UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
20-F





(Mark
One)


 ̈
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, 2008





OR





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





OR





 ̈ 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)





Kiryat
Weizmann Science Park


3 Hasapir
Street, Building 3, PO Box 370


Rehovot
76100, Israel





(Address
of principal executive offices)





David
Grossman


Co-Chief
Executive Officer


Kiryat
Weizmann Science Park


3 Hasapir
Street, Building 3, PO Box 370


Rehovot
76100, Israel


Tel:
+972-8-930-4444


Fax:
+972-8-930-0659





(Name,
Telephone, E-mail and/or Facsimile number and Address of Company Contact
Person)





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
            The
      NASDAQ Capital Market(Title
      of Class)
            (Name
      of each exchange on which
registered)








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.




21,444,383
      American Depositary Shares
                  292,805,326
      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).  (Check
one):




Large
      accelerated filer £
                    Accelerated
      filer ý
                    Non-accelerated
      filer £


Indicate
by check mark which basis of accounting the registrant has used to prepare the
financial statements included in this filing:




ý  U.S.
      GAAP
                  £  International
      Financial Reporting Standards as issued
                  £  Otherby
      the International Accounting Standards Board


If
“Other” has been check in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to
follow.




Item 17  o   
Item 18 £




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




PageSPECIAL
      CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
                      
                      1PART
      IITEM
      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
                      
                      17ITEM
      4A
                      Unresolved
      Staff Comments
                      
                      27ITEM
      5
                      Operating
      and Financial Review and Prospects
                      
                      27ITEM
      6
                      Directors,
      Senior Management and Employees
                      
                      39ITEM
      7
                      Major
      Shareholders and Related Party Transactions
                      
                      46ITEM
      8
                      Financial
      Information
                      
                      46ITEM
      9
                      The
      Offer and Listing
                      
                      47ITEM
      10
                      Additional
      Information
                      
                      48ITEM
      11
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      
                      62ITEM
      12
                      Description
      of Securities other than Equity Securities
                      
                      62PART
      IIITEM
      13
                      Defaults,
      Dividend Arrearages and Delinquencies
                      
                      63ITEM
      14
                      Material
      Modifications to the Rights of Security Holders and Use of
      Proceeds
                      
                      63ITEM
      15
                      Controls
      and Procedures
                      
                      63ITEM
      16
                      Reserved
                      
                      63ITEM
      16A
                      Audit
      Committee Financial Expert
                      
                      63ITEM
      16B
                      Code
      of Ethics
                      
                      63ITEM
      16C
                      Principal
      Accountant Fees And Services
                      
                      64ITEM
      16D
                      Exemptions
      From The Listing Standards For Audit Committees
                      
                      64ITEM
      16E
                      Purchases
      Of Equity Securities By The Issuer And Affiliated
    Purchasers
                      
                      64ITEM
      16G
                      Corporate
      Governance
                      
                      64PART
      IIIITEM
      17
                      Financial
      Statements
                      
                      65ITEM
      18
                      Financial
      Statements
                      
                      65ITEM
      19
                      Exhibits
                      
                      65SIGNATURES
                      
                      67





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, 2008, 2007, 2006, 2005 and 2004. We
have derived the selected financial data for the fiscal years ended December 31,
2008, 2007, and 2006, and as of December 31, 2008 and 2007, 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, 2005 and 2004 and as of December 31, 2006,
2005 and 2004, 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.”





Year
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004(In
      thousands, except share and per share amounts)Statements of Operations
      Data:RevenuesReimbursed
      out-of-pocket expenses
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      2,743
                      
                      
                      $
                      3,269License
                      
                      
                      5,940
                      
                      
                      
                      907
                      
                      
                      
                      454
                      
                      
                      
                      454
                      
                      
                      
                      1855,940
                      
                      
                      
                      907
                      
                      
                      
                      454
                      
                      
                      
                      3,197
                      
                      
                      
                      3,454Cost
      of RevenuesReimbursed
      out-of-pocket expenses
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      2,743
                      
                      
                      
                      3,269License
      (with respect to royalties)
                      
                      
                      —
                      
                      
                      
                      110
                      
                      
                      
                      54
                      
                      
                      
                      54
                      
                      
                      
                      32—
                      
                      
                      
                      110
                      
                      
                      
                      54
                      
                      
                      
                      2,797
                      
                      
                      
                      3,301Gross
      Margin
                      
                      
                      5,940
                      
                      
                      
                      797
                      
                      
                      
                      400
                      
                      
                      
                      400
                      
                      
                      
                      153Research
      and developmentResearch
      and development costs
                      
                      
                      11,490
                      
                      
                      
                      18,998
                      
                      
                      
                      10,229
                      
                      
                      
                      7,313
                      
                      
                      
                      11,985Less
      participations
                      
                      
                      —
                      
                      
                      
                      56
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —11,490
                      
                      
                      
                      18,942
                      
                      
                      
                      10,229
                      
                      
                      
                      7,313
                      
                      
                      
                      11,985In-process
      research and development
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,783
                      
                      
                      
                      —General
      and administrative
                      
                      
                      5,143
                      
                      
                      
                      5,582
                      
                      
                      
                      5,576
                      
                      
                      
                      5,457
                      
                      
                      
                      4,134Business
      development costs
                      
                      
                      (1,102
                      )
                      
                      
                      2,008
                      
                      
                      
                      641
                      
                      
                      
                      227
                      
                      
                      
                      810Operating
      loss
                      
                      
                      (9,591
                      )
                      
                      
                      (25,735
                      )
                      
                      
                      (16,046
                      )
                      
                      
                      (14,380
                      )
                      
                      
                      (16,776
                      )Other
      income (expense):Financial
      and other income, net
                      
                      
                      314
                      
                      
                      
                      590
                      
                      
                      
                      1,141
                      
                      
                      
                      443
                      
                      
                      
                      352Income
      taxes
                      
                      
                      31
                      
                      
                      
                      206
                      
                      
                      
                      (227
                      )
                      
                      
                      (78
                      )
                      
                      
                      (49
                      )Loss
      for the period
                      
                      $
                      (9,246
                      )
                      
                      $
                      (24,939
                      )
                      
                      $
                      (15,132
                      )
                      
                      $
                      (14,015
                      )
                      
                      $
                      (16,473
                      )Loss
      per ordinary shareBasic
      and diluted
                      
                      $
                      (0.03
                      )
                      
                      $
                      (0.11
                      )
                      
                      $
                      (0.08
                      )
                      
                      $
                      (0.08
                      )
                      
                      $
                      (0.12
                      )Weighted
      average shares outstanding
                      
                      
                      292,769,320
                      
                      
                      
                      228,492,818
                      
                      
                      
                      201,737,295
                      
                      
                      
                      170,123,003
                      
                      
                      
                      134,731,766


2





As
      of December 31,2008
                      
                      
                      2007
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004(In thousands)Balance Sheet
      Data:Cash,
      cash equivalents, bank deposits andtrading
      and marketable securities
                      
                      $
                      2,924
                      
                      
                      $
                      12,977
                      
                      
                      $
                      25,347
                      
                      
                      $
                      13,360
                      
                      
                      $
                      22,924Working
      capital
                      
                      
                      1,385
                      
                      
                      
                      8,532
                      
                      
                      
                      22,694
                      
                      
                      
                      11,385
                      
                      
                      
                      20,240Total
      assets
                      
                      
                      3,430
                      
                      
                      
                      14,127
                      
                      
                      
                      26,900
                      
                      
                      
                      15,151
                      
                      
                      
                      25,624Long-term
      obligations
                      
                      
                      —
                      
                      
                      
                      194
                      
                      
                      
                      738
                      
                      
                      
                      1,493
                      
                      
                      
                      2,489Total
      shareholders’ equity
                      
                      
                      1,426
                      
                      
                      
                      8,564
                      
                      
                      
                      22,760
                      
                      
                      
                      11,252
                      
                      
                      
                      19,602





Acquisition of the use
patent on Erythropoietin




On March
18, 2009, we entered into an asset purchase agreement with Bio-Gal Ltd, a
private company, for the rights to a use patent on Erythropoietin, or rHuEPO,
for the treatment of multiple myeloma, or MM. We intend to develop rHuEPO for
the prolongation of MM patients' survival and improvement of their quality of
life. MM is a severe and incurable malignant hematological cancer of plasma
cells. The course of the disease is progressive, and various complications
occur, until death. In the United States alone, there are approximately 56,000
people living with MM, with about 20,000 new cases diagnosed annually, making MM
the second most prevalent blood cancer.





In
accordance with the terms of the asset purchase agreement, we will issue to
Bio-Gal Ltd. ordinary shares representing just under 50% of the current issued
and outstanding share capital of XTL. In addition, we will make a milestone
payment of approximately $10 million in cash upon the successful completion of a
Phase 2 clinical trial. Our Board of Directors may at its sole discretion issue
additional ordinary shares to Bio-Gal Ltd in lieu of such milestone payment. We
are also obligated to pay 1% royalties on net sales of the product. The closing
of the transaction is subject to various conditions including: XTL’s and
Bio-Gal’s shareholders’ approval, as well as completion of a financing. Closing
is expected to take place in the second or third quarter of
2009.


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, 2008, we had an accumulated deficit of
approximately $149.1 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, consummate out-licensing agreements, 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 depends in part upon the rate
at which we are able to engage clinical trial sites and, thereafter, the rate of
enrollment of patients, and the rate at which we are able to collect, clean,
lock and analyze the clinical trial database. 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, the
existence of competitive clinical trials, and whether existing or new drugs are
approved for the indication we are studying. We are aware that other companies
are planning clinical trials that will seek to enroll patients with the same
diseases as we are studying. In addition, the multi-national nature of our
studies adds another level of complexity and risk as the successful completion
of those studies is subject to events affecting countries outside the United
States. 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 or timely 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, and other third-party service providers
to conduct the clinical trials of our drug candidates and technologies, and we
expect to continue to do so. We also may, from time to time, engage a clinical
research organization for the execution of our clinical trials.  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, and/or other foreign regulatory
agencies/authorities 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 could result in enforcement action against us.




Our
international clinical trials may be delayed or otherwise adversely impacted by
social, political and economic factors affecting the particular foreign
country.





We may
conduct clinical trials in different geographical locations. Our ability to
successfully initiate, enroll and complete a clinical trial in any of these
countries, or in any future foreign country in which we may initiate a clinical
trial, are subject to numerous risks unique to conducting business in foreign
countries, including:





·
            difficulty
      in establishing or managing relationships with clinical research
      organizations and physicians;





·
            different
      standards for the conduct of clinical trials and/or health care
      reimbursement;


4





·
            our
      inability to locate qualified local consultants, physicians, and
      partners;





·
            the
      potential burden of complying with a variety of foreign laws, medical
      standards and regulatory requirements, including the regulation of
      pharmaceutical products and treatment;
and





·
            general
      geopolitical risks, such as political and economic instability, and
      changes in diplomatic and trade
relations.





Any
disruption to our international clinical trial program could significantly delay
our product development efforts.





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.




Our drug
candidates and technologies are either in preclinical or clinical stages.
Specifically, our lead product candidate, Recombinant Erythropoietin (rHuEPO),
is planned for a Phase 1-2 clinical program and the Diversity Oriented
Synthesis, or DOS program has not yet been tested in humans. In order for our
candidates to proceed to later stage clinical testing, they must show positive
clinical or preclinical data. While Recombinant Erythropoietin (rHuEPO) has
shown promising preclinical data and has also shown promising clinical
observation data for the extension and improvement of the quality of life of
Multiple Myeloma terminal patients prior to it being acquired by us, preliminary
results of pre-clinical, clinical observations or clinical tests do not
necessarily predict the final results, and promising results in pre-clinical,
clinical observations 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.  In order to obtain FDA
approval to market a new drug product, we or our potential partners must
demonstrate proof of safety and efficacy in humans. To meet these requirements,
we or our potential partners will have to conduct extensive pre-clinical testing
and “adequate and well-controlled” clinical trials.





