics and a good safety profile in multiple animal
        species.
  In
        the
        fourth quarter of 2005, we filed an application with the Israel Ministry
        of
        Health to conduct Phase I human trials of XTL-2125 in chronic HCV
        patients.  In May 2006, we announced the initiation of patient dosing in a
        Phase I clinical trial of XTL-2125 for the treatment of chronic HCV. The
        Phase I
        trial is a placebo controlled, randomized, dose escalating study, designed
        to
        evaluate the safety, tolerability and antiviral activity of single and multiple
        doses of XTL-2125. The study - as originally designed - was expected to enroll
        48 patients into six cohorts comprised of eight patients each (of which two
        are
        placebo patients). Each patient was expected to receive a single dose, followed
        by a 14-day multi-dosing regimen commencing one week after the single dose
        administration. In January 2007, the Phase I clinical trial - as originally
        designed - was completed. As no dose limiting toxicities have been encountered,
        we have decided to add up to two additional higher dose cohorts to the study.
        We
        expect to announce results from this study in the second quarter of
        2007.
 
 **XTL-6865**
 
 XTL-6865
        is being developed for the treatment of hepatitis C. XTL-6865 is a combination
        of two fully human monoclonal antibodies (Ab68 and Ab65) against the hepatitis
        C
        virus E2 envelope protein. The antibodies comprising XTL-6865 are expected
        to
“trap” the virus in the patient’s serum and prevent the infection of healthy
        liver cells. A single antibody version of this product, then referred to
        as
        HepeX-C, was tested in a pilot clinical program that included both Phase
        I and
        Phase II clinical trials. In April 2005, we submitted an IND to the FDA in
        order
        to commence a Phase Ia/Ib clinical trial for XTL-6865, the dual-antibodies
        product. In September 2005, we announced the initiation of a Phase Ia clinical
        trial with XTL-6865 in patients with chronic hepatitis C.
  The
        two
        antibodies comprising XTL-6865 were selected by screening a large panel of
        candidates based on their high level of activity against the virus in our
        proprietary HCV models. We believe that a combination of two antibodies that
        bind to different epitopes is essential to provide broad coverage of virus
        quasispecies, and to minimize the probability for escape from therapy. We
        have
        shown that the two antibodies chosen (Ab68 and Ab65) specifically bind and
        immunoprecipitate viral particles from infected patients’ sera with different
        HCV genotypes. In addition, both antibodies reduced mean viral load in
        HCV-Trimera mice. We have also shown that incubation of an infectious human
        serum with Ab68 or Ab65 prevented the serum’s ability to infect human liver
        cells and human liver tissue.
  The
        original Phase Ia single-dose study was designed to evaluate the safety,
        tolerability, and virologic activity of escalating single doses of XTL-6865
        in
        patients with chronic hepatitis C virus infection, and to assess the
        pharmacokinetics of XTL-6865 in the presence of viral infection. The original
        study was a single-administration, randomized, double blind, placebo-controlled,
        multi-center design. Doses were administered to groups of four patients each:
        5
        mg, 20 mg, 75 mg, 250 mg, 600 mg, 1200 mg, 2400 mg, and placebo. Within each
        group, three subjects received XTL-6865 and one subject will receive placebo.
        No
        patient was enrolled in more than one dose level. Concentrations of anti-E2
        antibody and HCV RNA in the peripheral blood were periodically evaluated.
        In
        December 2006, we completed dosing all patients in the trial - as originally
        designed. In January 2007, we added one multiple dose cohort to the trial,
        which
        includes four patients: three of whom will receive five daily dosings of
        1200mg,
        and one of whom will receive placebo. Results from the trial are expected
        shortly.
  
 **DOS**
  DOS
        is a
        pre-clinical program focused on the development of three families of novel
        hepatitis C small molecule inhibitors.  Compounds in each family inhibited
        HCV replication in a pre-clinical cell-based assay with potencies comparable
        to
        clinical stage drugs.  These compounds are presently in advanced stages of
        optimization.
  We
        gained
        access to the DOS program through a license and asset purchase agreement
        with
        VivoQuest that was completed in September 2005. Under this agreement, we
        licensed lead HCV molecules, a proprietary compound library and medicinal
        chemistry technologies.  The DOS small molecule chemistry
        technology developed at VivoQuest was used to create these molecules and is
        currently being used to produce optimized compounds for advanced pre-clinical
        and IND-enabling GLP safety studies. See “Item 10. Additional Information
        -Material Contracts.”
   22
  **HepeX-B**
  HepeX-B,
        a combination of two monoclonal antibodies against hepatitis B, or HBV, was
        licensed to Cubist in June 2004. In December 2005, Cubist announced the positive
        results of a Phase IIb study with HepeX-B, based on which Cubist planned
        to meet
        with the FDA to discuss a proposed Phase III trial design. In July 2006,
        Cubist
        reported that the FDA direction on the regulatory pathway for approval creates
        both operational and economic challenges to it. The size of the safety
        population the FDA is looking for translates to an extremely lengthy development
        timeline, as there are only about 500 liver transplants due to hepatitis
        B in
        the US and Europe each year. In July 2006, Cubist announced that it had decided
        not to make any further investment in the HepeX-B program while it evaluates
        its
        strategic options for HepeX-B, including the potential sub-licensing of the
        product.
  ***Proprietary
        Technology***
  Our
        proprietary Trimera technology, which was in-licensed from Yeda, is a method
        for
        introducing functional human cells or tissue into a mouse. The Trimera
        technology is a patented tool whereby murine immune systems are ablated by
        radiation, and bone marrow is transplanted from genetically immuno-deficient
        mice to re-enable red blood cell production. The result is the production
        of
“radiation chimeras.” As these chimeras have no immune system, they are able to
        accept implanted human cells, without rejection, thereby creating a “Trimera.”
The resulting mouse can be used to generate humanized monoclonal antibodies,
        or
        hMAbs and/or as an animal model of human disease. These models can be used
        for
        testing various approaches to treat human disease, including the development
        of
        new prophylactic and therapeutic products and were used to discover the HepeX-B
        product and to screen the activity of XTL-6865 and XTL-2125. We have no plans
        to
        use these models and technology in our other current or planned development
        activities.
  ***Intellectual
        Property and Patents***
  **General**
  Patents
        and other proprietary rights are very important to the development of our
        business. We will be able to protect our proprietary technologies from
        unauthorized use by third parties only to the extent that our proprietary
        rights
        are covered by valid and enforceable patents or are effectively maintained
        as
        trade secrets. It is our intention to seek and maintain patent and trade
        secret
        protection for our drug candidates and our proprietary technologies. As part
        of
        our business strategy, our policy is to actively file patent applications
        in the
        US and internationally to cover methods of use, new chemical compounds,
        pharmaceutical compositions and dosing of the compounds and compositions
        and
        improvements in each of these. We also rely on trade secret information,
        technical know-how, innovation and agreements with third parties to continuously
        expand and protect our competitive position. Because of the extensive time
        required for development, testing and regulatory review of a potential product,
        it is possible that before we commercialize any of our products, any related
        patent may expire or remain in existence for only a short period following
        commercialization, thus reducing any commercial advantage or financial value
        attributable to the patent.
  Generally,
        patent applications in the US are maintained in secrecy for a period of
        18 months or more. Since publication of discoveries in the scientific or
        patent literature often lag behind actual discoveries, we are not certain
        that
        we were the first to make the inventions covered by each of our pending patent
        applications or that we were the first to file those patent applications.
        The
        patent positions of biotechnology and pharmaceutical companies are highly
        uncertain and involve complex legal and factual questions. Therefore, we
        cannot
        predict the breadth of claims allowed in biotechnology and pharmaceutical
        patents, or their enforceability. To date, there has been no consistent policy
        regarding the breadth of claims allowed in biotechnology patents. Third parties
        or competitors may challenge or circumvent our patents or patent applications,
        if issued. Granted patents can be challenged and ruled invalid at any time,
        therefore the grant of a patent is not of itself sufficient to demonstrate
        our
        entitlement to a proprietary right. The disallowance of a claim or invalidation
        of a patent in any one territory can have adverse commercial consequences
        in
        other territories.
  If
        our
        competitors prepare and file patent applications in the US that claim technology
        also claimed by us, we may choose to participate in interference proceedings
        declared by the US Patent and Trademark Office to determine priority of
        invention, which could result in substantial cost, even if the eventual outcome
        is favorable to us. While we have the right to defend patent rights related
        to
        our licensed drug candidates and technologies, we are not obligated to do
        so. In
        the event that we decide to defend our licensed patent rights, we will be
        obligated to cover all of the expenses associated with that effort.
   23
  If
        a
        patent is issued to a third party containing one or more preclusive or
        conflicting claims, and those claims are ultimately determined to be valid
        and
        enforceable, we may be required to obtain a license under such patent or
        to
        develop or obtain alternative technology. In the event of a litigation involving
        a third party claim, an adverse outcome in the litigation could subject us
        to
        significant liabilities to such third party, require us to seek a license
        for
        the disputed rights from such third party, and/or require us to cease use
        of the
        technology. Further, our breach of an existing license or failure to obtain
        a
        license to technology required to commercialize our products may seriously
        harm
        our business. We also may need to commence litigation to enforce any patents
        issued to us or to determine the scope, validity and/or enforceability of
        third-party proprietary rights. Litigation would involve substantial costs.
  **Bicifadine** ****
  There
        are
        currently eight patent families filed by DOV relating to Bicifadine: (i)
        methods
        and compositions containing Bicifadine for the treatment and prevention of
        hyperthermia; (ii) solid compositions containing the polymorph Form B of
        Bicifadine as characterized by certain infrared peaks and a distinct x-ray
        powder diffraction (XPRD) profile, and methods of treating pain in mammals
        using
        the same; (iii) methods and compositions employing a therapeutically effective
        amount of Bicifadine for preventing and treating a condition or symptom of
        acute
        pain, chronic pain, and/or a neuropathic disorder in mammalian subjects;
        (iv)
        methods and compositions containing Bicifadine HCl to prevent or treat
        neuropathic disorders in mammals, including, but not limited to, diabetic
        neuropathy; (v) methods and compositions containing Bicifadine for the
        prevention and treatment of lower urinary tract disorders; (vi) methods of
        making Bicifadine; (vii) methods and compositions for preventing or treating
        chronic pain comprising Bicifadine in combination with a non-steroidal
        anti-inflammatory drug (NSAID).
 
 Of
        these
        eight patent families, there is one issued patent, U.S. Patent No. 7,094,799,
        generally directed to solid compositions containing the polymorph Form B
        of
        Bicifadine and “substantially free” of polymorph Form A. Pending patent
        applications filed by DOV in 2006 include:
 
 ·
              A
                  patent application directed to sustained release formulations of
                  Bicifadine.·
              A
                  patent application directed to the use of Bicifadine for treating
                  a
                  disability or reducing a functional impairment associated with
                  acute pain,
                  chronic pain, and/or neuropathic disorders.·
              A
                  patent application directed to the use of Bicifadine for preventing
                  and
                  treating neuropathic disorders, including, but not limited to,
                  diabetic
                  neuropathy, diabetic peripheral neuropathy, and neuropathy associated
                  with
                  alcoholism, sciatica, multiple sclerosis, spinal cord injury, chronic
                  low
                  back pain, HIV, cancer, etc.
 
 In
        addition, there is one issued patent to Wyeth directed to a method of treating
        an addictive, compulsive disorder caused by alcohol or cocaine abuse using
        Bicifadine HCl. There are also three pending US applications filed by Wyeth
        in
        2005 directed to methods for treating neuropathic disorders or conditions.
        At
        least one of these patent applications covers the use of Bicifadine in the
        treatment of neuropathic pain.
 
 Under
        the
        license agreement with DOV, we have exclusive worldwide rights to the above
        patents and patent applications for all therapeutic uses, with the exception
        of
        the Wyeth Retained Field. Under the terms of the DOV/Wyeth agreement, Wyeth
        can
        only develop Bicifadine for use in the Wyeth Retained Field in collaboration
        with DOV, and under the license agreement between DOV and XTL Development,
        DOV
        will not conduct research or development with Wyeth for the use of Bicifadine
        in
        the Wyeth Retained Field. See “Item 3. Key Information-Risk Factors-Risks
        Related to Our Intellectual Property.”
  **XTL-2125**
 
 One
        patent family presently covers XTL-2125. It covers the structure of the
        compound, and its use for the treatment of chronic HCV patients. The patent
        application covers the unique structure of the molecules and their use as
        a
        pharmaceutical composition for the treatment of HCV. This patent family,
        if
        issued, will expire in 2023. Based on the provisions of the Patent Term
        Extension Act, we currently believe that we would qualify for certain patent
        term extensions. The patent application covering XTL-2125 is exclusively
        licensed to us by B&C Biopharm Co., Ltd.
   24
  **XTL-6865**
  XTL-6865
        is a combination of two human monoclonal antibodies against HCV, Ab68 and
        Ab65.
        Three patent families presently cover XTL-6865, including the two human
        monoclonal antibodies comprising XTL-6865 and its use to treat HCV infection.
        The patents cover both the treatment of chronic HCV patients with the antibodies
        and the prevention of liver re-infection in liver transplant recipients.
        One
        family concerns one antibody comprising XTL-6865, Ab68. Two families concern
        the
        second antibody comprising XTL-6865, Ab65.
  The
        patent and patent applications covering Ab68 are exclusively licensed to
        us from
        the DRK-Blutspendedienst Baden-Wurttemberg (Ulm University, Ulm, Germany).
  The
        patent and patent applications covering Ab65 are exclusively licensed to
        us from
        Stanford University, California in all territories outside China, and in
        China,
        it is co-exclusively licensed to us and Applied Immunogenetics.
  Currently,
        XTL-6865 and its use to treat hepatitis C infection is covered by one issued
        US
        patent that will expire in 2019. Additional patent applications, if issued,
        will
        expire between 2018 and 2021. Based on the provisions of the Patent Term
        Extension Act, we currently believe that we would qualify for certain patent
        term extensions. We believe that we will have sufficient time to commercially
        utilize the inventions directed to the treatment and prevention of hepatitis
        C
        infection.
 
 **DOS**
  The
        lead
        molecules that are included in the VivoQuest license are covered by two issued
        patents and four patent applications. The patent applications describe both
        the
        structure of the compounds and their use for treating HCV infection. The
        two
        issued VivoQuest patents will expire in 2023. Additional patent applications,
        if
        issued, will expire in 2023, 2024 and 2025. Based on the provisions of the
        Patent Term Extension Act, we currently believe that we would qualify for
        certain patent term extensions.
  We
        believe that we will have sufficient time to commercially utilize the inventions
        from our small molecule development program directed to the treatment and
        prevention of hepatitis C infection.
  **Other
        Intellectual Property Rights**
  We
        depend
        upon trademarks, trade secrets, know-how and continuing technological advances
        to develop and maintain our competitive position. To maintain the
        confidentiality of trade secrets and proprietary information, we require
        our
        employees, scientific advisors, consultants and collaborators, upon commencement
        of a relationship with us, to execute confidentiality agreements and, in
        the
        case of parties other than our research and development collaborators, to
        agree
        to assign their inventions to us. These agreements are designed to protect
        our
        proprietary information and to grant us ownership of technologies that are
        developed in connection with their relationship with us. These agreements
        may
        not, however, provide protection for our trade secrets in the event of
        unauthorized disclosure of such information.
  In
        addition to patent protection, we may utilize orphan drug regulations to
        provide
        market exclusivity for certain of our drug candidates. The orphan drug
        regulations of the FDA provide incentives to pharmaceutical and biotechnology
        companies to develop and manufacture drugs for the treatment of rare diseases,
        currently defined as diseases that exist in fewer than 200,000 individuals
        in
        the US, or, diseases that affect more than 200,000 individuals in the US
        but
        that the sponsor does not realistically anticipate will generate a net profit.
        Under these provisions, a manufacturer of a designated orphan drug can seek
        tax
        benefits, and the holder of the first FDA approval of a designated orphan
        product will be granted a seven-year period of marketing exclusivity for
        such
        FDA-approved orphan product. While we believe that certain of the indications
        for our drug candidates will be eligible for orphan drug designation, we
        cannot
        assure you that our drugs will obtain such orphan drug designation or that
        we
        will be the first to receive FDA approval for such drugs so as to be eligible
        for market exclusivity protection.
   25
  ***Licensing
        Agreements and Collaborations***
  We
        have
        formed strategic alliances with a number of companies for the manufacture
        and
        commercialization of our products. Our current key strategic alliances are
        discussed below. See “Item 5. Operating and Financial Review and Prospects -
        Obligations and Commitments” which describes contingent milestone payments we
        have undertaken to make to certain licensors over the life of the licenses
        described below.
  **Bicifadine
        License**
  In
        January 2007, XTL Development signed an agreement with DOV to in-license
        the
        worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake
        inhibitor. XTL Development intends to develop Bicifadine for the treatment
        of
        neuropathic pain - a chronic condition resulting from damage to peripheral
        nerves. In accordance with the terms of the license agreement, XTL Development
        made an initial up-front payment of $7.5 million in cash. In addition, XTL
        Development will make milestone payments of up to $126.5 million, in cash
        and/or
        in our ordinary shares over the life of the license, of which up to $115
        million
        will be due upon or after regulatory approval of the product and the remaining
        $11.5 million will be due prior to regulatory approval of the product. XTL
        Development is also obligated to pay DOV royalties on net sales of the product.
  **XTL-2125
        License**
  XTL-2125
        has been licensed from B&C since February 2003. Under the terms of the
        agreement, we have exclusive worldwide rights to XTL-2125, with the exception
        of
        Asia, which is shared between the two companies, and Korea, for which B&C
        retains exclusive rights. Under the terms of the agreement, we are obligated
        to
        make certain milestone payments in addition to royalties on product sales.
        To
        date we have made $1.5 million in license and milestone payments to B&C, and
        we have agreed to make additional contingent milestone payments of up to
        approximately $13.0 million over the life of the license, of which $8.0 million
        will be due upon or following regulatory approval of the drug. The license
        terminates upon the expiration of the last of the licensed patents.
        Notwithstanding the above, we may terminate this agreement upon specified
        notice
        to B&C.
  **XTL-6865
        License**
  XTL-6865
        is a combination of two human monoclonal antibodies against HCV, Ab68 and
        Ab65.
  In
        April
        2000, we licensed Ab68 under an exclusive worldwide license from the
        DRK-Blutspendedienst Baden-Wurttemberg (Ulm University, Germany, or Ulm).
        Under
        the terms of this agreement, we are obligated to pay Ulm a specified royalty
        rate on sales of product incorporating Ab68. We can deduct certain payments
        that
        are made to third parties from these royalties, subject to a minimum royalty
        rate. We are also obligated to pay Ulm a specified percentage of any milestone
        payments we may receive from any sublicensee to whom we may grant a license
        or
        sublicense of Ab68 or technology related to the production of Ab68. We can
        deduct certain of these payments that are made to third parties from the
        percentage of milestone payments owed to Ulm, subject to a minimum milestone
        payment amount. Either party may terminate the agreement, by written notice,
        upon or after the winding up or insolvency of the other party, or upon or
        after
        commitment of a material breach by the other party that cannot be cured,
        or if
        curable, has not been cured, within 60 days after receipt of notice. In the
        absence of such termination, the agreement shall expire upon the expiration
        of
        the patent family granted under the agreement. To date we have made $150,000
        in
        license and milestone payments to Ulm.
  In
        September 2003, we licensed Ab65 from Stanford University under an exclusive
        worldwide license agreement, excluding China. In China, we have co-exclusive
        rights with Applied Immunogenetics LLC. Under the terms of this agreement,
        we
        must use commercially reasonable efforts to commercialize and market Ab65.
        We
        are obligated to make royalty payments to Stanford University on sales of
        product incorporating Ab65, and we are also obligated to make milestone payments
        upon the occurrence of certain specified events. To date we have made $202,000
        in license and milestone payments to Stanford University, and we have undertaken
        to make contingent milestone payments of up to approximately $200,000 over
        the
        life of the license, all of which will be due upon or following regulatory
        approval of the drug. The license terminates upon the later of the expiration
        of
        last of the licensed patents or at the time of our last royalty payment.
        Notwithstanding the above, we may terminate this agreement upon specified
        notice
        to Stanford University. In addition, should we fail to meet certain
        developmental milestones for Ab65, our rights to the use of Ab65 become
        non-exclusive upon notice to that effect to us by Stanford University.
  In
        addition, under an agreement entered into in September 2003, we are obligated
        to
        make royalty payments on sales of product incorporating Ab65 to Applied
        Immunogenetics LLC, a company that previously held non-exclusive rights to
        Ab65
        and returned them to Stanford University, enabling us to gain exclusive rights
        to Ab65 from Stanford University. Our agreement with Applied Immunogenetics
        LLC
        expires on the expiration or termination of our exclusive agreement with
        Stanford University, as described above. To date we have made $183,000 in
        license and milestone payments to Applied Immunogenetics LLC. There are no
        additional contingent milestone payments.
   26
  **Cubist
        License**
  We
        have
        entered into a licensing agreement with Cubist dated June 2, 2004, as amended,
        under which we granted to Cubist an exclusive, worldwide license (with the
        right
        to sub-license) to commercialize HepeX-B and any other product containing
        a hMAb
        or humanized monoclonal antibody or fragment directed at the hepatitis B
        virus
        owned or controlled by us. In August 2005, we transferred full responsibility
        for completing the development of HepeX-B to Cubist. Cubist will be responsible
        for completing the development and for registration and commercialization
        of the
        product worldwide. Nevertheless, during the term of this agreement, we have
        an
        ongoing obligation to transfer to Cubist all information Cubist may reasonably
        require and to provide Cubist with reasonable access to pertinent employees
        of
        ours that have experience with or information related to HepeX-B. We are
        also
        required to file, prosecute and maintain the relevant patents at our sole
        expense.
  Cubist
        has the right to sub-license HepeX-B. The sub-licensee fees we will receive
        in
        such cases will vary according to the territory, the subject of the sub-license,
        the patent protection of HepeX-B in that territory, total costs of HepeX-B
        development, third party license payments, indemnification obligations and
        local
        competition.
  In
        December 2005, Cubist announced the positive results of a Phase IIb study
        with
        HepeX-B, based on which Cubist planned to meet with the FDA to discuss a
        proposed Phase III trial design. In July 2006, Cubist reported that the FDA
        direction on the regulatory pathway for approval creates both operational
        and
        economic challenges to it. The size of the safety population the FDA is looking
        for translates to an extremely lengthy development timeline, as there are
        only
        about 500 liver transplants due to hepatitis B in the US and Europe each
        year.
        As of the date hereof, Cubist has decided not to make any further investment
        in
        the HepeX-B program while Cubist evaluates strategic options for
        HepeX-B.
  The
        agreement expires on the later of the last valid patent claim covering HepeX-B
        to expire or 10 years after the first commercial sale of HepeX-B on a
        country-by-country basis.
  **VivoQuest
        License**
  In
        August
        2005, we entered into a license agreement with VivoQuest covering a proprietary
        compound library, including certain HCV compounds. Under the terms of the
        license agreement, we have exclusive worldwide rights to VivoQuest’s
        intellectual property and technology in all fields of use. To date we have
        made
        approximately $0.9 million in license payments to VivoQuest under the license
        agreement. The license agreement also provides for additional milestone payments
        triggered by certain regulatory and sales targets. These additional milestone
        payments total $34.6 million, $25.0 million of which will be due upon or
        following regulatory approval or actual product sales, and are payable in
        cash
        or ordinary shares at our election. In addition, the license agreement requires
        that we make royalty payments to VivoQuest on product sales.
  **Yeda
        License**
  In
        April
        of 1993, we entered into a research and license agreement with Yeda, which
        we
        refer to as the Yeda Agreement, under which Yeda granted us an exclusive
        worldwide license to use the Trimera patent portfolio and to exclusively
        use the
        information derived from the performance of certain research for the purposes
        specified in the agreement. Subject to earlier termination in accordance
        with
        the Yeda Agreement, the term of the license with respect to any licensed
        product
        made and/or sold or to any other licensed activity conducted in any country
        where a licensed patent covers such product or other licensed activity is
        until
        the date on which the last licensed patent in that country expires or until
        12
        years from the first commercial sale of the product (or first receipts to
        us from
        such other licensed activity) in such country, whichever is the longer period
        and in any other country until 12 years from the first commercial sale of
        such
        product (or first receipts to us from such other licensed activity) in that
        country. Similar provisions fix the term of the license with respect to licensed
        activities not attributable to any particular country. Under the agreement,
        any
        assignment or sublicense of the license granted by Yeda requires Yeda's prior
        written consent.
  The
        Yeda
        Agreement has undergone a number of amendments, one of the end results of
        which
        is that we shall pay to Yeda the following royalties in connection with the
        license: a royalty of 3% of all net sales received by us; 25% of amounts
        received by us on net sales of third parties (less certain royalties payable
        by
        us to third parties), but no more than 3% and no less than 1.5% of such net
        sales; and a royalty ranging between 20% to 40% on any receipts to us other
        than
        our net sales or receipts on net sales made by third parties. Furthermore,
        such
        amendments have also changed the termination provisions relating to Yeda’s
        entitlement to terminate the agreement if we do not pay Yeda a certain minimum
        amount of annual royalties of $100,000 or $200,000, depending on the year.
        We
        may terminate the agreement with Yeda with six months advance notice in which
        event our rights in any technology licensed by Yeda to us shall terminate
        and
        all rights in any technology derived from research and development activities
        performed by us in connection with the technology licensed by Yeda to us
        shall
        vest in Yeda.
   27
  In
        the
        agreement between Yeda, us and Cubist, whereby Yeda gave its consent relating
        to
        the grant of the license by us to Cubist under the terms of the HepeX-B
        collaboration, Yeda received the right to receive at least 1.5% of net sales
        of
        HepeX-B by Cubist sub-licensees, regardless of the amount received by us
        from
        Cubist in respect of such sales.
  ***Competition***
  Competition
        in the pharmaceutical and biotechnology industries is intense. Our competitors
        include pharmaceutical companies and biotechnology companies, as well as
        universities and public and private research institutions. In addition,
        companies that are active in different but related fields represent substantial
        competition for us. Many of our competitors have significantly greater capital
        resources, larger research and development staffs and facilities and greater
        experience in drug development, regulation, manufacturing and marketing than
        we
        do. These organizations also compete with us to recruit qualified personnel,
        attract partners for joint ventures or other collaborations, and license
        technologies that are competitive with ours. To compete successfully in this
        industry we must identify novel and unique drugs or methods of treatment
        and
        then complete the development of those drugs as treatments in advance of
        our
        competitors.
  The
        drugs
        that we are attempting to develop will have to compete with existing therapies.
        In addition, a large number of companies are pursuing the development of
        pharmaceuticals that target the same diseases and conditions that we are
        targeting. Other companies have products or
        drug
        candidates in various stages of pre-clinical or clinical development to treat
        diseases for which we are also seeking to discover and develop drug candidates.
        Some of these potential competing drugs are further advanced in development
        than
        our drug candidates and may be commercialized earlier.
  **Competing
        Products for Treatment of Neuropathic Pain**
  Three
        oral drugs have been approved by the FDA for the treatment of neuropathic
        pain:
        Gabapentin (developed by Pfizer Inc.) which is approved for the treatment
        of
        post herpetic neuralgia; Pregabalin (developed by Pfizer Inc.) which is approved
        for post herpetic neuralgia and diabetic neuropathic pain; and Cymbalta
        (developed by Eli Lilly and Company) which is approved for diabetic neuropathic
        pain.
  Several
        other drugs are in late-stage clinical trials for the treatment of neuropathic
        pain: milnacipran (developed by Cypress Bioscience Inc.) is presently is
        Phase
        III clinical trials for the treatment of fibromyalgia, and desvenlafaxin
        (developed by Wyeth Pharmaceuticals Inc.) is presently in Phase III clinical
        trials for the treatment of neuropathic pain. Wyeth has also filed a new
        drug
        application, or NDA, with the FDA, seeking approval of desvenlafaxin in
        depression.
  Several
        additional companies are developing drugs for neuropathic pain including:
        Vernalis plc, Endo Pharmaceuticals Inc., GlaxoSmithKline plc, Avanir
        Pharmaceuticals, and UCB.
  **Competing
        Products for Treatment of Chronic Hepatitis C**
  We
        believe that a certain number of the drugs that are currently under development
        will become available in the future for the treatment of
        hepatitis C.
  At
        present, the only approved therapies for treatment of chronic HCV are
        Interferon-based. There are multiple drugs presently under development for
        the
        treatment of HCV, most of which are in the pre-clinical or early stage of
        clinical development. These compounds are being developed by both established
        pharmaceutical companies, as well as by biotech companies. Examples of such
        companies are: Anadys Pharmaceuticals, Inc., F. Hoffman-LaRoche & Co.,
        Intercell AG, Schering-Plough Corporation, Gilead Sciences, Inc., Idenix
        Pharmaceuticals, Inc., InterMune, Inc., Vertex Pharmaceuticals Incorporated
        and
        Viropharma Incorporated. Many of these companies and organizations, either
        alone
        or with their collaborative partners, have substantially greater financial,
        technical and human resources than we do. In addition, our competitors also
        include smaller private companies such as Pharmasset, Ltd.
   28
  ***Supply
        and Manufacturing***
  We
        currently have no manufacturing capabilities and do not intend to establish
        any
        such capabilities.
  **Bicifadine**
  As
        part
        of our license agreement with DOV, we have the right to purchase certain
        inventories of Bicifadine that have been produced for DOV. We believe that
        the
        present Bicifadine inventories owned by DOV will be adequate to satisfy our
        current clinical supply needs. For further late stage trials, we intend to
        utilize DOV’s existing Bicifadine inventory so long as it meets the relevant
        specifications and quality control requirements. In the event that the inventory
        does not meet the proper specifications, or if DOV should fail to provide
        us
        with adequate supplies of the inventory, then we will contract with a
        manufacturer to supply us with our additional clinical needs. For commercial
        supply of Bicifadine, we intend to contract with the drug’s existing
        manufacturers or other drug manufacturers to produce drug supply in sufficient
        quantity for launch and commercialization. See “Item 3. Key Information-Risk
        Factors-Risks Related to Our Intellectual Property.”
  **XTL-2125**
  In
        2003,
        we entered into a contract manufacturing agreement with an Israeli-based
        manufacturer for the supply of XTL-2125. We believe that this contract
        manufacturer will be adequate to satisfy our current clinical supply needs.
  **XTL-6865**
  In
        2000,
        we entered into a contract manufacturing agreement with a US-based manufacturer
        for the supply of the HepeX-C drug product, the single antibody version of
        XTL-6865, and subsequently under a master agreement for the supply of XTL-6865,
        the dual-MAb product. We believe that this contract manufacturer will be
        adequate to satisfy our current clinical supply needs.
  **HepeX-B**
  In
        July
        2006, Cubist announced that it has decided not to make any further investment
        in
        the HepeX-B program, while it evaluates its strategic options for HepeX-B,
        including the sub-licensing of the product.
  Future
        supply of the HepeX-B clinical material will be manufactured by a contract
        manufacturer to be selected by our partner Cubist or its sub-licensor, should
        it
        sub-license HepeX-B to a third-party.
  **DOS**
  For
        planned pre-clinical and clinical supply of the HCV compounds licensed from
        VivoQuest, we intend to enter into a contract with a manufacturer to produce
        our
        pre-clinical and clinical supply needs.
  **General**
  At
        the
        time of commercial sale, to the extent possible and commercially practicable,
        we
        plan to engage a back-up supplier for each of our product candidates. Until
        such
        time, we expect that we will rely on a single contract manufacturer to produce
        each of our product candidates under cGMP regulations. Our third-party
        manufacturers have a limited numbers of facilities in which our product
        candidates can be produced and will have limited experience in manufacturing
        our
        product candidates in quantities sufficient for conducting clinical trials
        or
        for commercialization. Our third-party manufacturers will have other clients
        and
        may have other priorities that could affect our contractor’s ability to perform
        the work satisfactorily and/or on a timely basis. Both of these occurrences
        would be beyond our control.  We anticipate that we will similarly rely on
        contract manufacturers for our future proprietary product candidates.
  We
        expect
        to similarly rely on contract manufacturing relationships for any products
        that
        we may in-license or acquire in the future. However, there can be no assurance
        that we will be able to successfully contract with such manufacturers on
        terms
        acceptable to us, or at all.
  Contract
        manufacturers are subject to ongoing periodic inspections by the FDA, the
        US
        Drug Enforcement Agency and corresponding state agencies to ensure strict
        compliance with cGMP and other state and federal regulations. Our contractor
        in
        Israel faces similar inspections from Israeli regulatory agencies and from
        the
        FDA. We do not have control over third-party manufacturers’ compliance with
        these regulations and standards, other than through contractual obligations.
   29
  If
        we
        need to change manufacturers, the FDA and corresponding foreign regulatory
        agencies must approve these new manufacturers in advance, which will involve
        testing and additional inspections to ensure compliance with FDA regulations
        and
        standards and may require significant lead times and delay. Furthermore,
        switching manufacturers may be difficult because the number of potential
        manufacturers is limited. It may be difficult or impossible for us to find
        a
        replacement manufacturer quickly or on terms acceptable to us, or at
        all.
  ***Government
        and Industry Regulation***
  Numerous
        governmental authorities, principally the FDA and corresponding state and
        foreign regulatory agencies, impose substantial regulations upon the clinical
        development, manufacture and marketing of our drug candidates and technologies,
        as well as our ongoing research and development activities. None of our drug
        candidates have been approved for sale in any market in which we have marketing
        rights. Before marketing in the US, any drug that we develop must undergo
        rigorous pre-clinical testing and clinical trials and an extensive regulatory
        approval process implemented by the FDA, under the Federal Food, Drug and
        Cosmetic Act of 1938,
        as amended .
        The FDA
        regulates, among other things, the pre-clinical and clinical testing, safety,
        efficacy, approval, manufacturing, record keeping, adverse event reporting,
        packaging, labeling, storage, advertising, promotion, export, sale and
        distribution of biopharmaceutical products.
  The
        regulatory review and approval process is lengthy, expensive and uncertain.
        We
        are required to submit extensive pre-clinical and clinical data and supporting
        information to the FDA for each indication or use to establish a drug
        candidate’s safety and efficacy before we can secure FDA approval. The approval
        process takes many years, requires the expenditure of substantial resources
        and
        may involve ongoing requirements for post-marketing studies or surveillance.
        Before commencing clinical trials in humans, we must submit an IND to the
        FDA
        containing, among other things, pre-clinical data, chemistry, manufacturing
        and
        control information, and an investigative plan. Our submission of an IND
        may not
        result in FDA authorization to commence a clinical trial.
  The
        FDA
        may permit expedited development, evaluation, and marketing of new therapies
        intended to treat persons with serious or life-threatening conditions for
        which
        there is an unmet medical need under its fast track drug development programs.
        A
        sponsor can apply for fast track designation at the time of submission of
        an
        IND, or at any time prior to receiving marketing approval of the NDA. To
        receive
        fast track designation, an applicant must demonstrate that the
        drug:
  ·
              is
                  intended to treat a serious or life-threatening
                  condition;·
              is
                  intended to treat a serious aspect of the condition;
                  and·
              has
                  the potential to address unmet medical needs, and this potential
                  is being
                  evaluated in the planned drug development
                  program.
 Clinical
        testing must meet requirements for institutional review board oversight,
        informed consent and good clinical practices, and must be conducted pursuant
        to
        an IND, unless exempted.
  For
        purposes of NDA approval, clinical trials are typically conducted in the
        following sequential phases:
  ·
              *Phase
                  I*:
                  The drug is administered to a small group of humans, either healthy
                  volunteers or patients, to test for safety, dosage tolerance, absorption,
                  metabolism, excretion, and clinical pharmacology.·
              *Phase
                  II*:
                  Studies are conducted on a larger number of patients to assess
                  the
                  efficacy of the product, to ascertain dose tolerance and the optimal
                  dose
                  range, and to gather additional data relating to safety and potential
                  adverse events.·
              *Phase
                  III*:
                  Studies establish safety and efficacy in an expanded patient population.·
              *Phase
                  IV*:
                  The FDA may require Phase IV post-marketing studies to find out
                  more about
                  the drug’s long-term risks, benefits, and optimal use, or to test the drug
                  in different populations, such as
                  children.
   30
  The
        length of time necessary to complete clinical trials varies significantly
        and
        may be difficult to predict. Clinical results are frequently susceptible
        to
        varying interpretations that may delay, limit or prevent regulatory approvals.
        Additional factors that can cause delay or termination of our clinical trials,
        or that may increase the costs of these trials, include:
  ·
              slow
                  patient enrollment due to the nature of the clinical trial plan,
                  the
                  proximity of patients to clinical sites, the eligibility criteria
                  for
                  participation in the study or other factors;·
              inadequately
                  trained or insufficient personnel at the study site to assist in
                  overseeing and monitoring clinical trials or delays in approvals
                  from a
                  study site’s review board;·
              longer
                  treatment time required to demonstrate efficacy or determine the
                  appropriate product dose;·
              insufficient
                  supply of the drug candidates;·
              adverse
                  medical events or side effects in treated patients; and·
              ineffectiveness
                  of the drug candidates.
  In
        addition, the FDA may place a clinical trial on hold or terminate it if it
        concludes that subjects are being exposed to an unacceptable health risk.
        Any
        drug is likely to produce some toxicity or undesirable side effects when
        administered at sufficiently high doses and/or for a sufficiently long period
        of
        time. Unacceptable toxicity or side effects may occur at any dose level at
        any
        time in the course of studies designed to identify unacceptable effects of
        a
        drug candidate, known as toxicological studies, or clinical trials of drug
        candidates. The appearance of any unacceptable toxicity or side effect could
        cause us or regulatory authorities to interrupt, limit, delay or abort the
        development of any of our drug candidates and could ultimately prevent approval
        by the FDA or foreign regulatory authorities for any or all targeted
        indications.
  Before
        receiving FDA approval to market a product, we must demonstrate that the
        product
        is safe and effective for its intended use by submitting to the FDA an NDA
        containing the pre-clinical and clinical data that have been accumulated,
        together with chemistry and manufacturing and controls specifications and
        information, and proposed labeling, among other things. The FDA may refuse
        to
        accept an NDA for filing if certain content criteria are not met and, even
        after
        accepting an NDA, the FDA may often require additional information, including
        clinical data, before approval of marketing a product.
 
 As
        part
        of the approval process, the FDA must inspect and approve each manufacturing
        facility. Among the conditions of approval is the requirement that a
        manufacturer’s quality control and manufacturing procedures conform to cGMP.
        Manufacturers must expend time, money and effort to ensure compliance with
        cGMP,
        and the FDA conducts periodic inspections to certify compliance. It may be
        difficult for our manufacturers or us to comply with the applicable cGMP
        and
        other FDA regulatory requirements. If we or our contract manufacturers fail
        to
        comply, then the FDA will not allow us to market products that have been
        affected by the failure.
 
 If
        the
        FDA grants approval, the approval will be limited to those disease states,
        conditions and patient populations for which the product is safe and effective,
        as demonstrated through clinical studies. Further, a product may be marketed
        only in those dosage forms and for those indications approved in the NDA.
        Certain changes to an approved NDA, including, with certain exceptions, any
        changes to labeling, require approval of a supplemental application before
        the
        drug may be marketed as changed. Any products that we manufacture or distribute
        pursuant to FDA approvals are subject to continuing regulation by the FDA,
        including compliance with cGMP and the reporting of adverse experiences with
        the
        drugs. The nature of marketing claims that the FDA will permit us to make
        in the
        labeling and advertising of our products will be limited to those specified
        in
        an FDA approval, and the advertising of our products will be subject to
        comprehensive regulation by the FDA. Claims exceeding those that are approved
        will constitute a violation of the Federal Food, Drug, and Cosmetic Act.
        Violations of the Federal Food, Drug, and Cosmetic Act or regulatory
        requirements at any time during the product development process, approval
        process, or after approval may result in agency enforcement actions, including
        withdrawal of approval, recall, seizure of products, injunctions, fines and/or
        civil or criminal penalties. Any agency enforcement action could have a material
        adverse effect on our business.
 