Pre-clinical
testing and clinical development are long, expensive and uncertain
processes.  Clinical trials are very difficult to design and
implement, in part because they are subject to rigorous regulatory
requirements.  Satisfaction of regulatory requirements typically
depends on the nature, complexity and novelty of the product and requires the
expenditure of substantial resources. The commencement and rate of completion of
clinical trials may be delayed by many factors, including:




·
            obtaining
      regulatory approvals to commence a clinical
  trial;




·
            reaching
      agreement on acceptable terms with prospective contract research
      organizations, or CROs, and trial sites, the terms of which can be subject
      to extensive negotiation and may vary significantly among different CROs
      and trial sites;




·
            slower
      than expected rates of patient recruitment due to narrow screening
      requirements;




·
            the
      inability of patients to meet protocol requirements imposed by the FDA or
      other regulatory authorities;




·
            the
      need or desire to modify our manufacturing
  process;




·
            delays,
      suspension, or termination of the clinical trials due to the institutional
      review board responsible for overseeing the study at a particular study
      site; and




·
            government
      or regulatory delays or “clinical holds” requiring suspension or
      termination of the trials.




5




Following
the completion of a clinical trial, 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.  In addition, the designs of our ongoing clinical
trials were not, and the designs of future clinical trials may not be, reviewed
or approved by the FDA prior to their commencement, and consequently the FDA
could determine that the parameters of any existing or future studies are
insufficient to demonstrate proof of safety and efficacy in humans. Failure to
approve a completed study could also result from several other factors,
including unforeseen safety issues, the determination of dosing, low rates of
patient recruitment, the inability to monitor patients adequately during or
after treatment, the inability or unwillingness of medical investigators to
follow our clinical protocols, and the lack of effectiveness of the
trials.




Specifically,
in 2008, Amgen Inc. announced that US regulators added black box, or black
label, warnings to its erythropoietin drugs, Epogen and Aranesp. Similar
warnings were also added to Johnson and Johnson’s Procrit which is also licensed
from Amgen. In the United States, a black box warning is a type of warning that
appears on the package insert for prescription drugs that may cause serious
adverse effects. A black box warning means that medical studies indicate that
the drug carries a significant risk of serious or even life-threatening adverse
effects. The new warnings warn that the erythropoietin drugs increased death and
accelerated tumor growth in patients with several types of cancer, including
breast and cervical. Prior labeling warned of similar risks in other types of
cancers.




If the
clinical trials fail to satisfy the criteria required, the FDA and/or other
regulatory agencies/authorities may request additional information, including
additional clinical data, before approval of marketing a
product.  Negative or inconclusive results or medical events during a
clinical trial could also cause us to delay or terminate our development
efforts.  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.




Clinical
trials 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. 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.




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
some of our proprietary drug candidates and technologies are licensed to us by
third parties, termination of these license agreements could prevent us from
developing our drug candidates.





We do not
own all of our drug candidates and technologies. We have acquired and/or
licensed the rights, patent or otherwise, to our drug candidates from third
parties. Specifically, we have acquired the use patent on Recombinant
Erythropoietin (rHuEPO) for the prolongation of multiple myeloma patients'
survival and improvement of their quality of life from Bio-Gal Ltd., , who in
turn licensed it from Mor Research Applications Ltd. and Yeda Research and
Development Company Ltd., both Israeli private corporations, and we have
licensed DOS from VivoQuest, Inc.  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. From time to
time, in the ordinary course of business, we may have disagreements with our
licensors or collaborators regarding the terms of our agreements or ownership of
proprietary rights, which could lead to delays in the research, development,
collaboration and commercialization of our drug candidates or could require or
result in litigation or arbitration, which could be time-consuming and
expensive. 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.





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:




6




·
            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.




For
example, in 2008, we announced that we had out-licensed the DOS program to
Presidio Pharmaceuticals, Inc, or Presidio. Under the terms of the license
agreement, Presidio becomes responsible for the development and
commercialization activities and costs related to the DOS program.




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.




Even
if we or our collaborative/strategic partners or potential
collaborative/strategic partners receive approval to market our drug candidates,
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
      including potential generic
competition;




·
            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.




Specifically,
Recombinant Erythropoietin (rHuEPO), if successfully developed and commercially
launched for the treatment of multiple myeloma, will compete with both currently
marketed and new products marketed by other companies. Health care providers may
not accept or utilize any of our product candidates. Physicians and other
prescribers may not be inclined to prescribe our products unless our products
bring clear and demonstrable advantages over other products currently marketed
for the same indications. 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 the compounds that we need to conduct
our clinical trials and, therefore, rely upon, and intend to continue to rely
upon, certain manufacturers to produce and supply our drug candidates for use in
clinical trials and for future sales. See “Item 4. Information on the Company –
Business Overview - Supply and Manufacturing,” below.  In order to
commercialize our products, such products will need to be manufactured in
commercial quantities while adhering to all regulatory and other local
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.


7




We
believe that we will either be able to purchase Recombinant Erythropoietin
(rHuEPO) from existing pharmaceutical companies or to enter into collaborative
agreements with contract manufacturers or other third-parties to obtain
sufficient inventory to satisfy the clinical supply needs for our planned Phase
1-2 development program for the treatment of multiple myeloma.  If our
contract manufacturers or other third parties 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 or
sources, 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 clinical drug candidates
under strict compliance with current good manufacturing practices, or cGMP, in
order to meet acceptable regulatory 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 or local
governmental agencies to ensure strict compliance with, among other things,
cGMP, 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 already commercialized or 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 market their drugs more
effectively.




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 present 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
March 31, 2009, we had 5 full-time employees. To successfully develop our drug
candidates and technologies, we must be able to attract and retain highly
skilled personnel, including consultants and employees.  The retention
of their services cannot be guaranteed. In addition, David Grossman, our
co-Chief Executive Officer’s pending employment agreement will require approval
by our shareholders. We do not maintain a key man life insurance policy covering
Mr. Grossman.




Any
acquisitions or in-licensing transactions 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 or in-licensing
transactions to obtain additional businesses, products, technologies,
capabilities and personnel. If we complete one or more such transactions in
which the consideration includes our ordinary shares or other securities, your
equity in us may be significantly diluted. If we complete one or more such
transactions in which the consideration includes cash, we may be required to use
a substantial portion of our available cash.


8




Specifically,
as per the terms of our agreement with Bio-Gal Ltd., we will be issuing 58.0
million ordinary shares par value NIS 0.10 (equivalent to 290.0 million ordinary
shares par value NIS 0.02) and we may at our option issue 100.4 million ordinary
shares par value NIS 0.10 (equivalent to 500.2 million ordinary shares par value
NIS 0.02) to Bio-Gal Ltd. on a successful completion of a Phase 2 clinical trial
(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).




Acquisitions
and in-licensing transactions also involve a number of operational risks,
including:




·
            difficulty
      and expense of assimilating the operations, technology or personnel of the
      business;




·
            our
      inability to attract and retain management, key personnel and other
      employees necessary to conduct the
business;




·
            our
      inability to maintain relationships with key third parties, such as
      alliance partners, associated with the
business;




·
            exposure
      to legal claims for activities of the 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 or in-licensing 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 or in-license and our existing operations.




We
may not be able to successfully complete our acquisition of the use patent on
Erythropoietin, and as a result may be deemed a shell company with minimal
operations, which would significantly impact our ability to raise additional
capital and continue operations.




On March
18, 2009, we entered into an asset purchase agreement with Bio-Gal Ltd, a
private company, for the rights to a use patent on rHuEPO, for the treatment of
MM. We intend to develop rHuEPO for the prolongation of MM patients' survival
and improvement of their quality of life. MM is a severe and incurable malignant
hematological cancer of plasma cells. The course of the disease is progressive,
and various complications occur, until death. In accordance with the terms of
the asset purchase agreement, we will issue Bio-Gal Ltd. ordinary shares
representing just under 50% of the current issued and outstanding share capital
of XTL. In addition, we will make a milestone payment of approximately $10
million in cash upon the successful completion of a Phase 2 clinical trial. Our
Board of Directors may at its sole discretion issue additional ordinary shares
to Bio-Gal Ltd in lieu of such milestone payment. We are also obligated to pay
1% royalties on net sales of the product. The closing of the transaction is
subject to various conditions including: XTL’s and Bio-Gal’s shareholders’
approval, as well as completion of a financing. There can be no assurance that
the conditions to the closing will be achieved, and that we will be able to
consummate the acquisition of the use patent on rHuEPO.  If we do not
consummate this acquisition, we will be deemed a shell company, subject to
de-listing from the NASDAQ Stock Market, if we are not then already de-listed,
and our ability to raise additional capital and continue operations will be
significantly impaired.




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 will be able to obtain sufficient product liability insurance
coverage for our planned 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;




9




·
            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




Our
current cash, cash equivalents and bank deposits may not be adequate to support
our operations for the length of time that we have estimated. 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.
Based on our current business plan and forecast, we believe that our current
cash, cash equivalents and bank deposits provide us with sufficient resources to
fund our operations through July 2009; however, the actual amount of funds that
we will need will depend on many factors, some of which are beyond our control.
These factors include:




·
            the
      progress in successfully meeting the closing conditions for the agreement
      with Bio-Gal Ltd., including a
financing;





·
            the
      progress of our planned research
activities;





·
            the
      accuracy of our financial
forecasts;





·
            the
      number and scope of our planned 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 do
believe, however, that we will likely seek additional capital during the next
couple of months through a planned rights offering and / or public or private
equity offerings or debt financings. We have made no determination at this time
as to the amount or method of any such financing. The global capital markets
have been experiencing extreme volatility and disruption for more than twelve
months.  In recent months, the volatility and disruption have reached
unprecedented levels.  Given recent particularly adverse market
conditions for small biotechnology companies, additional financing may not be
available to us when we need it. We may also be forced to delay raising capital
or bear an unattractive cost of capital.  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,
ADRs, 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 or at all.  If we are not able to raise capital in a timely manner,
there is a material risk regarding our ability to continue as a going
concern.




It is possible
that we may 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.




We have
had a “permanent establishment” in the United States, or US, which began in
2005, due to the residency of the former Chairman of our Board of Directors and
our Chief Executive Officer in the US, as well as other less significant
contacts that we have with the US. This may continue in 2009 as well. 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.  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, 2008 since these losses were not attributable to the US
permanent establishment.  However, we would be able to utilize losses
attributable to the US permanent establishment to offset such US taxable
income.  As of December 31, 2008, we estimate that these US net
operating loss carryforwards are approximately $22.6 million.  These
losses can be carried forward to offset future US taxable income, subject to
limitation in the case of shifts in ownership of XTL, e.g. a planned offering or
capital raise, resulting in more than 50 percentage point change over a three
year lookback period, and expiring through 2028. 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.


10




Our
subsidiary's Lease Agreement with Suga Development with respect to its former
offices in Valley Cottage, New York could obligate that subsidiary to pay the
remaining lease payments even though they have delivered notice of termination
and mitigation to the landlord.




On April
6, 2009, our wholly-owned subsidiary, XTL Biopharmaceuticals, Inc., delivered a
termination notice to Suga Development, L.L.C., with respect to the leasing of
approximately 33,200 sq. ft. located at 711 Executive Boulevard, Suite Q, Valley
Cottage, New York 10989.  We believe that the notice provided a clear
indication of the termination of XTL Biopharmaceuticals, Inc.’s obligations
under the lease, effective as of the date of the notice.  In addition,
XTL Biopharmaceuticals, Inc. informed Suga Development that upon receipt of the
notice, they should use their best effort to re-rent the premises and to
mitigate any damages. There can be no assurance that the landlord will not
dispute the termination of the lease, and attempt to hold XTL
Biopharmaceuticals, Inc. responsible for the full amount of all future unpaid
lease payments, approximately $335,000.




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.




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.




Specifically,
we plan to pursue patent protection in the US and in certain foreign countries
relating to our development and commercialization of Recombinant Erythropoietin
(“rHuEPO”) for the prolongation of multiple myeloma patients' survival and
improvement of their quality of life. A main use patent (United States Patent
6,579,525 “Pharmaceutical Compositions Comprising Erythropoietin for Treatment
of Cancer”) was submitted by Mor Research Applications Ltd., an Israeli
corporation and Yeda Research and Development Company Ltd., an Israeli
corporation, in April 1998 and PCT was filed in April 1999.  The
patent was granted in the United States, Europe, Israel and Hong Kong. Patent
applications are pending in Canada and Japan. Currently, under the license
agreement which we are acquiring from Bio-Gal Ltd., we will have exclusive
worldwide rights to the above patent for the use of Recombinant Erythropoietin
(“rHuEPO”) in multiple myeloma. See “Item 4. Information on 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.


11




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, 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.




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.




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 in desirable volume 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.




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 and near-term
      working capital;




·
            expiration
      or termination of licenses, research contracts or other collaboration
      agreements;




12




·
            conditions
      or trends in the regulatory climate and the biotechnology and
      pharmaceutical industries;




·
            delisting
      from the Nasdaq Stock Market




·
            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 or sales 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
our cash, cash equivalents and bank deposits as of December 31, 2008 provide us
with sufficient resources to fund our operations through July 2009; 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 successfully close the Bio-Gal Ltd. transaction or 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.  In addition, 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. Additionally, pursuant to the Bio Gal Ltd. agreement, we may issue
100.4 million ordinary shares par value NIS 0.10 (equivalent to 500.2 million
ordinary shares par value NIS 0.02) upon a successful Phase 2 program. In the
future, we may also enter into additional arrangements with other third-parties
permitting us to issue ordinary shares in lieu of certain cash
payments.




Concentration
of ownership of our ordinary shares among our principal stockholders may prevent
new investors from influencing significant corporate decisions.





Following
the planned closing of the Bio-Gal Ltd. transaction, Bio-Gal Ltd.'s stockholders
and their affiliates will hold approximately 49% of our then outstanding
ordinary shares. As a result, these persons, acting together, may have the
ability to significantly influence the outcome of all matters submitted to our
stockholders for approval, including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, such persons, acting together, may have the ability to effectively
control our management and affairs. Accordingly, this concentration of ownership
may depress the market price of our ADRs or ordinary shares.





Our
ordinary shares and ADRs trade on more than one market, and this may result in
price variations and regulatory compliance issues.




ADRs
representing our ordinary shares are quoted on the NASDAQ Capital Market and our
ordinary shares are traded on the Tel Aviv Stock Exchange, or TASE. 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 and Israel. Consequently, the effective
trading prices of our shares on these two markets may differ. Any decrease in
the trading price of our securities on one of these markets could cause a
decrease in the trading price of our securities on the other
market.




Were we
to be delisted from the Nasdaq Stock Market, we may then be required to follow
the full rules and regulations of the Tel Aviv Stock Exchange. This would
include the need to file regulatory documents in both Hebrew and English, the
need to use International Financial Reporting Standards, and the need to comply
with the rules and regulations of the United States Securities and Exchange
Commission and the Tel Aviv Stock Exchange.




13




We
are currently not in compliance with NASDAQ rules for continued listing on the
NASDAQ Capital Market and are at risk of being delisted, which may subject us to
the SEC’s penny stock rules and decrease the liquidity of our ADRs and ordinary
shares.




On
January 27, 2009, we received a Staff Determination Letter from The Nasdaq Stock
Market, or Nasdaq, notifying us that the staff of Nasdaq's Listing
Qualifications Department determined, using its discretionary authority under
Nasdaq Marketplace Rule 4300, that our ADRs would be delisted from Nasdaq. The
letter further stated that Nasdaq would suspend trading on our ADRs at the
opening of trading on February 5, 2009, unless we appealed Nasdaq's delisting
determination. Nasdaq's determination to delist our ADRs was based on Nasdaq's
belief that the Company is a public shell, and that we do not meet the
stockholder's equity requirement or any of its alternatives. On February 3,
2009, we appealed the determination by the Nasdaq Listing Qualification Staff to
delist our ADRs from the Nasdaq Capital Market. On March 19, 2009, we
participated in an oral hearing before the Nasdaq Hearings Panel (the “Panel”).
Nasdaq’s delisting action has been stayed, pending a final written determination
by the Panel following the hearing. At the hearing, the Company presented its
plan to remedy its “public shell” determination and for future compliance with
all other applicable Nasdaq listing requirements.





We intend
to continue to work with Nasdaq to try to find an acceptable manner in which our
ADRs can remain listed on the NASDAQ Capital Market. However, we cannot provide
assurance that we will be successful in that effort, or that in the future we
will continue to meet the listing requirements of the NASDAQ Capital Market,
including, without limitation, bid price, stockholders’ equity and/or market
value of listed securities minimum requirements. Additionally, our efforts to
continue to meet the listing requirements may be limited by current market
conditions, including volatility in the market.





If we are
delisted from The NASDAQ Stock Market, our ADRs may be traded over-the-counter
on the OTC Bulletin Board or the “pink sheets.” These alternative markets,
however, are generally considered to be less efficient than, and not as broad
as, the NASDAQ Capital Market. Many OTC stocks trade less frequently and in
smaller volumes than securities traded on the NASDAQ markets, which could have a
material adverse effect on the liquidity of our ADRs.





If our
ADRs are delisted from the NASDAQ Stock Market, there may be a limited market
for our ADRs, trading in our ADRs may become more difficult and our ADR price
could decrease even further. In addition, if our ADRs are delisted, our ability
to raise additional capital may be impaired.





In
addition, our ADRs may become subject to penny stock rules. The SEC generally
defines “penny stock” as an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. We presently qualify for an
exemption from the penny stock rules, as our ADRs are quoted on the NASDAQ Stock
Market. However, if we were delisted, our ADRs would become subject to the penny
stock rules, which impose additional sales practice requirements on
broker-dealers who sell our securities. If our ADRs were considered penny stock,
the ability of broker-dealers to sell our ADRs and the ability of our
shareholders to sell their ADRs in the secondary market would be limited and, as
a result, the market liquidity for our ADRs would be adversely affected. We
cannot assure you that trading in our securities will not be subject to these or
other regulations in the future.





Holders
of our ordinary shares or ADRs who are US citizens or residents may be required
to pay additional income taxes.




There is
a risk that we will be classified as a passive foreign investment company, or
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 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 year ended
December 31, 2008. However, we believe that we were a PFIC for the taxable years
ended December 31, 2006 and 2007. 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 we may be classified as a PFIC in the 2009 taxable year and
possibly in subsequent years. Although we may not be a PFIC in any one year, the
PFIC taint remains with respect to those years in which we were or are a PFIC
and the special PFIC taxation regime will continue to apply.




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.




14




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 thereby depressing the
price of our ordinary shares.




We are
incorporated in the State of Israel. 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. These 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.




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 is 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
ADRs 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.




15




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, 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.




Risks
Relating to Operations in Israel




Conditions
in the Middle East and in Israel may harm our operations.




Our
headquarters and some of our planned clinical sites and 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 have
generated all of our revenues and hold most of our cash, cash equivalents, bank
deposits and marketable securities in US dollars. In the past, a substantial
amount of our operating expenses were in US dollars (approximately 96% in 2008),
and we incurred a portion of our expenses in New Israeli Shekels and in certain
other local currencies. 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.




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.




16




ITEM
4. INFORMATION ON THE COMPANY




History
and Development of XTL




We are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment of multiple myeloma, or MM, and hepatitis C.




Our lead
compound is Recombinant Erythropoietin, or rHuEPO, a known compound that we are
developing for the prolongation of MM patients' survival and improvement of
their quality of life. MM is a severe and incurable malignant hematological
cancer of plasma cells. The course of the disease is progressive, and various
complications occur, until death. This devastating disease affects the bone
marrow, bones, kidneys, heart and other vital organs. It is characterized by
pain, recurrent infections, anemia and pathological fractures. In the course of
the disease, many patients become gradually disabled and bed-ridden. The median
duration of survival with chemotherapy and other novel treatments is about
fiveyears.
Most of these treatments have severe side effects




We signed
an asset purchase agreement to acquire the rights to develop rHuEPO for the
treatment of MM from Bio-Gal Ltd., a private biotechnology company based in
Gibraltar, in March 2009. In accordance with the terms of the asset purchase
agreement, we will issue to Bio-Gal Ltd. ordinary shares representing just under
50% of the current issued and outstanding share capital of our company. In
addition, we will make milestone a payment of approximately $10 million in cash
upon the successful completion a Phase 2 clinical trial.  Our
company’s Board of Directors may, in its sole discretion, issue additional
ordinary shares to Bio-Gal Ltd in lieu of such milestone payment. We are also
obligated to pay 1% royalties on net sales of the product.  The
closing of the transaction is subject to various conditions including XTL’s and
Bio-Gal’s shareholders’ approvals, as well as completion of a financing. Closing
is expected to take place in the second or third quarter of 2009.




Our
second program is the Diversity Oriented Synthesis program, or DOS, which is
focused on the development of novel pre-clinical hepatitis C small molecule
inhibitors, which we had out-licensed to Presidio Pharmaceuticals, Inc., or
Presidio, a private specialty pharmaceutical company based in San Francisco,
California, in 2008.




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 hepatitis B virus,
interferon – γ and the hepatitis C virus.




During
2007, our legacy hepatitis C clinical programs, XTL-6865 and XTL-2125, were
terminated, and in July 2007, Cubist Pharmaceuticals terminated their license
agreement with us for HepeX-B for the treatment of hepatitis B.  On
December 31, 2007, the Yeda Research and Development Company Ltd. (“Yeda”), the
commercial arm of the Weizmann Institute, and XTL mutually terminated our
research and license agreement dated April 7, 1993, as amended, and subject to
certain closing conditions which were completed in March 2008, all rights in and
to the licensed technology and patents reverted to Yeda.




In
January 2007, XTL Development, Inc., our wholly owned subsidiary ("XTL
Development"), had signed an agreement with DOV Pharmaceutical, Inc.(" DOV"), to
in-license the worldwide rights for Bicifadine, a serotonin and norepinephrine
reuptake inhibitor (SNRI) (the Bicifadine transaction). XTL Development was
developing Bicifadine for the treatment of diabetic neuropathic pain - a chronic
condition resulting from damage to peripheral nerves. In November 2008, we
announced that the Phase 2b clinical trial failed to meet its primary and
secondary endpoints, and as a result we ceased development of Bicifadine for
diabetic neuropathic pain.




In 2008,
we signed an agreement to out-license the DOS program to Presidio
Pharmaceuticals, Inc., or Presidio, a specialty pharmaceutical company focused
on the discovery, in-licensing, development and commercialization of novel
therapeutics for viral infections, including HIV and HCV. Under the terms of the
license agreement, as revised, Presidio becomes responsible for all further
development and commercialization activities and costs relating to our DOS
program.  In accordance with the terms of the license agreement, we
received a $5.94 million, non-refundable, upfront payment in cash from Presidio
and will receive up to an additional $59 million upon reaching certain
development and commercialization milestones. In addition, we will receive a
royalty on direct product sales by Presidio, and a percentage of Presidio’s
income if the DOS program is sublicensed by Presidio to a third
party.




Our ADRs
are quoted on the NASDAQ Capital Market under the symbol “XTLB.”  Our
ordinary shares are traded on the Tel Aviv Stock Exchange under the symbol
“XTL.” We operate under the laws of the State of Israel, under the Israeli
Companies Act, and in the US, the Securities Act, the Exchange Act and the
regulations of the NASDAQ Capital Market.


17




Our
principal offices are located at Kiryat Weizmann Science Park, 3 Hasapir Street,
Building 3, PO Box 370 Rehovot 76100, Israel, and our telephone number is
+972-8-930-4444. XTL Biopharmaceuticals, Inc., our wholly-owned US subsidiary
and agent for service of process in the US, can be reached at XTL
Biopharmaceuticals, Inc., c/o Corporation Trust Company, Corporation Trust
Center, 1209 N. Orange Street, Wilmington, Deleware 19801, or by telephone at
(800) 677-3394. Our primary internet address is www.xtlbio.com. None of the
information on our website is incorporated by reference into this annual
report.