 Should
        we
        wish to market our products outside the US, we must receive marketing
        authorization from the appropriate foreign regulatory authorities. The
        requirements governing the conduct of clinical trials, marketing authorization,
        pricing and reimbursement vary widely from country to country. At present,
        companies are typically required to apply for foreign marketing authorizations
        at a national level. However, within the EU, registration procedures are
        available to companies wishing to market a product in more than one EU member
        state. Typically, if the regulatory authority is satisfied that a company
        has
        presented adequate evidence of safety, quality and efficacy, then the regulatory
        authority will grant a marketing authorization. This foreign regulatory approval
        process, however, involves risks similar or identical to the risks associated
        with FDA approval discussed above, and therefore we cannot guarantee that
        we
        will be able to obtain the appropriate marketing authorization for any product
        in any particular country. Our current development strategy calls for us
        to seek
        marketing authorization for our drug candidates outside the United
        States.
   31
 
 Failure
        to comply with applicable federal, state and foreign laws and regulations
        would
        likely have a material adverse effect on our business. In addition, federal,
        state and foreign laws and regulations regarding the manufacture and sale
        of new
        drugs are subject to future changes. We cannot predict the likelihood, nature,
        effect or extent of adverse governmental regulation that might arise from
        future
        legislative or administrative action, either in the US or abroad.
 
 **Organizational
        structure**
  Our
        wholly-owned subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development,
        Inc., are each incorporated in Delaware and each has its principal place
        of
        business in New York, New York.
  **Property,
        Plants and Equipment**
  We
        lease
        an aggregate of approximately 1,776 square meters of office and laboratory
        facilities in Rehovot, Israel, expiring in April 2007. On February 28, 2007,
        we
        exercised an option to renew the lease and to downsize the facilities to
        approximately 400 square meters of office space; the lease expires in April
        2008, with an option to extend for an additional year through April 2009.
        We
        lease approximately 3,000 square meters of laboratory facilities in Valley
        Cottage, New York, and 39 square meters in Raleigh, North Carolina. The leases
        in Valley Cottage and Raleigh expire in November 2009, and in October 2007,
        respectively. We also lease an approximate 100 square meter area in New York,
        New York, which is subject to a rent sharing agreement with the lessee of
        the
        facility. We have an option to renew our lease agreements, as needed.
  We
        anticipate that these facilities will be sufficient for our needs for the
        foreseeable future. To our knowledge, there are no environmental issues that
        affect our use of the properties that we lease.
  There
        are
        no encumbrances on our rights in these leased properties or on any of the
        equipment that we own. However, to
        secure
        the lease agreements in Israel, we provided a bank guarantee in the amount
        of
        approximately $236,000. As of December 31, 2006, the guarantee is secured
        by
        pledge on a restricted deposit amounting to $172,000 linked to the Israeli
        Consumer Price Index, which is included in the balance sheet as a restricted
        deposit .




32
  **ITEM
        4A. UNRESOLVED STAFF COMMENTS**
  None.
  **ITEM
        5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS**
  The
        following discussion and analysis contains forward-looking statements about
        our
        plans and expectations of what may happen in the future. Forward-looking
        statements are based on a number of assumptions and estimates that are
        inherently subject to significant risks and uncertainties, and our results
        could
        differ materially from the results anticipated by our forward-looking statements
        as a result of many known or unknown factors, including, but not limited
        to,
        those factors discussed in “Item 3. Key Information-Risk Factors” and “Item 4.
        Information on the Company.” See also the “Special Cautionary Notice Regarding
        Forward-Looking Statements” set forth above.
  You
        should read the following discussion and analysis in conjunction with our
        audited consolidated financial statements, including the related notes, prepared
        in accordance with US GAAP for the years ended December 31, 2006, 2005 and
        2004,
        and as of December 31, 2006 and 2005, contained in “Item 18. Financial
        Statements” and with any other selected financial data included elsewhere in
        this annual report.
  ***Selected
        Financial Data***
  The
        table
        below presents selected statement of operations and balance sheet data for
        the
        fiscal years ended and as of December 31, 2006, 2005, 2004, 2003 and 2002.
        We
        have derived the selected financial data for the fiscal years ended December
        31,
        2006, 2005, and 2004, and as of December 31, 2006 and 2005, from our audited
        consolidated financial statements, included elsewhere in this annual report
        and
        prepared in accordance with US GAAP. We have derived the selected financial
        data
        for fiscal years ended December 31, 2003 and 2002 and as of December 31,
        2004,
        2003 and 2002, from audited financial statements not appearing in this annual
        report, which have been prepared in accordance with US GAAP. You should read
        the
        selected financial data in conjunction with “Item 5. Operating and Financial
        Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial
        Statements,” including the related notes.
  33
 **Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  thousands, except share and per share amounts)****Statements
                  of Operations Data:**RevenuesReimbursed
                  out of-pocket-expenses
              
              $
              --
              
              $
              2,743
              
              $
              3,269
              
              $
              --
              
              $
              --License
              
              
              454
              
              
              454
              
              
              185
              
              
              --
              
              
              --454
              
              
              3,197
              
              
              3,454
              
              
              --
              
              
              --Cost
                  of RevenuesReimbursed
                  out-of-pocket expenses
              
              
              --
              
              
              2,743
              
              
              3,269
              
              
              --
              
              
              --License
              
              
              54
              
              
              54
              
              
              32
              
              
              --
              
              
              --54
              
              
              2,797
              
              
              3,301Gross
                  Margin
              
              
              400
              
              
              400
              
              
              153
              
              
              --
              
              
              --Research
                  and developmentResearch
                  and development costs
              
              
              10,229
              
              
              7,313
              
              
              11,985
              
              
              14,022
              
              
              13,231Less
                  participations
              
              
              --
              
              
              --
              
              
              --
              
              
              3,229
              
              
              7510,229
              
              
              7,313
              
              
              11,985
              
              
              10,793
              
              
              13,156In-process
                  research and development
              
              
              --
              
              
              1,783
              
              
              --
              
              
              --
              
              
              --General
                  and administrative
              
              
              5,576
              
              
              5,457
              
              
              4,134
              
              
              3,105
              
              
              3,638Business
                  development costs
              
              
              641
              
              
              227
              
              
              810
              
              
              664
              
              
              916Operating
                  loss
              
              
              (16,046
              )
              
              (14,380
              )
              
              (16,776
              )
              
              (14,562
              )
              
              (17,710
              )Other
                  income (expense)Financial
                  and other income, net
              
              
              1,141
              
              
              443
              
              
              352
              
              
              352
              
              
              597Taxes
                  on income
              
              
              (227
              )
              
              (78
              )
              
              (49
              )
              
              (78
              )
              
              (27
              )Loss
                  for the period
              
              $
              (15,132
              )
              $
              (14,015
              )
              $
              (16,473
              )
              $
              (14,288
              )
              $
              (17,140
              )Loss
                  per ordinary shareBasic
                  and diluted
              
              $
              (0.08
              )
              $
              (0.08
              )
              $
              (0.12
              )
              $
              (0.13
              )
              $
              (0.15
              )Weighted
                  average shares outstanding
              
              
              201,737,295
              
              
              170,123,003
              
              
              134,731,766
              
              
              111,712,916
              
              
              111,149,292
  **As
                  of December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  thousands)****Balance
                  Sheet Data:**Cash,
                  cash equivalents, bank deposits andtrading
                  and marketable securities
              
              $
              25,347
              
              $
              13,360
              
              $
              22,924
              
              $
              22,262
              
              $
              35,706Working
                  capital
              
              
              22,694
              
              
              11,385
              
              
              20,240
              
              
              19,967
              
              
              33,396Total
                  assets
              
              
              26,900
              
              
              15,151
              
              
              25,624
              
              
              24,853
              
              
              38,423Long-term
                  obligations
              
              
              738
              
              
              1,493
              
              
              2,489
              
              
              1,244
              
              
              1,017Total
                  shareholders’ equity
              
              
              22,760
              
              
              11,252
              
              
              19,602
              
              
              20,608
              
              
              34,830
  
 34
  **Overview**
  We
        are a
        biopharmaceutical company engaged in the acquisition, development and
        commercialization of pharmaceutical products for the treatment of unmet medical
        needs, particularly the treatment of neuropathic pain and hepatitis C. To
        date,
        we have not received approval for the sale of any of our drug candidates
        in any
        market and, therefore, have not generated any commercial revenues from the
        sales
        of our drug candidates.
 
 We
        were
        established as a corporation under the laws of the State of Israel in 1993,
        and
        commenced operations to use and commercialize technology developed at the
        Weizmann Institute, in Rehovot, Israel. Since commencing operations, our
        activities have been primarily devoted to developing our technologies and
        drug
        candidates, acquiring pre-clinical and clinical-stage compounds, raising
        capital, purchasing assets for our facilities, and recruiting personnel.
        We are
        a development stage company and have no product sales to date. Our major
        sources
        of working capital have been proceeds from various private placements of
        equity
        securities, option and warrant exercises, from our initial public offering
        and
        from our placing and open offer transaction.
  We
        have
        incurred negative cash flow from operations each year since our inception
        and we
        anticipate incurring negative cash flows from operating activities for the
        foreseeable future. We have spent, and expect to continue to spend, substantial
        amounts in connection with implementing our business strategy, including
        our
        planned product development efforts, our clinical trials and potential
        in-licensing and acquisition opportunities.
  Our
        revenues currently consist of license fees and reimbursed out of pocket expenses
        from Cubist. We recognize the license fee revenues from our agreement with
        Cubist ratably over the expected life of the arrangement or until regulatory
        approval is obtained, with un-amortized amounts recorded as deferred revenues.
        We also recognize revenue related to reimbursed out of pocket expenses at
        the
        time that that we provide development services to Cubist. In July 2006, Cubist
        announced that it had decided not to make any further investment in the HepeX-B
        program while it evaluates its strategic options for HepeX-B, including the
        sub-licensing of the product. See “Item 4. Information on the Company - Business
        Overview - Products Under Development - HepeX-B.”
  Our
        cost
        of revenues consist of costs associated with the Cubist program for HepeX-B
        which consist primarily of salaries and related personnel costs, fees paid
        to
        consultants and other third-parties for clinical and laboratory development,
        facilities-related and other expenses relating to the design, development,
        testing, and enhancement of our product candidate out-licensed to Cubist.
        In
        addition, we recognize license fee expenses associated with our agreement
        with
        Yeda proportional to our license fee agreement with Cubist, with un-amortized
        amounts recorded as deferred expenses.
  Our
        research and development costs consist primarily of salaries and related
        personnel costs, fees paid to consultants and other third-parties for clinical
        and laboratory development, license and milestone fees, facilities-related
        and
        other expenses relating to the design, development, testing, and enhancement
        of
        our product candidates. We expense our research and development costs as
        they
        are incurred.
  Our
        participations consist primarily of grants received from the Israeli government
        in support of our research and development activities. These grants are
        recognized as a reduction of expense as the related costs are incurred. See
“-
        Research and Development, Patents and Licenses - Israeli Government Research
        and
        Development Grants,” below.
  Our
        general and administrative expenses consist primarily of salaries and related
        expenses for executive, finance and other administrative personnel, professional
        fees, director fees and other corporate expenses, including investor relations,
        and facilities related expenses. We expense our general and administrative
        expenses as they are incurred.
  Our
        business development costs consist primarily of salaries and related expenses
        for business development personnel, travel and professional fees. Our business
        development activities are related to partnering activities for our drug
        programs, seeking new development collaborations and in-licensing opportunities.
        We expense our business development expenses as they are incurred.
  Our
        results of operations include non-cash compensation expense as a result of
        the
        grants of stock options. Compensation expense for awards of options granted
        to
        employees and directors represents the fair value of the award recorded over
        the
        respective vesting periods of the individual stock options. The expense is
        included in the respective categories of expense in the statement of operations.
        We experienced a significant increase in non-cash compensation in the fiscal
        year ended December 31, 2005, and continue to expect to incur significant
        non-cash compensation as a result of adopting Statement of Financial Accounting
        Standards No. 123, “Share Based Payment,” or SFAS 123R, on January 1,
        2005.
   35
  For
        awards of options and warrants to consultants and other third-parties,
        compensation expense is determined at the “measurement date.” The expense is
        recognized over the vesting period for the award. Until the measurement date
        is
        reached, the total amount of compensation expense remains uncertain. We record
        compensation expense based on the fair value of the award at the reporting
        date.
        These awards are then revalued, or the total compensation is recalculated
        based
        on the then current fair value, at each subsequent reporting date.
  Our
        ongoing clinical trials will be lengthy and expensive. Even if these trials
        show
        that our drug candidates are effective in treating certain indications, there
        is
        no guarantee that we will be able to record commercial sales of any of our
        product candidates in the near future. In addition, we expect losses to continue
        as we continue to fund development of our drug candidates. As we continue
        our
        development efforts, we may enter into additional third-party collaborative
        agreements and may incur additional expenses, such as licensing fees and
        milestone payments. As a result, our periodical results may fluctuate and
        a
        period-by-period comparison of our operating results may not be a meaningful
        indication of our future performance.
  **Results
        of Operations**
  ***Years
        Ended December 31, 2006 and 2005***
  *Revenues.* Revenues
        for the year ended December 31, 2006, decreased by $2,743,000 to $454,000,
        as
        compared to revenues of $3,197,000 for the year ended December 31, 2005.
        The
        decrease in revenues for the year ended December 31, 2006, was due to the
        absence of reimbursed out of pocket expenses from Cubist, pursuant to our
        agreement with Cubist, under which we transferred full responsibility for
        completing the development of HepeX-B to Cubist. We do not expect our revenues
        to have a material impact on our operating results during the next fiscal
        year.
  *Cost
        of Revenues* .
        Cost of
        revenues for the year ended December 31, 2006, decreased by $2,743,000 to
        $54,000, as compared to cost of revenues of $2,797,000, for the year ended
        December 31, 2005. The decrease in cost of revenues was due to the absence
        of
        development expenses for HepeX-B that were incurred pursuant to our licensing
        agreement with Cubist, as described above. We do not expect our cost of revenues
        to have a material impact on our operating results during the next fiscal
        year.
  *Research
        and Development Costs* .
        Research and development costs increased by $2,916,000 to $10,229,000 for
        the
        year ended December 31, 2006, as compared to $7,313,000 for the year ended
        December 31, 2005. The increase in research and development costs was due
        primarily to an increase of $3,413,000 in expenses related to the inclusion
        of a
        full year of DOS which was acquired from VivoQuest in September 2005 (see
“Item
        10. Additional Information -Material Contracts” and “Item 4. Information on the
        Company”), offset by a decrease of approximately $66,000 and $431,000 in
        expenses related to the XTL-6865 and XTL-2125 development and clinical programs,
        respectively. The decreased expenses associated with our clinical programs
        were
        due to the benefit in 2006 of cost reductions associated with our 2005
        restructuring (see “2005 Restructuring,” below).
  We
        expect
        our research and development costs to increase in 2007 due to the recent
        in-licensing and planned clinical development of Bicifadine (see “Item 10.
        Additional Information -Material Contracts” and “Item 4. Information on the
        Company”), and also due to the continued development of our existing programs.
  *In-Process
        Research and Development* .
        We did
        not record a charge for the year ended December 31, 2006. For the year ended
        December 31, 2005, we incurred a charge of $1,783,000 for the estimate of
        the
        portion of the VivoQuest transaction purchase price allocated to in-process
        research and development.
  *General
        and Administrative Expenses* .
        General
        and administrative expenses increased by $119,000 to $5,576,000 for the year
        ended December 31, 2006, as compared to expenses of $5,457,000 for the year
        ended December 31, 2005. The increase in general and administrative expenses
        was
        due primarily to increased expenses associated with the hiring of our Chief
        Executive Officer in 2006 and with being a US public company, offset by a
        decrease of $649,000 in non-cash compensation costs, related to option grants.
        In 2005 a market capitalization-based milestone, associated with certain
        grants
        made to our Chairman and to one of our non-executive directors in 2005 (see
        “Item 6. Directors, Senior Management and Employees - Employment Agreements”)
        was achieved; in 2006, no such milestone was achieved, resulting in a decrease
        in non-cash compensation expense in 2006 as compared to 2005.
  Excluding
        non-cash compensation costs, we do not expect any change in the level of
        our
        general and administrative costs during 2007.
   36
  *Business
        Development Costs* .
        Business development costs increased by approximately $414,000 to $641,000
        for
        the year ended December 31, 2006, as compared to expenses of $227,000 for
        the
        year ended December 31, 2005. The increase in business developments costs
        was
        due primarily to increased expenses associated with our acquisition and
        in-licensing program, which included legal and due diligence expenses associated
        with the recent in-licensing of Bicifadine.
  We
        expect
        our expenses to increase significantly during 2007 as a result of the expense
        associated with issuance the stock appreciation rights that were issued as
        a
        transaction advisory fee in connection with the recent in-licensing of
        Bicifadine (see “Item 10. Additional Information -Material Contracts” and “Item
        4. Information on the Company”).
  *Financial
        and Other Income* .
        Financial and other income for the year ended December 31, 2006, increased
        by
        $698,000 to $1,141,000, as compared to financial income of $443,000 for the
        year
        ended December 31, 2005. The increase in financial and other income was due
        primarily to a higher level of invested funds due to the completion of the
        private placement that closed in May 2006, as well as due to the general
        increase in short-term market interest rates when compared to the comparable
        period last year.
  *Income
        Taxes* .
        Income
        tax expense increased by $149,000 to $227,000 for the year ended December
        31,
        2006, as compared to expenses of $78,000 for year ended December 31, 2005.
        Our
        income tax expense is attributable to taxable income from the continuing
        operations of our subsidiary in the US. This income is eliminated upon
        consolidation of our financial statements.
  ***Years
        Ended December 31, 2005 and 2004***
  *Revenues.* Revenues
        for the year ended December 31, 2005, decreased by $257,000 to $3,197,000,
        as
        compared to revenues of $3,454,000 for the year ended December 31, 2004.
        The
        decrease in revenues for the year ended December 31, 2005, was due to a $526,000
        decrease associated with the reimbursement for development expenses for HepeX-B
        that were incurred pursuant to our licensing agreement with Cubist, partially
        offset by an increase of $269,000 in licensing revenues pursuant to our
        agreement with Cubist.
  *Cost
        of Revenues* .
        Cost of
        revenues for the year ended December 31, 2005, decreased by $504,000 to
        $2,797,000, as compared to cost of revenues of $3,301,000, for the year ended
        December 31, 2004. The decrease in cost of revenues was due to a $526,000
        decrease in development expenses for HepeX-B that were incurred pursuant
        to our
        licensing agreement with Cubist, partially offset by a $22,000 increase in
        licensing expense pursuant to our agreement with Yeda.
  *Research
        and Development Costs* .
        Research and development costs decreased by $4,672,000 to $7,313,000 for
        the
        year ended December 31, 2005, as compared to $11,985,000 for the year ended
        December 31, 2004. The decrease in research and development costs was due
        primarily to the absence of approximately $3,301,000 in expenses related
        to the
        development and clinical program of HepeX-B, due to the agreement with Cubist
        and the subsequent inclusion of development costs related to HepeX-B in Cost
        of
        Revenues above and a decrease of approximately $2,746,000 in expenses related
        to
        the XTL-6865 development and clinical program. This decrease was partially
        offset by an approximate $135,000 increase in expenses associated with XTL-2125
        and an increase of $1,240,000 in expenses related to the inclusion of DOS
        from
        September 2005 following the completion of the VivoQuest transaction (see
“Item
        10. Additional Information - Material Contracts”).
  *In-Process
        Research and Development.* For the
        year ended December 31, 2005, we incurred a charge of $1,783,000 for the
        estimate of the portion of the VivoQuest transaction purchase price allocated
        to
        in-process research and development.
  *General
        and Administrative Expenses* .
        General
        and administrative expenses increased by $1,323,000 to $5,457,000 for the
        year
        ended December 31, 2005, as compared to expenses of $4,134,000 for the year
        ended December 31, 2004. The increase in general and administrative expenses
        was
        due primarily to an increase in non-cash compensation costs of $2,639,000,
        primarily related to the grant of options to certain of our directors and
        the
        application of SFAS 123R, offset by a decrease in expenses following our
        2005
        restructuring.
  *Business
        Development Costs* .
        Business development costs decreased by approximately $583,000 to $227,000
        for
        the year ended December 31, 2005, as compared to expenses of $810,000 for
        the
        year ended December 31, 2004. The decrease in business developments costs
        was
        due primarily to reduced compensation costs and reduced professional fees.
   37
  *Financial
        and Other Income* .
        Financial and other income for the year ended December 31, 2005, increased
        by
        $91,000 to $443,000, as compared to financial and other income of $352,000
        for
        the year ended December 31, 2004. The increase in financial and other income
        was
        due primarily to increased interest income due to the general increase in
        short-term market interest rates when compared to the comparable period last
        year.
  *Income
        Taxes* .
        Income
        tax expense increased by $29,000 to $78,000 for the year ended December 31,
        2005, as compared to expenses of $49,000 for year ended December 31, 2004.
        Our
        income tax expense is attributable to taxable income from the continuing
        operations of our subsidiary in the US. This income is eliminated upon
        consolidation of our financial statements.
  ***2005
        Restructuring***
  In
        2005,
        we implemented a restructuring plan designed to focus our resources on the
        development of our lead programs, with the goal of moving these programs
        through
        to clinical proof of concept. The 2005 restructuring included a 32 person
        reduction in our workforce, 31 of whom were in research and development and
        one
        of whom was in general and administrative. As part of the 2005 restructuring,
        we
        took a charge in 2005 of $168,000, relating to employee dismissal costs,
        $163,000 of which was included in research and development costs and $5,000
        of
        which was included in general and administrative expenses. The 2005
        Restructuring was completed in early 2006.
 
 As
        of
        December 31, 2006, 32 employees have left under the 2005 restructuring plan
        and
        approximately $168,000 of dismissal costs were paid. As of December 31, 2006
        and
        2005, approximately $0 and $21,000, respectively in employee dismissal
        obligations were included in accounts payable and accrued expenses.
 
 In
        December 2005, as a result of our restructuring, and in accordance with the
        provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of
        Long-Lived Assets,” or SFAS 144, we reviewed the carrying value of certain lab
        equipment assets, and recorded an impairment charge in research and development
        costs in an amount of $26,000 in 2005.
   **Critical
        Accounting Policies**
  The
        discussion and analysis of our financial condition and results of operations
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with US GAAP. The preparation of these financial statements requires
        us to make estimates and judgments that affect the reported amount of assets
        and
        liabilities and related disclosure of contingent assets and liabilities at
        the
        date of our financial statements and the reported amounts of revenues and
        expenses during the applicable period. Actual results may differ from these
        estimates under different assumptions or conditions.
  We
        define
        critical accounting policies as those that are reflective of significant
        judgments and uncertainties and which may potentially result in materially
        different results under different assumptions and conditions. In applying
        these
        critical accounting policies, our management uses its judgment to determine
        the
        appropriate assumptions to be used in making certain estimates. These estimates
        are subject to an inherent degree of uncertainty. Our critical accounting
        policies include the following:
  *Revenue
        Recognition.* We
        recognize the revenue from our licensing agreement with Cubist under the
        provisions of EITF 00-21 entitled “Revenue Arrangements with Multiple
        Deliverables” and SAB 104 entitled “Revenue Recognition.” Under those
        pronouncements, companies are required to allocate revenues from
        multiple-element arrangements to the different elements based on sufficient
        objective and reliable evidence of fair value. Since we have not been able
        to
        determine the fair value of each unit of accounting, the Cubist agreement
        was
        accounted for as one unit of accounting, after failing the separation criteria.
        We, therefore, recognize revenue on the Cubist agreement ratably over the
        life
        of the arrangement. If actual future results vary, we may need to adjust
        our
        estimates, which could have an impact on the timing and amount of revenue
        to be
        recognized.
  *Stock
        Compensation* .
        We have
        granted options to employees, directors and consultants, as well as warrants
        to
        other third parties. Statement of Financial Accounting Standards, or SFAS,
        No.
        123R “Share - Based Payment” (“SFAS 123R”) addresses the accounting for
        share-based payment transactions in which a company obtains employee services
        in
        exchange for (a) equity instruments of a company or (b) liabilities that
        are
        based on the fair value of a company’s equity instruments or that may be settled
        by the issuance of such equity instruments.
   38
  SFAS
        123R
        eliminates the ability to account for employee share-based payment transactions
        using Accounting Principles Board Opinion No. 25 - “Accounting for Stock Issued
        to Employees,” or APB 25, and requires instead that such transactions be
        accounted for using the grant-date fair value based method. SFAS 123R applies
        to
        all awards granted or modified after the effective date of the standard.
        In
        addition, compensation costs for the unvested portion of previously granted
        awards that remain outstanding on the effective date shall be recognized
        on or
        after the effective date, as the related services are rendered, based on
        the
        awards’ grant-date fair value as previously calculated for the pro-forma
        disclosure under SFAS No. 123 “Accounting for Stock-Based Compensation,” or SFAS
        123.
  Prior
        to
        January 1, 2005, we accounted for employee stock-based compensation under
        the
        intrinsic value model in accordance with APB 25 and related interpretations.
        We
        implemented early adoption of SFAS 123R, as of January 1, 2005, using the
        modified prospective application transition method, as permitted by SFAS
        123R.
        Under such transition method, our financial statements for periods prior
        to the
        effective date of SFAS 123R (January 1, 2005) have not been restated. As
        a
        result of the early adoption, we reduced the deferred share-based compensation
        against the additional paid in capital.
  The
        fair
        value of stock
        options granted
        with service conditions was determined using the Black-Scholes valuation
        model.
        Such value is recognized as an expense over the service period, net of estimated
        forfeitures, using the straight-line method under SFAS 123R. The fair value
        of
        stock options granted with market conditions was determined using a lattice
        model that incorporated a Monte Carlo Simulation method. Such value is
        recognized as an expense using the graded method under SFAS123R.
  We
        account for equity instruments issued to third party service providers
        (non-employees) in accordance with the fair value method prescribed by SFAS123,
        and as of January 1, 2005, by SFAS 123R, and the provisions Emerging Issues
        Task
        Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
        Other Than Employees for Acquiring, or in Conjunction with Selling Goods
        or
        Services,” or EITF 96-18.
  The
        estimation of stock awards that will ultimately vest requires significant
        judgment, and to the extent actual results or updated estimates differ from
        our
        current estimates, such amounts will be recorded as a cumulative adjustment
        in
        the period those estimates are revised. We consider many factors when estimating
        expected forfeitures, including types of awards, employee class, and historical
        experience. Actual results, and future changes in estimates, may differ
        substantially from our current estimates.
  *Accounting
        For Income Taxes* .
        In
        preparing our consolidated financial statements, we are required to estimate
        our
        income taxes in each of the jurisdictions in which we operate. This process
        requires management to estimate our actual current tax exposure and assess
        temporary differences resulting from differing treatment of items for tax
        and
        accounting purposes. These differences result in deferred tax assets and
        liabilities. Deferred taxes are determined utilizing the asset and liability
        method based on the estimated future tax effects of differences between the
        financial accounting and tax bases of assets and liabilities under the
        applicable tax laws. Deferred tax balances are computed using the tax rates
        expected to be in effect when these differences reversed. Valuation allowances
        are provided if, based upon the weight of available evidence, it is more
        likely
        than not that some or all of the deferred tax assets will not be realized.
        As a
        result of our “approved enterprise” status, our current tax rate in Israel is
        0%, and therefore no deferred tax assets have been included in these financial
        statements in respect of carryforward losses. Our current income tax expense
        results from taxes imposed on our US-based subsidiary, and t he
        deferred tax assets included in these financial statements result
        from changes in respect of temporary differences between the financial reporting
        basis and the tax basis in
        our
        US-based subsidiary.
  Paragraph
        9(f) of SFAS No. 109, “Accounting for Income Taxes,” or SFAS 109, prohibits the
        recognition of deferred tax liabilities or assets that arise from differences
        between the financial reporting and tax bases of assets and liabilities that
        are
        measured from the local currency into dollars using historical exchange rates
        and that result from changes in exchange rates or indexing for tax purposes.
        Consequently, the above-mentioned differences were not reflected in the
        computation of deferred tax assets and liabilities.
  *Impairment* .
        Pursuant to SFAS 144, long-lived assets, including certain intangible assets,
        to
        be held and used by an entity are reviewed for impairment whenever events
        or
        changes in circumstances indicate that the carrying amount of the assets
        may not
        be recoverable. Under SFAS 144, if the sum of the estimated future cash flows
        (undiscounted and without interest charges) of the long-lived assets held
        and
        used is less than the carrying amount of such assets, an impairment loss
        would
        be recognized, and the assets are written down to their estimated fair values.
        Assets “held for sale” are reported at the lower of their carrying amount or
        fair value less estimated costs to sell.
  *Accounting
        Related to the Valuation of In-Process Research and Development.* In
        accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS
        142, we recorded a charge of $1,783,000 in 2005 for the amount allocated
        to
        in-process research and development in the VivoQuest transaction. In-process
        research and development costs represent the relative fair value of purchased
        in-process research and development costs that, as of the transaction date,
        have
        not reached technological feasibility and have no proven alternative future
        use.
        As VivoQuest is a development stage enterprise that had not yet commenced
        its
        planned principal operations, we accounted for the transaction as an acquisition
        of assets pursuant to the provisions of SFAS 142. Accordingly, the purchase
        price was allocated to the individual assets acquired, based on their relative
        fair values, and no goodwill was recorded.
   39
 
 The
        fair
        value of the in-process research and development acquired was estimated by
        management with the assistance of an independent third-party appraiser, using
        the “income approach.” In the income approach, fair value is dependent on the
        present value of future economic benefits to be derived from ownership of
        an
        asset. Central to this approach is an analysis of the earnings potential
        represented by an asset and of the underlying risks associated with obtaining
        those earnings. Fair value is calculated by discounting future net cash flows
        available for distribution to their present value at a rate of return, which
        reflects the time value of money and business risk. In order to apply this
        approach, the expected cash flow approach was used. Expected cash flow is
        measured as the sum of the average, or mean, probability-weighted amounts
        in a
        range of estimated cash flows. The expected cash flow approach focuses on
        the
        amount and timing of estimated cash flows and their relative probability
        of
        occurrence under different scenarios. The probability weighted expected cash
        flow estimates are discounted to their present value using the risk free
        rate of
        return, since the business risk is incorporated in adjusting the projected
        cash
        flows to the probabilities for each scenario. The valuation was based on
        information that was available to us as of the transaction date and the
        expectations and assumptions deemed reasonable by our management. No assurance
        can be given, however, that the underlying assumptions or events associated
        with
        such assets will occur as projected.
  **Recently
        Issued Accounting Standards**
  *EITF
        06-03, “How Taxes Collected from Customers and Remitted to Governmental
        Authorities Should be Presented in the Income Statement (That Is, Gross versus
        Net Presentation).”* In June
        2006, the Emerging Issues Task Force, or EITF, reached a consensus on Issue
        No.
        06-03, “How Taxes Collected from Customers and Remitted to Governmental
        Authorities Should be Presented in the Income Statement (That Is, Gross versus
        Net Presentation)”. EITF 06-03 relates to any tax assessed by a governmental
        authority that is directly imposed on a revenue-producing transaction. EITF
        06-03 states that the presentation of the taxes, either on a gross or net
        basis,
        is an accounting policy decision that should be disclosed pursuant to Accounting
        Principles Board Opinion No. 22, “Disclosure of Accounting Policies,” if those
        amounts are significant. EITF 06-03 should be applied to financial reports
        for
        interim and annual reporting periods beginning after December 15, 2006 (January
        1, 2007 for us). We are currently evaluating the impact of this standard
        on our
        consolidated financial statements and disclosures.
  *FIN
        48, “Accounting for Uncertainty in Income Taxes.”* In July
        2006, the Financial Accounting Standards Board, or FASB, issued Interpretation
        No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, which clarifies
        the accounting for uncertainty in income taxes recognized in the financial
        statements in accordance with SFAS 109. FIN 48 prescribes a two-step process
        to
        determine the amount of tax benefit to be recognized. First, the tax position
        must be evaluated to determine the likelihood that it will be sustained upon
        examination. If the tax position is deemed “more-likely-than-not” to be
        sustained, the tax position is then measured to determine the amount of benefit
        to recognize in the financial statements. The tax position is measured at
        the
        largest amount of benefit that has a greater than 50 percent likelihood of
        being
        realized upon ultimate settlement. FIN 48 is effective for fiscal years
        beginning after December 15, 2006 (January 1, 2007 for us). We are currently
        evaluating the impact of this standard on our consolidated financial statements
        and disclosures.
 
 *SFAS
        157, “Fair Value Measurements.”* The FASB
        has issued SFAS No. 157, Fair Value Measurements, or SFAS 157, which provides
        guidance for using fair value to measure assets and liabilities. The standard
        also responds to investors' requests for more information about (1) the extent
        to which companies measure assets and liabilities at fair value, (2) the
        information used to measure fair value, and (3) the effect that fair value
        measurements have on earnings. SFAS 157 will apply whenever another standard
        requires (or permits) assets or liabilities to be measured at fair value.
        The
        standard does not expand the use of fair value to any new circumstances.
        SFAS
        157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007 (January 1, 2008 for us), and interim periods within
        those fiscal years. We are currently evaluating the potential impact of the
        new
        standard on our consolidated financial statements and disclosures.
 
 *SAB
        108, “Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements.”* In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements, or SAB 108. SAB 108 expresses the SEC’s view
        regarding the process of quantifying financial statement misstatements. The
        bulletin was effective as of the year beginning January 1, 2006. The
        implementation of this bulletin had no impact on our consolidated financial
        statements and disclosures.
   40
 
 *SFAS
        No. 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities.”* In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities,” or SFAS 159. SFAS 159 permits
        entities to choose to measure many financial assets and financial liabilities
        at
        fair value. Unrealized gains and losses on items for which the fair value
        option
        has been elected are reported in earnings. As applicable to us, this statement
        will be effective as of the year beginning January 1, 2008. We are currently
        evaluating the impact that the adoption of SFAS 159 would have on our
        consolidated financial statements and disclosures.
 
 **Impact
        of Inflation and Currency Fluctuations**
  We
        generate all of our revenues and hold most of our cash, cash equivalents
        and
        bank deposits in US dollars. While a substantial amount of our operating
        expenses are in US dollars, we incur a portion of our expenses in New Israeli
        Shekels. In addition, we also pay for some of our services and supplies in
        the
        local currencies of our suppliers. As a result, we are exposed to the risk
        that
        the US dollar will be devalued against the New Israeli Shekel or other
        currencies, and as result our financial results could be harmed if we are
        unable
        to guard against currency fluctuations in Israel or other countries in which
        services and supplies are obtained in the future. Accordingly, we may enter
        into
        currency hedging transactions to decrease the risk of financial exposure
        from
        fluctuations in the exchange rates of currencies. These measures, however,
        may
        not adequately protect us from the adverse effects of inflation in Israel.
        In
        addition, we are exposed to the risk that the rate of inflation in Israel
        will
        exceed the rate of devaluation of the New Israeli Shekel in relation to the
        dollar or that the timing of any devaluation may lag behind inflation in
        Israel.
        To date, our business has not been materially adversely affected by changes
        in
        the US dollar exchange rate or by effects of inflation in Israel.
  **Governmental
        Economic, Fiscal, Monetary or Political Policies that Materially Affected
        or
        Could Materially Affect Our Operations**
  Israeli
        companies are generally subject to income tax at the corporate tax rate of
        29%
        in 2007 (31% in 2006), which will be reduced as follows: 2008 - 27%, 2009-26%,
        2010 and after - 25%. However, we have been granted approved enterprise status,
        and we are, therefore, eligible for a reduced corporate tax under the Law
        for
        the Encouragement of Capital Investments, 1959. Subject to compliance with
        applicable requirements, the portion of our undistributed profits derived
        from
        the approved enterprise program will be tax-exempt for a period of two years
        commencing in the first year in which we generate taxable income and will
        be
        subject, for a period of five to eight years, to a reduced corporate tax
        of
        between 10% and 25%, depending on the percentage of non-Israeli investors
        holding our ordinary shares. The period of tax benefits with respect to our
        approved enterprise program has not yet commenced because we have yet to
        realize
        taxable income. However, this benefit period cannot extend beyond 12 years
        from
        the year of commencement of operations or 14 years from the year in which
        approval was granted, whichever is earlier. Since we are currently over 25%
        foreign owned, we are entitled to a reduced tax rate of 25%. If we subsequently
        pay a dividend out of income derived from the “approved enterprise” during the
        tax exemption period, it will be subject to withholding tax on the amount
        distributed, including any company tax on these amounts from which it was
        exempt
        , at the rate which would have been applicable had such income not been exempt
        (25%). These benefits may not be applied to reduce the US federal tax rate
        for
        any income derived by our US subsidiary. To maintain our eligibility for
        these
        tax benefits, we must meet certain reporting requirements and certain conditions
        that we have either obligated ourselves to meet or that are included in the
        Certificate of Approval from the Investment Center of the Ministry of Industry
        and Trade of the State of Israel. We may, in the foreseeable future, cease
        to be
        entitled to the aforesaid tax benefits, as we may not in the future be in
        compliance with the Certificate of Approval from the Investment Center of
        the
        Ministry of Industry and Trade of the State of Israel due to a reduction
        in
        research and development activity in Israel. There can be no assurance that
        such
        tax benefits will continue in the future at their current levels or otherwise.
  As
        of
        December 31, 2006, XTL Biopharmaceuticals Ltd. did not have any taxable
        income. As of December 31, 2006, our net operating loss carryforwards for
        Israeli tax purposes amounted to approximately $110.6 million. Under Israeli
        law, these net-operating losses may be carried forward indefinitely and offset
        against future taxable income, including capital gains from the sale of assets
        used in the business, with no expiration date.
  For
        a
        description of Israeli government policies that affect our research and
        development expenses, and the financing of our research and development,
        see
“-Research and Development, Patents and Licenses - Israeli Government Research
        and Development Programs,” below.
   41
  **Liquidity
        and Capital Resources**
  We
        have
        financed our operations from inception primarily through our initial public
        offering, various private placement transactions, our August 2004 placing
        and
        open offer transaction and option and warrant exercises. As of December 31,
        2006, we had received net proceeds of $45.7 million from our initial public
        offering, net proceeds of $15.4 million from the 2004 placing and open offer
        transaction, net proceeds of approximately $67.6 million from various private
        placement transactions, including the March 2006 private placement that closed
        in May 2006, and proceeds of $2.1 million from the exercise of options and
        warrants.
  As
        of
        December 31, 2006, we had $25.2 million in cash, cash equivalents, and
        short-term bank deposits, an increase of $11.8 million from December 31,
        2005.
        Cash used in operating activities for the year ended December 31, 2006, was
        $12.6 million, as compared to $10.5 million for the year ended December 31,
        2005. This increase in cash used in operating activities was due primarily
        to
        increased expenditures associated with the execution of our business plan.
        For
        the year ended December 31, 2006, net cash used in investing activities of
        $20.8
        million, as compared to $9.5 million in net cash provided from investing
        activities, was primarily the result of investment of a portion of the proceeds
        of our private placement that closed in May 2006 in short-term bank deposits.
        For the year ended December 31, 2006, net cash provided by financing activities
        of $24.5 million, as compared to $1.5 million for the year ended December
        31, 2005, was the result of our $24.4 million private placement that closed
        in
        May 2006, and $0.1 million of proceeds from the exercise of stock options
        in
        2006.
  Our
        cash
        and cash equivalents, as of December 31, 2006, were invested in highly liquid
        investments such as cash and short-term bank deposits. As of December 31,
        2006,
        we are unaware of any known trends or any known demands, commitments, events,
        or
        uncertainties that will, or that are reasonably likely to, result in a material
        increase or decrease in our required liquidity. We expect that our liquidity
        needs during 2007 will continue to be funded from existing cash, cash
        equivalents, and short-term bank deposits.
  Based
        on
        our current business plan, we believe that we have sufficient resources to
        fund
        our operations for approximately the next 12 months. We
        do
        believe, however, that we will seek additional capital during the next 12
        months
        through public or private equity offerings, debt financings and/or
        collaborative, strategic alliance and licensing arrangements. We have
        made no determination at this time as to the amount, method or timing of
        any
        such financing. Such
        additional financing may not be available when we need it .
  Our
        forecast of the period of time through which our cash, cash equivalents and
        short-term investments will be adequate to support our operations is a
        forward-looking statement that involves risks and uncertainties. The actual
        amount of funds we will need to operate is subject to many factors, some
        of
        which are beyond our control. These factors include the following:
  ·
              the
                  timing of expenses associated with manufacturing and product development
                  of the proprietary drug candidates within our portfolio and those
                  that may
                  be in-licensed, partnered or acquired;·
              our
                  ability to achieve our milestones under licensing
                  arrangements;·
              the
                  timing of the in-licensing, partnering and acquisition of new product
                  opportunities; and·
              the
                  costs involved in prosecuting and enforcing patent claims and other
                  intellectual property rights.
  We
        have
        based our estimate on assumptions that may prove to be inaccurate. We may
        need
        to obtain additional funds sooner or in greater amounts than we currently
        anticipate. Potential sources of financing may be obtained through strategic
        relationships, public or private sales of our equity or debt securities,
        and
        other sources. We may seek to access the public or private equity markets
        when
        conditions are favorable due to our long-term capital requirements. We do
        not
        have any committed sources of financing at this time, and it is uncertain
        whether additional funding will be available when we need it on terms that
        will
        be acceptable to us, or at all. If we raise funds by selling additional shares
        of our ordinary shares or other securities convertible into shares of our
        ordinary shares, the ownership interest of our existing shareholders will
        be
        diluted. If we are not able to obtain financing when needed, we may be unable
        to
        carry out our business plan. As a result, we may have to significantly limit
        our
        operations, and our business, financial condition and results of operations
        would be materially harmed. See “Item 3. Key Information - Risk Factors - Risks
        Related to Our Financial Condition.”
  **Off-Balance
        Sheet Arrangements**
  We
        have
        not entered into any transactions with unconsolidated entities whereby we
        have
        financial guarantees, subordinated retained interests, derivative instruments
        or
        other contingent arrangements that expose us to material continuing risks,
        contingent liabilities, or any other obligations under a variable interest
        in an
        unconsolidated entity that provides us with financing, liquidity, market
        risk or
        credit risk support.
   42
  **Obligations
        and Commitments**
  As
        of
        December 31, 2006, we had known contractual obligations, commitments and
        contingencies of $1,919,000. Of this amount, $469,000 relates to research
        and
        development agreements, of which $441,000 is due within the next year, with
        the
        remaining balance due as per the schedule below. The additional $1,450,000
        relates to our operating lease obligations, of which $584,000 is due within
        the
        next year, with the remaining balance due as per the schedule
        below.
 