On
November 20, 2007, we completed a private placement of 72,485,020 ordinary
shares (equivalent to 7,248,502 ADRs) at $0.135 per ordinary share (equivalent
to $1.35 per ADR). Total proceeds to us from this private placement were
approximately $8.8 million, net of offering expenses of approximately $1.0
million. In addition, 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 $137.5 million to fund
our activities, including the net proceeds from our 2007 and 2006 private
placements.




For the
years ended December 31, 2008, 2007, and 2006 our capital expenditures were
$2,000, $65,000 and $21,000, respectively. During 2008, we completed the
disposition of certain assets (primarily lab equipment) associated with the DOS
program, with $327,000 in proceeds from disposals of those assets in 2008.During
2007, we completed the disposition of certain unused assets (primarily lab
equipment) which were held for sale during 2007, with $308,000 in proceeds from
disposals of property and equipment in 2007. There were no material divestitures
during the year ended December 31, 2006.




Business
Overview




Introduction




We are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment of MM and also hepatitis C.




Our lead
compound is rHuEPO, which we are developing for the survival extension of MM
patients.





Erythropoietin
(EPO) is aglycoprotein hormone
produced mainly by the kidney. It is the major growth regulator of the erythroid
lineage. EPO stimulates erythropoiesis, the production of red blood cells, by
binding to its receptor (EPO-R) on the surface of erythroid progenitor cells,
promoting their proliferation and differentiation and maintaining their
viability.  Over the last decade, several reports have indicated that
the action of EPO is not restricted to the erythroid compartment, but may have
additional biological, and consequently potential therapeutic properties,
broadly beyond erythropoiesis. Erythropoietin is available as a therapeutic
agent produced by recombinant DNA technology in mammalian cell culture. rHuEPO
is used in clinical practice for the treatment of various anemias including
anemia of kidney disease and cancer-related anemia. For over a decade, two types
of rHuEPO have been used: recombinant erythropoietin a and b; more recently,
novel long acting erythropoiesis stimulating proteins have been developed
(Amgen's AraNESP, Roche’s CERA).





Currently
incurable, MM is a severe plasma cell malignancy characterized by the
accumulation and proliferation of clonal plasma cells in the marrow, leading to
the gradual replacement of normal hematopoiesis. The course of the disease is
progressive, and various complications occur, until death. This devastating
disease affects the bone marrow, bones, kidneys, heart and other vital organs.
It is characterized by pain, recurrent infections, anemia and pathological
fractures. In the course of the disease, many patients become gradually disabled
and bed-ridden.




In the
first months, after the diagnosis, 15 % of the patients die. When no treatment
is given MM has a progressive course with a median survival of 6-10
months.  The median overall survival duration today with chemotherapy
and other novel treatments is about five years, with perhaps 20% of the patients
living for more than ten years. These treatments have severe side effects,
including the suppression of the immune system, susceptibility to infections,
nausea, vomiting and bleeding disorders.




Our
second program is the Diversity Oriented Synthesis, or DOS, program, which is
focused on the development of novel pre-clinical 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.
On March 20, 2008, we announced that we had out-licensed the DOS program to
Presidio.




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.


18




Our
Strategy





Under our
current strategy, we plan to:





·
            initiate
      a prospective, multi-center, double blind, placebo controlled Phase 1-2
      clinical study intended to assess the safety and efficacy  of
      rHuEPO when given to patients with advanced
MM;




·
            advance
      the development of rHuEPO towards approval as treatment of MM either alone
      or with a corporate partner; and




·
            seek
      to in-license or acquire additional
candidates.




Products
Under Development




rHuEPO for the treatment of
MM




Market
Opportunity





We intend
to develop the use of rHuEPO for the prolongation of MM patients' survival.
According to the MM Research Foundation, in the United States alone, there are
approximately 56,000 people living with MM, with about 20,000 new cases
diagnosed annually. MM is the second most prevalent blood cancer representing
approximately 1% of all cancers in white US residents and 2% of all cancers in
African Americans. The average age at diagnosis is 62 years for men and 61 years
for women, and is also more common in men than women, and in African Americans
than Caucasians.





Scientific
Background




Erythropoietin,
a glycoprotein hormone produced mainly by the kidney, is the major growth
regulator of the erythroid lineage. EPO stimulates erythropoiesis by binding to
its receptor (EPO-R) on the surface of erythroid progenitor cells, promoting
their proliferation and differentiation and maintaining their viability. The
cloning of the EPO gene led to the introduction of recombinant human EPO
(rHuEPO) into clinical practice for the treatment of various anemias including
anemia of kidney disease and cancer-related anemia.





Over the
last decade, several reports (Mittelman PNAS 2001, Mittelman European Journal of
Hematology 2004; Katz Acta Haematol 2005; Prutchi-Sagiv BJH 2006; Prutchi-Sagiv
Exp Hematol 2008; Brines PNAS 2001; Baz Acta Haematol 2007) have indicated that
the action of EPO is not restricted to the erythroid compartment, but may have
additional biological, and consequently potential therapeutic properties,
broadly beyond erythropoiesis.





A
clinical observation made by Professor Moshe Mittelman and colleagues (Mittelman
M, Zeidman A, Kanter P, Katz O, Oster H, Rund D, Neumann D. Erythropoietin has
an anti-myeloma effect - a hypothesis based on a clinical observation supported
by animal studies. Eur J Haematol. 2004 Mar;72(3):155-65) confirmed the high
success rate of rHuEPO in treating the anemia in patients with MM. Six patients
continued treatment with rHuEPO beyond the initial designed 12 week period with
very poor prognostic features of MM, whose expected survival was less than 6
months, , and surprisingly, they lived for 45–133 months cumulatively with the
MM diagnosis and 38–94 months with rHuEPO (with a good quality of
life).





This
clinical observation was further supported by pre-clinical animal studies. These
animal studies not only confirmed the anti-myeloma effect of rHuEPO but also
detected a new unrecognized hitherto immune-mediated effect to rHuEPO, probably
mediated via T cells (Mittelman M., Neumann D., Peled A., Kanter P. and Haran-
Ghera N. (2001) Erythropoietin induces tumor regression and antitumor immune
responses in murine myeloma models. PNAS, vol. 98: 9. 5181 -
5186;  Katz O, Barzilay E, Skaat A, Herman A, Mittelman M, Neumann
D.Erythropoietin induced tumour mass reduction in murine lymphoproliferative
models. Acta Haematol. 2005; 114 (3):177-9.). Recently, it was also shown that
treatment of stage II-III MM patients with rHuEPO is associated with a
significant improvement of various immunological parameters and functions
(Prutchi-Sagiv British Journal of Hematology 2006; Prutchi-Sagiv Experimental
Hematology 2008; Lifshitz Molecular Immunology 2009).





Furthermore,
several studies have been published by other investigators addressing survival
and/or prognosis in cancer patients treated with rHuEPO. For
example:




·
              Baz
      R et al: A team from the Cleveland Clinic Myeloma Program analyzed
      their experience with rHuEPO in MM patients. This retrospective analysis
      provides data on 292 MM patients enrolled on different protocols between
      1997 and 2003. The authors concluded that "rHuEPO was associated with
      improved overall survival in this population of anemic MM patients with
      SWOG stages II, III and IV." They summarized by saying that "a prospective
      randomized trial is warranted to corroborate this finding" (Baz R et al:
      Recombinant human erythropoietin is associated with increased overall
      survival in patients with multiple myeloma (Acta Haematol 2007; 117:
      162-7)).




19




·
            Ludwig
      H et al.: Forty two
      patients with various types of cancers were treated with rHuEPO for their
      anemia. The malignant diseases were: 18 multiple myeloma (MM), 10
      myelodysplastic syndromes (MDS), 9 breast cancers and 5 colon cancers. The
      median time period of treatment with rHuEPO was 16 weeks. The study was
      designed to treat anemia (not the cancer). Response was defined as an
      increase of the initial hemoglobin (Hb) level by at least 2 g/dl. The
      response rates varied: 44.4% for breast cancer, 40% for colon cancer,
      77.8% for MM, 10% for MDS. The median survival time of responders was 28.0
      months as compared to only 9.2 months for non-responders. (Ludwig H et al;
      Erythropoietin treatment for chronic anemia of selected hematological
      malignancies and solid tumorsAnn Oncol 1993;
  4:161-7).





·
            Wallvik
      J et al.: This Swedish group reports its experience with a
      long-term follow-up of 68 MDS patients treated with rHuEPO. The median Hb
      response duration was 15 months. The median overall survival time from
      start of rHuEPO treatment was 26 months, significantly longer for
      responders than for non-responders (49 vs. 18 months, p=0.018) (Wallvik J
      et al.; Serum erythropoietin (EPO) levels correlate with survival and
      independently predict response to EPO treatment in patients with
      myelodysplastic syndromes. Eur J Haematol 2002; 68:
  180-5).





Development
Status




We plan
on performing a prospective, multi-center, double blind, placebo controlled
phase 1-2 study intended to assess safety of rHuEPO when given to patients with
advanced MM and demonstrate its effects on survival, biological markers related
to the disease, immune improvements and quality of life. We intend to initiate
the clinical trial in the second half of 2009.  We have begun
preliminary discussions with potential clinical sites and third party vendors
for the planned study.




DOS




Market
Opportunity





We had
been developing the DOS program for the treatment of hepatitis C, prior to us
out-licensing it to Presidio in March 2008. 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 the 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 PharmaDD, the worldwide market for the treatment of chronic HCV in 2005
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.




Given the
limited efficacy of the present standard of care and significant side effects
associated with it, there is a clear need for novel treatments for Hepatitis
C.




Development
Status




In March
2008, and as revised in August 2008, we signed an agreement to out-license the
DOS program to Presidio, a specialty pharmaceutical company focused on the
discovery, in-licensing, development and commercialization of novel therapeutics
for viral infections, including HIV and HCV. Under the terms of the license
agreement, as revised, Presidio becomes responsible for all further development
and commercialization activities and costs relating to our DOS
program.  In accordance with the terms of the license agreement, we
received a $5.94 million, non-refundable, upfront payment in cash from Presidio
and will receive up to an additional $59 million upon reaching certain
development and commercialization milestones. In addition, we will receive a
royalty on direct product sales by Presidio, and a percentage of Presidio’s
income if the DOS program is sublicensed by Presidio to a third party. DOS is a
pre-clinical program focused on the development of novel hepatitis C small
molecule inhibitors. DOS applies proprietary, fully synthetic chemistry
methodologies to rapidly synthesize and diversify complex chemical compounds
such as natural products. Compounds in each family inhibited HCV replication in
a pre-clinical cell-based assay with potencies against the most prevalent HCV
genotypes comparable or superior to clinical stage drugs. They also retained
their potency against isolates that are resistant to clinical stage drugs.
Presidio is currently in the process of identifying drug leads to be tested in
formal toxicological studies in anticipation of the commencement of clinical
trials in humans thereafter. See “Item 10. Additional Information -Material
Contracts.”


20




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.  See “Item 10. Additional Information -Material
Contracts.”




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.




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.




rHuEPO for the treatment of
MM





A main
use patent, United States Patent 6,579,525 “Pharmaceutical Compositions
Comprising Erythropoietin for Treatment of Cancer,” was submitted by Mor
Research Applications Ltd. and Yeda Research and Development Company Ltd.,
Israeli corporations, in April 1998 and a PCT was filed in April
1999.  The patent was granted in the United States, Europe, Israel and
Hong Kong. Patent applications are pending in Canada and Japan.  The
issued patent will expire in 2019. Pursuant to our agreement with Bio-Gal Ltd.,
we will have exclusive worldwide rights to the above patent for the use of
rHuEPO in MM.


21





The main
claims of this issued patent are as follows: A method for the treatment of a
multiple myeloma patient, comprising the administration of erythropoietin or
recombinant human erythropoietin, as the case may be, for the inhibition of
tumor growth, triggering of tumor regression or inhibition of MM cell metastasis
in the said patient.





The
original EPO patent is currently owned by Amgen and Johnson &
Johnson.





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. We have also filed additional patent
applications that cover the lead compounds discovered since the licensing of the
DOS from VivoQuest. These additional patent applications, if issued, will expire
in 2026 and 2027.  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 Presidio 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.




Licensing
Agreements and Collaborations




We have
formed strategic alliances with a number of companies for the production and
commercialization of our drug candidates. 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.




Bio-Gal
Ltd.




In March
2009, we signed an asset purchase agreement to acquire the rights to develop
rHuEPO for the treatment of MM from Bio-Gal Ltd., a private biotechnology
company based in Gibraltar. In accordance with the terms of the asset purchase
agreement, we will issue to Bio-Gal Ltd. ordinary shares representing just under
50% of the current issued and outstanding share capital of our company. In
addition, we will make a milestone payment of approximately $10 million in cash
upon the successful completion of a Phase 2 clinical trial.  Our
company’s Board of Directors may, in its sole discretion, issue additional
ordinary shares to Bio-Gal Ltd in lieu of such milestone payment. We are also
obligated to pay 1% royalties on net sales of the product.  The
closing of the transaction is subject to various conditions including XTL’s and
Bio-Gal’s shareholders’ approvals, as well as completion of a financing. Closing
is expected to take place in the second or third quarter of 2009.




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.




22




Presidio
License




In March
2008, and as revised August 2008, we signed an agreement to out-license the DOS
program to Presidio, a specialty pharmaceutical company focused on the
discovery, in-licensing, development and commercialization of novel therapeutics
for viral infections, including HIV and HCV. Under the terms of the license
agreement, as revised, Presidio becomes responsible for all further development
and commercialization activities and costs relating to our DOS
program.  In accordance with the terms of the license agreement, we
received a $5.94 million, non-refundable, upfront payment in cash from Presidio
and will receive up to an additional $59 million upon reaching certain
development and commercialization milestones. In addition, we will receive a
royalty on direct product sales by Presidio, and a percentage of Presidio’s
income if the DOS program is sublicensed by Presidio to a third
party.




Bicifadine
License




In
January 2007, XTL Development had signed an agreement with DOV to in-license the
worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake
inhibitor (SNRI). XTL Development was developing Bicifadine for the treatment of
diabetic neuropathic pain - a chronic condition resulting from damage to
peripheral nerves. In accordance with the terms of the license agreement, XTL
Development paid an initial up-front license fee of $7.5 million in cash in
2007. In addition, XTL Development will make milestone payments of up to $126.5
million over the life of the license, of which up to $115 million will be due
upon or after regulatory approval of the product. These milestone payments may
be made in either cash and/or our ordinary shares, at our election, with the
exception of $5 million in cash, 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 November 2008, we announced that the Phase 2b clinical trial
failed to meet its primary and secondary endpoints, and as a result we ceased
development of Bicifadine for diabetic neuropathic pain in 2008.




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 MM




Traditional chemotherapy
treatment includes melphalan and prednisone, nowused
sparingly because of its propensity to compromise collectionof
haematopoietic stem cells, other combinations, and regimenscontaining
high dose corticosteroids. The latter—includingdexamethasone;
vincristine, doxorubicin, and dexamethasone;and
cyclophosphamide, vincristine, doxorubicin, and methylprednisolone—arepreferred
for transplant candidates.




High dose chemotherapy,
particularly melphalan, with autologoushaematopoietic
stem cell transplantation improves response ratesand
their duration and survival compared with conventional chemotherapy.It
is now commonly used as consolidation treatment. Unfortunately, even after
haematopoietic stem cell transplantation,relapse
is only a matter of time, although a minority of patientsseems
to survive over a decade in remission ("operational cure").Maintenance
treatment after transplantation with corticosteroidsor
ainterferon
is often prescribed in an attempt to delay relapse. Althoughthis
probably does prolong the duration of remission, it isunclear
if it confers a survival benefit.




Allogeneic haematopoietic stem cell
transplantation might potentially cure aproportion
of patients through immunologically mediated graftversus
myeloma effect. However, this procedure remains highly experimental at the
present time. High mortality related to treatmenthas
been a problem historically, but the use of safer preparativeregimens
of reduced intensity could improve long term results.




Thalidomide is effectivein
approximately one-third of patients (for a certain period of time) with advanced
disease and is synergisticwith
other agents active in multiple myeloma. Its exact mechanismof action
is unclear, but inhibition of angiogenesis, modulationof
cytokines, and immunological effects are probably involved.Thalidomide, as a single agent or in combination with steroids, is now
the standard first line treatmentfor
relapsed or refractory myeloma (if not used before) and is also being used
asfrontline and maintenance treatment. Newer derivatives ofthalidomide, such as revlinmid or lenalidomide (formerly CC5013), have
potentially greater biological activityand fewer
adverse effects, including teratogenicity. Preliminarystudies
show a response in 30-50% of patients with refractorydisease.
Thalidomide has severe side effects such as flu-like symptoms, constipation,
neuropathy and thrombophilia, and has not yet demonstrated survival
advantage.


23




Bortezomib (Velcade)inhibits the
proteasome, an intracellular organelleresponsible
for protein disposal. The response rate to bortezomibin
extensively treated myeloma is around 50%. The drug hasrecently
been approved by the FDAbased
phase 2 clinical results. The drug has several serious side effects, including
neuropathy.




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 and 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., Pharmasset, Ltd., 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.




Supply
and Manufacturing




We
currently have no manufacturing capabilities and do not intend to establish any
such capabilities.




rHuEPO for the treatment of
MM




We
believe that we will either be able to purchase Recombinant Erythropoietin
(rHuEPO) from existing pharmaceutical companies or to enter into collaborative
agreements with contract manufacturers or other third-parties to obtain
sufficient inventory to satisfy the clinical supply needs for our planned
development program for the treatment of MM.




DOS




Under the
terms of the license agreement, Presidio becomes responsible for all further
development and commercialization activities and costs relating to the DOS
program.




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 number 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 and local agencies to ensure
strict compliance with cGMP and other state and federal regulations. We do not
have control over third-party manufacturers’ compliance with these regulations
and standards, other than through contractual obligations.




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.




24




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 1: 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 2: 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 3: Studies
      establish safety and efficacy in an expanded patient
      population.




·
            Phase 4: The FDA may
      require Phase 4 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.




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;




25




·
            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.




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.




26




Property,
Plant and Equipment




We lease
an aggregate of approximately 414 square meters in Rehovot, Israel, expiring in
April 2009. 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 $68,000, linked to the
Israeli Consumer Price Index. As of December 31, 2008, the guarantee is secured
by pledge on a restricted deposit amounting to $71,000, which is included in the
balance sheet as a restricted deposit.




On April
6, 2009, our wholly-owned subsidiary, XTL Biopharmaceuticals, Inc., delivered a
termination notice to Suga Development, L.L.C., with respect to the leasing of
approximately 33,200 sq. ft. located at 711 Executive Boulevard, Suite Q, Valley
Cottage, New York 10989.  We believe that the notice provided a clear
indication of the termination of XTL Biopharmaceuticals, Inc.’s obligations
under the lease, effective as of the date of the notice.  In addition,
XTL Biopharmaceuticals, Inc. informed Suga Development that upon receipt of the
notice, they should use their best effort to re-rent the premises and to
mitigate any damages. There can be no assurance that the landlord will not
dispute the termination of the lease, and attempt to hold XTL
Biopharmaceuticals, Inc. responsible for the full amount of all future unpaid
lease payments, approximately $335,000.




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, 2008, 2007 and 2006,
and as of December 31, 2008 and 2007, 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, 2008, 2007, 2006, 2005 and 2004. We
have derived the selected financial data for the fiscal years ended December 31,
2008, 2007, and 2006, and as of December 31, 2008 and 2007, 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, 2005 and 2004 and as of December 31, 2006,
2005 and 2004, 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.


27




Year
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(In
      thousands, except share and per share amounts)Statements of Operations
      Data:RevenuesReimbursed
      out-of-pocket expenses
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            
                            
                            
                            $
                            2,743
                            
                            
                            $
                            3,269License
                            
                            
                            5,940
                            
                            
                            
                            907
                            
                            
                            
                            454
                            
                            
                            
                            454
                            
                            
                            
                            1855,940
                            
                            
                            
                            907
                            
                            
                            
                            454
                            
                            
                            
                            3,197
                            
                            
                            
                            3,454Cost
      of RevenuesReimbursed
      out-of-pocket expenses
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            2,743
                            
                            
                            
                            3,269License
      (with respect to royalties)
                            
                            
                            —
                            
                            
                            
                            110
                            
                            
                            
                            54
                            
                            
                            
                            54
                            
                            
                            
                            32—
                            
                            
                            
                            110
                            
                            
                            
                            54
                            
                            
                            
                            2,797
                            
                            
                            
                            3,301Gross
      Margin
                            
                            
                            5,940
                            
                            
                            
                            797
                            
                            
                            
                            400
                            
                            
                            
                            400
                            
                            
                            
                            153Research
      and developmentResearch
      and development costs
                            
                            
                            11,490
                            
                            
                            
                            18,998
                            
                            
                            
                            10,229
                            
                            
                            
                            7,313
                            
                            
                            
                            11,985Less
      participations
                            
                            
                            —
                            
                            
                            
                            56
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —11,490
                            
                            
                            
                            18,942
                            
                            
                            
                            10,229
                            
                            
                            
                            7,313
                            
                            
                            
                            11,985In-process
      research and development
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,783
                            
                            
                            
                            —General
      and administrative
                            
                            
                            5,143
                            
                            
                            
                            5,582
                            
                            
                            
                            5,576
                            
                            
                            
                            5,457
                            
                            
                            
                            4,134Business
      development costs
                            
                            
                            (1,102
                            )
                            
                            
                            2,008
                            
                            
                            
                            641
                            
                            
                            
                            227
                            
                            
                            
                            810Operating
      loss
                            
                            
                            (9,591
                            )
                            
                            
                            (25,735
                            )
                            
                            
                            (16,046
                            )
                            
                            
                            (14,380
                            )
                            
                            
                            (16,776
                            )Other
      income (expense):Financial
      and other income, net
                            
                            
                            314
                            
                            
                            
                            590
                            
                            
                            
                            1,141
                            
                            
                            
                            443
                            
                            
                            
                            352Income
      taxes
                            
                            
                            31
                            
                            
                            
                            206
                            
                            
                            
                            (227
                            )
                            
                            
                            (78
                            )
                            
                            
                            (49
                            )Loss
      for the period
                            
                            $
                            (9,246
                            )
                            
                            $
                            (24,939
                            )
                            
                            $
                            (15,132
                            )
                            
                            $
                            (14,015
                            )
                            
                            $
                            (16,473
                            )Loss
      per ordinary shareBasic
      and diluted
                            
                            $
                            (0.03
                            )
                            
                            $
                            (0.11
                            )
                            
                            $
                            (0.08
                            )
                            
                            $
                            (0.08
                            )
                            
                            $
                            (0.12
                            )Weighted
      average shares outstanding
                            
                            
                            292,769,320
                            
                            
                            
                            228,492,818
                            
                            
                            
                            201,737,295
                            
                            
                            
                            170,123,003
                            
                            
                            
                            134,731,766As
      of December 31,2008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004(In
      thousands)Balance Sheet
      Data:Cash,
      cash equivalents, bank deposits andtrading
      and marketable securities
                            
                            $
                            2,924
                            
                            
                            $
                            12,977
                            
                            
                            $
                            25,347
                            
                            
                            $
                            13,360
                            
                            
                            $
                            22,924Working
      capital
                            
                            
                            1,385
                            
                            
                            
                            8,532
                            
                            
                            
                            22,694
                            
                            
                            
                            11,385
                            
                            
                            
                            20,240Total
      assets
                            
                            
                            3,430
                            
                            
                            
                            14,127
                            
                            
                            
                            26,900
                            
                            
                            
                            15,151
                            
                            
                            
                            25,624Long-term
      obligations
                            
                            
                            —
                            
                            
                            
                            194
                            
                            
                            
                            738
                            
                            
                            
                            1,493
                            
                            
                            
                            2,489Total
      shareholders’ equity
                            
                            
                            1,426
                            
                            
                            
                            8,564
                            
                            
                            
                            22,760
                            
                            
                            
                            11,252
                            
                            
                            
                            19,602




Overview




We are a
biopharmaceutical company engaged in the acquisition and development of
pharmaceutical products for the treatment of unmet medical needs, particularly
the treatment multiple myeloma, or MM, 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 had 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.