 **Payment
                  due by period****Contractual
                  obligations**
              
              **Total**
              
              **Less
                  than**
                **1
                  year**
              
              **1-3**
                **years**
              
              **3-5**
                **years**
              
              **More
                  than**
                **5
                  years**Research
                  & development agreements
              
              $
              469,000
              
              $
              441,000
              
              $
              28,000
              
              $
              --
              
              $
              --Operating
                  leases
              
              
              1,450,000
              
              
              584,000
              
              
              866,000
              
              
              --
              
              
              --**Total**
              
              $
              1,919,000
              
              $
              1,025,000
              
              $
              894,000
              
              $
              --
              
              $
              --
 
 Additionally,
        we have undertaken to make contingent milestone payments to certain licensors
        of
        up to approximately $48.5 million over the life of the licenses, of which
        approximately $34.0 million will be due upon or following regulatory approval
        of
        the drugs. In some cases, these contingent payments will only be triggered
        upon
        receipt of royalties on sales of related products and in certain cases will
        partially offset royalties we would otherwise owe those licensors. See “Item 4.
        Information on the Company - Business Overview - Licensing Agreements and
        Collaborations” above.
 
 We
        also
        have a commitment to make contingent payments to the Office of the Chief
        Scientist of up to approximately $17.0 million, all of which is due from
        royalties of approximately 3%-5% from proceeds from net sales of products
        in the
        research and development of which the Israeli government participated in
        by way
        of grants, as discussed in the immediately following section.
 
 In
        addition, in January 2007, we signed an agreement with DOV to in-license
        the
        worldwide rights for Bicifadine. In accordance with the terms of the license
        agreement, we made an up-front payment of $7.5 million in cash. In addition,
        we
        will make milestone payments of up to $126.5 million, in cash and/or ordinary
        shares over the life of the license, of which up to $115 million will be
        due
        upon approval of the product. We are also obligated to pay royalties to DOV
        on
        net sales of the product. In addition, we have committed to pay a third party
        a
        transaction advisory fee in the form of stock appreciation rights in an amount
        equivalent to 3% of our fully diluted ordinary shares at the close of the
        transaction, vesting after one year of the close of the transaction, and
        7% of
        our fully diluted ordinary shares at the close of the transaction, vesting
        following the first to occur of successful Phase III clinical trial results
        or
        our acquisition. Payment of the stock appreciation rights by XTL Development
        can
        be satisfied, at our discretion, in cash and/or by issuance of our ordinary
        shares. See “Item 10. Additional Information - Material Contracts”.
 
 
 **Research
        and Development, Patents and Licenses**
 
 Research
        and development costs consist primarily of salaries and related personnel
        costs,
        fees paid to consultants and outside service providers for clinical and
        laboratory development, facilities-related and other expenses relating to
        the
        design, development, testing, and enhancement of our product candidates and
        technologies.
 
 The
        following table sets forth the research and development costs for each of
        our
        clinical-stage projects, our pre-clinical activities, and for all other research
        and development programs for the periods presented. Whether or not and how
        quickly we complete development of our clinical stage projects is dependent
        on a
        variety of factors, including the rate at which we are able to engage clinical
        trial sites and the rate of enrollment of patients. As such, the costs
        associated with the development of our drug candidates may change significantly.
        For a further discussion of factors that may affect our research and
        development, see “Item 3. Risk Factors - Risks Related to Our Business,” and
“Item 4.Information on the Company - Business Overview - Products Under
        Development” above.
   43
 
 **Years
                  ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **Cumulative,****as
                  of**
                **December
                  31, 2006****XTL-2125**Research
                  and development costs
              
              $
              2,936,000
              
              $
              3,367,000
              
              $
              3,232,000
              
              $
              12,301,000Less
                  participations
              
              
              --
              
              
              --
              
              
              --
              
              
              (168,000
              )2,936,000
              
              
              3,367,000
              
              
              3,232,000
              
              
              12,133,000**XTL-6865**Research
                  and development costs
              
              
              2,640,000
              
              
              2,706,000
              
              
              5,452,000
              
              
              24,259,000Less
                  participations
              
              
              --
              
              
              --
              
              
              --
              
              
              (2,540,000
              )2,640,000
              
              
              2,706,000
              
              
              5,452,000
              
              
              21,719,000**HepeX-B****1**Research
                  and development costs
              
              
              --
              
              
              2,743,000
              
              
              6,570,000
              
              
              26,985,000Less
                  participations
              
              
              --
              
              
              (2,743,000
              )
              
              (3,269,000
              )
              
              (10,173,000
              )--
              
              
              --
              
              
              3,301,000
              
              
              16,812,000**Other
                  research and development programs**2Research
                  and development costs
              
              
              4,653,000
              
              
              1,240,000
              
              
              --
              
              
              35,586,000Less
                  participations
              
              
              --
              
              
              --
              
              
              --
              
              
              (4,081,000
              )4,653,000
              
              
              1,240,000
              
              
              --
              
              
              31,505,000**Total
                  Research and development**Research
                  and development costs
              
              
              10,229,000
              
              
              10,056,000
              
              
              15,254,000
              
              
              99,131,000Less
                  participations
              
              
              --
              
              
              (2,743,000
              )
              
              (3,269,000
              )
              
              (16,962,000
              )10,229,000
              
              
              7,313,000
              
              
              11,985,000
              
              
              82,169,000
 ____________________
 1 Includes
        $6,012,000 in development costs for HepeX-B incurred from June 2004, the
        date we
        out-licensed HepeX-B to Cubist, for which we were subsequently reimbursed
        by
        Cubist pursuant to our license agreement. The amount was classified in revenues
        and cost of revenues in our statement of operations.
 2 Other
        research and development programs includes DOS from September 2005 pursuant
        to
        the completion of the VivoQuest transaction and also includes early stage
        discovery research activities that ceased in 2003.
 
 ***Israeli
        Government Research and Development Grants***
 
 In
        the
        past, we participated in programs offered by the Office of the Chief Scientist
        under the Industry, Trade and Labor Ministry of Israel that support research
        and
        development activities. We did not apply for, or receive, grants from the
        Office
        of the Chief Scientist for the years ended December 31, 2006, 2005 and
        2004.
 
 In
        the
        past, we received grants from the Office of the Chief Scientist for several
        projects. Under the terms of these grants, we will be required to pay a royalty
        ranging between 3% to 5% of the net sales of products developed from an Office
        of the Chief Scientist-funded project, beginning with the commencement of
        sales
        of such products and ending when 100% of the dollar value of the grant is
        repaid
        (100% plus LIBOR interest applicable to grants received on or after January
        1,
        1999). The royalty rate (between 3% and 5%) varies depending on the amount
        of
        years that lapse between receipt of the grant and its repayment by us. At
        the
        time grants were received, successful development of the related projects
        was
        not assured. In the case of failure of a project that was partly financed,
        as
        above, we are not obligated to pay any such royalties. At December 31, 2006,
        the
        maximum amount of the contingent liability in respect of royalties related
        to
        ongoing projects including interest and LIBOR rate was equal to $3,442,000.
  Israeli
        law requires that the manufacture of products developed with government grants
        be carried out in Israel, unless the Office of the Chief Scientist provides
        a
        special approval to the contrary. This approval, if provided, is generally
        conditioned on an increase in the total amount to be repaid to the Office
        of the
        Chief Scientist to between 120% and 300% of the amount of funds granted.
        The
        specific increase within this range would depend on the extent of the
        manufacturing to be conducted outside of Israel. Alternatively, the restriction
        on manufacturing outside of Israel will not apply to the extent that plans
        to
        manufacture were disclosed when filing the application for funding (and provided
        the application was approved based on the information disclosed in the
        application). In such circumstances, the Office of the Chief Scientist will
        take
        into account the proposal that Office of the Chief Scientist-funded projects
        will have an overseas manufacturing component. Under applicable Israeli law,
        Israeli government consent is required to transfer to Israeli third parties
        technologies developed under projects which the government funded. Transfer
        of
        Office of the Chief Scientist funded technologies outside of Israel is
        prohibited. Israeli law further specifies that both the transfer of know-how
        as
        well as the transfer of intellectual property rights in such know-how are
        subject to the same restrictions. These restrictions do not apply to exports
        from Israel or the sale of products developed with these
        technologies.
   44
  We
        have
        received the approval of the Office of the Chief Scientist for the transfer
        of
        manufacturing rights of our HepeX-B product under the terms of the agreement
        with Cubist. As a consequence, we are obligated to repay the grants received
        from the Office of the Chief Scientist for the financing of the HepeX-B product
        from any amounts received by us from Cubist due to the sales of HepeX-B product,
        at a percentage rate per annum calculated based on the aggregate amount of
        grants received from the Office of the Chief Scientist divided by all amounts
        invested by us in the research and development activities of HepeX-B, and
        up to
        an aggregate amount of 300% of the original amounts received for such project,
        including interest at the LIBOR rate. As of December 31, 2006, the aggregate
        amount received from the Office of the Chief Scientist for the financing
        of the
        HepeX-B project including interest and LIBOR rate was equal to $4,533,000.
        At
        December 31, 2006, the maximum amount of the contingent liability in respect
        of
        royalties related to HepeX-B product was $13,599,000.
  **Trend
        Information**
  Please
        see “Item 5. Operating and Financial Review and Prospects” and “Item 4.
        Information on the Company” for trend information.












45
  **ITEM
        6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES**
  **Directors
        and Senior Management**
  The
        following sets forth information with respect to our directors and executive
        officers as of February 28, 2007. Except as noted, the business address for
        each
        of the following is 750 Lexington Avenue, 20 th Floor,
        New York, NY 10022.
 
 Name
              Age
              PositionMichael
                  S. Weiss
              41
              Chairman
                  of the Board of DirectorsWilliam
                  J. Kennedy, Ph.D
              62
              Non
                  Executive DirectorIdo
                  Seltenreich(1)
              35
              Non
                  Executive and External DirectorVered
                  Shany, D.M.D(1)
              42
              Non
                  Executive and External DirectorBen
                  Zion Weiner, Ph.D(1)
              62
              Non
                  Executive DirectorRon
                  Bentsur
              41
              Chief
                  Executive OfficerBill
                  Kessler(1)
              41
              Director
                  of Finance
 
 (1) Business
        address is Kiryat Weizmann Science Park, Building 3, POB 370, Rehovot 76100,
        Israel.
  Michael
        S. Weiss has served as a director of our company since November 2004, and
        was
        appointed interim Chairman of the Board in March 2005 and Chairman of the
        Board
        in August 2005. Mr. Weiss is currently the Chairman and CEO of Keryx
        Biopharmaceuticals, Inc. (Nasdaq: KERX). Prior to that, from 1999-2002, Mr.
        Weiss was the founder, chairman and CEO of ACCESS Oncology, Inc., a private
        cancer company subsequently acquired by Keryx. Prior to that, Mr. Weiss was
        Senior Managing Director at Paramount Capital, Inc. From 1991-1993, Mr. Weiss
        was an attorney at Cravath, Swaine & Moore. Mr. Weiss received his B.A.,
        magna cum laude from State University of New York at Albany and was awarded
        a
        Juris Doctorate degree from Columbia University Law School.
  William
        J. Kennedy has served as a director of our company since February 2005. Dr.
        Kennedy retired as Vice President, Drug Regulatory Affairs, for Zeneca
        Pharmaceuticals Group in October 1999, and since that time has served as
        a
        regulatory consultant to the pharmaceutical industry. Prior to joining Zeneca
        Pharmaceuticals in 1986, Dr. Kennedy worked in regulatory affairs at G.D.
        Searle
& Co., Kalipharma Inc., Berlex Laboratories, Inc. and Pfizer
        Pharmaceuticals, Inc. Dr. Kennedy earned a B.S. from Siena College, a M.A.
        from
        Clark University and a Ph.D in Pharmacology from SUNY, Buffalo. Prior to
        joining
        the industry in 1977, he was an Associate Research Professor at Yale University
        conducting research in Molecular Biology and Recombinant DNA.
  Ido
        Seltenreich has served as a director of our company since August 2005. Mr.
        Seltenreich was the representative of Cinema City International N.V., or
        CCI, in
        the Czech Republic, for which he had served as the Managing and Financing
        Director from October 1999 to September 2006.  From July 2003 to
        August 2005, Mr. Seltenreich also served as a member of the Board of Directors
        of an intragroup company of CCI, a development company that operated in the
        Bulgarian market. Prior to that, from 1996-1999, Mr. Seltenreich worked at
        Luboshits Kasirer, a member of Ernst & Young. Mr. Seltenreich received his
        B.A. in economics and accounting from Haifa University and has an Israeli
        CPA
        license.
  Vered
        Shany has served as a director of our company since August 2005. Since September
        2006, Dr. Shany has served as the founder, Chairman and CEO of Lotus Bio
        Inc., a
        private medical diagnostics company. Since March 2002, Dr. Shany has managed
        Tashik Consultants, providing strategic consulting and corporate analysis
        for
        Israeli and international corporations and investment management in life
        sciences companies. Previously, Dr. Shany served as managing director of
        Up-Tech
        Ventures Ltd, a subsidiary of the Africa-Israel Investments Group from May
        2000
        to March 2002, as a member of the Board of Directors of the Weizmann Science
        Park Incubator from May 2000 to March 2002, and as vice president of marketing
        for Arad Technological Incubator from 1995 to 1999. Dr. Shany is currently
        an
        external director of Capital Point Ltd., since August 2006, and in Simigon
        Ltd.,
        since September 2006. Dr. Shany served as an external director in Lahak Mutual
        Funds of Bank Hapoalim, from October 2000 to September 2006, and in SFKT
        - Shrem
        Fudim Kellner Technologies, from September 2000 to September 2006. Dr. Shany
        holds an M.A. in business administration from Heriot - Watt University,
        Edinburgh Business School, and she completed her D.M.D., Doctor of Medical
        Dentistry, and her B.Med.Sc, from Hebrew University of Jerusalem.
  46
 
 Ben
        Zion
        Weiner has served as a director of our company since February 2005. Dr. Weiner
        has been with Teva Pharmaceutical Industries Ltd. since 1975, after a Post
        Doctorate fellowship at Schering-Plough in the U.S. He received his Ph.D
        in
        Chemistry from the Hebrew University of Jerusalem. In January 2006, Dr. Weiner
        joined the Office of the CEO and assumed the role of Chief R&D Officer at
        Teva. Dr. Weiner served as Group Vice President—Global Products from April
        2002 until January 2006, responsible for Global Generic Research and
        Development, Global Innovative Research and Development and innovative products
        marketing. Dr. Weiner is a member of Teva's Core Management Committee. He
        was
        granted twice the Rothschild Prize for Innovation/Export, in 1989 for the
        development of alpha D3 for Dialysis and Osteoporosis and in 1999 for the
        development of Copaxone® for Multiple Sclerosis.
  Ron
        Bentsur has served as our Chief Executive Officer since January 2006. From
        June
        2003 until January 2006, Mr. Bentsur served as Vice President, Finance and
        Investor Relations of Keryx Biopharmaceuticals, Inc. From October 2000 to
        June
        2003, Mr. Bentsur served as Director of Investor Relations at Keryx. From
        July
        1998 to October 2000, he served as Director of Technology Investment Banking
        at
        Leumi Underwriters, where he was responsible for all technology/biotechnology
        private placement and advisory transactions. From June 1994 to July 1998,
        Mr.
        Bentsur worked as an investment banker at ING Barings Furman Selz. Mr. Bentsur
        holds a B.A. in Economics and Business Administration with distinction from
        the
        Hebrew University of Jerusalem, Israel and an M.B.A., Magna Cum Laude, from
        New
        York University’s Stern Graduate School of Business. ****
  Bill
        Kessler has served as our Director of Finance since January 2006 and as our
        principal finance and accounting officer since July 2006. Mr. Kessler has
        over
        15 years of corporate and Wall Street experience, working with publicly-traded
        and private companies in Israel and the United States. During 2005, Mr. Kessler
        served as a consultant to our company, where he spearheaded the process of
        listing XTL for trading on Nasdaq. From October 2003 until December 2005,
        Mr.
        Kessler served as a financial consultant to Keryx, and from April 2001 until
        September 2003, Mr. Kessler served as the controller of Keryx. From 1996-2000,
        Mr. Kessler served as Chief Financial Officer for TICI Software Systems Ltd.,
        an
        Israeli based software development and consulting company. From 1990-1993,
        Mr.
        Kessler worked as a research analyst at Wertheim Schroder & Co., covering
        media and entertainment companies. Mr. Kessler holds a B.A., Magna Cum Laude,
        from Yeshiva University, and an M.B.A., from Columbia University.
  **Employment
        Agreements**
  We
        have
        an employment agreement dated as of January 3, 2006, with Ron Bentsur, Chief
        Executive Officer. Mr. Bentsur is entitled to an annual base salary of $225,000.
        He was entitled to receive a one time bonus of $25,000 in the event we are
        successful in securing an equity financing in excess of $10 million, and
        he
        received this bonus in 2006 as a result of our private placement completed
        in
        May 2006. He is entitled to receive discretionary bonus payments of up to
        100%
        of his annual base salary on achievement of certain milestones recommended
        by
        the Remuneration Committee and set by our Board of Directors. In March 2006,
        Mr.
        Bentsur was also granted options to purchase a total of 7,000,000 ordinary
        shares at an exercise price equal to $0.774 per share (the closing price
        of our
        ADRs on the Nasdaq Global Market on January 2, 2006, divided by ten). These
        options are exercisable for a period of ten years from the date of issuance,
        and
        granted under the same terms and conditions as the 2001 Share Option Plan
        (see
“- Share Ownership - Share Option Plans” below) and the specific terms of any
        option agreement entered into with Mr. Bentsur. Of these, 2,333,334 options
        shall vest as follows: 777,782 options on the one-year anniversary of the
        issuance of the options and 194,444 options at the end of each quarter
        thereafter for the following two years. The balance of options shall vest
        upon
        achievement of certain milestones (2,333,333 upon the achievement of $350
        million market capitalization or $75 million in working capital, as set out
        in
        the agreement and 2,333,333 upon the achievement of $550 million market
        capitalization or $125 million in working capital, as set out in the agreement).
        We may terminate the agreement without cause (as defined in the agreement)
        on 30
        days’ prior notice to Mr. Bentsur, and immediately and without prior notice for
        cause. Mr. Bentsur may terminate the agreement with good reason (as defined
        in
        the agreement) on 30 days’ prior notice to us. In addition, in the event of a
        merger, acquisition or other change of control or in the event that we terminate
        Mr. Bentsur, either without cause or as a result of his death or disability,
        or
        Mr. Bentsur terminates his agreement for good reason, any outstanding but
        unvested options granted to Mr. Bentsur under the agreement will immediately
        vest and the period during which he may exercise such options shall be the
        earlier of two years from the effective date of his termination or ten years
        from the date he commenced employment. Additionally, our Board of Directors
        shall have the discretion to accelerate all or a portion of Mr. Bentsur’s
        options at any time. If we choose to terminate the agreement for cause, Mr.
        Bentsur will not be owed any benefits, with the exception of any unpaid
        remuneration that would have accrued up to his date of termination.
   47
  We
        have
        an employment agreement dated February 10, 2006, and effective as of January
        1,
        2006, with Bill Kessler, our Director of Finance. Mr. Kessler is entitled
        to an
        annual base salary of $90,000. He is entitled to receive bonus payments at
        the
        discretion of the Chief Executive Officer and as set by our Board of Directors.
        Mr. Kessler shall also be entitled to receive one or more grants of options
        to
        purchase our ordinary shares, on terms and conditions set by our Board of
        Directors. Mr. Kessler is also entitled to receive benefits comprised of
        managers' insurance (pension and disability insurance), a continuing education
        plan, and the use of a company car. There is a non-compete clause surviving
        one
        year after termination of employment, preventing Mr. Kessler from competing
        directly with us. The employment agreement may be terminated by either party
        on
        three months prior written notice. In June 2006, our Board of Directors granted
        options to Mr. Kessler to purchase a total of 500,000 ordinary shares at
        an
        exercise price equal to $0.60 per share (the price of our ADRs in the private
        placement that we completed on March 22, 2006 and which closed on May 25,
        2006,
        divided by ten, which was above the market price of our ADRs on the Nasdaq
        Global Market on such date divided by ten). These options vest over a four-year
        period and are exercisable for a period of ten years from the date of issuance,
        and were granted under the Share Option Plan 2001.
  We
        have
        an agreement dated August 1, 2005, with Michael S. Weiss, our non-Executive
        Chairman of the Board of Directors. Mr. Weiss is entitled to annual remuneration
        of $150,000. He was granted options to purchase a total of 9,250,000 ordinary
        shares at an exercise price equal to $0.354 per share (which was below the
        market price of our ordinary shares on the date of grant). These options
        are
        exercisable for a period of five years from the date of issuance, and granted
        under the same terms and conditions as our 2001 Share Option Plan. The options
        shall vest upon achievement of certain market capitalization based milestones.
        As of December 31, 2006, 3,083,333 options that were granted to Mr. Weiss
        are
        vested. We may terminate the agreement without cause (as defined in the
        agreement) on 30 days’ prior notice to Mr. Weiss, and immediately and without
        prior notice for cause. Mr. Weiss may terminate the agreement with good reason
        (as defined in the agreement) on 30 days prior notice to us. In the event
        that
        the agreement is terminated without cause (in our case) or with good reason
        (in
        the case of Mr. Weiss), any outstanding but unvested options granted to Mr.
        Weiss under the agreement will immediately vest and the period during which
        he
        may exercise such options will be extended. If we choose to terminate the
        agreement for cause, Mr. Weiss will not be owed any benefits, with the exception
        of any unpaid remuneration that would have accrued through his date of
        termination.
  We
        have
        three types of service agreements with our non-executive directors, other
        than
        our agreement with our non-Executive Chairman. The first type, entered into
        with
        Ben Zion Weiner on August 1, 2005, provides for a grant of 2,000,000 options
        having an exercise price equal to $0.354 per share (which was below the market
        price of our ordinary shares on the date of grant), exercisable for a period
        of
        five years and vesting upon achievement of certain market capitalization
        based
        milestones. As of December 31, 2006, 666,667 options that were granted to
        Mr.
        Weiner are vested. The second type of director service agreement, entered
        into
        with William Kennedy on August 1, 2005, provides for a grant of 60,000 options
        having an exercise price equal $0.853 (equal to the average price per share,
        as
        derived from the Daily Official List of the London Stock Exchange, in the
        three
        days preceding the date of such grant), vesting over the three years from
        the
        date of grant. In addition, the second type of director service agreement
        provides for three annual grants of 20,000 options each, at an exercise price
        equivalent to the then current closing price of our ADRs on the Nasdaq Global
        Market (subject to the ordinary share-ADR ratio). The third type, entered
        into
        with Ido Seltenreich and Vered Shany, on August 1, 2005, , respectively,
        does
        not provide for option grants, and has a term of 36 months, unless terminated
        by
        the director upon two months’ written notice to us. Each of the three types of
        director service agreements provides for an annual salary of $20,000, payments
        of $2,000 for attendance at each board meeting, $500 for attendance at each
        committee meeting, $500 for attendance at a board meeting held by
        teleconference, reimbursement of reasonable out-of-pocket expenses, and
        termination by the director on two months’ written notice to us.
  **Compensation**
  The
        aggregate compensation paid by us and by our wholly-owned subsidiary to all
        persons who served as directors or officers for the year 2006 (nine persons)
        was
        approximately $1.1 million. This amount includes payments made for social
        security, pension, disability insurance and health insurance premiums of
        approximately $0.1 million, as well as bonus accruals, payments made in lieu
        of
        statutory severance, payments for continuing education plans, payments made
        for
        the redemption of accrued vacation, and amounts expended by us for automobiles
        made available to our officers.
  During
        2006, we granted a total of 40,000 options to two of our non-executive
        directors: 20,000 options granted to William Kennedy, are exercisable at
        $0.325
        per ordinary share (the closing price of our ADRs on the Nasdaq Global Market
        on
        the date of grant divided by ten), and expire ten years after date of grant;
        and
        20,000 options granted to the estate of Jonathan Spicehandler are exercisable
        at
        $0.325 per ordinary share (which was below the closing price of our ADRs
        on the
        Nasdaq Global Market on the date of grant divided by ten, $0.328), and expire
        on
        December 31, 2007. Subsequent to the passing of Jonathan Spicehandler, our
        Board
        of Directors accelerated the vesting of any unvested options and extended
        the
        exercise period through to December 31, 2007.
   48
  In
        March
        2006, the Board of Directors approved grants of a total of 9,898,719 options
        to
        our non-executive Chairman and 750,000 options to one of our non-executive
        directors, Ben Zion Weiner. These options are exercisable at an exercise
        price
        of $0.713 per share (the volume weighted average price per share of the ADRs
        on
        the Nasdaq Global Market during the thirty trading days prior to the Board
        of
        Directors’ approval divided by ten). The options vest as follows: (i) 1/3 of
        such options vest over three years, of which amounts, 1/3 vest and become
        exercisable upon the first anniversary of the issuance of the options and
        the
        remainder vest and become exercisable on a quarterly basis; (ii) 1/3 of such
        options vest and become exercisable upon our achieving a total market
        capitalization on a fully diluted basis of more than $350 million; and (iii)
        1/3
        of such options vest upon our achieving a total market capitalization on
        a fully
        diluted basis of more than $550 million. The options can be exercised for
        a
        period of ten years. The grant of such options is conditional upon approval
        of
        the shareholders at a duly convened shareholder meeting. During 2006, we
        did not
        seek shareholder approval, so the options had not been granted as of the
        date
        hereof.
  All
        members of our Board of Directors who are not our employees are reimbursed
        for
        their expenses for each meeting attended. Our directors who are not external
        directors as defined by the Israeli Companies Act are eligible to receive
        share
        options under our share option plans. Non-executive directors do not receive
        any
        remuneration from us other than their fees for services as members of the
        board,
        additional fees if they serve on committees of the board and expense
        reimbursement.
  In
        accordance with the requirements of Israeli Law, we determine our directors’
compensation in the following manner:
  ·
              first,
                  our audit committee reviews the proposal for
                  compensation;·
              second,
                  provided that the audit committee approves the proposed compensation,
                  the
                  proposal is then submitted to our Board of Directors for review,
                  except
                  that a director who is the beneficiary of the proposed compensation
                  does
                  not participate in any discussion or voting with respect to such
                  proposal;
                  and·
              finally,
                  if our Board of Directors approves the proposal, it must then submit
                  its
                  recommendation to our shareholders, which is usually done in connection
                  with our shareholders’ general
                  meeting.
  The
        approval of a majority of the shareholders voting at a duly convened
        shareholders meeting is required to implement any such compensation
        proposal.
  **Board
        practices**
  ***Election
        of Directors and Terms of Office***
  Our
        Board
        of Directors currently consists of five members, including our non-executive
        Chairman. Other than our two external directors, our new directors are elected
        by an ordinary resolution at the annual general meeting of our shareholders.
        The
        nomination of our directors is proposed by a nomination committee of our
        Board
        of Directors, whose proposal is then approved by the board. The current members
        of the nomination committee are William Kennedy, (chairman of the nomination
        committee), Ido Seltenreich and Vered Shany. Our board, following receipt
        of a
        proposal of the nomination committee, has the authority to add additional
        directors up to the maximum number of 12 directors allowed under our Articles.
        Such directors appointed by the board serve until the next annual general
        meeting of the shareholders. Unless they resign before the end of their term
        or
        are removed in accordance with our Articles, all of our directors, other
        than
        our external directors, will serve as directors until our next annual general
        meeting of shareholders. In November 2006, at the annual general meeting
        of our
        shareholders, Michael Weiss, Ben Zion Weiner and William Kennedy were re-elected
        to serve as directors of our company. Ido Seltenreich and Vered Shany were
        elected to serve as external directors of our company at the annual general
        meeting that took place in August 2005. Ido Seltenreich and Vered Shany are
        serving as external directors pursuant to the provisions of the Israeli
        Companies Law for a three-year term ending in August 2008, as more fully
        described below. After this date, their term of service may be renewed for
        an
        additional three-year term.
  None
        of
        our directors or officers have any family relationship with any other director
        or officer.
  None
        of
        our directors are entitled to receive any severance or similar benefits upon
        termination of his or her service, except for our chairman, as more fully
        described above in “ - Employment Agreements” above.
  Our
        Articles permit us to maintain directors and officers’ liability insurance and
        to indemnify our directors and officers for actions performed on behalf of
        us,
        subject to specified limitations. We maintain a directors and officers insurance
        policy which covers the liability of our directors and officers as allowed
        under
        Israeli Companies Law.
   49
  ***External
        and Independent Directors***
  The
        Israeli Companies Law requires Israeli companies with shares that have been
        offered to the public either in or outside of Israel to appoint two external
        directors. No person may be appointed as an external director if that person
        or
        that person’s relative, partner, employer or any entity under the person’s
        control, has or had, on or within the two years preceding the date of that
        person's appointment to serve as an external director, any affiliation with
        the
        company or any entity controlling, controlled by or under common control
        with
        the company. The term affiliation includes:
  ·
              an
                  employment relationship;·
              a
                  business or professional relationship maintained on a regular
                  basis;·
              control;
                  and·
              service
                  as an office holder, other than service as an officer for a period
                  of not
                  more than three months, during which the company first offered
                  shares to
                  the public.
  No
        person
        may serve as an external director if that person’s position or business
        activities create, or may create, a conflict of interest with that person's
        responsibilities as an external director or may otherwise interfere with
        his/her
        ability to serve as an external director. If, at the time external directors
        are
        to be appointed, all current members of the Board of Directors are of the
        same
        gender, then at least one external director must be of the other gender.
        A
        director in one company shall not be appointed as an external director in
        another company if at that time a director of the other company serves as
        an
        external director in the first company. In addition, no person may be appointed
        as an external director if he/she is a member or employee of the Israeli
        Security Authority, and also not if he/she is a member of the Board of Directors
        or an employee of a stock exchange in Israel.
  External
        directors are to be elected by a majority vote at a shareholders' meeting,
        provided that either:
  ·
              the
                  majority of shares voted at the meeting, including at least one-third
                  of
                  the shares held by non-controlling shareholders voted at the meeting,
                  vote
                  in favor of election of the director, with abstaining votes not
                  being
                  counted in this vote; or·
              the
                  total number of shares held by non-controlling shareholders voted
                  against
                  the election of the 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-year term. An external director may be removed only by the
        same
        percentage of shareholders as is required for their election, or by a court,
        and
        then only if such external director ceases to meet the statutory qualifications
        for their appointment or violates his or her duty of loyalty to the company.
        At
        least one external director must serve on every committee that is empowered
        to
        exercise one of the functions of the Board of Directors.
  An
        external director is entitled to compensation as provided in regulations
        adopted
        under the Israeli Companies Law and is otherwise prohibited from receiving
        any
        other compensation, directly or indirectly, in connection with service provided
        as an external director.
  Ido
        Seltenreich and Vered Shany serve as external directors pursuant to the
        provisions of the Israeli Companies Law and as our independent directors
        under
        the corporate governance codes of practice requirements of the London Stock
        Exchange. They both serve on our audit committee, our nomination committee
        and
        our compensation committee.
  Subject
        to certain exceptions, issuers that list on Nasdaq must have boards of directors
        including a majority of independent directors, as such term is defined by
        Nasdaq. We are in compliance with the independence requirements of both the
        SEC
        and Nasdaq.
   50
  ***Audit
        Committee***
  The
        Israeli Companies Law requires public companies to appoint an audit committee.
        The responsibilities of the audit committee include identifying irregularities
        in the management of the company’s business and approving related party
        transactions as required by law. An audit committee must consist of at least
        three directors, including all of its external directors. The chairman of
        the
        Board of Directors, any director employed by or otherwise providing services
        to
        the company, and a controlling shareholder or any relative of a controlling
        shareholder, may not be a member of the audit committee. An audit committee
        may
        not approve an action or a transaction with a controlling shareholder, or
        with
        an office holder, unless at the time of approval two external directors are
        serving as members of the audit committee and at least one of the external
        directors was present at the meeting in which an approval was granted.
  Our
        audit
        committee is currently comprised of three independent non-executive directors.
        The audit committee is chaired by Ido Seltenreich, who serves as the audit
        committee financial expert, with William Kennedy and Vered Shany as members.
        The
        audit committee meets at least twice a year and monitors the adequacy of
        our
        internal controls, accounting policies and financial reporting. It regularly
        reviews the results of the ongoing risk self-assessment process, which we
        undertake, and our interim and annual reports prior to their submission for
        approval by the full Board of Directors. The audit committee oversees the
        activities of the internal auditor, sets its annual tasks and goals and reviews
        its reports. The audit committee reviews the objectivity and independence
        of the
        external auditors and also considers the scope of their work and fees. In
        accordance with the Nasdaq requirements, our audit committee is directly
        responsible for the appointment, compensation and oversight of our independent
        auditors.
  We
        have
        adopted a written charter for our audit committee, setting forth its
        responsibilities as outlined by Nasdaq rules and the regulations of the SEC.
        In
        addition, our audit committee has adopted procedures for the receipt, retention
        and treatment of complaints we may receive regarding accounting, internal
        accounting controls, or auditing matters and the submission by our employees
        of
        concerns regarding questionable accounting or auditing matters. In addition,
        both SEC and Nasdaq rules mandate that the audit committee of a listed issuer
        consist of at least three members, all of whom must be independent, as such
        term
        is defined by rules and regulations promulgated by the SEC. We are in compliance
        with the independence requirements of both the SEC and Nasdaq.
  ***Approval
        of Compensation to Our Officers***
  The
        Israeli Companies Law prescribes that compensation to officers must be approved
        by a company's Board of Directors. Nasdaq corporate governance rules require
        that compensation of the chief executive officer and other executive officers
        be
        determined, or recommended to the Board of Directors, by a majority of the
        independent directors or by a compensation committee comprised solely of
        independent directors. We have established a compensation committee in
        compliance with the Israeli Companies Law and Nasdaq rules.
  Our
        compensation committee consists of three independent directors: Vered Shany
        (chairman of the compensation committee), William Kennedy and Ido Seltenreich.
        The responsibilities of the compensation committee are to set our overall
        policy
        on executive remuneration and to decide the specific remuneration, benefits
        and
        terms of employment for each senior manager, including the Chief Executive
        Officer.
  The
        objectives of the compensation committee’s policies are that senior managers
        should receive compensation which is appropriate given their performance,
        level
        of responsibility and experience. Compensation packages should also allow
        us to
        attract and retain executives of the necessary caliber while, at the same
        time,
        motivating them to achieve the highest level of corporate performance in
        line
        with the best interests of shareholders. In order to determine the elements
        and
        level of remuneration appropriate to each executive director, the compensation
        committee reviews surveys on executive pay, obtains external professional
        advice
        and considers individual performance.
  ***Research
        and Development Committee***
  Our
        research and development committee is currently comprised of three external
        directors, Ben-Zion Weiner, William Kennedy and Michael Weiss. The research
        and
        development committee oversees our current and proposed research and development
        activities in an advisory role and is only authorized to make recommendations
        to
        our Board of Directors.
   51
  ***Internal
        Auditor***
  Under
        the
        Israeli Companies Law, the board of directors must appoint an internal auditor,
        nominated by the audit committee. The role of the internal auditor is to
        examine, among other matters, whether the company's actions comply with the
        law
        and orderly business procedure. Under the Israeli Companies Law, the internal
        auditor cannot be an office holder, an interested party or a relative of
        an
        office holder or interested party, and he or she may not be the company's
        independent accountant or its representative. We comply with the requirement
        of
        the Israeli Companies Law relating to internal auditors. Our internal auditors
        examine whether our various activities comply with the law and orderly business
        procedure.
  ***Compliance
        with Nasdaq Corporate Governance Requirements***
  Under
        the
        Nasdaq corporate governance rules, foreign private issuers are exempt from
        many
        of the requirements if they instead elect to comply with home country practices
        and disclose where they have elected to do so. As noted above, we are currently
        in compliance with Nasdaq rules relating to the independence of our Board
        of
        Directors and its committees, however, as discussed below, we may in the
        future
        elect to comply with the practice required under Israeli law.
  Pursuant
        to Nasdaq Marketplace Rule 4350(a)(i), foreign private issuers may elect
        to
        follow home country practices in lieu of certain Nasdaq corporate governance
        requirements by submitting to Nasdaq a written statement from an independent
        counsel in the company's home country, certifying that the company's practices
        are not prohibited by the home country's laws. This letter is only required
        once, at the time of listing. We previously submitted to Nasdaq such a letter
        from our legal counsel in Israel in connection with the September 1, 2005,
        application for our ADRs to trade on the Nasdaq Global Market under the symbol
        “XTLB.”
  On
        March
        22, 2006, we completed a private placement of ordinary shares together with
        warrants for an aggregate consideration of approximately $28 million in gross
        proceeds. The transaction closed on May 25, 2006. In connection with the
        private
        placement, we relied on the exemption afforded by Nasdaq Marketplace Rule
        4350(a)(i) from the requirements of Nasdaq Marketplace Rule 4350(i)(D), which
        requires that an issuer receive shareholder approval prior to an issuance
        of
        shares (or securities convertible into or exercisable for shares) which together
        with any sales by officers, directors or substantial shareholders of the
        company
        equals 20% or more of the shares or the voting power outstanding before the
        issuance.
  **Employees**
  As
        of
        February 28, 2007, we had 33 full-time equivalent employees. We and our Israeli
        employees are subject, by an extension order of the Israeli Ministry of Welfare,
        to a few provisions of collective bargaining agreements between the Histadrut,
        the General Federation of Labor Unions in Israel and the Coordination Bureau
        of
        Economic Organizations, including the Industrialists Associations. These
        provisions principally address cost of living increases, recreation pay,
        travel
        expenses, vacation pay and other conditions of employment. We provide our
        employees with benefits and working conditions equal to or above the required
        minimum. Other than those provisions, our employees are not represented by
        a
        labor union. We have written employment contracts with our employees, and
        we
        believe that our relations with our employees are good.
  For
        the
        years ended December 31, 2006, 2005 and 2004, the number of our employees
        engaged in the specified activities, by geographic location, are presented
        in
        the table below.
   52
  **Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Research
                  and DevelopmentIsrael
              
              
              8
              
              
              22
              
              
              44U.S
              
              
              18
              
              
              19
              
              
              826
              
              
              41
              
              
              52Financial
                  and general managementIsrael
              
              
              4
              
              
              4
              
              
              7U.S
              
              
              2
              
              
              --
              
              
              --6
              
              
              4
              
              
              7Business
                  developmentIsrael
              
              
              --
              
              
              --
              
              
              --U.S
              
              
              1
              
              
              1
              
              
              11
              
              
              1
              
              
              1Total
              
              
              33
              
              
              46
              
              
              60Average
                  number of full-time employees
              
              
              40
              
              
              54
              
              
              58
 
 **Share
        Ownership**
  The
        following table sets forth certain information as of February 28, 2007,
        regarding the beneficial ownership by our directors and executive officers.
        All
        numbers quoted in the table are inclusive of options to purchase shares that
        are
        exercisable within 60 days of February 28, 2007.
  **Amount
                  and nature of beneficial ownership****Ordinary****shares****beneficially****owned****excluding****options**
              
              **Options**1**exercisable****within****60 days
                  of****February
                  28,****2007**
              
              **Total****ordinary****shares****beneficially****owned**
              
              **Percent
                  of**
                **ordinary
                  shares****beneficially****owned**Michael
                  S. Weiss
                *Chairman
                  of the Board*
              
              
              --
              
              
              3,083,3332
              
              
              3,083,333
              
              
              1.38
              %William
                  Kennedy
                *Director*
              
              
              --
              
              
              25,0003
              
              
              25,000
              
              
              *Ben
                  Zion Weiner
                *Director*
              
              
              --
              
              
              666,6672
              
              
              666,667
              
              
              *Ido
                  Seltenreich
                *Director*
              
              
              250,0004
              
              
              --
              
              
              250,000
              
              
              *Vered
                  Shany
                *Director*
              
              
              --
              
              
              --
              
              
              --
              
              
              --Ron
                  Bentsur
                *Chief
                  Executive Officer*
              
              
              48,220
              
              
              777,7825
              
              
              826,002
              
              
              *Bill
                  Kessler
                *Director
                  of Finance*
              
              
              --
              
              
              --
              
              
              --
              
              
              --All
                  directors and executive officers as a group
                  (7 persons)
              
              
              298,220
              
              
              4,552,782
              
              
              4,851,002
              
              
              2.16
              %-------------------------------------
 (1)
              Options
                  to purchase ordinary shares
 (2)
              At
                  an exercise price of $0.354 per ordinary share, expiring July 31,
                  2010.
 (3)
              20,000
                  options at an exercise price of $0.354 per ordinary share, expiring
                  July
                  31, 2015 and 5,000 options at an exercise price of $0.325 per ordinary
                  share, expiring July 31, 2016.
 (4)
              Held
                  under a blind trusteeship arrangement with a
                  third-party.
 (5)
              At
                  an exercise price of $0.774 per ordinary share, expiring March
                  15,
                  2016.
 *
        Represents Less than 1% of ordinary shares outstanding.
 