28




Our
revenues have consisted of license fees and reimbursed out of pocket expenses
from Cubist and license fees from Presidio.  We recognized the license
fee revenues from our agreement with Cubist for HepeX-B ratably over the
expected life of the arrangement; un-amortized amounts were recorded as deferred
revenues. We also recognized revenue related to reimbursed out of pocket
expenses at the time that we provided development services to Cubist. In July
2007, Cubist terminated the license agreement with us. We recognized the upfront
non-refundable payment from Presidio as license fee revenue over our period of
significant involvement.  See “Item 4. Information on the Company –
History and Development of XTL.”




Our cost
of revenues consisted of costs associated with the Cubist program for HepeX-B
which consisted 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 former product candidate out-licensed to Cubist.
In addition, we recognized license fee expenses associated with our agreement
with Yeda proportional to our license fee agreement with Cubist, with
unamortized amounts recorded as deferred expenses. On December 31, 2007, we
mutually terminated the research and license agreement with Yeda. See “Item 4.
Information on the Company – History and Development of XTL.”




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
historical participations consist primarily of grants received from the Israeli
government in support of our legacy research and development activities, which
are no longer being developed by us. 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, professional fees and transaction
advisory fees to third party intermediaries. 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. The transaction advisory fee
associated with the Bicifadine transaction in the form of a SAR will be
revalued, based on the then current fair value, at each subsequent reporting
date, until payment of the stock appreciation rights have been
satisfied.




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, or SFAS, No. 123, “Share Based Payment,” or SFAS 123R, on January 1,
2005.




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.
Unvested options are revalued at every reporting period and amortized over the
vesting period in order to determine the compensation expense.




Our
planned 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 or generate licensing revenues from
upfront payments associated with out-licensing transactions. 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.


29




Results
of Operations




Years
Ended December 31, 2008 and 2007




Revenues. Revenues for the
year ended December 31, 2008, increased by $5,033,000 to $5,940,000, as compared
to revenues of $907,000 for the year ended December 31, 2007. Revenues for the
year ended December 31, 2008, were due to the recognition of license revenue
associated with the Presidio out-licensing agreement. Revenue for the year ended
December 31, 2007 was due to the recognition of unamortized deferred revenue
upon termination of the HepeX-B license by Cubist in July 2007. We do not
anticipate to recognize material revenue in 2009.




Cost of Revenues. There was
no cost of revenues for the year ended December 31, 2008. The $110,000 of cost
of revenues for the year ended December 31, 2007 was due to the recognition of
unamortized license fees that were recorded as deferred expenses upon
termination of the HepeX-B license by Cubist in July 2007.




Research and Development
Costs. Research and development costs net of participations decreased by
$7,452,000 to $11,490,000 for the year ended December 31, 2008, as compared to
$18,942,000 for the year ended December 31, 2007. The decrease in research and
development costs was due primarily to the absence of the $7.5 million initial
upfront license fee paid to DOV in 2007 in connection with the in-licensing of
Bicifadine, the absence of $1,477,000 in development expenses associated with
our legacy hepatitis C projects that were terminated in 2007, and also due to a
decline of $3,361,000 in expenses associated with the pre-clinical DOS program
that we out-licensed to Presidio in 2008, offset by an increase of $4,830,000 in
clinical development expenses associated with the now terminated Bicifadine
clinical program. See 2008 Restructuring below and also see “Item 10. Additional
Information -Material Contracts” and “Item 4. Information on the
Company.”




Excluding
the impact of the Bio-Gal Ltd transaction and non-cash compensation expenses
associated with stock option grants, we expect our overall research and
development expenses to decrease in 2009 primarily due the smaller expected size
and geographic scope associated with our planned clinical program for
Recombinant Erythropoietin for the treatment of MM versus the larger size and
geographic scope associated with the Phase 2b and open label studies for the
Bicifadine clinical program terminated in November 2008.




General and Administrative
Expenses. General and administrative expenses decreased by $439,000 to
$5,143,000 for the year ended December 31, 2008, as compared to expenses of
$5,582,000 for the year ended December 31, 2007. The decrease in general and
administrative expenses was due primarily to a decrease in legal and patent
related expenses as well as second–year Sarbanes-Oxley compliance costs, offset
by an increase of severance related expenses associated with the 2008
Restructuring. Excluding non-cash compensation costs, we expect a significant
decline in our level of our general and administrative costs during
2008.




Business Development Costs.
Business development costs decreased by $3,110,000 to a negative expense, or
income of $1,102,000 for the year ended December 31, 2008, as compared to
expenses of $2,008,000 for the year ended December 31, 2007. The decrease in
business developments costs was due primarily to the reversal of $1,553,000 in
transaction advisory fees in the form of stock appreciation rights associated
with the in-licensing of Bicifadine in 2008 that was recorded in 2007. The
transaction advisory fee in the form of a SAR is revalued, based on the then
current fair value, at each subsequent reporting date, until payment of the
stock appreciation rights have been satisfied (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, 2008, decreased by
$276,000 to $314,000, as compared to financial and other income of $590,000 for
the year ended December 31, 2007. The decrease in financial and other income was
due primarily to a lower level of invested funds when compared to the comparable
period last year.




Income Taxes. Income tax
expense increased by $175,000 to a negative expense, or income of $31,000 for
the year ended December 31, 2008, as compared to a negative expense, or income,
of $206,000 for the year ended December 31, 2007. The negative expense for the
year ended December 31, 2008, was due to a carryback claim to the year ended
December 31, 2004 of the US consolidated tax group consisting of XTL
Biopharmaceuticals, Inc. and XTL Development which incurred net operating losses
in 2008 offset by New York State Franchise tax associated with the US permanent
establishment. The US consolidated tax group will file a carryback claim for
those losses to the year ended December 31, 2004 in order to receive a refund
for US federal income taxes paid for that year. For the year ended December 31,
2007, the US consolidated tax group incurred net operating losses. The group
filed a carryback claim for those losses to the years ended December 31, 2006
and December 31, 2005 to receive a refund for US federal income taxes paid for
those years. Our income tax expense (income) is attributable to taxable income
(losses) from the continuing operations of our US subsidiaries and the US
permanent establishment. This income is eliminated upon consolidation of our
financial statements.


30




Years
Ended December 31, 2007 and 2006




Revenues. Revenues for the
year ended December 31, 2007, increased by $453,000 to $907,000, as compared to
revenues of $454,000 for the year ended December 31, 2006. The increase in
revenues for the year ended December 31, 2007, was due to the recognition of
unamortized deferred revenue upon termination of the HepeX-B license by Cubist
in July 2007.




Cost of Revenues. Cost of
revenues for the year ended December 31, 2007, increased by $56,000 to $110,000,
as compared to cost of revenues of $54,000, for the year ended December 31,
2006. The increase in cost of revenues was due to the recognition of unamortized
license fees that were recorded as deferred expenses upon termination of the
HepeX-B license by Cubist in July 2007.




Research and Development
Costs. Research and development costs net of participations increased by
$8,713,000 to $18,942,000 for the year ended December 31, 2007, as compared to
$10,229,000 for the year ended December 31, 2006. The increase in research and
development costs was due primarily to an increase of $13,476,000 in expenses
related to our Bicifadine clinical program (including the $7.5 million initial
upfront license fee to DOV) (see “Item 10. Additional Information -Material
Contracts” and “Item 4. Information on the Company”), offset by a decrease of
$4,166,000 in expenses related to our legacy programs XTL-6865 and XTL-2125,
that were terminated in 2007, and also due to a $597,000 decrease in expenses
associated with our preclinical DOS program.




General and Administrative
Expenses. General and administrative expenses increased by $6,000 to
$5,582,000 for the year ended December 31, 2007, as compared to expenses of
$5,576,000 for the year ended December 31, 2006. The increase in general and
administrative expenses was due primarily to an increase in legal and patent
related expenses as well as Sarbanes-Oxley compliance costs, offset by a
decrease of $208,000 in non-cash compensation costs related to option
grants.




Business Development Costs.
Business development costs increased by $1,367,000 to $2,008,000 for the year
ended December 31, 2007, as compared to expenses of $641,000 for the year ended
December 31, 2006. The increase in business development costs was due primarily
to $1,560,000 in transaction advisory fees in the form of stock appreciation
rights associated with the in-licensing of Bicifadine offset by reduced legal
and due diligence expenses in 2007 as compared to 2006. The transaction advisory
fee in the form of a SAR will be revalued, based on the then current fair value,
at each subsequent reporting date, until payment of the stock appreciation
rights have been satisfied (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, 2007, decreased by
$551,000 to $590,000, as compared to financial and other income of $1,141,000
for the year ended December 31, 2006. The decrease in financial and other income
was due primarily to a lower level of invested funds when compared to the
comparable period last year.




Income Taxes. Income tax
expense decreased by $433,000 to a negative expense, or income, of $206,000 for
the year ended December 31, 2007, as compared to expenses of $227,000 for year
ended December 31, 2006. For the year ended December 31, 2007, the US
consolidated tax group consisting of XTL Biopharmaceuticals, Inc. and XTL
Development incurred net operating losses. The group will file a carryback claim
for those losses to the years ended December 31, 2006 and December 31, 2005 in
order to receive a refund for US federal income taxes paid for those years. Our
income tax expense (income) is attributable to taxable income (losses) from the
continuing operations of our subsidiaries in the US. This income is eliminated
upon consolidation of our financial statements.




2008
Restructuring




During
the first half of 2008, we terminated the employment of 11 research and
development employees in the DOS program, which was out-licensed to Presidio in
2008. As a result, we incurred a charge of $191,000 in research and development
during 2008 related to employee dismissal costs, all of which were paid in
2008.




In
December 2008, we implemented a restructuring plan following the failure of the
Bicifadine Phase 2b clinical trial. We notified nine of our remaining employees
(six in research and development, two in general and administrative and one in
business development) that they will be terminated, representing approximately
75% of our then remaining workforce. In addition, in December 2008, we announced
that our then Chief Executive Officer would be departing in 2009. The remaining
employees were tasked with seeking potential assets or a company to merge into
XTL, or for assisting in the liquidation and/or disposition of XTL’s remaining
assets. As a result, we took a charge of $420,000 in 2008 relating to employee
dismissal costs, $110,000 of which was included in research and development
costs, $305,000 of which was included in general and administrative expenses and
$5,000 was included in business development expenses.




As of
December 31, 2008, 5 employees left XTL under the 2008 Restructuring and $0 of
dismissal costs were paid. As of December 31, 2008 approximately $420,000 in
employee dismissal obligations were included in “liability in respect to
employee severance obligations,” and was all subsequently paid in the first
quarter of 2009.


31




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:




Stock Compensation. We have
granted options to employees, directors and consultants, as well as warrants to
other third parties.  SFAS No. 123R “Share - Based Payment,” or 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.




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 Monte Carlo Simulation method. Such value is recognized
as an expense using the accelerated method under SFAS 123R.




We
account for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by SFAS
123R, and the provisions of 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.
Until the vesting date is reached, the total amount of compensation expense
remains uncertain. We record option compensation based on the fair value of the
options at the reporting date. Unvested options are then revalued, or the
compensation is recalculated based on the then current fair value, at each
subsequent reporting date and are amortized over the vesting period in order to
determine the compensation expense. This may result in a change to the amount
previously recorded in respect of the option grant, and additional expense or a
negative expense may be recorded in subsequent periods based on changes in the
assumptions used to calculate fair value, until the measurement date is reached
and the compensation expense is finalized.




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.




Accruals for Clinical Research
Organization and Clinical Site Costs.  We make estimates of
costs incurred to date in relation to external clinical research organizations,
or CROs, and clinical site costs. We analyze the progress of clinical trials,
including levels of patient enrollment, invoices received and contracted costs
when evaluating the adequacy of the amount expensed and the related prepaid
asset and accrued liability. Significant judgments and estimates must be made
and used in determining the accrued balance in any accounting period. With
respect to clinical site costs, the financial terms of these agreements are
subject to negotiation and vary from contract to contract. Payments under these
contracts may be uneven, and depend on factors such as the achievement of
certain events, the successful accrual of patients, the completion of portions
of the clinical trial or similar conditions. The objective of our policy is to
match the recording of expenses in our financial statements to the actual
services received and efforts expended. As such, expense accruals related to
clinical site costs are recognized based on our estimate of the degree of
completion of the event or events specified in the specific clinical study or
trial contract.




Revenue Recognition.We
recognize license revenue consistent with the provisions of Staff Accounting
Bulletin (“SAB”) No. 104 and EITF Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables.” We analyze each element of our licensing agreement to
determine the appropriate revenue recognition. We recognize revenue on upfront
payments and milestone payments over the period of significant involvement under
the related agreements unless the fee is in exchange for products delivered or
services rendered that represent the culmination of a separate earnings process
and no further performance obligation exists under the contract. We may
recognize milestone payments in revenue upon the achievement of specified
milestones if (1) the milestone is substantive in nature, and the achievement of
the milestone was not reasonably assured at the inception of the agreement and
(2) the fees are nonrefundable. Any milestone payments received prior to
satisfying these revenue recognition criteria would be recognized as deferred
revenue.


32


Purchase Price
Allocation.  The purchase
price allocation for acquisitions requires extensive use of accounting estimates
and judgments to allocate the purchase price to the identifiable tangible and
intangible assets acquired, including in-process research and development, and
liabilities assumed based on their respective fair values. Additionally, we must
determine whether an acquired entity is considered to be a business or a set of
net assets, because a portion of the purchase price can only be allocated to
goodwill in a business combination.





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, 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 was 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.





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




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R changes the accounting for business
combinations. Among the more significant changes, it expands the definition of a
business and a business combination, changes the measurement of acquirer shares
issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance and income tax uncertainties. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early application is prohibited.  We were required
to adopt SFAS 141R on January 1, 2009. We are currently assessing the impact
that SFAS 141R may have on its consolidated financial statements in the event of
a future acquisition.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. An ownership interest in subsidiaries held by parties other than the
parent should be presented in the consolidated statement of financial position
within equity, but separate from the parent's equity. SFAS 160 requires that
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary should be accounted for
similarly as equity transactions. When a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary should be
initially measured at fair value, with any gain or loss recognized in earnings.
SFAS 160 requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated income statement, of
the amounts of consolidated net income attributable to the parent and to the
noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The statement shall be
applied prospectively as of the beginning of the fiscal year in which it is
initially applied, except for the presentation and disclosure requirement which
shall be applied retrospectively for all periods presented. We were required to
adopt SFAS 160 on January 1, 2009. We do not expect the adoption of this
Statement to have a material effect on our consolidated financial statements,
since as of December 31, 2008, we did not have any non-controlling
interests.


33




In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”).  EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years beginning
after December 15, 2008.  EITF 07-1 shall be applied using a modified
version of retrospective transition for those arrangements in place at the
effective date. Companies are required to report the effects of applying
EITF-07-1 as a change in accounting principle through retrospective application
to all prior periods presented for all arrangements existing as of the effective
date, unless it is impracticable to apply the effects of the change
retrospectively. We were required to adopt EITF 07-1 on January 1, 2009. We do
not expect the adoption of EITF 07-1 to have a material effect on our
consolidated financial statements.




In
February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement
No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delays the effective date of SFAS 157
from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).




In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions on legal and contractual provisions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. We will be required to adopt FSP
142-3 on January 1, 2009. We do not expect the adoption of this FSP to have a
material effect on our Consolidated Financial Statements.




In
November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets,” (“EITF 08-7”). EITF 08-7 applies to defensive intangible
assets, which are acquired intangible assets that the acquirer does not intend
to actively use but intends to hold to prevent its competitors from obtaining
access to them. As these assets are separately identifiable, EITF 08-7 requires
an acquiring entity to account for defensive intangible assets as a separate
unit of accounting. A defensive intangible asset shall be assigned a useful life
in accordance with paragraph 11 of Statement 142. EITF 08-7 is effective for
intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier application is
not permitted. We were required to adopt EITF 08-7 on January 1, 2009. We do not
expect the adoption of EITF 08-7 to have a material effect on our Consolidated
Financial Statements.




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 27%
in 2008 (29% in 2007), which will be reduced as follows: 2009 - 26%, 2010 and
after - 25%.




As of
December 31, 2008, XTL Biopharmaceuticals Ltd. did not have any taxable income.
As of December 31, 2008, our net operating loss carryforwards for Israeli tax
purposes amounted to approximately $153.5 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.




As of
December 31, 2008, we had a “permanent establishment” in the US, which began in
2005 due to the residency of our former Chairman of the Board of Directors and
the departing Chief Executive Officer in the US.  This may continue in
2009 as well. 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 we had income attributable to the permanent establishment in the
US, 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 qualified 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 any foreign taxes that
may become due in the future against its US tax liability in connection with
income attributable to its US permanent establishment and subject to both US and
foreign income tax. As of the signing date of our financial statements, there
was a change in our Board and senior management composition, such that the
residences of our newly appointed Chairman and co-Chief Executive Officer were
outside of the United States, as of the end of the first quarter of
2009.


34




As of
December 31, 2008, we did not earn any taxable income for US federal tax
purposes.  If we eventually earn taxable income attributable to its US
permanent establishment, we 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. As of December 31, 2008, we
estimate that these US net operating loss carryforwards are approximately $22.6
million.  These losses, subject to limitation in the case of shifts in
ownership of the Company, e.g. a planned offering or capital raise, resulting in
more than 50 percentage point change over a three year lookback period, can be
carried forward to offset future US taxable income and expire through 2028. For
the year ended December 31, 2008, the Company was subject to a State franchise
tax of $10,000 in regards to the permanent establishment.




Liquidity
and Capital Resources




We have
financed our operations from inception primarily through various private
placement transactions, our initial public offering, a placing and open offer
transaction, and option and warrant exercises. As of December 31, 2008, we had
received net proceeds of approximately $76.4 million from various private
placement transactions, including the November 2007 private placement, 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, and proceeds of
$2.1 million from the exercise of options and warrants.




As of
December 31, 2008, we had $2.9 million in cash, cash equivalents, and short-term
bank deposits, a decrease of $10.1 million from December 31, 2007. Cash used in
operating activities for the year ended December 31, 2008, was $10.6 million, as
compared to $21.4 million for the year ended December 31, 2007. This decrease in
cash used in operating activities was due primarily to the absence of the $7.5
million initial upfront license fee for Bicifadine and from our revenue from the
out-licensing of the DOS program to Presidio in 2008. For the year ended
December 31, 2008, the net cash provided by investing activities of $10.9
million, as compared to net cash provided by investing activities of $10.6
million for the year ended December 31, 2007, was primarily the result of the
maturity of short-term bank deposits. For the year ended December 31, 2008, net
cash provided by financing activities of $0.2 million, as compared to $8.8
million for the year ended December 31, 2007, was the result of our $8.8 million
private placement that closed in November 2007.




We
currently anticipate that our cash and cash equivalents and restricted
short-term bank deposits are sufficient to finance our operations through July
2009. Continuation of our current operations after utilizing our current cash
reserves is dependent upon the generation of additional financial resources
either through agreements for the monetization of our residual in the DOS
program or through external financing. These matters raise substantial doubt
about our ability to continue as a going concern. We do believe, however, that
we will likely seek additional capital during the next couple of months through
a planned rights offering and / or public or private equity offerings or debt
financings. 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
      costs involved in closing the Bio-Gal transaction, including the required
      financing;




·
            the
      accuracy of our financial
forecasts;




·
            the
      timing of the in-licensing, partnering and acquisition of new product
      opportunities;




·
            the
      timing of expenses associated with product development and manufacturing
      of the proprietary drug candidate that we have acquired from Bio-Gal Ltd.
      and those that may be in-licensed, partnered or
  acquired;




·
            our
      ability to achieve our milestones under licensing arrangements;
      and




·
            the
      costs involved in prosecuting and enforcing patent claims and other
      intellectual property rights.




35




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 and which would raise substantial doubt about our
ability to continue as a going concern. 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.”




The
accompanying financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The factors
discussed above, taken together with our limited cash and cash equivalents raise
substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern. In addition, the report of
our independent registered public accounting firm covering our 2008 Consolidated
Financial Statements, included in this Annual Report, contains an explanatory
paragraph that makes reference to uncertainty about our ability to continue as a
going concern.





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.




Obligations
and Commitments




As of
December 31, 2008, we had known contractual obligations, commitments and
contingencies of $464,000. Of this amount, $0 relates to research and
development agreements. The $464,000 relates to our operating lease obligations,
of which $457,000 is due within the next year, with the remaining balance due as
per the schedule below.





Payment due by periodContractual obligations
                  
                  Total
                  
                  
                  Less than
                    1 year
                  
                  
                  1-3
                    years
                  
                  
                  3-5
                    years
                  
                  
                  More than
                    5 yearsResearch
      & development agreements
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
      leases
                  
                  
                  464,000
                  
                  
                  
                  457,000
                  
                  
                  
                  7,000
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  464,000
                  
                  
                  $
                  457,000
                  
                  
                  $
                  7,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —





On April
6, 2009, our wholly-owned subsidiary, XTL Biopharmaceuticals, Inc., delivered a
termination notice to Suga Development, L.L.C., with respect to the leasing of
approximately 33,200 sq. ft. located at 711 Executive Boulevard, Suite Q, Valley
Cottage, New York 10989.  We believe that the notice provided a clear
indication of the termination of XTL Biopharmaceuticals,
Inc.’s  obligations under the lease, effective as of the date of the
notice.  In addition, XTL Biopharmaceuticals, Inc. informed Suga
Development that upon receipt of the notice, they should use their best effort
to re-rent the premises and to mitigate any damages. There can be no assurance
that the landlord will not dispute the termination of the lease, and attempt to
hold XTL Biopharmaceuticals, Inc. responsible for the full amount of all future
unpaid lease payments, approximately $335,000 as of March 31,
2009.  The $335,000 is included in operating lease obligations in the
table above.





Additionally,
the VivoQuest license agreement provides for contingent 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. Pursuant to our out-licensing agreement with
Presidio, Presidio is obligated to pay us for any contingent milestone
consideration owed to VivoQuest pursuant to the XTL and VivoQuest license
agreement.





We have
undertaken to make contingent milestone payments to DOV Pharmaceuticals, Inc. of
up to approximately $126.5 million over the life of the license, of which
approximately $115.0 million will be due upon or following regulatory approval
of the drugs. These milestone payments may be made in either cash and/or our
ordinary shares, at our election, with the exception of $5 million in cash,
which would due upon or after regulatory approval. We are also obligated to make
royalty payments on future product sales net sales.  We ceased
development of Bicifadine in November 2008.


36




Pursuant
to our asset purchase agreement to acquire the rights to develop rHuEPO for the
treatment of MM from Bio-Gal Ltd., we will issue to Bio-Gal Ltd. ordinary shares
representing just under 50% of the current issued and outstanding share capital
of our company. In addition, we will make milestone payments of approximately
$10 million in cash upon the successful completion of a Phase 2 clinical trial.
In addition, our company’s Board of Directors may, in its sole discretion, issue
additional ordinary shares to Bio-Gal Ltd. in lieu of such milestone payment. We
are also obligated to pay 1% royalties on net sales of the product. See “Item 4.
Information on the Company - Business Overview - Licensing Agreements and
Collaborations” above.