 
 ***Share
        Option Plans***
 
 We
        maintain the following share option plans for our and our subsidiary’s
        employees, directors and consultants. In addition to the discussion below,
        see
        Note 6 of our consolidated financial statements, included at “Item 18. Financial
        Statements.”
  Our
        Board
        of Directors administers our share option plans and has the authority to
        designate all terms of the options granted under our plans including the
        grantees, exercise prices, grant dates, vesting schedules and expiration
        dates,
        which may be no more than ten years after the grant date. Options may not
        be
        granted with an exercise price of less than the fair market value of our
        ordinary shares on the date of grant, unless otherwise determined by our
        Board
        of Directors.
  As
        of
        December 31, 2006, we have granted to employees, directors and consultants
        options that are outstanding to purchase up to 33,235,238 ordinary shares,
        under
        the five share option plans and pursuant to certain grants apart from these
        plans also discussed below under Non-Plan Share Options.
   53
  *1998
        Share Option Plan*
  Under
        a
        share option plan established in 1998, we granted options to our employees
        which
        are held by a trustee under section 3(i) of the Israeli tax ordinance, or
        the
        Tax Ordinance, of which 3,884,810 are outstanding and exercisable at an exercise
        price of $0.497 per ordinary share. The options are
        non-transferable.
  The
        options granted thereunder are outstanding and exercisable until January
        2008.
        If the options are not exercised and the shares not paid for by such date,
        all
        interests and rights of any grantee shall expire. These options were granted
        for
        no consideration. There are no options available for grant under this
        plan.
  *1999
        Share Option Plan*
  Under
        a
        share option plan established in 1999, we granted options to our employees
        which
        are held by a trustee under section 3(i) of the Tax Ordinance, of which 790,790
        are outstanding and exercisable, at an exercise price of $0.497 per ordinary
        share. The options are non-transferable.
  The
        option term is for a period of ten years from the grant date. If the options
        are
        not exercised and the shares not paid for by such date, all interests and
        rights
        of any grantee shall expire. These options were granted for no consideration.
        There are no options available for grant under this plan.
  *1999
        International Share Option Plan*
  Under
        an
        international share option plan established in 1999, we granted options to
        our
        employees during 1999 and 2000 of which 1,380,000 are outstanding and
        exercisable at an exercise price between $0.497 and $1.10 per ordinary share.
        The options are non-transferable.
  The
        options granted thereunder are outstanding until October 2007. If the options
        are not exercised and the shares are not paid for by such date, all interests
        and rights of any grantee shall expire. These options were granted for no
        consideration. There are no options available for grant under this
        plan.
  *2000
        Share Option Plan*
  Under
        a
        share option plan established in 2000, we granted options to our employees
        which
        are held by a trustee under section 3(i) of the Tax Ordinance, of which 669,800
        are outstanding and exercisable, at an exercise price of $1.10 per ordinary
        share. The options are non-transferable.
  The
        option term is for a period of ten years from grant date. If the options
        are not
        exercised and the shares not paid for by such date, all interests and rights
        of
        any grantee shall expire. These options were granted for no consideration.
        There
        are no options available for grant under this plan.
  *2001
        Share Option Plan*
  Under
        a
        share option plan established in 2001, referred to as the 2001 Plan, we granted
        options during 2001-2006, at an exercise price between $0.106 and $0.931
        per
        ordinary share. Up to 11,000,000 options were available to be granted under
        the
        2001 Plan, of which 5,714,838 are outstanding. Options granted to Israeli
        employees were in accordance with section 102 of the Tax Ordinance, under
        the
        capital gains option set out in section 102(b)(2) of the ordinance. The options
        are non-transferable.
  The
        option term is for a period of ten years from the grant date. The options
        were
        granted for no consideration. The options vest over a four year period. As
        of
        December 31, 2006, 1,801,637 options are fully vested. As of December 31,
        2006,
        the remaining number of options available for future grants under the 2001
        Plan
        is 4,799,569.
   54
  *Non-Plan
        Share Options*
  In
        addition to the options granted under our share option plans, there are
        20,795,000 outstanding options, and 6,066,667 exercisable options, as of
        December 31, 2006, which were granted to employees, directors and consultants
        not under an option plan during 1997-2006. The options were granted at an
        exercise price between $0.20 and $2.11 per ordinary share. The options expire
        between 2008 and 2016.
  This
        figure includes 9,250,000 and 2,000,000 options that were granted to our
        Chairman and Ben Zion Weiner, a non-executive director, respectively, at
        an
        exercise price equal to $0.354 per ordinary share, in August 2005, and are
        exercisable for a period of five years from the date of issuance, and vest
        upon
        achievement of certain market capitalization based milestones (see “-Employment
        Agreements,” above).
  This
        figure also includes 7,000,000 options that were granted to our CEO, and
        are
        exercisable for a period of ten years from the date of issuance at an exercise
        price equal to $0.774 per ordinary share. Of these, 2,333,334 options vest
        over
        a three year period and the balance of options vest upon achievement of certain
        market capitalization based or working capital based milestones (see
“-Employment Agreements above”).
  In
        addition, this figure also includes options granted to consultants as in
        conjunction with a licensing agreement with Stanford University to purchase
        a
        total of up to 320,000 of our ordinary shares at an exercise price per share
        of
        $0.200.
   **ITEM
        7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**
  **Major
        Shareholders**
  As
        of
        February 28, 2007, we are not aware of any beneficial owner holding more
        than 5%
        of our outstanding ordinary shares. As of February 28, 2007, there were
        5,110,019 ADRs outstanding, held by approximately 5 record holders, whose
        holdings represented approximately 23% of the total outstanding ordinary
        shares,
        substantially all of which record holders were in the US.
  **Related
        Party Transactions**
  We
        did
        not have any transactions or loans with related parties during the fiscal
        year
        ended December 31, 2005. For the fiscal year ended December 31, 2006 and
        during
        the two months ended February 28, 2007, we leased approximately 100 meters
        of
        office space from Keryx subject to a rent sharing agreement for $15,000 and
        $3,000, respectively. In addition, our Chief Executive Officer and our Director
        of Finance provide consulting services to Keryx; however, the amount of their
        time devoted to this endeavor and the compensation they receive, if any,
        is
        immaterial.
   **ITEM
        8. FINANCIAL INFORMATION**
  **Consolidated
        Statements and Other Financial Information**
  Our
        audited consolidated financial statements are included on pages F-1 through
        F-39
        of this annual report.
  **Legal
        Proceedings**
  Neither
        we nor our subsidiaries are a party to, and our property is not the subject
        of,
        any material pending legal proceedings.
  **Dividend
        Distributions**
  We
        have
        never declared or paid any cash dividends on our ordinary shares and do not
        anticipate paying any such cash dividends in the foreseeable future. Any
        future
        determination to pay dividends will be at the discretion of our Board of
        Directors.
 
 In
        the
        event that we decide to pay a cash dividend from income that is tax exempt
        under
        our approved enterprise status, we would be liable for corporate tax on the
        amount distributed at the rate of up to 25%. See Note 8 of our Consolidated
        Financial Statements, included at “Item 18. Financial Statements,” and “Item 10.
        Additional Information - Taxation.” Cash dividends may be paid by an Israeli
        company only out of retained earnings as calculated under Israeli law. We
        currently have no retained earnings and do not expect to have any retained
        earnings in the foreseeable future.
   55
 
 **Significant
        Changes**
  *In-Licensing
        of Bicifadine*
 
 In
        January 2007, XTL Development signed an agreement with DOV to in-license
        the
        worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake
        inhibitor. XTL Development intends to develop Bicifadine for the treatment
        of
        neuropathic pain - a chronic condition resulting from damage to peripheral
        nerves.
 
 In
        accordance with the terms of the license agreement, XTL Development made
        an
        initial up-front payment of $7.5 million in cash. In addition, XTL Development
        will make milestone payments of up to $126.5 million, in cash and/or our
        ordinary shares over the life of the license, of which up to $115 million
        will
        be due upon or after regulatory approval of the product. XTL Development
        is also
        obligated to pay royalties on net sales of the product to DOV. In addition,
        XTL
        Development has committed to pay a transaction advisory fee to a third party
        in
        the form of stock appreciation rights in the amount equivalent to 3% of our
        fully diluted ordinary shares at the close of the transaction, vesting one
        year
        after the close of the transaction, and 7% of our fully diluted ordinary
        shares
        at the close of the transaction, vesting following successful Phase III clinical
        trial results or the acquisition of XTL. Payment of the stock appreciation
        rights can be satisfied, at our discretion, in cash and/or by issuance of
        our
        ordinary shares.
 
 
 **ITEM
        9. THE OFFER AND LISTING**
  **Markets
        and Share Price History**
  The
        primary trading market for our ordinary shares, having a nominal value of
        NIS
        0.02, is the London Stock Exchange, where our shares have been listed and
        traded
        under the symbol “XTL” since our initial public offering in September of 2000.
        As of July 12, 2005, our ordinary shares are also listed on the Tel Aviv
        Stock
        Exchange under the symbol “XTL.” Since September 1, 2005, our ADRs have been
        traded on the Nasdaq Global Market under the symbol “XTLB,” with each ADR
        representing ten ordinary shares.
 
 The
        following table sets forth, for the periods indicated, the high and low reported
        sales prices of the ordinary shares on the London Stock Exchange. For
        comparative purposes only, we have also provided such figures translated
        into US
        Dollars at an exchange rate of 1.958 US Dollars per British Pound, as reported
        by the Bank of Israel on February 28, 2007.
  **British
                  Pence (p)**
              
              **US
                  Dollar****Last
                  Six Calendar Months**
              **High**
              
              **Low**
              
              **High**
              
              **Low**February
                  2007
              21.75
              
              19.50
              
              0.43
              
              0.38January
                  2007
              24.25
              
              14.25
              
              0.47
              
              0.28December
                  2006
              16.00
              
              14.25
              
              0.31
              
              0.28November
                  2006
              19.00
              
              14.75
              
              0.37
              
              0.29October
                  2006
              18.00
              
              11.75
              
              0.35
              
              0.23September
                  2006
              16.00
              
              12.00
              
              0.31
              
              0.23**Financial
                  Quarters During the Past Two Full Fiscal Years**Fourth
                  Quarter of 2006
              19.00
              
              11.75
              
              0.37
              
              0.23Third
                  Quarter of 2006
              24.00
              
              12.00
              
              0.47
              
              0.23Second
                  Quarter of 2006
              40.75
              
              23.50
              
              0.80
              
              0.46First
                  Quarter of 2006
              45.00
              
              34.25
              
              0.88
              
              0.67Fourth
                  Quarter of 2005
              53.00
              
              42.00
              
              1.04
              
              0.82Third
                  Quarter of 2005
              61.75
              
              38.00
              
              1.21
              
              0.74Second
                  Quarter of 2005
              40.50
              
              36.00
              
              0.79
              
              0.70First
                  Quarter of 2005
              43.50
              
              26.00
              
              0.85
              
              0.51**Last
                  Five Full Financial Years**2006
              45.00
              
              11.75
              
              0.88
              
              0.232005
              61.75
              
              26.00
              
              1.21
              
              0.512004
              32.25
              
              13.00
              
              0.63
              
              0.252003
              18.75
              
              5.75
              
              0.37
              
              0.112002
              64.00
              
              11.50
              
              1.25
              
              0.23
   56
  The
        following table sets forth, for the periods indicated, the high and low sales
        prices of the ordinary shares on the Tel Aviv Stock Exchange. For comparative
        purposes only, we have also provided such figures translated into US Dollars
        at
        an exchange rate of 4.211 New Israeli Shekel per US Dollar, as reported by
        the
        Bank of Israel on February 28, 2007.
  **New
                  Israeli Shekel**
              
              **US
                  Dollar****Last
                  Six Calendar Months**
              **High**
              
              **Low**
              
              **High**
              
              **Low**February
                  2007
              1.86
              
              1.59
              
              0.44
              
              0.38January
                  2007
              2.02
              
              1.12
              
              0.48
              
              0.27December
                  2006
              1.34
              
              1.03
              
              0.32
              
              0.24November
                  2006
              1.57
              
              1.24
              
              0.37
              
              0.29October
                  2006
              1.40
              
              0.96
              
              0.33
              
              0.23September
                  2006
              1.31
              
              1.04
              
              0.31
              
              0.25
 **Financial
                  Quarters Since Listing**Fourth
                  Quarter of 2006
              1.57
              
              0.96
              
              0.37
              
              0.23Third
                  Quarter of 2006
              2.03
              
              1.04
              
              0.48
              
              0.25Second
                  Quarter of 2006
              3.37
              
              2.03
              
              0.80
              
              0.48First
                  Quarter of 2006
              3.66
              
              2.86
              
              0.87
              
              0.68Fourth
                  Quarter of 2005
              4.38
              
              3.44
              
              1.04
              
              0.82
 **Full
                  Financial Years Since Listing**2006
              3.66
              
              0.96
              
              0.87
              
              0.23
  **American
        Depositary Shares**
  The
        following table presents, for the periods indicated, the high and low market
        prices for our ADRs as reported on the Nasdaq Global Market since September
        1,
        2005, the date on which our ADRs were initially quoted. Prior to the initial
        quotation of our ADRs on the Nasdaq Global Market on September 1, 2005, our
        ADRs
        were not traded in any organized market and were not liquid.
 
 **US
                  Dollar****Last
                  Six Calendar Months**
              **High**
              **Low**February
                  2007
              4.35
              3.90January
                  2007
              4.99
              2.69December
                  2006
              3.30
              2.70November
                  2006
              3.69
              2.85October
                  2006
              3.40
              2.22September
                  2006
              3.02
              2.08
 **Financial
                  Quarters Since Listing**Fourth
                  Quarter of 2006
              3.69
              2.22Third
                  Quarter of 2006
              4.43
              2.08Second
                  Quarter of 2006
              7.50
              4.40First
                  Quarter of 2006
              8.12
              6.13Fourth
                  Quarter of 2005
              9.50
              7.10
 **Full
                  Financial Years Since Listing**2006
              8.12
              2.08
   57
  **ITEM
        10. ADDITIONAL INFORMATION**
  **Memorandum
        and Articles of Association**
  ***Objects
        and Purposes of the Company***
  Pursuant
        to Part B, Section 3 of our Articles of Association, we may undertake any
        lawful
        activity.
  ***Powers
        and Obligations of the Directors***
  Pursuant
        to the Israeli Companies Law and our Articles of Association, a director
        is not
        permitted to vote on a proposal, arrangement or contract in which he or she
        has
        a personal interest. Also, the directors may not vote compensation to themselves
        or any members of their body, as that term is defined under Israeli law,
        without
        the approval of our audit committee and our shareholders at a general meeting.
        The requirements for approval of certain transactions are set forth below
        in
“Item 10. Additional Information - Memorandum and Articles of
        Association-Approval of Certain Transactions.” The power of our directors to
        enter into borrowing arrangements on our behalf is limited to the same extent
        as
        any other transaction by us.
  The
        Israeli Companies Law codifies the fiduciary duties that office holders,
        including directors and executive officers, owe to a company. An office holder’s
        fiduciary duties consist of a duty of care and a duty of loyalty. The duty
        of
        care generally requires an office holder to act with the same level of care
        as a
        reasonable office holder in the same position would employ under the same
        circumstances. The duty of loyalty includes avoiding any conflict of interest
        between the office holder’s position in the company and such person’s personal
        affairs, avoiding any competition with the company, avoiding exploiting any
        corporate opportunity of the company in order to receive personal advantage
        for
        such person or others, and revealing to the company any information or documents
        relating to the company’s affairs which the office holder has received due to
        his or her position as an office holder.
  ***Indemnification
        of Directors and Officers; Limitations on Liability***
 
 Israeli
        law permits a company to insure an office holder in respect of liabilities
        incurred by him or her as a result of an act or omission in the capacity
        of an
        office holder for:
 
 ·
              a
                  breach of the office holder’s duty of care to the company or to another
                  person;·
              a
                  breach of the office holder’s fiduciary duty to the company, provided that
                  he or she acted in good faith and had reasonable cause to believe
                  that the
                  act would not prejudice the company; and·
              a
                  financial liability imposed upon the office holder in favor of
                  another
                  person.
 Moreover,
        a company can
        indemnify an office holder for any of the following obligations or expenses
        incurred in connection with the acts or omissions of such person in his or
        her
        capacity as an office holder:
 
 ·
              monetary
                  liability imposed upon him or her in favor of a third party by
                  a judgment,
                  including a settlement or an arbitral award confirmed by the court;
                  and·
              reasonable
                  litigation expenses, including attorneys’ fees, actually incurred by the
                  office holder or imposed upon him or her by a court, in a proceeding
                  brought against him or her by or on behalf of the company or by
                  a third
                  party, or in a criminal action in which he or she was acquitted,
                  or in a
                  criminal action which does not require criminal intent in which
                  he or she
                  was convicted; furthermore, a company can, with a limited exception,
                  exculpate an office holder in advance, in whole or in part, from
                  liability
                  for damages sustained by a breach of duty of care to the
                  company.
 
 Our
        Articles of Association allow for insurance, exculpation and indemnification
        of
        office holders to the fullest extent permitted by law. We have entered into
        indemnification, insurance and exculpation agreements with our directors
        and
        executive officers, following shareholder approval of these agreements. We
        have
        directors’ and officers’ liability insurance covering our officers and directors
        for a claim imposed upon them as a result of an action carried out while
        serving
        as an officer or director, for (a) the breach of duty of care towards us
        or
        towards another person, (b) the breach of fiduciary duty towards us, provided
        that the officer or director acted in good faith and had reasonable grounds
        to
        assume that the action would not harm our interests, and (c) a monetary
        liability imposed upon him in favor of a third party.
   58
  ***Approval
        of Certain Transactions***
  The
        Israeli Companies Law codifies the fiduciary duties that office holders,
        including directors and executive officers, owe to a company. An office holder,
        as defined in the Israeli Companies Law, is a director, general manager,
        chief
        business manager, deputy general manager, vice general manager, executive
        vice
        president, vice president, other manager directly subordinate to the managing
        director or any other person assuming the responsibilities of any of the
        foregoing positions without regard to such person's title. An office holder's
        fiduciary duties consist of a duty of care and a duty of loyalty. The duty
        of
        loyalty includes avoiding any conflict of interest between the office holder's
        position in the company and his personal affairs, avoiding any competition
        with
        the company, avoiding exploiting any business opportunity of the company
        in
        order to receive personal advantage for himself or others, and revealing
        to the
        company any information or documents relating to the company's affairs which
        the
        office holder has received due to his position as an office holder. Each
        person
        listed in the table under “Directors and Senior Management,” which is displayed
        under “Item 6. Directors, Senior Management and Employees - Directors and Senior
        Management,” holds such office in our Company. Under the Israeli Companies Law,
        all arrangements as to compensation of office holders who are not directors
        require approval of the Board of Directors, or a committee thereof. Arrangements
        regarding the compensation of directors also require audit committee and
        shareholders approval, with the exception of compensation to external directors
        in the amounts specified in the regulations discussed in “Item 6. Directors,
        Senior Management and Employees - Directors and Senior Management -
        Compensation.”
  The
        Israeli Companies Law requires that an office holder promptly discloses any
        personal interest that he or she may have, and all related material information
        known to him or her, in connection with any existing or proposed transaction
        by
        the company. The disclosure must be made to our Board of Directors or
        shareholders without delay and prior to the meeting at which the transaction
        is
        to be discussed. In addition, if the transaction is an extraordinary
        transaction, as defined under the Israeli Companies Law, 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 the foregoing, or by any corporation in which the office
        holder is a 5% or greater shareholder, or holder of 5% or more of the voting
        power, director or general manager or in which he or she has the right to
        appoint at least one director or the general manager. An extraordinary
        transaction is defined as a transaction not in the ordinary course of business,
        not on market terms, or that is likely to have a material impact on the
        company's profitability, assets or liabilities.
  In
        the
        case of a transaction which is not an extraordinary transaction (other than
        transactions relating to a director’s conditions of service), after the office
        holder complies with the above disclosure requirement, only board approval
        is
        required unless the Articles of Association of the company provides otherwise.
        The transaction must not be adverse to the company's interest. If the
        transaction is an extraordinary transaction, then, in addition to any approval
        required by the Articles of Association, the transaction must also be approved
        by the audit committee and by the Board of Directors, and under specified
        circumstances, by a meeting of the shareholders. An office holder who has
        a
        personal interest in a matter that is considered at a meeting of the Board
        of
        Directors or the audit committee may not be present at this meeting or vote
        on
        this matter.
  The
        Israeli Companies Law applies the same disclosure requirements to a controlling
        shareholder of a public company, which is defined as a shareholder who has
        the
        ability to direct the activities of a company, other than in circumstances
        where
        this power derives solely from the shareholder’s position on the Board or any
        other position with the company, and includes a shareholder that holds 25%
        or
        more of the voting rights if no other shareholder owns more than 50% of the
        voting rights in the company. Extraordinary transactions with a controlling
        shareholder or in which a controlling shareholder has a personal interest,
        and
        the terms of compensation of a controlling shareholder who is an office holder,
        require the approval of the audit committee, the Board of Directors and the
        shareholders of the company. The shareholders’ approval must either include at
        least one-third of the disinterested shareholders who are present, in person
        or
        by proxy, at the meeting, or, alternatively, the total shareholdings of the
        disinterested shareholders who vote against the transaction must not represent
        more than one percent of the voting rights in the company.
  In
        addition, a private placement of securities that will increase the relative
        holdings of a shareholder that holds 5% or more of the company’s outstanding
        share capital, assuming the exercise by such person of all of the convertible
        securities into shares held by that person, or that will cause any person
        to
        become a holder of more than 5% of the company’s outstanding share capital,
        requires approval by the Board of Directors and the shareholders of the company.
        However, subject to certain exceptions under regulations adopted under the
        Israeli Companies Law, shareholder approval will not be required if the
        aggregate number of shares issued pursuant to such private placement, assuming
        the exercise of all of the convertible securities into shares being sold
        in such
        a private placement, comprises less than 20% of the voting rights in a company
        prior to the consummation of the private placement.
   59
  Under
        the
        Israeli Companies Law, a shareholder has a duty to act in good faith towards
        the
        company and other shareholders and refrain from abusing his power in the
        company, including, among other things, voting in the general meeting of
        shareholders on the following matters:
  ·
              any
                  amendment to the Articles of Association;·
              an
                  increase of the company's authorized share capital;·
              a
                  merger; and·
              approval
                  of interested party transactions that require shareholders
                  approval.
  In
        addition, any controlling shareholder, any shareholder who knows it can
        determine the outcome of a shareholders vote and any shareholder who, under
        a
        company’s Articles of Association, can appoint or prevent the appointment of an
        office holder, is under a duty to act with fairness towards the company.
        The
        Israeli Companies Law does not describe the substance of this duty. The Israeli
        Companies Law requires that specified types of transactions, actions and
        arrangements be approved as provided for in a company’s articles of association
        and in some circumstances by the audit committee, by the Board of Directors
        and
        by the shareholders. In general, the vote required by the audit committee
        and
        the Board of Directors for approval of these matters, in each case, is a
        majority of the disinterested directors participating in a duly convened
        meeting.
  ***Rights
        Attached to Ordinary Shares***
  Our
        authorized share capital consists of 300,000,000 ordinary shares, par value
        NIS
        0.02 per share.
  Holders
        of ordinary shares have one vote per share, and are entitled to participate
        equally in the payment of dividends and share distributions and, in the event
        of
        our liquidation, in the distribution of assets after satisfaction of liabilities
        to creditors. No preferred shares are currently authorized. All outstanding
        ordinary shares are validly issued and fully paid.
  ***Transfer
        of Shares***
  Fully
        paid ordinary shares are issued in registered form and may be freely transferred
        under our Articles of Association unless the transfer is restricted or
        prohibited by another instrument or applicable securities laws.
  ***Dividend
        and Liquidation Rights***
  We
        may
        declare a dividend to be paid to the holders of ordinary shares according
        to
        their rights and interests in our profits. 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 the nominal value of their
        holdings.
  This
        right may be affected by the grant of preferential dividend or distribution
        rights, to the holders of a class of shares with preferential rights that
        may be
        authorized in the future. Under the Israeli Companies Law, the declaration
        of a
        dividend does not require the approval of the shareholders of the company,
        unless the company's articles of association require otherwise. Our Articles
        provide that the Board of Directors may declare and distribute dividends
        without
        the approval of the shareholders.
  ***Annual
        and Extraordinary General Meetings***
  We
        must
        hold our annual general meeting of shareholders each year no later than 15
        months from the last annual meeting, at a time and place determined by the
        Board
        of Directors, upon at least 21 days’ prior notice to our shareholders to which
        we need to add additional three days for notices sent outside of Israel.
        A
        special meeting may be convened by request of two directors, 25% of the
        directors then in office, one or more shareholders holding at least 5% of
        our
        issued share capital and at least 1% of our issued voting rights, or one
        or more
        shareholders holding at least 5% of our issued voting rights. Notice of a
        general meeting must set forth the date, time and place of the meeting. Such
        notice must be given at least 21 days but not more than 45 days prior to
        the
        general meeting. The quorum required for a meeting of shareholders consists
        of
        at least two shareholders present in person or by proxy who hold or represent
        between them at least one-third of the voting rights in the company. 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 (with no need for any notice to
        the
        shareholders) or until such other later time if such time is specified in
        the
        original notice convening the general meeting, or if we serve notice to the
        shareholders no less than seven days before the date fixed for the adjourned
        meeting. If at an adjourned meeting there is no quorum present half an hour
        after the time set for the meeting, any number participating in the meeting
        shall represent a quorum and shall be entitled to discuss the matters set
        down
        on the agenda for the original meeting. All shareholders who are registered
        in
        our registrar on the record date, or who will provide us with proof of ownership
        on that date as applicable to the relevant registered shareholder, are entitled
        to participate in a general meeting and may vote as described in “Voting Rights”
and “Voting by Proxy and in Other Manners,” below.
   60
  ***Voting
        Rights***
  Our
        ordinary shares do not have cumulative voting rights in the election of
        directors. As a result, the holders of ordinary shares that represent more
        than
        50% of the voting power represented at a shareholders meeting in which a
        quorum
        is present have the power to elect all of our directors, except the external
        directors whose election requires a special majority as described under the
        section entitled “Item 6. Directors, Senior Management and Employees - Board
        Practices - External and Independent Directors.”
  Holders
        of ordinary shares have one vote for each ordinary share held on all matters
        submitted to a vote of shareholders. Shareholders may vote in person or by
        proxy. 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.
  Under
        the
        Israeli Companies Law, unless otherwise provided in the Articles of Association
        or by applicable law, all resolutions of the shareholders require a simple
        majority. Our Articles of Association provide that all decisions may be made
        by
        a simple majority. See “-Approval of Certain Transactions” above for certain
        duties of shareholders towards the company.
  ***Voting
        by Proxy and in Other Manners***
  Our
        Articles of Association enable a shareholder to appoint a proxy, who need
        not be
        a shareholder, to vote at any shareholders meeting. We require that the
        appointment of a proxy be in writing signed by the person making the appointment
        or by an attorney authorized for this purpose, and if the person making the
        appointment is a corporation, by a person or persons authorized to bind the
        corporation. In the document appointing a proxy, each shareholder may specify
        how the proxy should vote on any matter presented at a shareholders meeting.
        The
        document appointing the proxy shall be deposited in our offices or at such
        other
        address as shall be specified in the notice of the meeting not less than
        48
        hours before the time of the meeting at which the person specified in the
        appointment is due to vote.
  The
        Israeli Companies Law and our Articles of Association do not permit resolutions
        of the shareholders to be adopted by way of written consent, for as long
        as our
        ordinary shares are publicly traded.
  ***Limitations
        on the Rights to Own Securities***
  The
        ownership or voting of ordinary shares by non-residents of Israel is not
        restricted in any way by our Articles of Association or the laws of the State
        of
        Israel, except that nationals of countries which are, or have been, in a
        state
        of war with Israel may not be recognized as owners of ordinary
        shares.
  ***Anti-Takeover
        Provisions under Israeli Law***
  The
        Israeli Companies Law permits merger transactions with the approval of each
        party’s board of directors and shareholders. In accordance with the Israeli
        Companies Law, a merger may be approved at a shareholders meeting by a majority
        of the voting power represented at the meeting, in person or by proxy, and
        voting on that resolution. In determining whether the required majority has
        approved the merger, shares held by the other party to the merger, any person
        holding at least 25% of the outstanding voting shares or means of appointing
        the
        board of directors of the other party to the merger, or the relatives or
        companies controlled by these persons, are excluded from the vote.
  Under
        the
        Israeli Companies Law, a merging company must inform its creditors of the
        proposed merger. Any creditor of a party to the merger may seek a court order
        blocking the merger, if there is a reasonable concern that the surviving
        company
        will not be able to satisfy all of the obligations of the parties to the
        merger.
        Moreover, a merger may not be completed until at least 30 days have passed
        from
        the time the merger was approved in a general meeting of each of the merging
        companies, and at least 50 days have passed from the time that a merger proposal
        was filed with the Israeli Registrar of Companies.
   61
  Israeli
        corporate law provides that an acquisition of shares in a public company
        must be
        made by means of a tender offer if, as a result of such acquisition, the
        purchaser would become a 25% or greater shareholder of the company. This
        rule
        does not apply if there is already another shareholder with 25% or greater
        shares in the company. Similarly, Israeli corporate law provides that an
        acquisition of shares in a public company must be made by means of a tender
        offer if, as a result of the acquisition, the purchaser's shareholdings would
        entitle the purchaser to over 45% of the shares in the company, unless there
        is
        a shareholder with 45% or more of the shares in the company. These requirements
        do not apply if, in general, the acquisition (1) was made in a private placement
        that received the approval of the company’s shareholders; (2) was from a 25% or
        greater shareholder of the company which resulted in the purchaser becoming
        a
        25% or greater shareholder of the company, or (3) was from a 45% or greater
        shareholder of the company which resulted in the acquirer becoming a 45%
        or
        greater shareholder of the company. These rules do not apply if the acquisition
        is made by way of a merger. Regulations promulgated under the Israeli Companies
        Law provide that these tender offer requirements do not apply to companies
        whose
        shares are listed for trading external of Israel if, according to the law
        in the
        country in which the shares are traded, including the rules and regulations
        of
        the stock exchange or which the shares are traded, either:
  ·
              there
                  is a limitation on acquisition of any level of control of the company;
                  or·
              the
                  acquisition of any level of control requires the purchaser to do
                  so by
                  means of a tender offer to the
                  public.
 
 The
        Israeli Companies Law provides specific rules and procedures for the acquisition
        of shares held by minority shareholders, if the majority shareholder holds
        more
        than 90% of the outstanding shares. If, as a result of an acquisition of
        shares,
        the purchaser 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 less than 5% of the outstanding shares are not tendered in the
        tender
        offer, all the shares that the purchaser offered to purchase will be transferred
        to it. The Israeli Companies 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 more than 5% of the outstanding shares
        are not tendered in the tender offer, then the purchaser may not acquire
        shares
        in the tender offer that will cause his shareholding to exceed 90% of the
        outstanding shares of the company. Israeli tax law treats specified
        acquisitions, including a stock-for-stock swap between an Israeli company
        and a
        foreign company, less favorably than does US tax law. These laws may have
        the
        effect of delaying or deterring a change in control of us, thereby limiting
        the
        opportunity for shareholders to receive a premium for their shares and possibly
        affecting the price that some investors are willing to pay for our
        securities.
 
 ***Rights
        of Shareholders***
  Under
        the
        Israeli Companies Law, our shareholders have the right to inspect certain
        documents and registers including the minutes of general meetings, the register
        of shareholders and the register of substantial shareholders, any document
        held
        by us that relates to an act or transaction requiring the consent of the
        general
        meeting as stated above under “-Approval of Certain Transactions,” our Articles
        of Association and our financial statements, and any other document which
        we are
        required to file under the Israeli Companies Law or under any law with the
        Registrar of Companies or the Israeli Securities Authority, and is available
        for
        public inspection at the Registrar of Companies or the Securities Authority,
        as
        the case may be.
  If
        the
        document required for inspection by one of our shareholders relates to an
        act or
        transaction requiring the consent of the general meeting as stated above,
        we may
        refuse the request of the shareholder if in our opinion the request was not
        made
        in good faith, the documents requested contain a commercial secret or a patent,
        or disclosure of the documents could prejudice our good in some other
        way.
  The
        Israeli Companies Law provides that with the approval of the court any of
        our
        shareholders or directors may file a derivative action on our behalf if the
        court finds the action is a priori, to our benefit, and the person demanding
        the
        action is acting in good faith. The demand to take action can be filed with
        the
        court only after it is serviced to us, and we decline or omit to act in
        accordance to this demand.
  ***Enforceability
        of Civil Liabilities***
  We
        are
        incorporated in Israel and some of our directors and officers and the Israeli
        experts named in this report reside outside the US. Service of process upon
        them
        may be difficult to effect within the US. Furthermore, because substantially
        all
        of our assets, and those of our non-US directors and officers and the Israeli
        experts named herein, are located outside the US, any judgment obtained in
        the
        US against us or any of these persons may not be collectible within the US.
   62
  We
        have
        been informed by our legal counsel in Israel, Kantor & Co., that there is
        doubt as to the enforceability of civil liabilities under the Securities
        Act or
        the Exchange Act, pursuant to original actions instituted in Israel. However,
        subject to particular time limitations, executory judgments of a US court
        for
        monetary damages in civil matters may be enforced by an Israeli court, provided
        that:
  ·
              the
                  judgment was obtained after due process before a court of competent
                  jurisdiction, that recognizes and enforces similar judgments of
                  Israeli
                  courts, and the court had authority according to the rules of private
                  international law currently prevailing in Israel;·
              adequate
                  service of process was effected and the defendant had a reasonable
                  opportunity to be heard;·
              the
                  judgment is not contrary to the law, public policy, security or
                  sovereignty of the State of Israel and its enforcement is not contrary
                  to
                  the laws governing enforcement of judgments;·
              the
                  judgment was not obtained by fraud and does not conflict with any
                  other
                  valid judgment in the same matter between the same
                  parties;·
              the
                  judgment is no longer appealable; and·
              an
                  action between the same parties in the same matter is not pending
                  in any
                  Israeli court at the time the lawsuit is instituted in the foreign
                  court.
 We
        have
        irrevocably appointed XTL Biopharmaceuticals, Inc., our US subsidiary, as
        our
        agent to receive service of process in any action against us in any US federal
        court or the courts of the State of New York.
  Foreign
        judgments enforced by Israeli courts generally will be payable in Israeli
        currency. The usual practice in an action before an Israeli court to recover
        an
        amount in a non-Israeli currency is for the Israeli court to render judgment
        for
        the equivalent amount in Israeli currency at the rate of exchange in force
        on
        the date of the judgment. Under existing Israeli law, a foreign judgment
        payable
        in foreign currency may be paid in Israeli currency at the rate of exchange
        for
        the foreign currency published on the day before date of payment. Current
        Israeli exchange control regulations also permit a judgment debtor to make
        payment in foreign currency. Pending collection, the amount of the judgment
        of
        an Israeli court stated in Israeli currency ordinarily may be linked to Israel’s
        consumer price index plus interest at the annual statutory rate set by Israeli
        regulations prevailing at that time. Judgment creditors must bear the risk
        of
        unfavorable exchange rates.
   **Material
        Contracts**
  ***Bicifadine
        License***
  In
        January 2007, XTL Development, our wholly owned subsidiary, signed an agreement
        with DOV to in-license the worldwide rights for Bicifadine, a serotonin and
        norepinephrine reuptake inhibitor. XTL Development intends to develop Bicifadine
        for the treatment of neuropathic pain - a chronic condition resulting from
        damage to peripheral nerves. In accordance with the terms of the license
        agreement, XTL Development made an initial up-front payment of $7.5 million
        in
        cash. In addition, XTL Development will make milestone payments of up to
        $126.5
        million, in cash and/or in our ordinary shares over the life of the license,
        of
        which up to $115 million will be due upon or after regulatory approval of
        the
        product and the remaining $11.5 million will be due prior to regulatory approval
        of the product. XTL Development is also obligated to pay royalties to DOV
        on net
        sales of the product to DOV.
  In
        addition, XTL Development has committed to pay a transaction advisory fee
        to a
        third party in the form of stock appreciation rights in the amount equivalent
        to
        3% of our fully diluted ordinary shares at the close of the transaction,
        vesting
        one year after the close of the transaction, and 7% of our fully diluted
        ordinary shares at the close of the transaction, vesting following the first
        to
        occur of successful Phase III clinical trial results or the acquisition of
        XTL.
        Payment of the stock appreciation rights by XTL Development can be satisfied,
        at
        our discretion, in cash and/or by issuance of our ordinary shares.
  ***Yeda
        License Agreement***
  In
        April
        of 1993, we entered into a research and license agreement with Yeda, which
        we
        refer to as the Yeda Agreement, under which Yeda granted us an exclusive
        worldwide license to use the Trimera patent portfolio and to exclusively
        use the
        information derived from the performance of certain research for the purposes
        specified in the agreement. Subject to earlier termination in accordance
        with
        the Yeda Agreement, the term of the license with respect to any licensed
        product
        made and/or sold or to any other licensed activity conducted in any country
        where a licensed patent covers such product or other licensed activity is
        until
        the date on which the last licensed patent in that country expires or until
        12
        years from the first commercial sale of the product (or first receipts to
        us
        from such other licensed activity) in such country, whichever is the longer
        period and in any other country until 12 years from the first commercial
        sale of
        such product (or first receipts to us from such other licensed activity)
        in that
        country. Similar provisions fix the term of the license with respect to licensed
        activities not attributable to any particular country. Under the agreement,
        any
        assignment or sublicense of the license granted by Yeda requires Yeda's prior
        written consent.
   63
  The
        Yeda
        Agreement has undergone a number of amendments, one of the end results of
        which
        is that we shall pay to Yeda the following royalties in connection with the
        license: a royalty of 3% of all net sales received by us; 25% of amounts
        received by us on net sales of third parties (less certain royalties payable
        by
        us to third parties), but no more than 3% and no less than 1.5% of such net
        sales; and a royalty ranging between 20% to 40% on any receipts to us other
        than
        our net sales or receipts on net sales made by third parties. Furthermore,
        such
        amendments have also changed the termination provisions relating to Yeda’s
        entitlement to terminate the agreement if we do not pay Yeda a certain minimum
        amount of annual royalties of $100,000 or $200,000, depending on the year.
        We
        may terminate the agreement with Yeda with six months advance notice in which
        event our rights in any technology licensed by Yeda to us shall terminate
        and
        all rights in any technology derived from research and development activities
        performed by us in connection with the technology licensed by Yeda to us
        shall
        vest in Yeda.
  In
        the
        agreement between Yeda, us and Cubist, whereby Yeda gave its consent relating
        to
        the grant of the license by us to Cubist under the terms of the HepeX-B
        collaboration, Yeda received the right to receive at least 1.5% of net sales
        of
        HepeX-B by Cubist sub-licensees, regardless of the amount received by us
        from
        Cubist in respect of such sales.
  ***Cubist
        Collaboration***
  We
        have
        entered into a licensing agreement with Cubist dated June 2, 2004, as amended,
        under which we granted to Cubist an exclusive, worldwide license (with the
        right
        to sub-license) to commercialize HepeX-B and any other product containing
        a hMAb
        or humanized monoclonal antibody or fragment directed at the hepatitis B
        virus
        owned or controlled by us. In August 2005, we transferred full responsibility
        for completing the development of HepeX-B to Cubist. Cubist will be responsible
        for completing the development and for registration and commercialization
        of the
        product worldwide. Nevertheless, during the term of this agreement, we have
        an
        ongoing obligation to transfer to Cubist all information Cubist may reasonably
        require and to provide Cubist with reasonable access to pertinent employees
        of
        ours that have experience with or information related to HepeX-B. We are
        also
        required to file, prosecute and maintain the relevant patents at our sole
        expense.
  In
        the
        event that the actual costs incurred in conducting activities that Cubist
        determines are necessary or advisable to obtain regulatory approval for HepeX-B
        for the prevention of recurrent hepatitis B infections in liver transplant
        patients exceed $33.9 million, any costs in excess shall be borne in equal
        share
        by us and Cubist.
  Under
        the
        terms of the agreement, Cubist paid us an initial up-front payment of $1
        million
        upon the signing of the agreement, a further aggregate amount of $1 million
        was
        paid in 2004, and an additional amount of up to $3 million will be paid upon
        achievement of certain regulatory milestones. We are entitled to receive
        royalties from net sales by Cubist, generally ranging from 10% to 17%, depending
        on levels of net sales achieved by Cubist, subject to certain deductions
        based
        on patent protection of HepeX-B in that territory, total costs of HepeX-B
        development, third party license payments and indemnification
        obligations.
  Cubist
        has the right to sub-license HepeX-B. The sub-licensee fees we will receive
        in
        such cases will vary according to the territory, the subject of the sub-license,
        the patent protection of HepeX-B in that territory, total costs of HepeX-B
        development, third party license payments, indemnification obligations and
        local
        competition. For example, where HepeX-B is not patent protected and a competing
        product obtains more than an agreed percentage of the local market, we would
        receive no royalties on sales of HepeX-B.
  Cubist
        has granted us the non-exclusive right of negotiation during the term of
        the
        agreement to obtain all or any portion of the rights to manufacture and supply
        HepeX-B or any other product containing an hMAb or humanized monoclonal antibody
        or fragment directed at the hepatitis B virus owned or controlled by us.
        Furthermore, in certain circumstances, we have the exclusive right to negotiate
        with Cubist to obtain from Cubist a sub-license to market and sell the HepeX-B
        or such other product in certain territories.
   64
  We
        agreed
        that during the term of the agreement and for one year thereafter, we will
        not
        research, develop or commercialize any competitive product containing a human
        or
        humanized monoclonal antibody or fragment that is directed to and binds with
        the
        hepatitis B virus.
  The
        agreement expires on the later of the last valid patent claim covering HepeX-B
        to expire or ten years after the first commercial sale of HepeX-B on a
        country-by-country basis.
  In
        December 2005, Cubist announced the positive results of a Phase IIb study
        with
        HepeX-B, based on which Cubist planned to meet with the FDA to discuss a
        proposed Phase III trial design. In July 2006, Cubist reported that the FDA
        direction on the regulatory pathway for approval creates both operational
        and
        economic challenges to it. The size of the safety population the FDA is looking
        for translates to an extremely lengthy development timeline, as there are
        only
        about 500 liver transplants due to hepatitis B in the US and Europe each
        year.
        As of the date hereof, Cubist has decided not to make any further investment
        in
        the HepeX-B program while Cubist evaluates strategic options for
        HepeX-B.
  ***VivoQuest
        Inc.***
 
 In
        August
        2005, we entered into an asset purchase agreement with VivoQuest, a privately
        held biotechnology company based in the US, pursuant to which we agreed to
        purchase from VivoQuest certain assets, including VivoQuest’s laboratory
        equipment, and to assume VivoQuest’s lease of its laboratory space. In
        consideration, we paid $450,000 to VivoQuest, which payment was satisfied
        by the
        issuance of ordinary shares having a fair market value in the same amount
        as of
        the closing date. In addition, we entered into a license agreement with
        VivoQuest pursuant to which we acquired exclusive worldwide rights to
        VivoQuest’s intellectual property and technology. The license covers a
        proprietary compound library, including VivoQuest’s lead HCV compounds, that was
        developed through the use of Diversity Oriented Synthesis, or DOS, technology.
        The terms of the license agreement include an initial upfront license fee
        of
        approximately $941,000 that was paid in our ordinary shares. The license
        agreement also provides for additional milestone payments triggered by certain
        regulatory and sales targets. These milestone payments total $34.6 million,
        $25.0 million of which will be due upon or following regulatory approval
        or
        actual product sales, and are payable in cash or ordinary shares at our
        election. In addition, the license agreement requires that we make royalty
        payments on product sales. The asset purchase agreement and the license
        agreement with VivoQuest were completed in September 2005.
  **Exchange
        Controls**
  Under
        Israeli Law, Israeli non-residents who purchase ordinary shares with certain
        non-Israeli currencies (including dollars) may freely repatriate in such
        non-Israeli currencies all amounts received in Israeli currency in respect
        of
        the ordinary shares, whether as a dividend, as a liquidating distribution,
        or as
        proceeds from any sale in Israel of the ordinary shares, provided in each
        case
        that any applicable Israeli income tax is paid or withheld on such amounts.
        The
        conversion into the non-Israeli currency must be made at the rate of exchange
        prevailing at the time of conversion.
  **Taxation**
  The
        following discussion of Israeli and US tax consequences material to our
        shareholders is not intended and should not be construed as legal or
        professional tax advice and does not exhaust all possible tax considerations.
        To
        the extent that the discussion is based on new tax legislation, which has
        not
        been subject to judicial or administrative interpretation, the views expressed
        in the discussion might not be accepted by the tax authorities in question.
        This
        summary does not purport to be a complete analysis of all potential tax
        consequences of owning ordinary shares or ADRs. In particular, this discussion
        does not take into account the specific circumstances of any particular
        shareholder (such as tax-exempt entities, certain financial companies,
        broker-dealers, shareholders subject to Alternative Minimum Tax, shareholders
        that actually or constructively own 10% or more of our voting securities,
        shareholders that hold ordinary shares or ADRs as part of straddle or hedging
        or
        conversion transaction, traders in securities that elect mark to market,
        banks
        and other financial institutions or shareholders whose functional currency
        is
        not the US dollar), some of which may be subject to special rules.
  *We
        urge shareholders to consult their own tax advisors as to the US, Israeli,
        or
        other tax consequences of the purchase, ownership and disposition of ordinary
        shares and ADRs, including, in particular, the effect of any foreign, state
        or
        local taxes. For purposes of the entire Taxation discussion, we refer to
        ordinary shares and ADRs collectively as ordinary shares.*
   65
  ***Israeli
        Tax Considerations***
  The
        following discussion refers to the current tax law applicable to companies
        in
        Israel, with special reference to its effect on us. This discussion also
        includes specified Israeli tax consequences to holders of our ordinary shares
        and Israeli Government programs benefiting us.
  **Tax
        Reforms**
  On
        January 1, 2003 a comprehensive tax reform took effect in Israel (the Law
        for
        Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002, as
        amended) (which we refer to as “the 2003 Reform”). Pursuant to the 2003 Reform,
        resident companies are subject to Israeli tax on income on a worldwide basis.
        In
        addition, the concept of controlled foreign corporation was introduced according
        to which an Israeli company may become subject to Israeli taxes on certain
        income of a non-Israeli subsidiary if the subsidiary’s primary source of income
        is passive income (such as interest, dividends, royalties, rental income
        or
        certain capital gains). An Israeli company that is subject to Israeli taxes
        on
        the income of its non-Israeli subsidiaries will receive a credit for income
        tax
        paid by the subsidiary in its country of resident subject to certain
        limitations. The 2003 Reform also substantially changed the system of taxation
        of capital gains.
  On
        July
        25, 2005 an additional tax reform took effect in Israel (the Law for Amendment
        of the Income Tax Ordinance (Amendment No. 147) (which we refer to as “the 2005
        Reform”). In general terms, pursuant to the 2005 Reform, and generally effective
        from January 1, 2006, the Israeli corporate tax rates were and will be further
        reduced, the capital gains tax rate that applies to Israeli individuals on
        the
        disposition of traded securities was increased and the tax rates that apply
        to
        dividends distributed by an Israeli company was partly reduced.
  **Corporate
        Tax Rate**
  The
        regular tax rate in Israel in 2007 is 29% (2006-31%). This rate is currently
        scheduled to decrease as follows: in 2008 - 27%, 2009 - 26%, 2010 and after
        -
        25%. However, the effective tax rate of a company which derives income from
        an
        approved enterprise may be considerably less, as further discussed
        below.
  **Tax
        Benefits Under the Law for the Encouragement of Capital Investments,
        1959**
  The
        Law
        for the Encouragement of Capital Investment, 1959, as amended, commonly referred
        to as the Investment Law, provides that a proposed capital investment in
        eligible facilities may, upon application to the Investment Center of the
        Ministry of Industry and Trade of the State of Israel, be designated as an
        Approved Enterprise. Each certificate of approval for an Approved Enterprise
        relates to a specific investment program delineated both by its financial
        scope,
        including its capital sources, and by its physical characteristics, for example,
        the equipment to be purchased and utilized under the program. The tax benefits
        derived from any certificate of approval relate only to taxable income
        attributable to the specific Approved Enterprise. If a company has more than
        one
        approval or only a portion of its capital investments is approved, its effective
        tax rate is the result of a weighted average of the applicable
        rates.
  Taxable
        income of a company derived from an Approved Enterprise is subject to company
        tax at the maximum rate of 25% rather than the usual rate in 2007 of 29%
        (as
        mentioned above, gradually scheduled to be reduced to 25% in 2010), for the
        benefit period. This period is ordinarily seven years, or ten years if the
        company qualifies as a foreign investors’ company as described below, commencing
        with the year in which the Approved Enterprise first generates taxable income.
        However, this period is limited to 12 years from commencement of production
        of
        the Approved Enterprise or 14 years from the date of approval, whichever
        is
        earlier.
  A
        company
        that has been granted the status of an Approved Enterprise may elect to forego
        entitlement to grants otherwise available for an Approved Enterprise, in
        return
        for an alternative package of benefits. Under the alternative package of
        benefits, a company’s undistributed income derived from an Approved Enterprise
        will be exempt from company tax for a period of between two and ten years
        from
        the first year of taxable income, depending on the geographic location of
        the
        Approved Enterprise within Israel, and the company will be eligible for a
        reduced tax rate for the remainder of the benefits period.
  A
        company
        that has elected the alternative package of benefits and that subsequently
        pays
        a dividend out of income derived from the approved enterprise during the
        tax
        exemption period will be subject to tax on the amount distributed, including
        any
        company tax on these amounts, at the rate which would have been applicable
        had
        it not elected the alternative package of benefits, generally 10%-25%, depending
        on the percentage of the company’s shares held by foreign shareholders. The
        dividend recipient is taxed at the reduced rate applicable to dividends from
        approved enterprises, which is 15%, if the dividend is distributed during
        the
        tax exemption period or within 12 years after this period, or in the case
        of a
        foreign investors’ company, without time limitation. The company must withhold
        this tax at source, regardless of whether the dividend is converted into
        or paid
        in foreign currency.
   66
  A
        company
        that has an Approved Enterprise program is eligible for enhanced tax benefits
        if
        it qualifies as a foreign investors’ company. A foreign investors' company is a
        company more than 25% of whose share capital and combined share and loan
        capital
        is owned by non-Israeli residents. A company which qualifies as a foreign
        investors' company and has an Approved Enterprise program is eligible for
        tax
        benefits for a ten-year benefit period. The company tax rate applicable to
        income earned from approved enterprise programs in the benefit period by
        a
        company meeting these qualifications is as follows:
  **For
                  a company with foreign investment of**
              
              **Company
                  tax rate**More
                  than 25% and less than 49%
              
              
              25%49%
                  or more and less than 74%
              
              
              20%74%
                  or more and less than 90%
              
              
              15%90%
                  or more
              
              
              10%
  The
        determination of foreign ownership is made on the basis of the lowest level
        of
        foreign ownership during the tax year.
  Subject
        to applicable provisions concerning income under the alternative package
        of
        benefits, all dividends are considered to be attributable to the entire
        enterprise and their effective tax rate is the result of a weighted average
        of
        the various applicable tax rates. Under the Investment Law, a company that
        has
        elected the alternative package of benefits is not obliged to attribute part
        of
        the dividend to exempt profits, and may generally decide from which year's
        profits to declare dividends. We currently intend to reinvest any income
        derived
        from our Approved Enterprise programs and not to distribute the income as
        a
        dividend.
  The
        Investment Center bases its decision whether or not to approve an application
        on
        the criteria set forth in the Investment Law and regulations and the then
        prevailing policy of the Investment Center. In addition, the benefits available
        to an Approved Enterprise are conditioned upon the fulfillment of conditions
        stipulated in the Investment Law and its regulations and in the criteria
        in the
        specific certificate of approval, as described above. If a company does not
        meet
        these conditions, it would be required to refund the amount of tax benefits,
        together with consumer price index linkage adjustment and interest.
  Additionally
        after receiving the certificate of approval from the Investment Center, a
        company must meet certain reporting requirements. The company must file periodic
        audited reports on the progress in implementing the program. Additionally,
        where
        a company has completed the implementation of investing in fixed assets,
        a final
        implementation report must be filed with, and reviewed by, the Investment
        Center. Should the Investment Center determine that the investments in assets
        were made in accordance with the certificate of approval and that the required
        minimum capital has been invested, it will issue a final approval of
        implementation, which will also indicate the year that will be the first
        year of
        potential benefits under the Approved Enterprise.
  On
        March
        29, 2005, the Israeli Parliament enacted an amendment to the Investment Law,
        which is intended to provide expanded tax benefits to local and foreign
        investors and to simplify the bureaucratic process relating to approval of
        investments qualifying under the Investment Law.
  The
        amendment to the Investment Law does not retroactively apply for investment
        programs having an Approved Enterprise approval certificate from the Investment
        Center issued up to December 31, 2004 (even when investments under these
        programs are conducted after January 1, 2005). Consequently, the amendment
        to
        the Investment Law should not impact an existing Approved Enterprise that
        received an approval certificate prior to December 2004. The new tax regime
        will
        only apply for a new Approved Enterprise and to an Approved Enterprise expansion
        for which the first year of benefits was 2004 or later.
  Under
        the
        amended Investment Law, if an investment project meets all of the eligibility
        criteria under the alternative benefits route as set forth in the amended
        Investment Law and in regulations to be issued thereunder, such project will
        automatically qualify for the Approved Enterprise taxation benefits under
        the
        alternative package of benefits with no need for prior approval from the
        Israeli
        Tax Authorities. In addition, the amended Investment Law provides that the
        criteria for conferral of tax benefits in the alternative package of benefits
        of
        the Investment Law be handled by the Israeli Tax Authorities rather than
        the
        Investment Center. In this respect a mechanism will be available which will
        enable a company to apply for a pre-ruling from the Israeli Tax Authorities
        to
        obtain certainty as to the investment taxation status of its investment under
        the amended Investment Law.
   67
  The
        Investment Center has granted us Approved Enterprise status, which approval
        was
        granted prior to December 31, 2004, and is therefore entitled to the benefits
        afforded by the Investment Law prior to its amendment. Accordingly, our
        undistributed taxable income derived from this program will be tax exempt
        for a
        period of two years beginning with the year in which we first generate taxable
        income, and thereafter will be subject to a reduced tax rate of 25% or less,
        if
        we qualify as a foreign investors' company, for a period of between five
        and
        eight years, depending on the percentage of our capital held by non-Israeli
        shareholders. However, this benefit period cannot extend beyond 12 years
        from
        the year of commencement of operations or 14 years from the year in which
        approval was granted, whichever is earlier. To date, we have not generated
        taxable income. We may, in the forseeable future, cease to be entitled to
        the
        aforesaid tax benefits, as we may not in the future be in compliance with
        the
        Certificate of Approval from the Investment Center of the Ministry of Industry
        and Trade of the State of Israel due to a reduction in research and development
        activity in Israel.
  Additionally,
        given our significant amount of net operating losses, and the limitation
        mentioned above to the benefit period, there is no certainty if and when
        we
        would be able to enjoy the tax benefits described above.
  **Tax
        Benefits for Research and Development**
  Israeli
        tax law allows, under specific conditions, a tax deduction in the year incurred
        for expenditures, including capital expenditures, relating to scientific
        research and development projects, if the expenditures are approved by the
        relevant Israeli government ministry, determined by the field of research,
        and
        the research and development is for the promotion of the company and is carried
        out by or on behalf of the company seeking the deduction. Expenditures not
        so
        approved are deductible over a three-year period. In the past, expenditures
        that
        were made out of proceeds made available to us through government grants
        were
        automatically deducted during a one year period.
  **Tax
        Benefits Under the Law for the Encouragement of Industry (Taxes),
        1969**
  The
        Law
        for the Encouragement of Industry (Taxes), 1969, generally referred to as
        the
        Industry Encouragement Law, provides several tax benefits for industrial
        companies. An industrial company is defined as a company resident in Israel,
        at
        least 90% of the income of which in a given tax year exclusive of income
        from
        specified government loans, capital gains, interest and dividends, is derived
        from an industrial enterprise owned by it. An industrial enterprise is defined
        as an enterprise whose major activity in a given tax year is industrial
        production activity.
  Under
        the
        Industry Encouragement Law, industrial companies are entitled to a number
        of
        corporate tax benefits, including:
  ·
              deduction
                  of purchase of know-how and patents over an eight-year period;
                  and·
              the
                  right to elect, under specified conditions, to file a consolidated
                  tax
                  return with additional related Israeli industrial companies and
                  an
                  industrial holding company.
  Under
        some tax laws and regulations, an industrial enterprise may be eligible for
        special depreciation rates for machinery, equipment and buildings. These
        rates
        differ based on various factors, including the date the operations begin
        and the
        number of work shifts. An industrial company owning an approved enterprise
        may
        choose between these special depreciation rates and the depreciation rates
        available to the approved enterprise.
  Eligibility
        for benefits under the Industry Encouragement Law is not subject to receipt
        of
        prior approval from any governmental authority.
  We
        believe that we currently qualify as an industrial company within the definition
        of the Industry Encouragement Law. We cannot assure you that the Israeli
        tax
        authorities will agree that we qualify, or, if we qualify, that we will continue
        to qualify as an industrial company or that the benefits described above
        will be
        available to us in the future. We may, in the forseeable future, cease to
        be
        entitled to the aforesaid tax benefits, due to a reduction in research and
        development activity in Israel.
   68
  **Special
        Provisions Relating to Taxation under Inflationary
        Conditions**
  The
        Income Tax Law (Inflationary Adjustments), 1985, generally referred to as
        the
        Inflationary Adjustments Law, represents an attempt to overcome the problems
        presented to a traditional tax system by an economy undergoing rapid inflation.
        The Inflationary Adjustments Law is highly complex. Its features, which are
        material to us, can be described as follows:
  ·
              where
                  a company's equity, as defined in the law, exceeds the cost of
                  fixed
                  assets as defined in the Inflationary Adjustments Law, a deduction
                  from
                  taxable income that takes into account the effect of the applicable
                  annual
                  rate of inflation on the excess is allowed up to a ceiling of 70%
                  of
                  taxable income in any single tax year, with the unused portion
                  permitted
                  to be carried forward on a linked basis. If the cost of fixed assets,
                  as
                  defined in the Inflationary Adjustments Law, exceeds a company's
                  equity,
                  then the excess multiplied by the applicable annual rate of inflation
                  is
                  added to taxable income; and·
              subject
                  to specified limitations, depreciation deductions on fixed assets
                  and
                  losses carried forward are adjusted for inflation based on the
                  increase in
                  the consumer price index.
 
  **Israeli
        Estate and Gift Taxes**
  Generally,
        Israel does not currently impose taxes on inheritance or bona fide gifts.
        For
        transfer of assets by inheritance or gift that would normally be subject
        to
        capital gains tax or land appreciation tax, the recipient’s tax cost basis and
        date of purchase are generally deemed to be the same as those for the transferor
        of the property.
  **Capital
        Gains Tax on Sale of our Ordinary Shares by Both Residents and Non-Residents
        of
        Israel**
  Israeli
        law generally imposes a capital gains tax on the sale of capital assets located
        in Israel, including shares in Israeli resident companies, by both residents
        and
        non-residents of Israel, unless a specific exemption is available or unless
        a
        treaty between Israel and the country of the non-resident provides otherwise.
        The law distinguishes between the inflationary surplus and the real gain.
        The
        inflationary surplus is the portion of the total capital gain, which is
        equivalent to the increase of the relevant asset’s purchase price attributable
        to the increase in the Israeli consumer price index from the date of purchase
        to
        the date of sale. The real gain is the excess of the total capital gain over
        the
        inflationary surplus. A non resident that invests in taxable assets with
        foreign
        currency may elect to calculate the inflationary amount by using such foreign
        currency.
  Non-Israeli
        residents will be exempt from Israeli capital gains tax on any gains derived
        from the sale of shares publicly traded on a stock exchange recognized by
        the
        Israeli Ministry of Finance (including the Tel-Aviv Stock Exchange and Nasdaq),
        provided such shareholders did not acquire their shares prior to an initial
        public offering and that such capital gains are not derived by a permanent
        establishment of the foreign resident in Israel. Notwithstanding the foregoing,
        dealers in securities in Israel are taxed at the regular tax rates applicable
        to
        business income. However, Non-Israeli corporations will not be entitled to
        such
        exemption if an Israeli resident (1) has a controlling interest of 25% or
        more
        in such non-Israeli corporation, or (2) is the beneficiary of, or is entitled
        to, 25% or more of the revenue or profits of such non-Israeli corporation,
        whether directly or indirectly. In any event, the provisions of the tax reform
        shall not affect the exemption from capital gains tax for gains accrued before
        January 1, 2003, as described in the previous paragraph.
  On
        July
        25, 2005, the 2005 Reform came into effect. Pursuant to the 2005 Reform,
        effective January 1, 2006, the capital gains tax imposed on Israeli tax resident
        individuals on the sale of securities is 20%. With respect to an Israeli
        tax
        resident individual who is a “substantial shareholder” on the date of sale of
        the securities or at any time during the 12 months preceding such sale, the
        capital gains tax rate was increased to 25%. A “substantial shareholder” is
        defined as someone who alone, or together with another person, holds, directly
        or indirectly, at least 10 % in one or all of any of the means of control
        in the
        corporation. With respect to Israeli tax resident corporate investors, effective
        January 1, 2006 capital gains tax at the regular corporate rate will be imposed
        on such taxpayers on the sale of traded shares.
  Other
        provisions may apply to shareholders that acquired their ordinary shares
        in XTL
        prior to our 2006 private placement and / or prior to January 1,
        2003.
  In
        addition, 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 (the “United States- Israel Tax Treaty”), the sale, exchange or
        disposition of ordinary shares by a person who qualifies as a resident of
        the US
        within the meaning of the United States-Israel Tax Treaty and who is entitled
        to
        claim the benefits afforded to such person by the United States- Israel Tax
        Treaty (a “Treaty United States Resident”) generally will not be subject to the
        Israeli capital gains tax unless such “Treaty United States Resident” holds,
        directly or indirectly, shares representing 10% or more of our voting power
        during any part of the twelve- month period preceding such sale, exchange
        or
        disposition, subject to certain conditions or if the capital gains from such
        sale are considered as business income attributable to a permanent establishment
        of the US resident in Israel. However, under the United States-Israel Tax
        Treaty, such “Treaty United States Resident” would be permitted to claim a
        credit for such taxes against the US federal income tax imposed with respect
        to
        such sale, exchange or disposition, subject to the limitations in US laws
        applicable to foreign tax credits.
   69
  **Taxation
        of Dividends**
  Non-residents
        of Israel are subject to income tax on income accrued or derived from sources
        in
        Israel
  Pursuant
        to the 2005 Reform, effective January 1, 2006, the tax rate imposed on dividends
        distributed by an Israeli company to Israeli tax resident individuals or
        to
        non-Israeli residents was reduced to a tax at a rate of 20%. With respect
        to
“substantial shareholders,” as defined above, the applicable tax rate remains
        25%. The taxation of dividends distributed by an Israeli company to another
        Israeli corporate tax resident remains unchanged.
  Notwithstanding,
        dividends distributed by an Israeli company to Israeli tax resident individuals
        or to non-Israeli residents are subject to a 20% withholding tax (15% in
        the
        case of dividends distributed from the taxable income attributable to an
        Approved Enterprise), unless a lower rate is provided in a treaty between
        Israel
        and the shareholder’s country of residence. Dividends distributed by an Israeli
        company to another Israeli tax resident company are generally exempt, unless
        such dividends are distributed from taxable income attributable to an Approved
        Enterprise, in which case such dividends are taxed at a rate of 15%, or unless
        such dividends are distributed from income that was not taxed in Israel,
        in
        which case such dividends are taxed at a rate of 25%.
  In
        any
        case, dividends distributed from the taxable income attributable to an Approved
        Enterprise, to both Israeli tax residents and non-Israeli residents remains
        subject to a 15% tax rate.
  Under
        the
        US-Israel Tax Treaty, the maximum Israeli tax and withholding tax on dividends
        paid to a holder of ordinary shares who is a resident of the US is generally
        25%, but is reduced to 12.5% if the dividends are paid to a corporation that
        holds in excess of 10% of the voting rights of company during the company’s
        taxable year preceding the distribution of the Dividend and the portion of
        the
        company’s taxable year in which the dividend was distributed. Dividends of an
        Israeli company derived from the income of an Approved Enterprise will still
        be
        subject to a 15% dividend withholding tax; if the dividend is attributable
        partly to income derived from an Approved Enterprise, and partly to other
        sources of income, the withholding rate will be a blended rate reflecting
        the
        relative portions of the two types of income. A non-resident of Israel who
        has
        dividend income derived from or accrued in Israel, from which tax was withheld
        at the source, is generally exempt from the duty to file tax returns in Israel
        in respect of such income, provided such income was not derived from a business
        conducted in Israel by the taxpayer.
  ***US
        Federal Income Tax Considerations***
  The
        following discusses the material US federal income tax consequences to a
        holder
        of our ordinary shares who qualifies as a US holder, which is defined
        as:
  ·
              a
                  citizen or resident of the US;·
              a
                  corporation created or organized under the laws of the US, the
                  District of
                  Columbia, or any state; or·
              a
                  trust or estate, treated, for US federal income tax purposes, as
                  a
                  domestic trust or estate.
  This
        discussion is based on current provisions of the Internal Revenue Code of
        1986,
        as amended, which we refer to as the Code, current and proposed Treasury
        regulations promulgated under the Code, and administrative and judicial
        decisions as of the date of this report, all of which are subject to change,
        possibly on a retroactive basis. This discussion does not address any aspect
        of
        state, local or non-US tax laws. Except where noted, this discussion addresses
        only those holders who hold our shares as capital assets. This discussion
        does
        not purport to be a comprehensive description of all of the tax considerations
        that may be relevant to US holders entitled to special treatment under US
        federal income tax laws, for example, financial institutions, insurance
        companies, tax-exempt organizations and broker/dealers, and it does not address
        all aspects of US federal income taxation that may be relevant to any particular
        shareholder based on the shareholder's individual circumstances. In particular,
        this discussion does not address the potential application of the alternative
        minimum tax, or the special US federal income tax rules applicable in special
        circumstances, including to US holders who:
  ·
              have
                  elected mark-to-market accounting;·
              hold
                  our ordinary shares as part of a straddle, hedge or conversion
                  transaction
                  with other investments;·
              own
                  directly, indirectly or by attribution at least 10% of our voting
                  power;·
              are
                  tax exempt entities;·
              are
                  persons who acquire shares in connection with employment or other
                  performance of services; and·
              have
                  a functional currency that is not the US
                  dollar.
   70
  Additionally,
        this discussion does not consider the tax treatment of partnerships or persons
        who hold ordinary shares through a partnership or other pass-through entity
        or
        the possible application of US federal gift or estate taxes. Material aspects
        of
        US federal income tax relevant to a holder other than a US holder are also
        described below.
  Each
        shareholder should consult its tax advisor regarding the particular tax
        consequences to such holder of ownership and disposition of our shares, as
        well
        as any tax consequences that may arise under the laws of any other relevant
        foreign, state, local, or other taxing jurisdiction.
  **Taxation
        of Dividends Paid on Ordinary Shares**
  Subject
        to the description of the passive foreign investment company rules below,
        a US
        holder will be required to include in gross income as ordinary income the
        amount
        of any distribution paid on ordinary shares, including any Israeli taxes
        withheld from the amount paid, to the extent the distribution is paid out
        of our
        current or accumulated earnings and profits as determined for US federal
        income
        tax purposes. Distributions in excess of these earnings and profits will
        be
        applied against and will reduce the US holder’s basis in the ordinary shares
        and, to the extent in excess of this basis, will be treated as gain from
        the
        sale or exchange of ordinary shares.
  Certain
        dividend income may be eligible for a reduced rate of taxation. Dividend
        income
        will be taxed to a non-corporate holder at the applicable long-term capital
        gains rate if the dividend is received from a “qualified foreign corporation,”
and the shareholder of such foreign corporation holds such stock for more
        than
        60 days during the 121 day period that begins on the date that is 60 days
        before
        the ex-dividend date for the stock. The holding period is tolled for any
        days on
        which the shareholder has reduced his risk of loss. A “qualified foreign
        corporation” is either a corporation that is eligible for the benefits of a
        comprehensive income tax treaty with the US or a corporation whose stock,
        the
        shares of which are with respect to any dividend paid by such corporation,
        is
        readily tradable on an established securities market in the United States.
        However, a foreign corporation will not be treated as qualified if it is
        a
        passive foreign investment company (as discussed below) for the year in which
        the dividend was paid or the preceding year. Distributions of current or
        accumulated earnings and profits paid in foreign currency to a US holder
        will be
        includible in the income of a US holder in a US dollar amount calculated
        by
        reference to the exchange rate on the day the distribution is received. A
        US
        holder that receives a foreign currency distribution and converts the foreign
        currency into US dollars subsequent to receipt will have foreign exchange
        gain
        or loss based on any appreciation or depreciation in the value of the foreign
        currency against the US dollar, which will generally be US source ordinary
        income or loss.
  As
        described above, we will generally be required to withhold Israeli income
        tax
        from any dividends paid to holders who are not resident in Israel. See “ -
        Israeli Tax Considerations—Taxation of Dividends” above. If a US holder receives
        a dividend from us that is subject to Israeli withholding, the following
        would
        apply:
  ·
              You
                  must include the gross amount of the dividend, not reduced by the
                  amount
                  of Israeli tax withheld, in your US taxable income.·
              You
                  may be able to claim the Israeli tax withheld as a foreign tax
                  credit
                  against your US income tax liability. However, to the extent that
                  25% or
                  more of our gross income from all sources was effectively connected
                  with
                  the conduct of a trade or business in the US (or treated as effectively
                  connected, with limited exceptions) for a three-year period ending
                  with
                  the close of the taxable year preceding the year in which the dividends
                  are declared, a portion of this dividend will be treated as US
                  source
                  income, possibly reducing the allowable foreign tax.·
              The
                  foreign tax credit is subject to significant and complex limitations.
                  Generally, the credit can offset only the part of your US tax attributable
                  to your net foreign source passive income. Additionally, if we
                  pay
                  dividends at a time when 50% or more of our stock is owned by US
                  persons,
                  you may be required to treat the part of the dividend attributable
                  to US
                  source earnings and profits as US source income, possibly reducing
                  the
                  allowable credit.·
              A
                  US holder will be denied a foreign tax credit with respect to Israeli
                  income tax withheld from dividends received on the ordinary shares
                  to the
                  extent the US holder has not held the ordinary shares for at least
                  16 days
                  of the 31-day period beginning on the date which is 15 days before
                  the
                  ex-dividend date or, alternatively, to the extent the US holder
                  is under
                  an obligation to make related payments with respect to substantially
                  similar or related property. Any days during which a US holder
                  has
                  substantially diminished its risk of loss on the ordinary shares
                  are not
                  counted toward meeting the 16-day holding period required by the
                  statute.·
              If
                  you do not elect to claim foreign taxes as a credit, you will be
                  entitled
                  to deduct the Israeli income tax withheld from your XTL dividends
                  in
                  determining your taxable income.·
              Individuals
                  who do not claim itemized deductions, but instead utilize the standard
                  deduction, may not claim a deduction for the amount of the Israeli
                  income
                  taxes withheld.·
              If
                  you are a US corporation holding our stock, the general rule is
                  that you
                  cannot claim the dividends-received deduction with respect to our
                  dividends. There is an exception to this rule if you own at least
                  10% of
                  our ordinary shares (by vote and value) and certain conditions
                  are met,
                  including that we were not a PFIC during the period you have held
                  our
                  ordinary shares.
  Special
        rules, described below, apply if we are a passive foreign investment
        company.
   71
  **Taxation
        of the Disposition of Ordinary Shares**
  Subject
        to the description of the passive foreign investment company rules below,
        upon
        the sale, exchange or other disposition of our ordinary shares, a US holder
        will
        recognize capital gain or loss in an amount equal to the difference between
        the
        US holder's basis in the ordinary shares, which is usually the cost of these
        shares, and the amount realized on the disposition. Capital gain from the
        sale,
        exchange or other disposition of ordinary shares held more than one year
        is
        long-term capital gain and is eligible for a reduced rate of taxation for
        non-corporate holders. In general, gain realized by a US holder on a sale,
        exchange or other disposition of ordinary shares generally will be treated
        as US
        source income for US foreign tax credit purposes. A loss realized by a US
        holder
        on the sale, exchange or other disposition of ordinary shares is generally
        allocated to US source income. However, regulations require the loss to be
        allocated to foreign source income to the extent certain dividends were received
        by the taxpayer within the 24-month period preceding the date on which the
        taxpayer recognized the loss. The deductibility of a loss realized on the
        sale,
        exchange or other disposition of ordinary shares is subject to limitations
        for
        both corporate and individual shareholders.
  A
        US
        holder that uses the cash method of accounting calculates the US dollar value
        of
        the proceeds received from a sale of ordinary shares as of the date that
        the
        sale settles, and will generally have no additional foreign currency gain
        or
        loss on the sale, while a US holder that uses the accrual method of accounting
        is required to calculate the value of the proceeds of the sale as of the
        trade
        date and may therefore realize foreign currency gain or loss, unless the
        US
        holder has elected to use the settlement date to determine its proceeds of
        sale
        for purposes of calculating this foreign currency gain or loss. In addition,
        a
        US holder that receives foreign currency upon disposition of our ordinary
        shares
        and converts the foreign currency into US dollars subsequent to receipt will
        have foreign exchange gain or loss based on any appreciation or depreciation
        in
        the value of the foreign currency against the US dollar, which will generally
        be
        US source ordinary income or loss.
  **Tax
        Consequences If We Are A Passive Foreign Investment
        Company**
  Special
        tax rules apply to the timing and character of income received by a US holder
        of
        a PFIC. We will be a PFIC if either 75% or more of our gross income in a
        tax
        year is passive income or the average percentage of our assets (by value)
        that
        produce or are held for the production of passive income in a tax year is
        at
        least 50%. The IRS, has indicated that cash balances, even if held as working
        capital, are considered to be assets that produce passive income. Therefore,
        any
        determination of PFIC status will depend upon the sources of our income,
        and the
        relative values of passive and non- passive assets, including goodwill.
        Furthermore, because the goodwill of a publicly-traded corporation such as
        us is
        largely a function of the trading price of its shares, the valuation of that
        goodwill is subject to significant change throughout each year. A determination
        as to a corporation’s status as a PFIC must be made annually. We believe that we
        were likely not a PFIC for the taxable years ended December 31, 2005 and
        2004.
        However, we believe that we were a PFIC for the taxable year ended December
        31,
        2006. Although such a determination is fundamentally factual in nature and
        generally cannot be made until the close of the applicable taxable year,
        based
        on our current operations, we believe that there is a significant likelihood
        that we will be classified as a PFIC in the 2007 taxable year and possibly
        in
        subsequent years.
   72
 
 If
        we are
        classified as a PFIC, a special tax regime would apply to both (a) any “excess
        distribution” by us (generally, the US holder's ratable share of distributions
        in any year that are greater than 125% of the average annual distributions
        received by such US holder in the three preceding years or its holding period,
        if shorter) and (b) any gain recognized on the sale or other disposition
        of your
        ordinary shares. Under this special regime, any excess distribution and
        recognized gain would be treated as ordinary income and the federal income
        tax
        on such ordinary income is determined under the following steps: (i) the
        amount
        of the excess distribution or gain is allocated ratably over the US holder's
        holding period for our ordinary shares; (ii) tax is determined for amounts
        allocated to the first year in the holding period in which we were classified
        as
        a PFIC and all subsequent years (except the year in which the excess
        distribution was received or the sale occurred) by applying the highest
        applicable tax rate in effect in the year to which the income was allocated;
        (iii) an interest charge is added to this tax calculated by applying the
        underpayment interest rate to the tax for each year determined under the
        preceding sentence from the due date of the income tax return for such year
        to
        the due date of the return for the year in which the excess distribution
        or sale
        occurs; and (iv) amounts allocated to a year prior to the first year in the
        US
        holder’s holding period in which we were classified as a PFIC or to the year in
        which the excess distribution or the disposition occurred are taxed as ordinary
        income and no interest charge applies.
  A
        US
        holder may generally avoid the PFIC regime by electing to treat his PFIC
        shares
        as a “qualified electing fund.” If a US holder elects to treat PFIC shares as a
        qualified electing fund, also known as a “QEF Election,” the US holder must
        include annually in gross income (for each year in which PFIC status is met)
        his *pro
        rata* share of
        the PFIC’s ordinary earnings and net capital gains, whether or not such amounts
        are actually distributed to the US holder. A US holder may make a QEF Election
        with respect to a PFIC for any taxable year in which he was a shareholder.
        A QEF
        Election is effective for the year in which the election is made and all
        subsequent taxable years of the US holder. Procedures exist for both retroactive
        elections and the filing of protective statements. A US holder making the
        QEF
        Election must make the election on or before the due date, as extended, for
        the
        filing of the US holder's income tax return for the first taxable year to
        which
        the election will apply.
  A
        QEF
        Election is made on a shareholder-by-shareholder basis. A US holder must
        make a
        QEF Election by completing Form 8621, Return by a Shareholder of a Passive
        Foreign Investment Company or Qualified Electing Fund, and attaching it to
        the
        holder’s timely filed US federal income tax return. We have complied with the
        record-keeping and reporting requirements that are a prerequisite for US
        holders
        to make a QEF Election for the 2006 tax year. For this purpose, we have made
        our
        2006 PFIC annual information statement available under a link entitled “PFIC
        Annual Information Statement” under the “Investor Information” section on our
        corporate website, which you may access at www.xtlbio.com .
        While
        we plan to continue to comply with such requirements, if, in the future,
        meeting
        those record-keeping and reporting requirements becomes onerous, we may decide,
        in our sole discretion, that such compliance is impractical and will so notify
        US holders.
  Alternatively,
        a US holder may also generally avoid the PFIC regime by making a so-called
        "mark-to-market" election. Such an election may be made by a US holder with
        respect to ordinary shares owned at the close of such holder's taxable year,
        provided that we are a PFIC and the ordinary shares are considered “marketable
        stock.” The ordinary shares will be marketable stock if they are regularly
        traded on a national securities exchange that is registered with the Securities
        and Exchange Commission, or the national market system established pursuant
        to
        section 11A of the Securities and Exchange Act of 1934, or an equivalent
        regulated and supervised foreign securities exchange.
  If
        a US
        holder were to make a mark-to-market election with respect to ordinary shares,
        such holder generally will be required to include in its annual gross income
        the
        excess of the fair market value of the PFIC
        shares at year-end over such shareholder’s adjusted tax basis in the ordinary
        shares. Such amounts will be taxable to the US holder as ordinary income,
        and
        will increase the holder’s tax basis in the ordinary shares. Alternatively, if
        in any year, a United States holder’s tax basis exceeds the fair market value of
        the ordinary shares at year-end, then the US holder generally may
        take an
        ordinary loss deduction to the
        extent of the aggregate amount of ordinary income inclusions for prior years
        not
        previously recovered through loss deductions and any loss deductions taken
        will
        reduce the shareholder’s tax basis in the ordinary shares. Gains
        from an actual sale or other disposition of the ordinary shares with a
“mark-to-market” election will be treated as ordinary income, and any losses
        incurred on an actual sale or other disposition of the ordinary shares will
        be
        treated as an ordinary loss to the extent of any prior “unreversed inclusions”
as defined in Section 1296(d) of the Code.
  The
        mark-to-market election is made on a shareholder-by-shareholder basis. The
        mark-to-market election is made by completing Form 8621, Return by a Shareholder
        of a Passive Foreign Investment Company or Qualified Electing Fund, and
        attaching it to the holder’s timely filed US federal income tax return for the
        year of election. Such election is
        effective for the taxable year for which made and all subsequent years until
        either (a) the ordinary shares cease to be marketable stock or (b) the election
        is revoked with the consent of the IRS.
   73
  A
        US
        holder who did not make an election either to (i) treat us as a “qualified
        electing fund,” or (ii) mark our ordinary shares to market, will be subject to
        the following:
  ·
              gain
                  recognized by the US holder upon the disposition of, as well as
                  income
                  recognized upon receiving certain excess distributions on the ordinary
                  shares would be taxable as ordinary income;·
              the
                  US holder would be required to allocate the excess distribution
                  and/or
                  disposition gain ratably over such US holder's entire holding period
                  for
                  such ordinary shares;·
              the
                  amount allocated to each year other than the year of the excess
                  distribution or disposition and pre-PFIC years would be subject
                  to tax at
                  the highest applicable tax rate, and an interest charge would be
                  imposed
                  with respect to the resulting tax liability;·
              the
                  US holder would be required to file an annual return on IRS Form
                  8621 for
                  the years in which distributions were received on and gain was
                  recognized
                  on dispositions of, our ordinary shares; and·
              any
                  US holder who acquired the ordinary shares upon the death of the
                  shareholder would not receive a step-up to market value of his
                  income tax
                  basis for such ordinary shares. Instead such US holder beneficiary
                  would
                  have a tax basis equal to the decedent's basis, if
                  lower.
 
 ***In
        view of the complexity of the issues regarding our treatment as a PFIC, US
        shareholders are urged to consult their own tax advisors for guidance as
        to our
        status as a PFIC.***
 
 **US
        Federal Income Tax Consequences for Non-US holders of Ordinary
        Shares**
  Except
        as
        described in "Information Reporting and Back-up Withholding" below, a Non-US
        holder of ordinary shares will not be subject to US federal income or
        withholding tax on the payment of dividends on, and the proceeds from the
        disposition of, ordinary shares, unless:
  ·
              the
                  item is effectively connected with the conduct by the Non-US holder
                  of a
                  trade or business in the US and, in the case of a resident of a
                  country
                  which has a tax treaty with the US, the item is attributable to
                  a
                  permanent establishment in the US;·
              the
                  Non-US holder is subject to tax under the provisions of US tax
                  law
                  applicable to US expatriates; or·
              the
                  individual non-US holder is present in the US for 183 days or more
                  in the
                  taxable year of the disposition and certain other conditions are
                  met.
  **Information
        Reporting and Back-Up Withholding**
  US
        holders generally are subject to information reporting requirements with
        respect
        to dividends paid in the US on ordinary shares. Existing regulations impose
        back-up withholding on dividends paid in the US on ordinary shares unless
        the US
        holder provides IRS Form W-9 or otherwise establishes an exemption. US holders
        are subject to information reporting and back-up withholding on proceeds
        paid
        from the disposition of ordinary shares unless the US holder provides IRS
        Form
        W-9 or otherwise establishes an exemption.
 
 Non-US
        holders generally are not subject to information reporting or back-up
        withholding with respect to dividends paid on, or upon the disposition of,
        ordinary shares, provided that the non-US holder provides a taxpayer
        identification number, certifies to its foreign status, or otherwise establishes
        an exemption to the US financial institution holding the ordinary shares.
 
 Prospective
        investors should consult their tax advisors concerning the effect, if any,
        of
        these Treasury regulations on an investment in ordinary shares. Back-up
        withholding is not an additional tax. The amount of any back-up withholding
        will
        be allowed as a credit against a holder's US federal income tax liability
        and
        may entitle the holder to a refund, provided that specified required information
        is furnished to the IRS on a timely basis.
   74
 
 **US
        Federal Income Tax Consequences for XTL**
 
 The
        residency of the Chairman of our Board of Directors and our Chief Executive
        Officer in the United States (“US”), as well as other less significant contacts
        that we have with the US, could likely lead to a determination by the US
        Internal Revenue Service that we currently have a “permanent establishment” in
        the US, which began in 2005. As a result, any income attributable to such
        US
        permanent establishment would be subject to US corporate income tax in the
        same
        manner as if we were a US corporation. The maximum US corporate income tax
        rate
        (not including applicable state and local tax rates) is currently at 35%.
        In
        addition, if this occurred, we may be subject to an additional branch profits
        tax of 30% on our US effectively connected earnings and profits, subject
        to
        adjustment, for that taxable year if certain conditions occur, unless we
        qualify
        for the reduced 12.5% US branch profits tax rate pursuant to the United
        States-Israel tax treaty. We would be potentially able to credit foreign
        taxes
        against our US tax liability in connection with income attributable to our
        US
        permanent establishment and subject to US and foreign income tax.
 
 At
        present, the parent company, XTL Biopharmaceuticals Ltd., does not earn any
        taxable income for US tax purposes. If we do eventually earn taxable income
        attributable to our US permanent establishment, w e
        may not
        be able to utilize any of the accumulated Israeli loss carryforwards reflected
        on our balance sheet as of December 31, 2006 since these losses were all
        accumulated under Israeli tax laws. However, we
        would
        be able to utilize accumulated loss carryforwards to offset such U.S. taxable
        income only to the extent these carryforwards were attributable to our US
        permanent establishment .
        As of
        December 31, 2006, we estimate these U.S. net operating loss carryforwards
        are
        approximately $ 15.2 million. **** These
        losses can be carried forward twenty years to offset future US taxable income.
        US corporate tax rates are higher than those to which we are subject in the
        State of Israel, and if we are subject to US corporate tax, it would have
        a
        material adverse effect on our results of operations .
 
 *The
        above comments are intended as a general guide to the current position. Any
        person who is in any doubt as to his or her taxation position, and who requires
        more detailed information than the general outline above or who is subject
        to
        tax in a jurisdiction other than the United States should consult professional
        advisers.*
  **Documents
        on Display**
  We
        are
        required to file reports and other information with the SEC under the Exchange
        Act and the regulations thereunder applicable to foreign private issuers.
        You
        may inspect and copy reports and other information filed by us with the SEC
        at
        the SEC’s public reference facilities described below. Although as a foreign
        private issuer we are not required to file periodic information as frequently
        or
        as promptly as US companies, we generally announce publicly our interim and
        year-end results promptly and will file that periodic information with the
        SEC
        under cover of Form 6-K. As a foreign private issuer, we are also 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 other provisions in Section 16 of the Exchange
        Act.
  You
        may
        review and obtain copies of our filings with the SEC, including any exhibits
        and
        schedules, at the SEC’s public reference facilities in Room 1580, 100 F. Street,
        N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for
        further
        information on the public reference rooms. Our periodic filings will also
        be
        available on the SEC’s website at www.sec.gov. These SEC filings are also
        available to the public from commercial document retrieval services. Any
        statement in this annual report about any of our contracts or other documents
        is
        not necessarily complete. If the contract or document is filed as an exhibit
        to
        this annual report, the contract or document is deemed to modify the description
        contained in this annual report. We urge you to review the exhibits themselves
        for a complete description of the contract or document.
  **ITEM
        11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  *Interest
        Rate Risk.* The
        primary objective of our investment activities is to preserve principal while
        maximizing our income from investments and minimizing our market risk. We
        invest
        in government, investment-grade corporate debt securities, and bank deposits
        in
        accordance with our investment policy. Some of these instruments in which
        we
        invest may have market risk. This means that a change in prevailing interest
        rates may cause the principal amount of the investment to fluctuate. For
        example, if we hold a security that was issued with a fixed interest rate
        at the
        then-prevailing rate and the prevailing interest rate later rises, the principal
        amount of our investment will probably decline. As of December 31, 2006,
        our
        portfolio of financial instruments consists of cash equivalents and short-term
        bank deposits with multiple institutions. The average duration of all of
        our
        investments held as of December 31, 2006, was less than one year. Due to
        the
        short-term nature of these investments, we believe we have no material exposure
        to interest rate risk arising from our investments.
   75
  *Foreign
        Currency and Inflation Risk.* We
        generate all of our revenues and hold most of our cash, cash equivalents
        and
        bank deposits in US dollars. While a substantial amount of our operating
        expenses are in US dollars, we incur a portion of our expenses in New Israeli
        Shekels. In addition, we also pay for some of our services and supplies in
        the
        local currencies of our suppliers. As a result, we are exposed to the risk
        that
        the US dollar will be devalued against the New Israeli Shekel or other
        currencies, and as result our financial results could be harmed if we are
        unable
        to guard against currency fluctuations in Israel or other countries in which
        services and supplies are obtained in the future. Accordingly, we may enter
        into
        currency hedging transactions to decrease the risk of financial exposure
        from
        fluctuations in the exchange rates of currencies. These measures, however,
        may
        not adequately protect us from the adverse effects of inflation in Israel.
        In
        addition, we are exposed to the risk that the rate of inflation in Israel
        will
        exceed the rate of devaluation of the New Israeli Shekel in relation to the
        dollar or that the timing of any devaluation may lag behind inflation in
        Israel.
  **ITEM
        12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES**
  Not
        applicable.
   
 76
  **PART
        II**
  **ITEM
        13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES**
  Not
        applicable.
  **ITEM
        14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
        PROCEEDS**
  Not
        applicable.
  **ITEM
        15. CONTROLS AND PROCEDURES** ****
  (a)
        Disclosure controls and procedures.   Our management is responsible
        for establishing and maintaining effective disclosure controls and procedures,
        as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of
        1934.
        As of December 31, 2006, an evaluation was performed under the supervision
        and
        with the participation of our management, including the chief executive officer
        and chief financial officer, of the effectiveness of the design and operation
        of
        our disclosure controls and procedures. Based on that evaluation, management
        concluded that our disclosure controls and procedures as of December 31,
        2006,
        were effective.
 
 (b)
        Internal controls. There have been no changes in our internal control over
        financial reporting that occurred during the fiscal year ended December 31,
        2006
        that have materially affected, or are reasonably likely to materially affect,
        our internal control over financial reporting.
  **ITEM
        16.** **RESERVED**
  Not
        applicable.
  **ITEM
        16A. AUDIT COMMITTEE FINANCIAL EXPERT**
  Our
        Board
        of Directors has determined that Ido Seltenreich, chairman of our audit
        committee, is an audit committee financial expert, as defined by applicable
        SEC
        regulations, and is independent in accordance with applicable SEC and Nasdaq
        regulations.
  **ITEM
        16B. CODE OF ETHICS**
  We
        have
        adopted a Code of Conduct applicable that applies to all employees, directors
        and officers of our company, including our principal executive officer,
        principal financial officer, principal accounting officer or controller and
        other individuals performing similar functions. A copy of our Code of Conduct
        can be found on our website ( www.xtlbio.com )
        and may
        also may be obtained, without charge, upon a written request addressed to
        our
        investor relations department, XTL Biopharmaceuticals Ltd., 750 Lexington
        Avenue, 20 th Floor,
        New York, NY 10022.
 
 **ITEM
        16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
  **Policy
        on Pre-Approval of Audit and Non-Audit Services of Independent
        Auditors**
  Our
        audit
        committee is responsible for the oversight of the independent auditors’ work.
        The audit committee’s policy is to pre-approve all audit and non-audit services
        provided by our independent auditors, Kesselman & Kesselman, a member of
        PricewaterhouseCoopers International Ltd., or PWC. These services may include
        audit services, audit-related services and tax services, as further described
        below.
  **Principal
        Accountant Fees and Services**
  We
        were
        billed the following fees for professional services rendered by PwC, for
        the
        years ended December 31, 2006 and 2005.
   77
 
 **2006**
              
              **2005**(in
                  thousands)Audit
                  fees
              
              $
              166
              
              $
              161Audit-related
                  fees
              
              
              150
              
              
              74Tax
                  fees
              
              
              63
              
              
              46Total
              
              $
              379
              
              $
              281
 
 The
        audit
        fees for the years ended December 31, 2006 and 2005, respectively, were for
        professional services rendered for the audit of our annual consolidated
        financial statements, review of interim consolidated financial statements,
        and
        statutory audits.
  The
        audit-related fees as of the years ended December 31, 2006 and 2005,
        respectively, were for assurance and related due diligence services related
        to
        accounting consultations in connection with our fundraising activity in 2006
        and
        our listing on the Nasdaq Global Market in 2005, including issuance of comfort
        letters, and consents and assistance with review of documents filed with
        the SEC
        and the United Kingdom Listing Authority.
  Tax
        fees
        as of the years ended December 31, 2006 and 2005, respectively, were for
        services related to tax compliance, including the preparation of tax returns,
        tax planning and tax advice, including assistance with tax audits and appeals,
        and tax advice related to our in-licensing activities.
  For
        the
        fiscal year ended December 31, 2006, all of our audit-related fees were
        pre-approved by our audit committee.  For the fiscal year ended  December
        31,  2005,
        $29,000 of the tax fees were pre-approved  by
        our
        audit committee.  The balance of $17,000 in tax fees were related to
        professional services initiated prior to our becoming subject to the
        pre-approval requirements of the Exchange Act and the rules and regulations
        promulgated thereunder in connection with our listing on Nasdaq in
        September 2005.
  **ITEM
        16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
        COMMITTEES**
  Not
        applicable.
  **ITEM
        16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
        PURCHASERS**
  Not
        applicable.
      78
  **PART
        III**
 
 **ITEM
        17. FINANCIAL STATEMENTS**
  We
        have
        elected to furnish financial statements and related information specified
        in
        Item 18.
  **ITEM
        18. FINANCIAL STATEMENTS**
  See
        pages
        F-1 to F-39 of this Annual Report.
  **ITEM
        19. EXHIBITS**
  The
        following exhibits are filed as part of this annual report:
 Exhibit
                  Number
                Description3.1
                Articles
                    of Association†4.1
                Form
                    of Share Certificate (including both Hebrew and English
                    translations)4.2
                Form
                    of American Depositary Receipt (included in Exhibit 4.3)
                    †4.3
                Deposit
                    Agreement, dated as of August 31, 2005, by and between XTL
                    Biopharmaceuticals Ltd., The Bank of New York, as Depositary,
                    and each
                    holder and beneficial owner of American Depositary Receipts issued
                    thereunder†4.5
                Form
                    of Director and Senior Management Lock−up Letter^10.12
                1998
                    Share Option Plan dated October 19, 1998†10.13
                1999
                    Share Option Plan dated June 1, 1999†10.14
                1999
                    International Share Option Plan Dated June 1, 1999†10.15
                2000
                    Share Option Plan dated April 12, 2000†10.16
                2001
                    Share Option Plan dated February 28, 2001†10.17
                Letter
                    of Understanding, dated August 5, 2005, relating to the License
                    Agreement
                    dated June 2, 2004 between Cubist Pharmaceuticals, Inc. and XTL
                    Biopharmaceuticals Ltd.†10.19
                Employment
                    Agreement, dated August 1, 1999, between XTL Biopharmaceuticals
                    Ltd. and
                    Jonathan Burgin†10.20
                Employment
                    Agreement, dated as of January 3, 2006, between XTL Biopharmaceuticals
                    Ltd. and Ron Bentsur^10.21
                Agreement,
                    dated August 1, 2005, between XTL Biopharmaceuticals Ltd. and
                    Michael S.
                    Weiss†10.22
                Form
                    No. 1 of Director Service Agreement†10.23
                Form
                    No. 2 of Director Service Agreement†10.24
                Form
                    No. 3 of Director Service Agreement†10.25
                Form
                    No. 4 of Director Indemnification Agreement†10.26
                License
                    Agreement Between XTL Biopharmaceuticals Ltd. and VivoQuest,
                    Inc., dated
                    August 17, 2005†10.27
                Asset
                    Purchase Agreement Between XTL Biopharmaceuticals Ltd. and VivoQuest,
                    Inc., dated August 17, 2005†10.28
                Form
                    of Securities Purchase Agreement, dated March 17, 2006, by and
                    among XTL
                    Biopharmaceuticals Ltd., and the purchasers named
                    therein^10.29
                Form
                    of Registration Rights Agreement, dated March 22, 2006, by and
                    among XTL
                    Biopharmaceuticals Ltd. and the purchasers named
                    therein^10.30
                Form
                    of Ordinary Share Purchase Warrants, dated March 22, 2006, issued
                    to the
                    purchasers under the Securities Purchase Agreement^10.31
                Escrow
                    Agreement, dated March 22, 2006, by and among XTL Biopharmaceuticals
                    Ltd.,
                    the Placement Agents named therein, and JPMorgan Chase Bank,
                    N.A., as
                    escrow agent^10.32
                License
                    Agreement between XTL Development, Inc. and DOV Pharmaceutical,
                    Inc.,
                    dated January 15, 2007.10.33
                Employment
                    Agreement, dated as of January 1, 2006, between XTL Biopharmaceuticals
                    Ltd. and Bill Kessler.21.1
                List
                    of Subsidiaries†31.1
                Certification
                    of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a),
                    as
                    adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002, dated
                    March 22, 2007.31.2
                Certification
                    of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a),
                    as
                    adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                    2002, dated
                    March 22, 2007.32.1
                Certification
                    of Chief Executive Officer and Chief Financial Officer pursuant
                    to 18
                    U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                    Act
                    of 2002, dated March 22,
                    2007.
  †
        Incorporated by reference from the registration statement on Form 20-F filed
        by
        XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on
        July
        14, 2005, as it may be amended or restated.
 
 ^
        Incorporated by reference from the registration statement on Form F-1 filed
        by
        XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on
        April
        20, 2006, as it may be amended or restated.
 
 79
  **SIGNATURES**
  The
        registrant hereby certifies that it meets all the requirements for filing
        on
        Form 20-F and that it has duly caused and authorized the undersigned to sign
        this registration statement on its behalf.
 **XTL
                  BIOPHARMACEUTICALS LTD.**
                (*Registrant*)Date:
                March 22, 2007
              Signature:
              /s/
                Ron BentsurRon
                BentsurChief
                Executive Officer
    
     
  
 80


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


2006
      ANNUAL REPORT





TABLE
      OF
      CONTENTS





**Page**Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Consolidated
                Balance Sheets as of December 31, 2006 and 2005
            
            
            F-4Consolidated
                Statements of Operations for the years ended
              December
                31, 2006, 2005 and 2004, and the period from
              March
                9, 1993 to December 31, 2006
            
            
            F-5Statements
                of Changes in Shareholders’ Equity for the
              years
                ended December 31, 2006, 2005 and 2004, and the period from
              March
                9, 1993 to December 31, 2006
            
            
            F-6Consolidated
                Statements of Cash Flows for the years ended
              December
                31, 2006, 2005 and 2004, and the period from
              March
                9, 1993 to December 31, 2006
            
            
            F-10Notes
                to the Consolidated Financial Statements
            
            
            F-12










**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To
      the
      Shareholders of


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)





We
      have
      audited the consolidated balance sheets of XTL Biopharmaceuticals Ltd.
      (A Development Stage Company; hereafter - the "Company") and its subsidiary
      as of December 31, 2006 and 2005 and the related consolidated statements of
      operations, changes in shareholders' equity and of cash flows for each of the
      three years ended December 31, 2006 and cumulatively for the period from January
      1, 2001 to December 31, 2006 (see also below). These consolidated financial
      statements are the responsibility of the Company's Board of Directors and
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits. We did not audit the cumulative totals
      of the Company for the period from March 9, 1993 (date of incorporation) to
      December 31, 2000, which totals reflect a deficit of $25,201,000 accumulated
      during the development stage. Those cumulative totals were audited by another
      independent registered public accounting firm whose report, dated May 3, 2005,
      expressed an unqualified opinion on the cumulative amounts through December
      31,
      2000. Our opinion, insofar as it relates to amounts included for that period
      is
      based on the report of the other independent registered public accounting firm,
      mentioned above.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States of America). Those standards require
      that we plan and perform the audit to obtain reasonable assurance about whether
      the financial statements are free of material misstatement. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by the Company’s Board of
      Directors and management, as well as evaluating the overall financial statement
      presentation. We believe that our audits and the report of the other independent
      registered public accounting firm provide a reasonable basis for our
      opinion.





In
      our
      opinion, based upon our audits and the report of the other independent
      registered public accounting firm, the consolidated financial statements
      referred to above present fairly, in all material respects, the consolidated
      financial position of the Company and its subsidiary as of December 31, 2006
      and
      2005, and the consolidated results of operations and cash flows for each of
      the
      three years ended December 31, 2006 and for the cumulative period from
      March 9, 1993 (incorporation date) to December 31, 2006, in conformity with
      accounting principles generally accepted in the United States of America.





As
      discussed in Note 1a to the financial statements, continuation of the Company’s
      current operations after utilizing its current cash reserves during 2008 is
      dependent upon the generation of additional financial resources, either through
      collaboration agreements for the commercialization of its product portfolio
      or
      through external financing.





As
      discussed in Note 1o to the financial statements, the Company adopted Statement
      of Financial Accounting Standards No.123 (revised 2004), Share Based Payment,
      effective January 1, 2005.








Kesselman
      & Kesselman


Certified
      Public Accountants (Israel)


A
      Member
      of PricewaterhouseCoopers International Limited


Tel-Aviv,
      Israel


March
      14,
      2007




F-2




**Report
      of Independent Registered Public Accounting Firm**





To
      the
      Board of Directors and Shareholders of XTL Biopharmaceuticals Ltd.


(A
      Development Stage Company):








We
      have
      audited the accompanying consolidated statements of operations, changes in
      shareholders' equity and cash flows of XTL Biopharmaceuticals Ltd. (A
      Development Stage Company) (the "Company") and its subsidiary for the period
      from March 9, 1993 to December 31, 2000. These consolidated financial
      statements are the responsibility of the Company's management and of the
      Company's Board of Directors. Our responsibility is to express an opinion on
      these consolidated 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. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated results of operations of the Company
      and its subsidiary and their cash flows for the period from March 9, 1993 to
      December 31, 2000, in conformity with generally accepted accounting principles
      in the United States of America.














Somekh
      Chaikin


Certified
      Public Accountants (Isr.)


A
      member
      firm of KPMG International





Tel
      Aviv,
      Israel


May
      3,
      2005














F-3


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      BALANCE SHEETS


(in
      thousands of US dollars, except share amounts)





**December
                31****2006**
            
            **2005****Assets****CURRENT
                ASSETS:**Cash
                and cash equivalents
            
            
            4,400
            
            
            13,360Short-term
                bank deposits
            
            
            20,845
            
            
            —Trading
                securities
            
            
            102
            
            
            —Property
                and equipment (held for sale) -- net
            
            
            18
            
            
            —Deferred
                tax asset
            
            
            29
            
            
            —Other
                receivables and prepaid expenses
            
            
            702
            
            
            431Total
                current assets
            
            
            26,096
            
            
            13,791**EMPLOYEE
                SEVERANCE PAY FUNDS**
            
            
            98
            
            
            449**RESTRICTED
                LONG-TERM DEPOSITS**
            
            
            172
            
            
            110**PROPERTY
                AND EQUIPMENT -- net**
            
            
            490
            
            
            762**INTANGIBLE
                ASSETS -- net**
            
            
            25
            
            
            39**DEFERRED
                TAX ASSET**
            
            
            19
            
            
            —Total
                assets
            
            
            26,900
            
            
            15,151**Liabilities
                and shareholders’ equity****CURRENT
                LIABILITIES:**Accounts
                payable and accrued expenses
            
            
            3,003
            
            
            2,007Deferred
                gain
            
            
            399
            
            
            399Total
                current liabilities
            
            
            3,402
            
            
            2,406**LIABILITY
                IN RESPECT OF EMPLOYEE****SEVERANCE
                OBLIGATIONS******
            
            
            340
            
            
            695**DEFERRED
                GAIN**
            
            
            398
            
            
            798**COMMITMENTS
                AND CONTINGENCIES (Note 7)**Total
                liabilities
            
            
            4,140
            
            
            3,899**SHAREHOLDERS’
                EQUITY:**Ordinary
                shares of NIS 0.02 par value (authorized: 300,000,000
              as
                of December 31, 2006 and 2005; issued and outstanding:
              220,124,349
                as of December 31, 2006 and 173,180,441 as of
              December
                31, 2005)
            
            
            1,072
            
            
            864Additional
                paid in capital
            
            
            136,611
            
            
            110,179Deficit
                accumulated during the development stage
            
            
            (114,923
            )
            
            (99,791
            )Total
                shareholders’ equity
            
            
            22,760
            
            
            11,252Total
                liabilities and shareholders’ equity
            
            
            26,900
            
            
            15,151







**/s/
                Michael Weiss**
            
            **/s/
                Ron Bentsur****Michael
                Weiss**
            
            **Ron
                Bentsur****Chairman
                of the Board of Directors**
            
            **Chief
                Executive Officer**





Date
      of
      approval of the financial statements: March 14, 2007.





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


F-4


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(in
      thousands of US dollars, except share and per share amounts)





**Year
                ended December 31**
            
            **Period
                from**
              **March
                9, 1993***
              **to
                December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2006****REVENUES**:Reimbursed
                out-of-pocket expenses
            
            
            —
            
            
            2,743
            
            
            3,269
            
            
            6,012License
            
            
            454
            
            
            454
            
            
            185
            
            
            1,093454
            
            
            3,197
            
            
            3,454
            
            
            7,105**COST
                OF REVENUES**:Reimbursed
                out-of-pocket expenses
            
            
            —
            
            
            2,743
            
            
            3,269
            
            
            6,012License
                (with respect to royalties)
            
            
            54
            
            
            54
            
            
            32
            
            
            14054
            
            
            2,797
            
            
            3,301
            
            
            6,152**GROSS
                MARGIN**
            
            
            400
            
            
            400
            
            
            153
            
            
            953**RESEARCH
                AND DEVELOPMENT COSTS**(includes
                non-cash stock option compensation of $173, $112 and $30, in 2006,
                2005
                and 2004, respectively)
            
            
            10,229
            
            
            7,313
            
            
            11,985
            
            
            93,119**LESS
                - PARTICIPATIONS**
            
            
            —
            
            
            —
            
            
            —
            
            
            10,95010,229
            
            
            7,313
            
            
            11,985
            
            
            82,169**IN
                - PROCESS RESEARCH AND****DEVELOPMENT
                COSTS**
            
            
            —
            
            
            1,783
            
            
            —
            
            
            1,783**GENERAL
                AND ADMINISTRATIVE****EXPENSES**(includes
                non-cash stock optioncompensationof
                $1,992, $2,641 and $2, in 2006, 2005 and 2004,
                respectively)
            
            
            5,576
            
            
            5,457
            
            
            4,134
            
            
            34,588**BUSINESS
                DEVELOPMENT COSTS**(includes
                non-cash stock option compensation of $15, $10 and $0, in 2006, 2005
                and
                2004, respectively)
            
            
            641
            
            
            227
            
            
            810
            
            
            5,154**OPERATING
                LOSS**
            
            
            16,046
            
            
            14,380
            
            
            16,776
            
            
            122,741**FINANCIAL
                AND OTHER INCOME -**net
            
            
            1,141
            
            
            443
            
            
            352
            
            
            8,284**LOSS
                BEFORE INCOME TAXES**
            
            
            14,905
            
            
            13,937
            
            
            16,424
            
            
            114,457**INCOME
                TAXES**
            
            
            227
            
            
            78
            
            
            49
            
            
            466**LOSS
                FOR THE PERIOD**
            
            
            15,132
            
            
            14,015
            
            
            16,473
            
            
            114,923**BASIC
                AND DILUTED LOSS PER****ORDINARY
                SHARE**
            
            $
            0.08
            
            $
            0.08
            
            $
            0.12**WEIGHTED
                AVERAGE NUMBER OF****SHARES
                USED IN COMPUTING****BASIC
                AND DILUTED LOSS PER****ORDINARY
                SHARE**
            
            
            201,737,295
            
            
            170,123,003
            
            
            134,731,766





*
      Incorporation date, see Note 1a.





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


F-5


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY


(in
      thousands of US dollars, except share amounts)


**Preferred
                  shares**
              
              **Ordinary
                  shares**
              
              **Additional****Number
                  of**
              
              
              
              **Number
                  of**
              
              
              
              **paid-in****shares**
              
              **Amount**
              
              **shares**
              
              **Amount**
              
              **capital****CHANGES
                  DURING THE PERIOD****FROM
                  MARCH 9, 1993 (DATE OF****INCORPORATION)
                  TO DECEMBER 31, **2003**:**Comprehensive
                  loss:Loss
                  for the period
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  unrealized loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Comprehensive
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Employee
                  stock options expenses
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              377Non-employee
                  stock option expenses
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              106Exercise
                  of share warrants in 2000
              
              
              —
              
              
              —
              
              
              1,499,980
              
              
              7
              
              
              340Exercise
                  of share warrants in 2001
              
              
              —
              
              
              —
              
              
              208,000
              
              
              1
              
              
              74Exercise
                  of employee stock options in 1999
              
              
              15,600
              
              
              **
              
              
              —
              
              
              —
              
              
              **Exercise
                  of employee stockoptions
                  in 2000
              
              
              —
              
              
              —
              
              
              162,500
              
              
              1
              
              
              —Exercise
                  of employee stock options in 2001
              
              
              —
              
              
              —
              
              
              59,138
              
              
              **
              
              
              26Exercise
                  of employee stock options in 2002
              
              
              —
              
              
              —
              
              
              38,326
              
              
              **
              
              
              20Exercise
                  of employee stock options in 2003
              
              
              —
              
              
              —
              
              
              854,100
              
              
              4
              
              
              —Issuance
                  of share capital in 1993 (netof
                  $912 - issuance expenses)
              
              
              7,705,470
              
              
              45
              
              
              —
              
              
              —
              
              
              5,545Issuance
                  of share capital in 1994 (netof
                  $22 - issuance expenses)
              
              
              717,500
              
              
              5
              
              
              —
              
              
              —
              
              
              2,103Issuance
                  of share capital in 1996 (netof
                  $646 - issuance expenses)
              
              
              6,315,810
              
              
              49
              
              
              —
              
              
              —
              
              
              5,314Issuance
                  of share capital in 1998 (netof
                  $1,650 - issuance expenses)
              
              
              26,319,130
              
              
              139
              
              
              —
              
              
              —
              
              
              12,036Issuance
                  of share capital in 1999 (netof
                  $49 - issuance expenses)
              
              
              2,513,940
              
              
              12
              
              
              —
              
              
              —
              
              
              1,189Issuance
                  of share capital in 2000
              
              
              —
              
              
              —
              
              
              15,183,590
              
              
              75
              
              
              16,627Bonus
                  shares
              
              
              7,156,660
              
              
              41
              
              
              19,519,720
              
              
              97
              
              
              (138
              )Conversion
                    of preferred shares into ordinary shares
              
              
              (50,744,110
              )
              
              (291
              )
              
              50,744,110
              
              
              291
              
              
              —Receipts
                    in respect of share warrants (expired in 1999)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              89Initial
                          public offering (“IPO”) of the Company’s shares under
                        a
                          prospectus dated September 20, 2000
                        (net
                          of $ 5,199-issuance expenses)
              
              
              —
              
              
              —
              
              
              23,750,000
              
              
              118
              
              
              45,595**BALANCE
                  AT DECEMBER 31, 2003**
              
              
              —
              
              
              —
              
              
              112,019,464
              
              
              594
              
              
              89,303




**
      Represents an amount less than $1,000.





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


F-6


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)


(in
      thousands of US dollars, except share amounts)




**Accumulated
                  other comprehensive income (loss)**
              
              **Deficit
                  accumulated during the development stage**
              
              **Total****CHANGES
                  DURING THE PERIOD****FROM
                  MARCH 9, 1993 (DATE OF****INCORPORATION)
                  TO DECEMBER 31, **2003**:**Comprehensive
                  loss:Loss
                  for the period
              
              
              —
              
              
              (69,303
              )
              
              (69,303
              )Net
                  unrealized loss
              
              
              14
              
              
              —
              
              
              14Comprehensive
                  loss
              
              
              14
              
              
              (69,303
              )
              
              (69,289
              )Employee
                  stock options expenses
              
              
              —
              
              
              —
              
              
              377Non-employee
                  stock option expenses
              
              
              —
              
              
              —
              
              
              106Exercise
                  of share warrants in 2000
              
              
              —
              
              
              —
              
              
              347Exercise
                  of share warrants in 2001
              
              
              —
              
              
              —
              
              
              75Exercise
                  of employee stock options in 1999
              
              
              —
              
              
              —
              
              
              **Exercise
                  of employee stock options in 2000
              
              
              —
              
              
              —
              
              
              1Exercise
                  of employee stock options in 2001
              
              
              —
              
              
              —
              
              
              26Exercise
                  of employee stock options in 2002
              
              
              —
              
              
              —
              
              
              20Exercise
                  of employee stock options in 2003
              
              
              —
              
              
              —
              
              
              4Issuance
                  of share capital in 1993 (netof
                  $912 - issuance expenses)
              
              
              —
              
              
              —
              
              
              5,590Issuance
                  of share capital in 1994 (netof
                  $22 - issuance expenses)
              
              
              —
              
              
              —
              
              
              2,108Issuance
                  of share capital in 1996 (netof
                  $646 - issuance expenses)
              
              
              —
              
              
              —
              
              
              5,363Issuance
                  of share capital in 1998 (netof
                  $1,650 - issuance expenses)
              
              
              —
              
              
              —
              
              
              12,175Issuance
                  of share capital in 1999 (netof
                  $49 - issuance expenses)
              
              
              —
              
              
              —
              
              
              1,201Issuance
                  of share capital in 2000
              
              
              —
              
              
              —
              
              
              16,702Bonus
                  shares
              
              
              —
              
              
              —
              
              
              —Conversion
                    of preferred shares into ordinary
                    shares
              
              
              —
              
              
              —
              
              
              —Receipts
                  in respect of share warrants(expired
                  in 1999)
              
              
              —
              
              
              —
              
              
              89Initial
                  public offering (“IPO”) of the Company’s shares under a
                  prospectus dated September 20, 2000 (net of $ 5,199 issuance
                  expenses)
              
              
              —
              
              
              —
              
              
              45,713**BALANCE
                  AT DECEMBER 31, 2003**
              
              
              14
              
              
              (69,303
              )
              
              20,608




**
      Represents an amount less than $1,000.





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


F-7


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)


(in
      thousands of US dollars, except share amounts)




**Ordinary
                  shares**
              
              **Additional****Number
                  of**
              
              
              
              **paid
                  in****shares**
              
              **Amount**
              
              **capital****BALANCE
                  AT DECEMBER 31, 2003**-brought
                  forward
              
              
              112,019,464
              
              
              594
              
              
              89,303**CHANGES
                  DURING 2004:**Comprehensive
                  loss:Loss
                  for the period
              
              
              —
              
              
              —
              
              
              —Net
                  unrealized gain
              
              
              —
              
              
              —
              
              
              —Comprehensive
                  loss
              
              
              —
              
              
              —
              
              
              —Non-employee
                    stock option compensation expenses
              
              
              —
              
              
              —
              
              
              32Exercise
                  of stock options
              
              
              50,000
              
              
              **
              
              
              19Issuance
                  of shares, net of $2,426share
                  issuance expenses
              
              
              56,009,732
              
              
              247
              
              
              15,183**BALANCE
                  AT DECEMBER 31, 2004**
              
              
              168,079,196
              
              
              841
              
              
              104,537**CHANGES
                  DURING 2005:**Comprehensive
                  loss - loss for the periodNon-employee
                    stock option compensation expenses
              
              
              —
              
              
              —
              
              
              45Employee
                  stock option compensation expenses
              
              
              —
              
              
              —
              
              
              2,718Exercise
                  of stock options
              
              
              3,786,825
              
              
              17
              
              
              1,494Issuance
                  of ordinary shares in respect of licenseand
                  purchases of assets (Note 3)
              
              
              1,314,420
              
              
              6
              
              
              1,385**BALANCE
                  AT DECEMBER 31, 2005**
              
              
              173,180,441
              
              
              864
              
              
              110,179**CHANGES
                  DURING 2006:**Comprehensive
                  loss - loss for the period
              
              
              —
              
              
              —
              
              
              —Non-employee
                    stock option compensation expenses
              
              
              —
              
              
              —
              
              
              7Employee
                  stock option compensation expenses
              
              
              —
              
              
              —
              
              
              2,173Exercise
                  of stock options
              
              
              277,238
              
              
              1
              
              
              96Issuance
                  of share warrants, net of $681share
                  issuance expenses
              
              
              —
              
              
              —
              
              
              4,565Issuance
                  of shares, net of $2,956share
                  issuance expenses
              
              
              46,666,670
              
              
              207
              
              
              19,591**BALANCE
                  AT DECEMBER 31, 2006**
              
              
              220,124,349
              
              
              1,072
              
              
              136,611




**  Represents
      an amount less than $ 1,000.




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




F-8


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)


(in
      thousands of US dollars, except share amounts)


**Accumulated
                  other comprehensive income (loss)**
              
              **Deficit
                  accumulated during the development stage**
              
              **Total****BALANCE
                  AT DECEMBER 31, 2003**-brought
                  forward
              
              
              14
              
              
              (69,303
              )
              
              20,608**CHANGES
                  DURING 2004:**Comprehensive
                  loss:Loss
                  for the period
              
              
              —
              
              
              (16,473
              )
              
              (16,473
              )Net
                  unrealized gain
              
              
              (14
              )
              
              —
              
              
              (14
              )Comprehensive
                  loss
              
              
              (14
              )
              
              (16,473
              )
              
              (16,487
              )Non-employee
                  stock option compensation expenses
              
              
              —
              
              
              —
              
              
              32Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              19Issuance
                  of shares, net of $2,426share
                  issuance expenses
              
              
              —
              
              
              —
              
              
              15,430**BALANCE
                  AT DECEMBER 31, 2004**
              
              
              —
              
              
              (85,776
              )
              
              19,602**CHANGES
                  DURING 2005:**Comprehensive
                  loss - loss for the period
              
              
              —
              
              
              (14,015
              )
              
              (14,015
              )Non-employee
                    stock option compensation expenses
              
              
              —
              
              
              —
              
              
              45Employee
                  stock option compensation expenses
              
              
              —
              
              
              —
              
              
              2,718Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              1,511Issuance
                  of ordinary shares in respect of licenseand
                  purchases of assets (Note 3)
              
              
              —
              
              
              —
              
              
              1,391**BALANCE
                  AT DECEMBER 31, 2005**
              
              
              —
              
              
              (99,791
              )
              
              11,252**CHANGES
                  DURING 2006:**Comprehensive
                  loss - loss for the period
              
              
              —
              
              
              (15,132
              )
              
              (15,132
              )Non-employee
                    stock option compensation expenses
              
              
              —
              
              
              —
              
              
              7Employee
                  stock option compensation expenses
              
              
              —
              
              
              —
              
              
              2,173Exercise
                  of stock options
              
              
              —
              
              
              —
              
              
              97Issuance
                  of share warrants, net of $681share
                  issuance expenses
              
              
              —
              
              
              —
              
              
              4,565Issuance
                  of shares, net of $2,956share
                  issuance expenses
              
              
              —
              
              
              —
              
              
              19,798**BALANCE
                  AT DECEMBER 31, 2006**
              
              
              —
              
              
              (114,923
              )
              
              22,760




**  Represents
      an amount less than $ 1,000.




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


F-9


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(in
      thousands of US dollars)


**Year
                  ended December 31**
              
              **Period
                  from**
                **March
                  9, 1993 (a)**
                **to
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2006****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Loss
                  for the period
              
              
              (15,132
              )
              
              (14,015
              )
              
              (16,473
              )
              
              (114,923
              )Adjustments
                  to reconcile loss to net cash used inoperating
                  activities:Depreciation
                  and amortization
              
              
              243
              
              
              242
              
              
              319
              
              
              3,072Linkage
                  difference on restricted deposits
              
              
              (10
              )
              
              3
              
              
              —
              
              
              (7
              )Acquisition
                  of in process research and development
              
              
              —
              
              
              1,783
              
              
              —
              
              
              1,783Loss
                  (gain) on disposal of property and equipment
              
              
              (57
              )
              
              6
              
              
              1
              
              
              (39
              )Increase
                    (decrease) in liability in respect of employee
                  severance
                    obligations
              
              
              8
              
              
              (159
              )
              
              30
              
              
              1,236Impairment
                  charges
              
              
              —
              
              
              26
              
              
              —
              
              
              380Loss
                  (gain) from sales of investment securities
              
              
              —
              
              
              —
              
              
              13
              
              
              (410
              )Other
                  income related to exchange of shares
                (see
                  Note 10d)
              
              
              (100
              )
              
              —
              
              
              —
              
              
              (100
              )Gain
                  from trading securities
              
              
              (2
              )
              
              —
              
              
              —
              
              
              (2
              )Stock
                  option based compensation expenses
              
              
              2,180
              
              
              2,763
              
              
              32
              
              
              5,458Gain
                  on amounts funded in respect of employee
                severance
                  pay funds
              
              
              (1
              )
              
              (6
              )
              
              (4
              )
              
              (92
              )Deferred
                  tax asset
              
              
              (48
              )
              
              —
              
              
              —
              
              
              (48
              )Changes
                  in operating assets and liabilities:Decrease
                  (increase) in other receivablesand
                  prepaid expenses
              
              
              (178
              )
              
              418
              
              
              (143
              )
              
              (609
              )Increase
                  (decrease) in accounts payableand
                  accrued expenses
              
              
              910
              
              
              (1,127
              )
              
              133
              
              
              2,917Increase
                  (decrease) in deferred gain
              
              
              (400
              )
              
              (400
              )
              
              1,597
              
              
              797Net
                  cash used in operating activities
              
              
              (12,587
              )
              
              (10,466
              )
              
              (14,495
              )
              
              (100,587
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Decrease
                  (increase) in short-term bank deposits
              
              
              (20,845
              )
              
              10,136
              
              
              7,193
              
              
              (20,845
              )Restricted
                  deposits
              
              
              (52
              )
              
              —
              
              
              46
              
              
              (165
              )Investment
                  in investment securities
              
              
              —
              
              
              —
              
              
              —
              
              
              (3,363
              )Proceeds
                  from sales of investment securities
              
              
              —
              
              
              —
              
              
              722
              
              
              3,773Employeeseverance
                  pay funds
              
              
              (18
              )
              
              (50
              )
              
              (136
              )
              
              (909
              )Purchase
                  of property and equipment
              
              
              (21
              )
              
              (38
              )
              
              (180
              )
              
              (4,042
              )Proceeds
                  from disposals of property and equipment
              
              
              103
              
              
              27
              
              
              5
              
              
              252Acquisition
                  in respect of license and purchase of assets
              
              
              —
              
              
              (548
              )
              
              —
              
              
              (548
              )Net
                  cash provided by (used in) investing activities
              
              
              (20,833
              )
              
              9,527
              
              
              7,650
              
              
              (25,847
              )




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




F-10


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


CONSOLIDATED
      STATEMENTS OF CASH FLOWS (continued)


(in
      thousands of US dollars)




**Year
                  ended December 31**
              
              **Period
                  from**
                **March
                  9, 1993 (a)**
                **to December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2006****CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Issuance
                  of share capital and warrants-
                  net of
                share
                  issuance expenses
              
              
              24,363
              
              
              —
              
              
              15,430
              
              
              128,734Exercise
                  of share warrants and stock options
              
              
              97
              
              
              1,511
              
              
              19
              
              
              2,100Proceeds
                  from long-term debt
              
              
              —
              
              
              —
              
              
              —
              
              
              399Proceeds
                  from short-term debt
              
              
              —
              
              
              —
              
              
              —
              
              
              50Repayment
                  of long-term debt
              
              
              —
              
              
              —
              
              
              —
              
              
              (399
              )Repayment
                  of short-term debt
              
              
              —
              
              
              —
              
              
              —
              
              
              (50
              )Net
                  cash provided by financing activities
              
              
              24,460
              
              
              1,511
              
              
              15,449
              
              
              130,834**NET
                  INCREASE (DECREASE) IN CASH AND****CASH
                  EQUIVALENTS**
              
              
              (8,960
              )
              
              572
              
              
              8,604
              
              
              4,400**BALANCE
                  OF CASH AND CASH EQUIVALENTS****AT
                  BEGINNING OF PERIOD**
              
              
              13,360
              
              
              12,788
              
              
              4,184
              
              
              —**BALANCE
                  OF CASH AND CASH EQUIVALENTS****AT
                  END OF PERIOD**
              
              
              4,400
              
              
              13,360
              
              
              12,788
              
              
              4,400**Supplementary
                  information on investing and****financing
                  activities not involving cash flows:**Issuance
                  of ordinary shares in respect oflicense
                  and purchase of assets
              
              
              —
              
              
              1,391
              
              
              —
              
              
              1,391Conversion
                  of convertible subordinated debentureinto
                  shares
              
              
              —
              
              
              —
              
              
              —
              
              
              1,700**Supplemental
                  disclosures of cash flow information:**Income
                  taxes paid
              
              
              136
              
              
              49
              
              
              107
              
              
              457Interest
                  paid
              
              
              —
              
              
              —
              
              
              —
              
              
              350


(a)  Incorporation
        date, see Note 1a.




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




F-11


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES**





**a.**
            **General:**





1)
            XTL
                Biopharmaceuticals Ltd. (“the Company”) was incorporated under the Israel
                Companies Ordinance on March 9, 1993. The Company is a development
                stage
                company in accordance with Statement of Financial Accounting Standards
                (“SFAS”) No. 7 “Accounting and Reporting by Development Stage
                Enterprises.”





The
      Company is a biopharmaceutical company engaged in the acquisition, development
      and commercialization of therapeutics for the treatment of unmet medical needs,
      particularly neuropathic pain and hepatitis C. See Note 12.





During
      September 2005, the Company licensed from VivoQuest Inc. (“VivoQuest”), a US
      privately-held company, which is a development stage enterprise, perpetual,
      exclusive, and worldwide rights to VivoQuest’s intellectual property and
      technology, covering a proprietary compound library, which includes VivoQuest’s
      lead hepatitis C compounds. In addition, the Company also acquired from
      VivoQuest certain assets, see Note 3.





The
      Company licensed its product candidate HepeX-B to Cubist Pharmaceuticals, Inc.
      (hereinafter “Cubist”) during 2004, see Notes 1k and 2 as to details of the
      license agreement.





The
      Company has a wholly-owned subsidiary in the United States, XTL
      Biopharmaceuticals Inc. (the “Subsidiary”), which was incorporated in 1999 under
      the laws of the State of Delaware. Subsidiary is primarily engaged in
      development activities and business development. Subsidiary also has a
      wholly-owned subsidiary, XTL Development, Inc. (“XTL Development”), which was
      incorporated in 2007 under the laws of the State of Delaware and is engaged
      in
      development activities. See Note 12 in regards to XTL Development’s agreement
      with DOV Pharmaceutical, Inc.





2)
            Through
                December 31, 2006, the Company has incurred losses in an aggregate
                amount
                of United States $114.9 million. Such losses have resulted from the
                Company’s activities as a development stage company. It is expected that
                the Company will be able to finance its operations from its current
                reserves through 2007. Continuation of the Company’s current operations
                after utilizing its current cash reserves during 2008 is dependent
                upon
                the generation of additional financial resources either through agreements
                for the commercialization of its product portfolio or through external
                financing. See Note 7.





3)
            The
                consolidated financial statements are prepared in accordance with
                generally accepted accounting principles in the United States (“US
                GAAP”).





4)
            The
                preparation of the financial statements, in conformity with US GAAP,
                requires management to make estimates and assumptions that affect
                the
                reported amounts of assets and liabilities and the disclosure of
                contingent assets and liabilities, at the date of the financial
                statements, and the reported expenses during the reporting periods.
                Actual
                results may vary from these
                estimates.





**b.**
            **Functional
                currency**





The
      currency of the primary economic environment in which the operations of the
      Company are conducted is the United States (“US”) dollar ("$" or
      "dollar").


F-12


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





Most
      of
      the Company's expenses and revenues are incurred in dollars. A significant
      part
      of the Company's capital expenditures and most of its external financing is
      in
      dollars. The Company holds most of its cash, cash equivalents and bank deposits
      in dollars. Thus, the functional currency of the Company is the
      dollar.





Since
      the
      dollar is the primary currency in the economic environment in which the Company
      operates, monetary accounts maintained in currencies other than the dollar
      (principally “cash and cash equivalents” and “accounts payable and accrued
      expenses”) are remeasured using the representative foreign exchange rate at the
      balance sheet date. Operational accounts and nonmonetary balance sheet accounts
      are measured and recorded at the rate in effect at the date of the transaction.
      The effects of foreign currency remeasurement are reported in current operations
      (as “financial and other income - net”) and have not been material to
      date.





**c.**
            **Principles
                of consolidation**





The
      consolidated financial statements include the accounts of the Company and the
      Subsidiary. All intercompany transactions and balances were eliminated in
      consolidation.





**d.**
            **Impairment
                of long-lived and intangible
                assets**





Pursuant
      to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”), long-lived assets, including long-lived intangible assets
      subject to amortization, to be held and used by an entity, are reviewed for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of the assets may not be recoverable. Under SFAS 144, if
      the sum of the expected future cash flows (undiscounted and without interest
      charges) of the long-lived assets held and used is less than the carrying amount
      of such assets, an impairment loss would be recognized, and the assets are
      written down to their estimated fair values. Assets “held for sale” are reported
      at the lower of their carrying amount or fair value less estimated costs to
      sell. As to the impairment charges recognized by the Company in 2005, see Note
      4b.





**e.**
            **Cash
                equivalents**





Highly
      liquid investments, which include short-term bank deposits (up to three months
      from date of deposit), that are not restricted as to withdrawal or use, are
      considered by the Company to be cash equivalents.





**f.**
            **Marketable
                securities**





Pursuant
      to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
      Securities,” the Company's marketable securities (debt securities (mainly in the
      form of debentures) through 2004) have been designated as available-for-sale.
      Available-for-sale securities are carried at fair value, which is determined
      based upon the quoted market prices of the securities, with unrealized gains
      and
      losses reported in accumulated other comprehensive income (loss), a component
      of
      shareholders' equity. Realized gains and losses and declines in value judged
      to
      be other than temporary on available-for-sale securities are included in
“financial and other income - net.” The Company views its available-for-sale
      portfolio as available for use in its current operations. Interest, premium
      and
      discount amortization, and dividends on securities classified as
      available-for-sale are included in “financial and other income- net.”





As
      of
      December 31, 2006, the Company has trading securities, w hich
      are
      carried at their fair value based upon the quoted market prices of those
      investments at period end. Accordingly, net realized and unrealized gains and
      losses on trading securities are included in “financial and other income - net.”


F-13


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





**g.**
            **Property
                and equipment**





Property
      and equipment are carried at historical cost less depreciation, amortization
      and
      impairment charges. Depreciation is computed using the straight-line method
      over
      the estimated useful life of the assets. Property and equipment that is to
      be
      disposed of is no longer depreciated.





Annual
      rates of depreciation are as follows:





**%**Laboratory
                equipment
            
            10-20(mainly
                15)Computers
            
            33Furniture
                and office equipment
            
            6-15





Leasehold
      improvements are amortized by the straight-line method over the term of the
      lease, which is shorter than the estimated useful life of the
      improvements.





**h.**
            **Intangible
                assets**





Intangible
      assets consist of the assembled workforce in respect of the license and purchase
      of certain assets from VivoQuest (see Note 3). The intangible assets are being
      amortized using the straight- line method over an estimated useful life of
      three
      years.





**i.**
            **Deferred
                income taxes**





Deferred
      taxes are determined utilizing the asset and liability method based on the
      estimated future tax effects of differences between the financial accounting
      and
      tax basis of assets and liabilities under the applicable tax laws. Deferred
      tax
      balances are computed using the tax rates expected to be in effect when these
      differences are reversed. Valuation allowances are provided if, based upon
      the
      weight of available evidence, it is more likely than not that some or all of
      the
      deferred tax assets will not be realized.





Paragraph
      9(f) of SFAS No. 109, “Accounting for Income Taxes,” (“SFAS 109”) prohibits
      the recognition of deferred tax liabilities or assets that arise from
      differences between the financial reporting and tax basis of assets and
      liabilities that are measured from the local currency into dollars using
      historical exchange rates, and that result from changes in exchange rates or
      indexing for tax purposes. Consequently, the abovementioned differences were
      not
      reflected in the computation of deferred tax assets and liabilities.





**j.**
            **Research
                and development costs and
                participations**





Research
      and development costs are expensed as they are incurred and consist primarily
      of
      salaries and related personnel costs, fees paid to consultants and other
      third-parties for clinical and laboratory development, license and milestone
      fees, and facilities-related and other expenses relating to the design,
      development, testing, and enhancement of product candidates.





Participations
      from government (and from others) for development of approved projects are
      recognized as a reduction of expense as the related costs are incurred (see
      Note
      7).





In
      connection with the purchase of assets, amounts assigned to intangible assets
      to
      be used in a particular research and development project that have not reached
      technological feasibility and have no alternative future use are charged to
      in-process research and development costs at the purchase date.




F-14


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





**k.**
            **Revenue
                recognition**





The
      Company recognizes the revenue from its licensing agreement with Cubist (see
      Note 2) under the provisions of the EITF 00-21 “Revenue Arrangements with
      Multiple Deliverables” and SAB 104 “Revenue Recognition.” Under those
      pronouncements, companies are required to allocate revenues from
      multiple-element arrangements to the different elements based on sufficient
      objective and reliable evidence of fair value. Since the Company does not have
      the ability to determine the fair value of each unit of accounting, the
      agreement was accounted for as one unit of accounting, after failing the
      separation criteria, and the Company recognizes each payment on the
      abovementioned agreement ratably over the expected life of the
      arrangement.





In
      addition, through 2005, Cubist had requested that the Company provide
      development services to be reimbursed by Cubist. As required by EITF 01-14
      “Income Statement Characterization of Reimbursements Received for
      "Out-of-Pocket" Expenses Incurred,” amounts paid by the Company, as a principal,
      are included in the cost of revenues as reimbursable out-of-pocket expenses,
      and
      the reimbursements the Company receives as a principal are reported as
      reimbursed out-of-pocket revenues.





**l.**
            **Business
                development costs**





Costs
      associated with business development are comprised of costs related to
      partnering activities for the Company’s drug programs, seeking new development
      collaborations and in-licensing opportunities. Business development costs are
      expensed as incurred.




**m.**
            **Loss
                per share (“LPS”)**





Basic
      and
      diluted losses per share are presented in accordance with SFAS No. 128 “Earnings
      per share” (“SFAS 128”), for all the years presented. Outstanding share options,
      and warrants have been excluded from the calculation of the diluted loss per
      share because all such securities are antidilutive for all the years presented.
      The total weighted average number of ordinary shares related to outstanding
      options and warrants excluded from the calculations of diluted loss per share
      were 46,312,329, 20,807,875 and 18,187,062 for the years ended December 31,
      2006, 2005 and 2004, respectively.





**n.**
            **Comprehensive
                loss**





Comprehensive
      loss, included in shareholders' equity, consists of the loss for each period
      presented, and for the year ended December 31, 2004 and the development stage
      (since incorporation date), also includes the net unrealized gains or losses
      on
      available-for-sale investment securities.





**o.**
            **Stock-
                based compensation**





SFAS
      No.
      123R “Share - Based Payment” (“SFAS 123R”) addresses the accounting for
      share-based payment transactions in which a company obtains employee services
      in
      exchange for (a) equity instruments of a company or (b) liabilities that are
      based on the fair value of a company’s equity instruments or that may be settled
      by the issuance of such equity instruments.




F-15


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





SFAS
      123R
      eliminates the ability to account for employee share-based payment transactions
      using Accounting Principles Board Opinion No. 25 - “Accounting for Stock Issued
      to Employees” (“APB 25”), and requires instead that such transactions be
      accounted for using the grant-date fair value based method. SFAS 123R applies
      to
      all awards granted or modified after the effective date of the standard. In
      addition, compensation costs for the unvested portion of previously granted
      awards that remain outstanding on the effective date shall be recognized on
      or
      after the effective date, as the related services are rendered, based on the
      awards’ grant-date fair value as previously calculated for the pro-forma
      disclosure under SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS
      123”).





The
      Company adopted SFAS 123R as of January 1, 2005, using the modified prospective
      application transition method. Under such transition method, the Company’s
      financial statements for periods prior to the effective date of SFAS 123R
      (January 1, 2005) have not been restated.





Prior
      to
      January 1, 2005, the Company accounted for employee stock-based compensation
      under the intrinsic value model in accordance with APB 25 and related
      interpretations. Under APB 25, compensation expense is based on the difference,
      if any, on the date of the grant, between the fair value of the Company’s
      ordinary shares and the exercise price. When the number of the underlying shares
      or the exercise price was not known on the grant date, the Company updated,
      at
      each period, the compensation expenses until such data became known.





The
      fair
      value of stock
      options granted
      with service conditions or with performance conditions was determined using
      the
      Black-Scholes valuation model. Such value is recognized as an expense over
      the
      service period, net of estimated forfeitures, using the straight-line method
      under SFAS 123R. The fair value of stock options granted with market conditions
      was determined using a lattice model that incorporated a Monte Carlo Simulation
      method. Such value is recognized as an expense using the graded method under
      SFAS123R.





The
      estimation of stock awards that will ultimately vest requires significant
      judgment, and to the extent actual results or updated estimates differ from
      the
      Company’s current estimates, such amounts will be recorded as a cumulative
      adjustment in the period those estimates are revised. The Company considers
      many
      factors when estimating expected forfeitures, including types of awards,
      employee class, and historical experience. Actual results, and future changes
      in
      estimates, may differ substantially from the Company’s current estimates.





Both
      the
      Black-Scholes model and a lattice model incorporating the Monte Carlo simulation
      method take into account a number of valuation parameters, see also Note
      6.





The
      Company accounts for equity instruments issued to third party service providers
      (non-employees) in accordance with the fair value method prescribed by SFAS123,
      and as of January 1, 2005, by SFAS 123R, and the provisions Emerging Issues
      Task
      Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to
      Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
      Services” (“EITF 96-18”). See Note 6 b (3).





The
      following table illustrates the effect on loss and loss per share assuming
      the
      Company had applied the fair value recognition provisions of SFAS 123 to its
      stock-based employee compensation, for years presented prior to the adoption
      of
      SFAS 123R:


F-16


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





**Year
                endedDecember 31**
            
            **Period
                from**
              **March
                9, 1993***
              **to
                December 31,****2004**
            
            **2004****($
                in thousands except per share amounts)**Loss
                for the period, as reported
            
            
            16,473
            
            
            85,776Deduct:
                stock- based employee compensationexpense,
                included in reported loss
            
            
            —
            
            
            (483
            )Add:
                stock-based employee compensationexpense
                determined under fair valuemethod
                for all awards
            
            
            239
            
            
            6,355Loss
                - pro-forma
            
            
            16,712
            
            
            91,648




Basic
                and diluted loss per share:As
                reported
            
            
            0.12Pro-forma
            
            
            0.12*
                Incorporation date, see Note 1a.




**p.**
            **Recently
                issued accounting pronouncements in the United
                States:**





In
      June
      2006, the Emerging Issues Task Force, reached a consensus on Issue No. 06-03,
      “How Taxes Collected from Customers and Remitted to Governmental Authorities
      Should be Presented in the Income Statement (That Is, Gross versus Net
      Presentation)”. EITF 06-03 relates to any tax assessed by a governmental
      authority that is directly imposed on a revenue-producing transaction. EITF
      06-03 states that the presentation of the taxes, either on a gross or net basis,
      is an accounting policy decision that should be disclosed pursuant to Accounting
      Principles Board Opinion No. 22, "Disclosure of Accounting Policies," if those
      amounts are significant. EITF 06-03 should be applied to financial reports
      for
      interim and annual reporting periods beginning after December 15, 2006 (January
      1, 2007 for the Company). The Company is currently evaluating the impact of
      this
      standard on its consolidated financial statements and disclosures.





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which clarifies
      the accounting for uncertainty in income taxes recognized in the financial
      statements in accordance with SFAS 109. FIN 48 prescribes a two-step process
      to
      determine the amount of tax benefit to be recognized. First, the tax position
      must be evaluated to determine the likelihood that it will be sustained upon
      examination. If the tax position is deemed “more-likely-than-not” to be
      sustained, the tax position is then measured to determine the amount of benefit
      to recognize in the financial statements. The tax position is measured at the
      largest amount of benefit that has a greater than 50 percent likelihood of
      being
      realized upon ultimate settlement. FIN 48 is effective for fiscal years
      beginning after December 15, 2006 (January 1, 2007 for the Company). The Company
      is currently evaluating the impact of this standard on its consolidated
      financial statements and disclosures.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements (“SAB 108”). SAB 108 expresses the SEC’s view
      regarding the process of quantifying financial statement misstatements. The
      bulletin was effective as of the year beginning January 1, 2006. The
      implementation of this bulletin had no impact on the Company’s consolidated
      financial statements and disclosures.




F-17


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      1 - SIGNIFICANT ACCOUNTING POLICIES** (continued)





In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS
      157”), which provides guidance for using fair value to measure assets and
      liabilities. The standard also responds to investors' requests for more
      information about (1) the extent to which companies measure assets and
      liabilities at fair value, (2) the information used to measure fair value,
      and
      (3) the effect that fair value measurements have on earnings. SFAS 157 will
      apply whenever another standard requires (or permits) assets or liabilities
      to
      be measured at fair value. The standard does not expand the use of fair value
      to
      any new circumstances. SFAS 157 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007 (January 1, 2008 for the
      Company), and interim periods within those fiscal years. The Company is
      evaluating the potential impact of the new standard on its consolidated
      financial statements and disclosures.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits
      entities to choose to measure many financial assets and financial liabilities
      at
      fair value. Unrealized gains and losses on items for which the fair value option
      has been elected are reported in earnings. As applicable to the Company, this
      statement will be effective as of the year beginning January 1, 2008. The
      Company is currently evaluating the impact that the adoption of SFAS 159 would
      have on its consolidated financial statements and disclosures.





**q.**
            **Reclassifications**





Certain
      comparative figures have been reclassified to conform to the current year
      presentation.





**NOTE
      2 - LICENSE AGREEMENT WITH CUBIST**





The
      Company entered into a licensing agreement with Cubist in June 2004, under
      which
      the Company granted to Cubist an exclusive, worldwide license (with the right
      to
      sub-license) to commercialize HepeX-B and any other product containing an hMAb,
      or humanized monoclonal antibody, or fragment directed at the hepatitis B virus
      owned or controlled by the Company. See Note 1k for the revenue recognition
      treatment.




In
      August
      2005, the Company amended its licensing agreement with Cubist. Under the terms
      of the agreement, as amended, Cubist paid the Company an initial up-front
      nonrefundable payment of $1 million upon the signing of the agreement, and
      a
      payment of $1 million (out of which $454,000, $454,000 and $185,000 was recorded
      as revenue in the years ended December 31, 2006, 2005 and 2004, respectively)
      as
      collaboration support paid in 2004 (instead of a total of $2 million to be
      paid
      in installments through 2005, as per the original agreement). Furthermore,
      under
      the terms of the agreement, as amended, Cubist shall make a payment in the
      amount of $3 million upon achievement of certain regulatory milestones until
      the
      end of 2007 or an amount of $2 million upon achievement of the same certain
      regulatory milestones until the end of 2008. Under this agreement, as amended,
      the Company was responsible for certain clinical and product development
      activities of HepeX-B through August 2005, at the expense of Cubist. The Company
      has transferred full responsibility for completing the development of HepeX-B
      to
      Cubist. Cubist will be responsible for completing the development and for
      registration and commercialization of the product worldwide.





The
      Company accounts for the payments resulting from the agreement as follows (i)
      the $1 million up-front fee and the collaboration support payments are recorded
      as deferred revenue upon receipt and amortized through 2008 or the date upon
      which regulatory approval is reached, if earlier; and (ii) the milestone
      contingent payments will be recorded as revenue when regulatory approval
      milestones are obtained.


F-18


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      2 - LICENSE AGREEMENT WITH CUBIST** (continued)




Under
      the
      agreement, the Company is entitled to receive royalties from net sales by
      Cubist, if any, generally ranging from 10% to 17%, depending on the levels
      of
      net sales achieved by Cubist and subject to certain deductions based on the
      patent protection of HepeX-B in such territory, the total cost of HepeX-B
      development, third party license payments and indemnification obligations.
      As of
      the date hereof, Cubist has decided not to make any further investment in the
      HepeX-B program while Cubist evaluates strategic options for
      HepeX-B.





The
      agreement expires on the later of the last valid patent claim covering Hepex-B
      to expire or 10 years after the first commercial sale of HepeX-B on a
      country-by-country basis.





U nder
      a
      research and license agreement with Yeda (see Note 7a(1)), the Company paid
      Yeda
      during 2004, $250,000 with respect to the $1 million up-front fee received
      by
      the Company from Cubist in June 2004, out of which $54,000, $54,000 and $32,000
      was recorded as cost of revenues in 2006, 2005 and 2004, respectively.





The
      balance of the deferred gain related to the revenue from Cubist, as of December
      31, 2006 and 2005, was presented in the balance sheet, net of the above
      mentioned payment, as follows:





**December
                31****2006**
            
            **2005****($
                in thousands)**Deferred
                revenue
            
            
            907
            
            
            1,361Less
                - Deferred expenses related to Yeda
            
            
            110
            
            
            164Deferred
                gain
            
            
            797
            
            
            1,197





For
      a
      discussion of the Company's commitment to the Government of Israel related
      to
      the transfer of manufacturing rights of the Company’s HepeX-B product candidate
      under the terms of the agreement with Cubist, see Note 7a(2).




**NOTE
      3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST**





During
      September 2005, the Company licensed from VivoQuest, a US privately-held
      company, which is a development stage enterprise, perpetual, exclusive, and
      worldwide rights to VivoQuest’s intellectual property and technology, covering a
      proprietary compound library, which includes VivoQuest’s lead hepatitis C
      compounds. In addition, the Company acquired from VivoQuest certain assets,
      including VivoQuest’s laboratory equipment, assumed VivoQuest’s lease of its
      laboratory space and certain research and development employees. The Company
      executed this transaction in order to broaden its pipeline and strengthen its
      franchise in infectious diseases.





In
      connection with the VivoQuest transaction (the “Transaction”):




(1)
            the
                Company issued the fair value equivalent of $1,391,000 of its ordinary
                shares (1,314,420 ordinary shares, calculated based upon the average
                of
                the closing prices per share for the period commencing two days before,
                and ending two days after the closing of the transaction), made cash
                payments of approximately $400,000 to cover VivoQuest’s operating expenses
                prior to the closing of the Transaction, and incurred $148,000 in
                direct
                expenses associated with the
                Transaction;




F-19




**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST** (continued)





(2)
            the
                Company agreed to make additional contingent milestone payments triggered
                by certain regulatory and sales targets, totaling up to $34.6 million,
                $25.0 million of which will be due upon or following regulatory approval
                or actual product sales, and payable in cash or ordinary shares at
                the
                Company’s election. No contingent consideration has been paid pursuant to
                the license agreement as of the balance sheet date, because none
                of the
                milestones have been achieved. The contingent consideration will
                be
                recorded as part of the acquisition costs in the future; and





(3)
            the
                Company agreed to make royalty payments on future product
                sales.





As
      VivoQuest is a development stage enterprise that had not yet commenced its
      planned principal operations, the Company accounted for the Transaction as
      an
      acquisition of assets pursuant to the provisions of SFAS 142 “Goodwill and Other
      Intangible Assets.” Accordingly, the purchase price was allocated to the
      individual assets acquired, based on their relative fair values, and no goodwill
      was recorded.





The
      purchase price consisted of:





**($
                in thousands)**Fair
                value of the Company’s ordinary shares
            
            
            1,391Cash
                consideration paid
            
            
            400Direct
                expenses associated with the Transaction
            
            
            148Total
                purchase price
            
            
            1,939





The
      tangible and intangible assets acquired consisted of the following:





**($
                in thousands)**Tangible
                assets acquired - property and equipment
            
            
            113Intangible
                assets acquired:In-process
                research and development
            
            
            1,783Assembled
                workforce
            
            
            43Total
                intangible assets acquired
            
            
            1,826Total
                tangible and intangible assets acquired
            
            
            1,939





The
      fair
      value of the in-process research and development acquired was estimated by
      management with the assistance of an independent third-party appraiser, using
      the “income approach.” In the income approach, fair value is dependent on the
      present value of future economic benefits to be derived from ownership of an
      asset. Central to this approach is an analysis of the earnings potential
      represented by an asset and of the underlying risks associated with obtaining
      those earnings. Fair value is calculated by discounting future net cash flows
      available for distribution to their present value at a rate of return, which
      reflects the time value of money and business risk. In order to apply this
      approach, the expected cash flow approach was used. Expected cash flow is
      measured as the sum of the average, or mean, probability-weighted amounts in
      a
      range of estimated cash flows. The expected cash flow approach focuses on the
      amount and timing of estimated cash flows and their relative probability of
      occurrence under different scenarios. The probability weighted expected cash
      flow estimates are discounted to their present value using the risk free rate
      of
      return, since the business risk is incorporated in adjusting the projected
      cash
      flows to the probabilities for each scenario. The risk-free discount rate
      assumed for the valuation of the license to the intellectual property is 4.6%,
      based upon the yields on long-term US treasury securities, as of the valuation
      date.





F-20


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST** (continued)





The
      fair
      value of the assembled workforce acquired was estimated by management with
      the
      assistance of an independent third-party appraiser, using the “cost approach.”
The cost approach measures the fair- value based on the cost of reproducing
      or
      replacing an asset, less depreciation and amortization from physical
      deterioration and functional or economic obsolescence, if present and
      measurable. According to this approach, the estimated fair value of the
      assembled workforce is based on the cost of replacing VivoQuest’s key employees,
      which were hired by the Company as a part of Transaction.




The
      amount allocated to in-process research and development represents the relative
      fair value of purchased in-process research and development that, as of the
      transaction date, have not reached technological feasibility and have no proven
      alternative future use. Accordingly, they were charged in the consolidated
      statement of operations as “in- process research and development
      costs.”




The
      assembled workforce that was acquired is being amortized using the straight-line
      method over its estimated useful life of three years, and is classified as
      “intangible assets” on the Company’s balance sheet.





For
      the
      years ended December 31, 2006 and 2005, amortization of the assembled workforce
      was $14,000 and $4,000, respectively. Estimated amortization expenses of the
      assembled workforce for future years subsequent to December 31, 2006 are
      $14,000 for 2007 and $11,000 for 2008.




**NOTE
      4 - PROPERTY AND EQUIPMENT**





**a.**
            Composition
                of the assets, grouped by major classifications, is as
                follows:


**December
                  31****2006**
              
              **2005****($
                  in thousands)****Property
                  and equipment****Cost:**Laboratory
                  equipment
              
              
              1,281
              
              
              1,960Computers
              
              
              227
              
              
              232Leasehold
                  improvements
              
              
              572
              
              
              698Furniture
                  and office equipment
              
              
              156
              
              
              2382,236
              
              
              3,128**Accumulated
                  depreciation and amortization:**Laboratory
                  equipment
              
              
              895
              
              
              1,333Computers
              
              
              202
              
              
              217Leasehold
                  improvements
              
              
              572
              
              
              697Furniture
                  and office equipment
              
              
              77
              
              
              1191,746
              
              
              2,366490
              
              
              762





As
      of
      December 31, 2006, the Company's unused assets (primarily lab equipment) which
      are held-for-sale were classified as current assets at their net book value
      of
      $18,000. The Company expects to dispose of these assets during the first six
      months of 2007.





**b.**
            Under
                the provisions of SFAS 144, the Company’s management reviewed the carrying
                value of certain property and equipment (primarily laboratory equipment),
                and recorded an impairment charge in an amount of $26,000 for the
                year
                ended December 31, 2005. See Note 9.





**c.**
            Depreciation
                totaled $229,000, $238,000 and $319,000 for the years ended December
                31,
                2006, 2005 and 2004, respectively.




F-21




**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      5 -** **EMPLOYEE
      SEVERANCE OBLIGATIONS**





**a.**
            **The
                Company**





Israeli
      labor law generally requires payment of severance upon dismissal of an employee
      or upon termination of employment in certain other circumstances. The following
      principal plans relate to the Company:





1)
            On
                June 30, 2001, the Company entered into an agreement with each employee
                implementing Section 14 of the Severance Compensation Act, 1963 (the
                “Law”) and the General Approval of the Labor Minister issued in accordance
                with Section 14 of the Law, mandating that upon termination of such
                employee’s employment, the Company shall release to the employee all
                amounts accrued in its insurance policies with respect to such employee.
                Accordingly, the Company remits each month to each of its employees’
                insurance policies, the amounts required by the Law to cover the
                severance
                pay liability.





The
      employee severance obligations covered by these contribution plans are not
      reflected in the financial statements, as the severance payment obligation
      has
      been irrevocably transferred to the severance funds.





2)
            Insurance
                policies for certain employees: the policies provide most of the
                coverage
                for severance pay and pension liabilities of managerial personnel,
                the
                remainder of such liabilities are covered by the
                Company.





The
      Company has recorded an employee severance obligation for the amount that would
      be paid if all such employees were dismissed at the balance sheet date, on
      an
      undiscounted basis, in accordance with Israeli labor law. This liability is
      computed based upon the number of years of service multiplied by the latest
      monthly salary. The amount of accrued severance represents the Company’s
      severance obligation in accordance with labor agreements in force and based
      on
      salary components, which in management’s opinion, create an entitlement to
      severance.





The
      Company may only utilize the severance pay funds in the insurance policies
      for
      the purpose of disbursement of severance.





**b.**
            **The
                Subsidiary**





The
      Subsidiary’s severance obligation is calculated based on employment agreements
      between the Subsidiary and its employees.





**c.**
            **Severance
                expenses**





Severance
      expenses (income) totaled $8,000, $(159,000) and $30,000 for the years ended
      December 31, 2006, 2005 and 2004, respectively.





Gain
      on
      employee severance pay funds in respect of employee severance obligations
      totaled $(1,000), $(6,000), and $(4,000) for the years ended December 31, 2006,
      2005 and 2004, respectively.





**d.**
            **Cash
                flow information regarding the Company’s liability for employee rights
                upon retirement:**





1)
            For
                the years ended December 31, 2006, 2005 and 2004, the Company contributed
                to insurance companies, in respect of its severance obligations to
                its
                Israeli employees, $82,000, $166,000 and $276,000, respectively,
                and
                expects to contribute, in 2007, $48,000 to insurance companies in
                respect
                of its severance obligations to its Israeli
                employees.




F-22




**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      5 -** **EMPLOYEE
      SEVERANCE OBLIGATIONS** **(continued)**





2)
            The
                Company expects to pay future benefits to certain employees who will
                reach
                retirement, as follows:




**($
                in thousands)**2010
            
            122011
            
            —2012-2016
            
            5567*





*As
      of
      December 31, 2006, $43,000 of these future benefits have been funded by the
      Company and are included in “employee severance pay funds.”





The
      above
      amounts were determined based on each employee’s current salary and the number
      of service years that will be accumulated upon each employee’s retirement date.
      These amounts do not include amounts that might be paid to employees that will
      cease being employed by the Company prior to the normal retirement age.





**NOTE
      6 - SHAREHOLDERS’ EQUITY**





**a.**
            **Share
                Capital and Warrants**





As
      of
      December 31, 2006, the Company’s ordinary shares are traded on the London Stock
      Exchange (“LSE”) and on the Tel Aviv Stock Exchange (“TASE”). The closing price
      per ordinary share, as of December 31, 2006, was 14.25p on the LSE ($0.28)
      and
      NIS 1.03 on the TASE ($0.24). In addition, American Depositary Receipts,
      representing the Company’s ordinary
      shares (“ADRs”), trade on the Nasdaq National Market, with each ADR representing
      ten ordinary shares. The closing price of the Company’s ADRs, as of December 31,
      2006, was $2.74.





On
      September 20, 2000 and October 26, 2000, the Company issued 20,900,000 and
      2,850,000 ordinary shares, respectively, in an initial public offering and
      in
      exercise of the underwriters over-allotment option, respectively (collectively
      the “IPO”), at
      the
      price of ₤ 1.5 per ordinary share ($2.1 per ordinary share). Total
      proceeds to the Company from the IPO were approximately $45.7 million, net
      of
      offering expenses of approximately $5.2 million.





On
      August
      2, 2004, the Company completed a Placing and Open Offer transaction of
      56,009,732 ordinary shares at ₤0.175 per ordinary share ($0.32 per ordinary
      share). Total proceeds to the Company from the Placing and Open Offer
      transaction were approximately $15.4 million, net of offering expenses of
      approximately $2.4 million.





On
      September 21, 2005, the Company issued to VivoQuest Inc. the fair value
      equivalent of $1,391,000 of its ordinary shares (1,314,420 ordinary shares),
      see
      Note 3.





On
      March
      22, 2006, the Company completed a private placement of 46,666,670 ordinary
      shares (equivalent to 4,666,667 ADRs) at $0.60 per ordinary share ($6.00 per
      ADR), together with warrants for the purchase of an aggregate of 23,333,335
      ordinary shares (equivalent to 2,333,333.5 ADRs) at an exercise price of $0.875
      ($8.75 per ADR). The warrants expire on March 22, 2011. The private placement
      closed on May 25, 2006.





F-23




**XTL
      BIOPHARMACEUTICALS LTD.**




(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





As
      of
      December 31, 2006, no warrants have been exercised and no warrants have been
      cancelled. The
      Company used the Black & Scholes fair value option pricing model to value
      the warrants issued. The following assumptions under this method were used: expected
      volatility of 48%; risk-free interest rate (in dollar terms) of 4.8%, dividend
      yield of 0%, and expected life of 4.8 years. The fair value of the warrants
      issued was $0.22 per warrant, and was recorded as additional paid-in
      capital.





Total
      proceeds to the Company from this private placement were approximately $24.4
      million, net of offering expenses of approximately $3.6 million.





**b.**
            **Stock
                Option Plans:**





1)
            The
                Company maintains the following share option plans for its employees,
                directors and consultants.





The
      Company’s board of directors administers its share option plans and has the
      authority to designate all terms of the options granted under the Company’s
      plans including the grantees, exercise prices, grant dates, vesting schedules
      and expiration dates, which may be no more than ten years after the grant date.





As
      of
      December 31, 2006, the Company has granted to employees, directors and
      consultants options that are outstanding to purchase up to 33,235,238 ordinary
      shares, under the five share option plans discussed below and pursuant to
      certain grants apart from these plans also discussed below.





(a)
            1998
                Share Option Plan





Under
      a
      share option plan established in 1998 (“the 1998 Plan”), the Company granted
      options to employees during 1998, which are held by a trustee under section
      3(i)
      of the Israeli tax ordinance (hereinafter the “Tax Ordinance”), of which
      3,884,810 are outstanding and exercisable as of December 31, 2006 at an exercise
      price of $0.497 per ordinary share.





The
      options granted thereunder are outstanding and exercisable until January 2008.
      If the options are not exercised and the shares not paid for by such date,
      all
      interests and rights of any grantee shall expire. These options were granted
      for
      no consideration. There are no options available for grant under this plan.





(b)
            1999
                Share Option Plan





Under
      a
      share option plan established in 1999 (“the 1999 Plan”), the Company granted
      options to employees during 1999, which are held by a trustee under section
      3(i)
      of the Tax Ordinance, of which 790,790 are outstanding and exercisable as of
      December 31, 2006, at an exercise price of $0.497 per ordinary share.





The
      option term is for a period of 10 years from the grant date. If the options
      are
      not exercised and the shares not paid for by such date, all interests and rights
      of any grantee shall expire. These options were granted for no consideration.
      There are no options available for grant under this plan.





F-24




**XTL
      BIOPHARMACEUTICALS LTD.**




(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





(c)
            1999
                International Share Option Plan





Under
      an
      international share option plan established in 1999 (“the International Plan”),
      the Company granted options to employees during 1999 and 2000, of which
      1,380,000 are outstanding and exercisable as of December 31, 2006, at an
      exercise price between $0.497 and $1.10 per ordinary share.





The
      options granted thereunder are outstanding and exercisable until October 2007.
      If the options are not exercised and the shares are not paid for by such date,
      all interests and rights of any grantee shall expire. These options were granted
      for no consideration. There are no options available for grant under this plan.





(d)
            2000
                Share Option Plan




Under
      a
      share option plan established in 2000 (“the 2000 Plan”), the Company granted
      options to employees during 2000, which are held by a trustee under section
      3(i)
      of the Tax Ordinance, of which 669,800 are outstanding and exercisable as of
      December 31, 2006, at an exercise price of $1.10 per ordinary share.




The
      option term is for a period of 10 years from grant date. If the options are
      not
      exercised and the shares not paid for by such date, all interests and rights
      of
      any grantee shall expire. These options were granted for no consideration.
      There
      are no options available for grant under this plan.




(e)
            2001
                Share Option Plan




Under
      a
      share option plan established in 2001 (“the 2001 Plan”), the Company has granted
      options during
      2001-2006 ,
      at an
      exercise price between $0.106 and $0.931 per ordinary share. Up to 11,000,000
      options were available to be granted under the 2001 Plan, of which 5,714,838
      are
      outstanding as of December 31, 2006. Options
      granted to Israeli employees were in accordance with section 102 of the Tax
      Ordinance, under the capital gains option set out in section 102(b)(2) of the
      ordinance.




The
      option term is for a period of 10 years from the grant date. The
      options were granted for no consideration. The options vest over a four year
      period. As of December 31, 2006, 1,801,637 options are fully vested. As of
      December 31, 2006, the remaining number of options available for future grants
      under the 2001 Plan is 4,799,569.




(f)
              Non-Plan
                  Share Options




In
      addition to the options granted under the Company’s share option plans, there
      are 20,795,000 outstanding options, and 6,066,667 exercisable options, as of
      December 31, 2006, which were granted by the Company to employees, directors
      and
      consultants not under an option plan during
      1997-2006 .
      The
      options were granted at an exercise price between $0.20 and $2.11 per ordinary
      share. The options expire between 2008 and 2016.




F-25


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





2)
              The
                  following table summarizes options granted to employees and directors
                  under the Company's stock option plans, as discussed
                  above:




**Year
                    ended December 31****2006**
                
                **2005**
                
                **2004****Weighted**
                
                
                
                **Weighted**
                
                
                
                **Weighted****Average**
                
                
                
                **average**
                
                
                
                **average****Number**
                
                **exercise
                    price**
                
                **Number**
                
                **exercise
                    price**
                
                **Number**
                
                **exercise
                    price**$
                
                
                
                $
                
                
                
                **$**Balance
                      outstanding atbeginning
                      of year
                
                
                24,268,975
                
                
                0.59
                
                
                17,805,661
                
                
                0.69
                
                
                17,552,661
                
                
                0.69Changes
                    during the year:Granted
                    *
                
                
                11,740,000
                
                
                0.70
                
                
                11,370,000
                
                
                0.36
                
                
                432,000
                
                
                0.33Exercised
                    **
                
                
                (277,238
                )
                
                0.35
                
                
                (3,786,825
                )
                
                0.40
                
                
                (50,000
                )
                
                0.37Reclassified***
                
                
                (125,000
                )
                
                0.25
                
                
                —
                
                
                —
                
                
                —
                
                
                —Expired
                
                
                (2,074,505
                )
                
                0.60
                
                
                (153,285
                )
                
                0.95
                
                
                (44,133
                )
                
                0.91Forfeited
                
                
                (1,056,994
                )
                
                0.57
                
                
                (966,576
                )
                
                0.39
                
                
                (84,867
                )
                
                0.56Balance
                    outstanding atend
                    of year****
                
                
                32,475,238
                
                
                0.63
                
                
                24,268,975
                
                
                0.59
                
                
                17,805,661
                
                
                0.69Balance
                      exercisable at end of year****
                
                
                14,145,370
                
                
                0.72
                
                
                16,262,310
                
                
                0.70
                
                
                16,051,324
                
                
                0.72





*
              In
                  2006, the exercise price of the options granted to employees was
                  greater
                  than, equal to, or less than the share price on the grant date
                  (see (a)
                  below). In 2005, the exercise price of options granted to the Company's
                  directors was equal to or less than the share price on the grant
                  date (see
                  (b) and (c) below). In 2004, the exercise price of options granted
                  to
                  employees and directors was equal to the share price on the grant
                  date
                  (see (d) below).


**
            The
                total intrinsic value of options exercised during 2006, 2005 and
                2004 was
                $167,000, $1,521,000 and $6,000, respectively.


***
            In
                2006, a former employee was engaged by the Company as a consultant.
                The
                options that were granted to that former employee have been reclassified
                from options to an employee to options to a consultant.


****
              The
                  aggregate intrinsic value as of December 31, 2006 is $33,000 for
                  outstanding options, and $21,000 for exercisable options.





The
      following table summarizes information about stock options granted to employees
      and directors outstanding and exercisable at December 31, 2006:





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-average**
              **exercise**
              **price**$0.100-$0.299
            
            
            272,772
            
            
            5.9
            
            $
            0.16
            
            
            126,237
            
            
            3.9
            
            $
            0.11$0.300-$0.399
            
            
            11,290,000
            
            
            3.6
            
            $
            0.35
            
            
            3,771,667
            
            
            3.6
            
            $
            0.35$0.400-$0.499
            
            
            5,802,600
            
            
            1.1
            
            $
            0.49
            
            
            5,802,600
            
            
            1.1
            
            $
            0.49$0.500-$0.699
            
            
            3,625,000
            
            
            9.5
            
            $
            0.60
            
            
            —
            
            
            —
            
            $
            —$0.700-$0.899
            
            
            7,273,800
            
            
            9.0
            
            $
            0.78
            
            
            233,800
            
            
            4.1
            
            $
            0.85$0.900-$1.100
            
            
            2,936,066
            
            
            1.5
            
            $
            1.02
            
            
            2,936,066
            
            
            1.5
            
            $
            1.02$2.110
            
            
            1,275,000
            
            
            3.7
            
            $
            2.11
            
            
            1,275,000
            
            
            3.7
            
            $
            2.1132,475,238
            
            
            4.9
            
            $
            0.63
            
            
            14,145,370
            
            
            2.1
            
            $
            0.72





F-26


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





(a)
            In
                March 2006, the Company’s board of directors granted the Company's Chief
                Executive Officer (“CEO”) options to purchase a total of 7,000,000
                ordinary shares at an exercise price equal to $0.774 per ordinary
                share
                (closing price of the last trading day prior to official appointment;
                closing price on grant date was $0.784). These options are exercisable
                for
                a period of 10 years from the date of issuance, and granted under
                the same
                terms and conditions as the 2001 Plan. Of these, 2,333,334 options
                shall
                vest as follows: 777,782 options on the one-year anniversary of the
                issuance of the options and 194,444 options at the end of each quarter
                thereafter for the following two years. The balance of the options
                shall
                vest upon achievement of certain market conditions or performance
                conditions (2,333,333 of the options shall vest upon achievement
                of a
                certain market capitalization or working capital condition and 2,333,333
                of the options shall vest upon achievement of another market
                capitalization or working capital condition). In addition, in the
                event of
                a merger, acquisition or other change of control or in the event
                that the
                Company terminates the CEO, either without cause or as a result of
                his
                death or disability, or he terminates his agreement for good reason,
                the
                exercisability of any of the options granted to him that are unexercisable
                at the time of such event or termination shall accelerate and the
                time
                period during which he shall be allowed to exercise such options
                shall be
                extended by two years from the date of the termination of his agreement.
                Additionally, the Company’s board of directors shall have the discretion
                to accelerate all or a portion of the CEO’s options at any time. As of
                December 31, 2006, none of the options granted to the CEO have vested.
                The
                compensation expenses for the options that vest upon achievement
                of
                certain market conditions or performance conditions are amortized
                using
                the graded method.





The
      Company used a Black & Scholes model as the fair value option pricing model
      for the service condition tranche (see below).





The
      Company used a lattice model that incorporated a Monte Carlo Simulation method
      as the fair value option pricing model for the market condition tranche of
      the
      CEO’s options grant, which was estimated by management with the assistance of an
      independent third-party appraiser. The following assumptions under this method
      were used for the stock options granted: average risk free interest rate of
      4.7%
      (in dollar terms), expected volatility of 50%, dividend yield of 0%, and derived
      expected life of 4.00 to 5.00 years. The weighted average fair value of options
      granted during the year, estimated by using the Monte Carlo Simulation Method
      was $0.46 per option.





In
      June
      2006, the Company’s board of directors granted options to its employees to
      purchase a total of 4,625,000 ordinary shares at an exercise price equal to
      $0.60 per ordinary share (a price above the closing price on the date of grant).
      In September 2006, the Company’s board of directors granted options to its
      employees to purchase a total of 75,000 ordinary shares at an exercise price
      equal to $0.286 per ordinary share (a price equal to the closing price on the
      date of grant). These options are exercisable for a period of 10 years from
      the
      date of issuance, and were granted under the Company’s 2001 Plan.





In
      August
      2006, the Company granted options to a non-executive director to purchase 20,000
      ordinary shares, at an exercise price equal to $0.325 per ordinary share (a
      price equal to the closing price on the date of grant). The options are
      exercisable for a period of ten years from date of grant. In August 2006, the
      Company granted options to the estate of a non-executive director to purchase
      20,000 ordinary shares, at an exercise price equal to $0.325 per ordinary share
      (a price below the closing price on the date of grant). The options are
      exercisable through December 31, 2007 (see (c) below).





F-27


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





The
      Company used a Black & Scholes model as the fair value option pricing model
      for the service condition awards described above. The following assumptions
      under this method were used for the stock options granted:  weighted
      average expected volatility of: 48%; weighted average risk-free interest rates
      (in dollar terms) of 5.0%, dividend yield of 0%, and weighed average expected
      life of 5.7 years. The weighted average fair value of options granted during
      the
      year using the model was $0.27 per option.





The
      expected term of options granted is derived from historical data and the
      expected vesting period. Expected volatility is based on the historical
      volatility of the Company’s ordinary shares and the Company’s assessment of its
      future volatility. The risk-free interest rate is based on the US Treasury
      yield
      for a period consistent with the expected term of the option in effect at the
      time of the grant. The Company has assumed no expected dividend yield, as
      dividends have never been paid to share or option holders and will not be for
      the foreseeable future. The Company used historical information to estimate
      forfeitures within the valuation model. Compensation expenses are calculated
      based on the straight line method (unless noted otherwise).





(b)
            In
                August 2005, the Company’s shareholders granted its Chairman of the Board
                (the “Chairman”) and one of its non-executive directors, options to
                purchase a total of 9,250,000 and 2,000,000 ordinary shares, respectively,
                at an exercise price equal to $0.354 per ordinary share (which was
                below
                market price on the date of grant) . These options are exercisable
                for a
                period of five years from the date of issuance, and were granted
                under the
                same terms and conditions as the 2001 Plan. The options shall vest
                upon
                achievement of certain market conditions (in each case, 1/3 of the
                options
                will vest upon achievement of a certain market condition). In addition,
                with regard to the Chairman, in the event of a merger, acquisition
                or
                other change of control or in the event that the Company terminates
                the
                Chairman, either without cause or as a result of his death or disability,
                or he terminates his agreement for good reason, the exercisability
                of any
                of the options granted to him (9,250,000 options) that are unexercisable
                at the time of such event or termination shall accelerate and the
                time
                period during which he shall be allowed to exercise such options
                shall be
                extended by two years from the date of the termination of his agreement.
                Additionally, the Company’s board of directors shall have the discretion
                to accelerate all or a portion of the Chairman’s options at any time. As
                of December 31, 2006, 3,083,333 options that were granted to the
                Chairman
                and 666,667 options that were granted to one of the Company's
                non-executive directors are vested (the first market condition milestone
                was reached and therefore 1/3 of the options were vested). The
                compensation expenses are amortized using the graded method.





The
      Company used a lattice model that incorporated a Monte Carlo Simulation method
      as the fair value option pricing model, which was estimated by management with
      the assistance of an independent third-party appraiser. The following
      assumptions under this method were used for the stock options granted: risk
      free
      interest rate of 4.6% (in dollar terms), expected volatility of 50%, dividend
      yield of 0%, and derived expected life of 1.43 to 4.37 years. The weighted
      average fair value of options granted during the year, estimated by using the
      Monte Carlo Simulation Method, was $0.53 per option.





F-28




**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





(c)
            In
                August 2005, the Company granted to two of its non-executive directors
                options to purchase a total of 60,000 ordinary shares each, having
                an
                exercise price equal to $0.853 per ordinary share (equal to the average
                price per share, as derived from the Daily Official List of the London
                Stock Exchange, in the three days preceding the date of such grant)),
                vesting over the three years from the date of grant. In addition,
                they
                also provided for an annual grant of 20,000 options each, for three
                years,
                at an exercise price equivalent to the then current closing price
                of the
                Company’s ADR’s on the Nasdaq National Market, with the future grants
                being contingent on such non-executive directors being members of
                the
                Company's board of directors at such time (also see (a)
                above).





The
      Company used a Black & Scholes model as the fair value option pricing model.
      The following assumptions under this method were used for the stock options
      granted:  expected
      volatility of 50%; risk-free interest rates (in dollar terms) of 4.6%, dividend
      yield of 0% and expected life of 5 years based on management estimation. The
      weighted average fair value of options granted during the year using the model
      was $0.42 per option.





(d)
            The
                weighted average fair value of options granted during 2004, estimated
                by
                using the Black & Scholes option-pricing model, was $ 0.10. The fair
                value of options was estimated on the date of grant, based on the
                following weighted average assumptions: dividend yield of 0%; expected
                volatility of 35%; risk-free interest rates (in dollar terms) of
                2.9%; and
                expected life of 2 to 4 years, depending on the vesting period of
                the
                options.





(e)
            For
                the years ended December 31, 2006, 2005 and 2004, non-cash compensation
                relating to options granted to employees and directors was $2,173,000
                (of
                which $170,000 was charged to research and development costs, $1,990,000
                was charged to general and administrative expenses and $13,000 was
                charged
                to business development costs), $2,718,000 (of which $67,000 was
                charged
                to research and development costs, $2,641,000 was charged to general
                and
                administrative expenses and $10,000 was charged to business development
                costs), and $0, respectively. The total compensation costs related
                to
                nonvested awards not recognized as of December 31, 2006 was $5,478,000,
                and the weighted average period over which it is expected to be recognized
                is 3.0 years.





(f)
            In
                March 2006, the Board of Directors of the Company approved the grant
                to
                the Chairman and to a non-executive director, of options to purchase
                9,898,719 and 750,000 ordinary shares, respectively. All of such
                options
                are subject to vesting of which one third is based on service period,
                and
                the remainder is based on achievement of certain milestones linked
                to the
                Company’s valuation on the public markets. These grants are subject to
                shareholder approval. During 2006, the Company did not seek shareholder
                approval, so the options had not been granted at December 31,
                2006.





3)
            The
                following table summarizes options granted to consultants (including
                consultants and members of the scientific advisory board and other
                third-party service providers) under the Company's stock option plans,
                as
                discussed above:





F-29


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)


**Year
                  ended December 31****2006**
              
              **2005**
              
              **2004****Weighted**
              
              
              
              **Weighted**
              
              
              
              **Weighted****average**
              
              
              
              **average**
              
              
              
              **average****Number**
              
              **exercise
                  price**
              
              **Number**
              
              **exercise
                  price**
              
              **Number**
              
              **exercise
                  price**$
              
              
              
              $
              
              
              
              **$**Balance
                  outstanding atbeginning
                  of year
              
              
              525,000
              
              
              0.33
              
              
              525,000
              
              
              0.33
              
              
              205,000
              
              
              0.54Changes
                  during the year:Granted*
              
              
              120,000
              
              
              0.29
              
              
              —
              
              
              —
              
              
              320,000
              
              
              0.20Reclassified**
              
              
              125,000
              
              
              0.25
              
              
              —
              
              
              —
              
              
              —
              
              
              —Expired
              
              
              (10,000
              )
              
              0.50
              
              
              —
              
              
              —
              
              
              —
              
              
              —Balance
                  outstanding atend
                  of year***
              
              
              760,000
              
              
              0.31
              
              
              525,000
              
              
              0.33
              
              
              525,000
              
              
              0.33Balance
                  exercisable atend
                  of year***
              
              
              448,334
              
              
              0.36
              
              
              355,000
              
              
              0.39
              
              
              280,901
              
              
              0.45




*
            The
                options exercise price was equal to the share price on the grant
                date.


**
            In
                2006, a former employee was engaged by the Company as a consultant.
                The
                options that were granted to that former employee have been reclassified
                from options to an employee to options to a consultant.


***
            The
                aggregate intrinsic value as of December 31, 2006 is $27,000 for
                outstanding options, and $13,000 for exercisable
                options.




The
      following table summarizes information about stock options outstanding and
      exercisable at December 31, 2006:





**Options
                outstanding**
            
            **Options
                exercisable****Range
                of**
              **exercise
                prices**
            
            **Number**
              **outstanding**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-**
              **average**
              **exercise**
              **price**
            
            **Number**
              **exercisable**
            
            **Weighted-**
              **average**
              **remaining**
              **contractual**
              **life
                (years)**
            
            **Weighed-average**
              **exercise**
              **price**0.100-0.299
            
            
            375,000
            
            
            5.5
            
            $
            0.24
            
            
            233,334
            
            
            3.5
            
            $
            0.220.100-0.299
            
            
            170,000
            
            
            *
            
            $
            0.20
            
            
            —
            
            
            —
            
            $
            —0.300-0.399
            
            
            20,000
            
            
            5.0
            
            $
            0.31
            
            
            20,000
            
            
            5.0
            
            $
            0.310.500-0.699
            
            
            195,000
            
            
            5.0
            
            $
            0.54
            
            
            195,000
            
            
            5.0
            
            $
            0.54760,000
            
            
            
            
            
            
            
            
            448,334





*
      Two
      years from date of regulatory approval to sell in any geographic location.
      The
      options were granted during 2004.





F-30


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      6 - SHAREHOLDERS’ EQUITY** (continued)





(a)
            The
                Company used the Black & Scholes fair value option pricing model. The
                following assumptions under this method on grant date were used in
                2006:weighted
                average expected volatility of 49%; weighted average risk-free interest
                rates (in dollar terms) of 4.6%, dividend yield of 0%, and weighed
                average
                expected life of 4.5 years. The weighted average fair value of options
                granted during the year using the model was $0.13 per option.The following assumptions under this method were used in 2004: expected
                volatility of 33%, risk free interest rates (in dollars terms) of
                3.6% and
                expected life of five years. The weighted average fair value of options
                granted during 2004 using this model was
                $0.30.





(b)
            For
                the years ended December 31, 2006, 2005 and 2004, non-cash compensation
                relating to options granted to consultants were $7,000 (of which
                $3,000
                was charged to research and development costs, $2,000 was charged
                to
                general and administrative expenses and $2,000 was charged to business
                development costs), $45,000 (all of which was charged to research
                and
                development costs), and $32,000 (of which $30,000 was charged to
                research
                and development costs, and $2,000 was charged to general and
                administrative expenses), respectively.The
                total compensation costs related to nonvested awards not recognized
                as of
                December 31, 2006 was $14,000, and the weighted average period over
                which
                it is expected to be recognized is 2.2 years.




**NOTE
      7 - COMMITMENTS AND CONTINGENCIES**





**a.**
            **Royalty
                Bearing Agreements:**





1)
            Under
                a Research and License agreement with Yeda Research and Development
                Company Ltd. (“Yeda”), the Company is committed to pay royalty payments at
                rates determined in the agreement not exceeding 3% of net sales,
                or
                royalty rates between 20% to 25% of sublicensing fees, for products
                in
                development and research under the agreement.





The
      Company has entered into certain license agreements with third parties in
      respect of particular projects. In connection with such agreements, the Company
      may incur royalty and milestone payment obligations at varying royalty rates
      not
      exceeding 5% of future net sales or 25% of sublicensing fees for developed
      products.





Additionally,
      the Company has undertaken to make contingent milestone payments to certain
      licensors of up to approximately $48.5 million over the life of the licenses,
      of
      which $34.0 million will be due upon or following regulatory approval of the
      drugs (for contingent milestones related to VivoQuest’s purchase agreement which
      are included in these figures, see Note 3).





In
      some
      cases, these contingent milestone payments will be triggered only upon receipt
      of royalties on sales of related products and in certain cases will partially
      offset royalties the Company would otherwise owe those licensors. In addition,
      the Company is required to pay one of its licensors a minimum royalty in the
      amount of $100,000-$200,000 per year during the life of the license. The Company
      may terminate this agreement at any time upon six months advance notice.





F-31


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      7 - COMMITMENTS AND CONTINGENCIES** (continued)




2)
            The
                Company is committed to pay royalties to the Government of Israel
                on
                proceeds from sales of products in the research and development of
                which
                the Government participates by way of grants. At the time grants
                were
                received, successful development of the related projects was not
                assured.
                In the case of failure of a project that was partly financed as above,
                the
                Company is not obligated to pay any such royalties. Under the terms
                of the
                Company's funding from the Israeli Government, royalties of 3% -
                5% are
                payable on sales of products developed from projects so funded, up
                to 100%
                of the amount of the grant received by the Company (dollar linked),
                and as
                from January 1, 1999, with the addition of an annual interest based
                on
                Libor.





The
      Company has received the approval from the Government
      of Israel for the transfer of manufacturing rights of its HepeX-B product,
      under
      the terms of the agreement with Cubist (see Note 2). As a consequence, thereof,
      the Company is obligated to repay the grants received from the Government
      of Israel for the financing of the HepeX-B product from any amounts received
      by
      the Company from Cubist due to the sales of HepeX-B product, at a percentage
      rate, per annum, calculated based on the aggregate amount of grants received
      from the  Government
      of Israel divided by all amounts invested by the Company in the research and
      development activities of HepeX-B, and up to an aggregate amount of 300% of
      the
      original amounts received for such project, including interest at the Libor
      rate.





As
      of
      December 31, 2006, the aggregate amount received from the Government
      of Israel for the financing of the HepeX-B and other ongoing projects, including
      interest and Libor rate, is equal to $4,533,000 and $3,442,000, respectively. As
      of
      December 31, 2006, the maximum amount of the contingent liability in respect
      of
      royalties related to ongoing projects to the Government
      of Israel is
      $17,041,000.





3)
            The
                Company has provided forannual
                grants, over the next two years, of options to a non-executive director.
                The future grants are contingent on being a member of the board of
                directors at such time (see Note
                6(b)2c).





**b.**
            **Operating
                lease commitments:**





1)
            The
                Company leases its office space in Israel and the United States under
                lease agreements that expire through 2009.





Future
      minimum rental payments under these agreements are as follows:




**December
                31,
                2006****($
                in thousands)**In
                2007
            
            
            569In
                2008
            
            
            447In
                2009
            
            
            4191,435





To
      secure
      the lease agreement in Israel, the Company provided a bank guarantee in the
      amount of $236,000 linked to the Israeli Consumer Price Index (“CPI”). As of
      December 31, 2006, the guarantee is secured by a pledge on restricted deposits
      amounting to $172,000 (December 31, 2005- $110,000), which is included in the
      balance sheet as restricted deposits.





F-32


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      7 - COMMITMENTS AND CONTINGENCIES** (continued) ****





Rental
      expenses for the years ended December 31, 2006, 2005 and 2004 were $755,000,
      $524,000 and $394,000, respectively. The Company has an option to extend certain
      rental agreements for up to 5 years.





2)
            The
                Company leases vehicles under the terms of certain operating lease
                agreements that expire in 2007, aggregating $15,000. Vehicle lease
                expense
                for the years ended December 31, 2006, 2005 and 2004 were $41,000,
                $76,000
                and $84,000, respectively.





**c.**
            **Research
                and development agreement
                commitments**





The
      Company has commitments to pay amounts aggregating $469,000, in respect of
      research and development costs (mainly to outside service providers), of which
      $441,000 relates to 2007, $14,000 relates to 2008 and $14,000 relates to
      2009.





**d.**
            **Tax
                Assessment**





In
      2005,
      the Company received an assessment from the Israeli tax authorities of
      approximately $730,000 (including fines and interest expenses) related to
      withholding taxes for the periods of 2001-2004. In 2006, the Company settled
      this assessment with the Israeli tax authorities and paid $48,000.




**NOTE
      8 - INCOME TAXES**





**a.**
            **The
                Company**





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





Under
      this law, results for tax purposes are measured in real terms, adjusted
      according to changes in the Israeli consumer price index (hereinafter the
“CPI”). The Company is taxed under this law.





Results
      for tax purposes are measured on a real basis and are adjusted to reflect the
      increase in the Israeli CPI. As explained in Note 1b, the financial statements
      are presented in dollars. The difference between the change in the Israeli
      CPI
      and the NIS-dollar exchange rate, both on an annual and cumulative basis, causes
      a difference between taxable income and income reflected in these financial
      statements (see also Note 1i).





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





The
      Company has been granted “approved enterprise” status under the Israeli Law for
      Encouragement of Capital Investments, 1959. Subject to compliance with
      applicable requirements, the portion of the Company's undistributed profits
      derived from the approved enterprise program will be tax-exempt for a period
      of
      two years commencing in the first year in which the Company generates taxable
      income and will be subject, for a period of five to eight years, to a reduced
      corporate tax of between 10% and 25%, depending on the percentage of non-Israeli
      investors holding the Company's ordinary shares. Since the Company is currently
      over 25% foreign owned, it is entitled to reduced tax rate of 25%.





The
      period of tax benefits with respect to the Company's approved enterprise program
      has not yet commenced because the Company has yet to realize taxable income.
      However, this benefit period cannot extend beyond 12 years from the year of
      commencement of operations or 14 years from the year in which approval was
      granted, whichever is earlier. The Company has an “approved enterprise” plan
      from 2001. The expiration of this plan is in 2015.




F-33


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      8 - INCOME TAXES** (continued)





If
      the
      Company subsequently pays a dividend out of income derived from the “approved
      enterprise” during the tax exemption period, it will be subject to withholding
      tax on the amount distributed, including any company tax on these amounts from
      which it was exempt, at the rate which would have been applicable had such
      income not been exempt (25%).





The
      entitlement to the above benefits is conditional upon the Company fulfilling
      the
      conditions stipulated by the law, regulations published thereunder and the
      instruments of approval for the specific investment in approved enterprise.
      In
      the event of failure to comply with these conditions, the benefits may be
      cancelled and a company may be required to refund the amount of the benefits,
      in
      whole or in part, with the addition of interest. As of the date hereof, the
      Company has not received any benefits
      from the Investment Center. Additionally, given the Company’s significant amount
      of net-operating losses and the limitation mentioned above to the benefit
      period, there is no certainty if and when the Company would be able to enjoy
      the
      tax benefits described above.





**Tax
                benefits under the Israeli Law for the Encouragement of Industry
                (Taxes),
                1969**





The
      Company qualifies as an “industrial company” under the Law
      for
      the Encouragement of Industry (Taxes), 1969 (the “Industry Law ).
      In
      accordance with the Industry Law the Company is entitled to certain benefits
      including accelerated depreciation on industrial buildings and equipment and
      a
      deduction of 12.5% per year of the purchase price of a good-faith acquisition
      of know-how
      and patents and certain other intangible property rights .





Eligibility
      for the benefits under the Industry Encouragement Law is not subject to receipt
      of prior approval from any government authority. The Company can not assure
      that
      it will continue to qualify as such in the future, or that the benefits will
      be
      granted in the future.





**Tax
                rates in Israel applicable to income from other
                sources**





The
      income of the Company not eligible for “approved enterprise” benefits, as
      discussed above (other than income from “approved enterprises”, see c. below) is
      taxed at the regular rate. For the years ended December 31, 2006, 2005, 2004,
      the corporate rates were 31%, 34% and 35%, respectively. The corporate tax
      rates
      thereafter are as follows: 2007 - 29%, 2008 - 27%, 2009 - 26% and for 2010
      and
      thereafter - 25%.





**US
                Federal Income Tax
                Consequences**





The
      residency of the Company’s Chairman of the Board of Directors and Chief
      Executive Officer in the United States (“US”), as well as other less significant
      contacts that the Company has with the US, could likely lead to a determination
      by the US Internal Revenue Service that the Company currently has a “permanent
      establishment” in the US, which began in 2005. As a result, any income
      attributable to such United States permanent establishment would be subject
      to
      US corporate income tax in the same manner as if we were a US corporation.
      The
      maximum US corporate income tax rate (not including applicable state and local
      tax rates) is currently at 35%. In addition, if this occurred, the Company
      may
      be subject to an additional branch profits tax of 30% on its US effectively
      connected earnings and profits, subject to adjustment, for that taxable year
      if
      certain conditions occur, unless the Company qualified for the reduced 12.5%
      US
      branch profits tax rate pursuant to the United States-Israel tax treaty. The
      Company would be potentially able to credit foreign taxes against its US tax
      liability in connection with income attributable to its US permanent
      establishment and subject to US and foreign income tax.





F-34


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)





**NOTE
      8 - INCOME TAXES** (continued)





At
      present, the Company does not earn any taxable income for US tax purposes.
      If
      the Company eventually earns taxable income attributable to its US permanent
      establishment, the Company would be able to utilize accumulated loss
      carryforwards to offset such income only to the extent these carryforwards
      were
      attributable to its US permanent establishment





**b.**
                **The
                    Subsidiary**





The
      Subsidiary is taxed according to US tax laws.





**c.**
                **Current
                    tax losses for tax
                    purposes**





1)
            Company





Israeli
      income tax of the Company is computed on the basis of the income in Israeli
      currency as determined for statutory purposes. The Company has incurred losses
      for tax purposes from inception. The
      loss
      carryforwards for tax purposes as of December 31, 2006 are approximately $110.6
      million (linked to the CPI), which may be offset against future taxable income
      generated from a business, (including capital gains from the sale of assets
      used
      in the business) with no expiration date.





2)
            Subsidiary





The
      Subsidiary is remunerated under a cost plus agreement with the Company. The
      Subsidiary has incurred taxable income and recorded tax expenses and is taxed
      under the applicable US tax laws.





The
      following table summarizes the taxes on income for the Company and the
      Subsidiary for 2006, 2005 and 2004:




**2006**
              
              **2005**
              
              **2004****($
                  in thousands)**
              
              **($
                  in thousands)**
              
              **($
                  in thousands)****Company**
              
              **Subsidiary**
              
              **Company**
              
              **Subsidiary**
              
              **Company**
              
              **Subsidiary**Net
                    income (loss) beforeincome taxes
              
              
              (15,363
              )
              
              458
              
              
              (14,187
              )
              
              250
              
              
              (16,582
              )
              
              158Income
                  taxes
              
              
              —
              
              
              227
              
              
              —
              
              
              78
              
              
              —
              
              
              49Net
                  income (loss) for the year
              
              
              (15,363
              )
              
              231
              
              
              (14,187
              )
              
              172
              
              
              (16,582
              )
              
              109




**d.**
                **Deferred
                    income taxes**




As
      a
      result of the “approved
      enterprise” status of the Company, the Company’s current Israeli tax rate is 0%,
      and therefore no deferred tax assets have been included in these financial
      statements in respect of carryforward losses.




The
      deferred tax assets included in these financial statements result
      from changes in respect of temporary differences between the financial reporting
      basis and the tax basis in
      the
      Subsidiary in respect of property and equipment in the amount of $19,000 and
      certain employee related provisions in the amount of $29,000.





F-35


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      8 - INCOME TAXES** (continued)





**2006**
            
            **2005**
            
            **2004****($
                in thousands)**Income
                taxes for the reported year:Current
            
            
            275
            
            
            78
            
            
            49Deferred
                (in respect of the reporting period)
            
            
            (48
            )
            
            —
            
            
            —227
            
            
            78
            
            
            49




**e.**
                **Tax****assessments**





1)
            Income
                taxes





The
      Company received tax assessments for the years up to and including the 1998
      tax
      year.





The
      Company’s tax returns until 2001 are considered final. The Subsidiary has not
      been audited for tax purposes since incorporation.





2)
            Withholding
                taxes - see Note 7d.




**NOTE
      9 - RESTRUCTURING:**





In
      2005,
      the Company implemented a restructuring plan designed to focus its resources
      on
      the development of its lead programs, with the goal of moving these programs
      through to clinical proof of concept (hereinafter the “2005 Restructuring”). The
      2005 Restructuring included a 32 person reduction in the Company’s workforce, 31
      of whom were in research and development and one of whom was in general and
      administrative. As part of the 2005 Restructuring, the Company took a charge
      in
      2005 of $168,000, relating to employee dismissal costs, $163,000 of which was
      included in research and development costs and $5,000 of which was included
      in
      general and administrative expenses. The 2005 Restructuring was completed in
      early 2006.





As
      of
      December 31, 2006, 32 employees left the Company under the 2005 Restructuring
      and approximately $168,000 of dismissal costs were paid. As of December 31,
      2006
      and 2005, approximately $0 and $21,000, respectively in employee dismissal
      obligations were included in accounts payable and accrued expenses.





In
      December 2005, as a result of the Company's 2005 Restructuring, and in
      accordance with the provisions of SFAS 144, the Company reviewed the carrying
      value of certain lab equipment assets, and recorded an impairment charge in
      research and development costs in an amount of $26,000 in 2005 (see also Note
      4b).





F-36


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION**





**a.**
            **Short-term
                bank deposits**





The
      deposits are denominated in dollars and bear a weighted average annual interest
      rate of 5.37 % as of December 31, 2006.





**b.**
            **Other
                receivables and prepaid
                expenses:**




**December
                  31****2006**
              
              **2005****($
                  in thousands)**Prepaid
                  expenses
              
              
              258
              
              
              285Employees
              
              
              118
              
              
              75Value
                  added tax authorities
              
              
              8
              
              
              17Interest
                  receivable
              
              
              318
              
              
              54702
              
              
              431




**c.**
            **Accounts
                payable and accrued
                expenses:**





Suppliers
            
            
            941
            
            
            657Accrued
                expenses
            
            
            1,190
            
            
            940Income
                taxes
            
            
            143
            
            
            —Accrued
                compensation and related liabilities
            
            
            729
            
            
            4103,003
            
            
            2,007





**d.**
            **Financial
                and other income - net:**




**March
                  9, 1993****Year
                  ended December 31**
              
              **to
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2006****($
                  in thousands)**Interest
                  income
              
              
              1,058
              
              
              503
              
              
              297
              
              
              10,286Interest
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              (374
              )Foreign
                  exchange differences-gain (loss)
              
              
              2
              
              
              (39
              )
              
              67
              
              
              (1,755
              )Gain
                  from trading securities*
              
              
              2
              
              
              —
              
              
              13
              
              
              1Other
                  income*
              
              
              100
              
              
              —
              
              
              —
              
              
              100Other
                  expense
              
              
              (21
              )
              
              (21
              )
              
              (25
              )
              
              261,141
              
              
              443
              
              
              352
              
              
              8,284





*
      During
      2001 the Company acquired 20% of the shares of US-based iviGene Corporation
      (“iviGene”) for $1 million and agreed to fund certain research activities at
      iviGene which were charged to research and development costs in the consolidated
      statement of operations. During 2002, the Company terminated funding research
      activities at iviGene. In November 2006, Oragenics Inc. (“Oragenics”) acquired
      the outstanding stock of iviGene owned by the Company in exchange for shares
      of
      its common stock at a fair value of $100,000 (representing less than 1% of
      Oragenics shares outstanding). Oragenics’ common
      stock is listed on the American Stock Exchange with the ticker symbol
“ONI.” As a
      result of the exchange, the Company recorded other income of $100,000. The
      fair
      market value of the stock of Oragenics at December 31, 2006 is recorded on
      the
      Company's balance sheet under trading securities.





F-37


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT**





**a.**
            **Linkage
                terms of balances in non-dollars
                currency:**





1)
            As
                follows:


**December 31,
                  2006****Israeli
                  currency**
              
              **Other****Unlinked****($
                  in thousands)**Assets
              
              
              548
              
              
              4Liabilities
              
              
              747
              
              
              108




The
      above
      balances do not include Israeli currency balances linked to the
      dollar.





2)
              Data
                  regarding the changes in the exchange rate of the dollar and the
                  Israeli
                  CPI:
 **Year
                    ended December 31****2006**
                
                **2005**
                
                **2004**Devaluation
                      (evaluation) of the Israelicurrency
                      against the dollar
                
                
                (8.21
                )%
                
                6.85
                %
                
                (1.6
                )%Changes
                    in the Israeli CPI
                
                
                (0.1
                )%
                
                2.4
                %
                
                1.2
                %Exchange
                      rate of one dollar (at end of year)
                
                
                NIS
                    4.225
                
                
                NIS
                    4.603
                
                
                NIS
                    4.308


**b.**
            **Fair
                value of financial
                instruments**





The
      financial instruments of the Company consist of non-derivative assets and
      liabilities, included in working capital. In view of their nature, the fair
      value of these financial instruments is usually identical or close to their
      carrying value.





The
      fair
      value of short term deposits approximates the carrying value, since they bear
      interest at rates close to the market rates.





**c.**
            **Concentration
                of credit risks**





Most
      of
      the Company’s cash and cash equivalents and bank deposits at the balance sheet
      dates were deposited with Israeli banks. The Company is of the opinion that
      the
      credit risk in respect of those balances is remote.





F-38


**XTL
      BIOPHARMACEUTICALS LTD.**


(A
      Development Stage Company)


NOTES
      TO
      THE CONSOLIDATED FINANCIAL STATEMENTS (continued)




**NOTE
      12 - SUBSEQUENT EVENT**





In
      January 2007, XTL Development signed an agreement with DOV Pharmaceutical,
      Inc.
      (hereinafter “DOV”) to in-license the worldwide rights for Bicifadine, a
      serotonin and norepinephrine reuptake inhibitor (SNRI). XTL Development intends
      to develop Bicifadine for the treatment of neuropathic pain - a chronic
      condition resulting from damage to peripheral nerves.





In
      accordance with the terms of the license agreement, XTL Development made an
      initial up-front payment of $7.5 million in cash, which was expensed in the
      Company’s consolidated statements of operations. In addition, XTL Development
      will make milestone payments of up to $126.5 million, in cash and/or ordinary
      shares of the Company over the life of the license, of which up to $115 million
      will be due upon or after regulatory approval of the product. XTL Development
      is
      also obligated to pay royalties on net sales of the product to DOV. In addition,
      XTL Development has committed to pay a transaction advisory fee in the form
      of
      stock appreciation rights in the amount equivalent to 3% of the Company's fully
      diluted ordinary shares at the close of the transaction, vesting one year after
      the close of the transaction, and 7% of the Company's fully diluted ordinary
      shares at the close of the transaction, vesting following successful Phase
      III
      clinical trial results or the acquisition of the Company. Payment of the stock
      appreciation rights by XTL Development can be satisfied, at the Company’s
      discretion, in cash and/or by issuance of the Company’s ordinary
      shares.





F-39