In
addition, in January 2007, XTL Development and the company committed to pay a
transaction advisory fee to certain third party intermediaries in connection
with the in-license of Bicifadine from DOV. In October 2008, XTL Development
entered into definitive agreements with the third party intermediaries with
respect to the binding term sheets signed in 2007 (the “Definitive Agreements”).
Under the terms of the Definitive Agreements, the transaction advisory fee was
structured in the form of SARs, in the amount equivalent to (i) 3% of our fully
diluted ordinary shares at the close of the transaction (representing 8,299,723
ordinary shares), vesting immediately and exercisable one year after the close
of the transaction, and (ii) 7% of our fully diluted ordinary shares at the
close of the transaction (representing 19,366,019 ordinary shares), vesting on
the “Date of Milestone Event.” The “Date of Milestone Event” shall mean the
earlier to occur of (i) positive (i.e., a statistically significant difference
between the placebo arm and (x) at least one drug arm in the trial, or (y) the
combined drug arms in the trial in the aggregate) results from any
adequately-powered trial that is intended from its design to be submitted to the
US Food and Drug Administration as a pivotal trial of Bicifadine conducted by us
or XTL Development, or by a licensee thereof, which included the recent Phase 2b
randomized, double blind, placebo controlled study in diabetic neuropathic pain
(regardless of indication or whether the study is the first such pivotal trial
for Bicifadine conducted thereby), (ii) the filing of a New Drug Application for
Bicifadine by us or XTL Development, or by a licensee thereof, or (iii) the
consummation of a merger, acquisition or other similar transaction with respect
to us or XTL Development whereby persons or entities holding a majority of the
equity interests of us or XTL Development prior to such merger, acquisition or
similar transaction no longer hold such a majority after the consummation of
such merger, acquisition or similar transaction. Payment of the SARs by XTL
Development can be satisfied, at our discretion, in cash and/or by issuance of
our registered ordinary shares. Upon the exercise of a SAR, the amount paid by
XTL Development will be an amount equal to the amount by which the fair market
value of one ordinary share on the exercise date exceeds the $0.34 grant price
for such SAR (fair market value equals (i) the greater of the closing price of
an “ADR” on the exercise date, divided by ten, or (ii) the preceding five day
ADR closing price average, divided by ten). The SARs expire on January 15, 2017.
In the event of the termination of our license agreement for the Bicifadine
compounds, any unvested SARs will expire. As of December 31, 2008, the 3%
tranche was vested and the 7% tranche was not vested. In the event of the
termination of our license agreement with DOV, any unvested SARs will expire.
See also “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 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.





The
information below provides estimates regarding the costs associated with the
completion of the current development phase and our current estimated range of
the time that will be necessary to complete that development phase for rHuEPO
for the treatment of MM. We also have provided information with respect to our
other drug candidates. We also direct your attention to the risk factors which
could significantly affect our ability to meet these cost and time estimates
found in this report in Item 3 under the heading “Risk Factors-Risks Related to
our Business.”





Following
the closing of the agreement with Bio-Gal Ltd., we plan on performing a
prospective, multi-center, double blind, placebo controlled phase 1-2 study
intended to assess safety of rHuEPO when given to patients with advanced MM and
demonstrate its effects on survival, biological markers related to the disease,
immune improvements and quality of life. We intend to initiate the clinical
trial in the second half of 2009. While we have begun preliminary discussions
with potential clinical sites and third party vendors for the planned study, we
have not yet determined the size and scope of the study, and as a result, we
cannot estimate when such clinical development will end, and the estimated cost
to complete the study.





Under the
terms of the license agreement, Presidio became responsible for all further
development and commercialization activities and costs relating to the DOS
program. The DOS program is currently in preclinical development. The timing and
results of pre-clinical studies are highly unpredictable. Due to the nature of
pre-clinical studies and our inability to predict the results of such studies,
we cannot estimate when such pre-clinical development will end.




The
following table sets forth the research and development costs for our current
and legacy clinical-stage projects, our pre-clinical activities, and 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.




37





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.





Years ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              Cumulative, as of
                  December 31, 2008Bicifadine(includes
      $7.5 million initial upfront license fee in 2007)
              
              $
              10,806,000
              
              
              $
              13,476,000
              
              
              $
              —
              
              
              $
              24,282,000DOS
              
              
              684,000
              
              
              
              4,056,000
              
              
              
              4,653,000
              
              
              
              10,633,000Legacy
      programs12Research
      and development costs
              
              
              —
              
              
              
              1,466,000
              
              
              
              5,576,000
              
              
              
              94,704,000Less
      participations
              
              
              —
              
              
              
              (56,000
              )
              
              
              —
              
              
              
              (17,018,000
              )Total
      legacy programs
              
              
              —
              
              
              
              1,410,000
              
              
              
              5,576,000
              
              
              
              77,686,000Total Research and
    developmentResearch
      and development costs
              
              
              11,490,000
              
              
              
              18,998,000
              
              
              
              10,229,000
              
              
              
              129,619,000Less
      participations
              
              
              —
              
              
              
              (56,000
              )
              
              
              —
              
              
              
              (17,018,000
              )11,490,000
              
              
              
              18,942,000
              
              
              
              10,229,000
              
              
              
              112,601,000




____________________


1Includes
$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.


2Legacy
programs include, XTL-2125, XTL-6865, HepeX-B and early stage discovery research
activities that ceased in 2003.





Trend
Information




Please
see “Item 5. Operating and Financial Review and Prospects” and “Item 4.
Information on the Company” for trend information.


38


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 March 31, 2009. Except as noted, the business address for each of
the following is Kiryat Weizmann Science Park, Building 3, POB 370, Rehovot
76100, Israel.





Name
                            
                            Age
                            
                            PositionMarc
      Allouche
                            
                            35
                            
                            Non
      Executive DirectorDafna
      Cohen
                            
                            39
                            
                            Non
      Executive and External DirectorJaron
      Diament
                            
                            42
                            
                            Non
      Executive and External DirectorDavid
      Grossman
                            
                            34
                            
                            Executive
      Director and Co-Chief Executive OfficerBoaz
      Shweiger
                            
                            33
                            
                            Non
      Executive DirectorAmit
      Yonay
                            
                            39
                            
                            Chairman
      of the Board of DirectorsRon
      Bentsur
                            
                            43
                            
                            Co-Chief
      Executive OfficerBill
      Kessler
                            
                            43
                            
                            Director
      of
Finance





David
Grossman has served as a director in our company and as co-Chief Executive
Officer of our company since February 2009. He served as a Vice President of
Eurocom Investments LP, a private equity fund focused on long-term investments
mainly in Israeli public companies, from March 2006 to December 2008. Also from
March 2006 to December 2008, Mr. Grossman was Vice President of Sahar
Investments Ltd, (TASE: SAIN) which focused on investments in the Life Sciences
arena. From July 2003 to March 2006, Mr. Grossman was a Senior Analyst at Israel
Health Care Ventures, an Israeli healthcare venture capital fund. From 2001 to
March 2003, Mr. Grossman was a senior investment banker with Reliance Capital
Ltd. From 2001-2003, he was a partner of Magna Business Development, a
consulting boutique. In addition, Mr. Grossman is currently a director and
member of the audit committee of Bio Light Israeli Life Science Investments Ltd.
(TASE: BOLT) since December 2008, and from May 2007 to July 2008 was a Director
and member of the audit committee of Gilat Satcom Ltd. (AIM: GLT). Mr. Grossman
received a BA business administration with a focus on information technology,
from the Interdisciplinary Center Herzliya.




Boaz
Shweiger has served as a director in our company since February 2009. He has
served as a partner and Managing Director of Sean S. Holdings Ltd., a private
investment company, since August 2005. Mr. Shweiger was an attorney at S.
Horowitz & Co, practicing commercial law, from June 2001 to January 2005.
From December 2001 to April 2005, Mr. Shweiger served as Director and a member
of the investment committee of Isal Amlat Investments (1993) Ltd., an investment
company (TASE: ISAL), engaged in the fields of industry, commerce, real estate
and advanced technologies services. Mr. Shweiger received an LL.B, magna cum
laude, from the College of Management and an MBA in finance and auditing from
Tel - Aviv University.




Marc
Allouche has served as a director in our company since March 2009. He is
currently actively involved in independent business ventures. He had served as
the head of the Alternative Investments Division of Harel Insurance Investments
& Financial Services Ltd. (TASE: HARL), from January 2008 until January
2009, focused on venture capital, private equity and real estate investments.
From March 2006 to July 2007, Mr. Allouche served as Executive Vice President of
investments and strategic development of SGPA Ltd., a French holding company and
concurrently was CEO of one of its portfolio companies, operating in the retail
sector in France for turn-around purposes. From November 2002 to December 2005,
Mr. Allouche was a Senior Manager in the private equity advisory group of Russel
Bedford International, in charge of corporate finance transaction services and
restructuring advisory services. From 2001 to 2002, Mr. Allouche was involved in
the creation of an Israeli-French software start-up (in strategic alliance with
ENST – Telecom Paris) operating within the Telecommunications arena. From 2000
to 2001, Mr. Allouche served a Vice President at Nessuah Zanex Venture Capital
Company Ltd., then running a Life Sciences venture capital vehicle, and was
concurrently also Managing Director of one of its healthcare portfolio companies
for turn-around purposes. In addition, from 1998 to 2000, Mr. Allouche was a
Senior Advisor in the Corporate Finance division of KPMG International - Somekh
Chaikin. From 1996 to 1998, Mr. Allouche was a Senior Consultant at the Audit
division and the Transaction Services / Corporate Finance division of Price
Waterhouse in Paris. Mr. Allouche received a BA in economics and management and
an MBA with major in corporate finance and accounting from Dauphine University,
Paris. He is also a Chartered Public Accountant in France.




Amit
Yonay has served as a director in our company since March 2009. Since 2007, he
has been actively involved in independent investments primarily in the real
estate and capital markets with an emphasis toward distressed asset
opportunities. Mr. Yonay had served from 2000 to January 2007, as the Head
Israeli Sell-Side Analyst with ING Financial Markets (NYSE: ING, Euronext: INGA)
in Israel. From 1998 until 2000, Mr. Yonay was Portfolio Manager at Meretz
Investments Ltd. and from 1996 until 1998 he was a buy-side analyst at Meretz
Investments. Mr. Yonay received a BS in Electrical Engineering from Binghamton
University and an MBA from Tel Aviv University in Finance and International
Business.




39




Jaron
Diament has served as a director in our company since March 2009. He has served
as the founding partner and Chief Financial Officer of Tagor Capital Ltd., a
public real estate investment company (TASE: TGCP), since September 2006 and a
board member of all of its non-Israel real estate investments. From 2003 to
September 2006, Mr. Diament was an independent financial advisor focused on risk
management and corporate finance transactions. From 1994 to February 2005 Mr.
Diament was CFO of H.G.I.I. Ltd. (TASE: HGII, today a private company) and a
member of the board of certain wholly owned subsidiaries. Prior to that Mr.
Diament was an accountant with Eliezer Oren and Partners. In addition, Mr.
Diament serves as an external director of Mega Or Holdings Ltd. (TASE: MGOR)
since September 2007. Mr. Diament received a BA in economics and accounting from
Tel Aviv University.




Dafna
Cohen has served as a director in our company since March 2009. She has served
as Director of Group Investment and a Treasurer of Emblaze Ltd. (LSE-BLZ), a
group of technology companies focused on growth and innovation, since December
2005. From 2000 to 2004, Ms. Cohen was an Investment Manager for Leumi &
Co., an investment house of the Bank Leumi Group. From 1994-2000, Ms. Cohen
worked in the derivatives sector of Bank Leumi. In addition, Ms. Cohen serves as
an external director of Bee-Contact Ltd (TASE: BCNT) since September 2007. Ms.
Cohen received a BA in economics and political science and an MBA in finance and
accounting from Hebrew University, Jerusalem.




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 in New York
City. 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. Mr.
Bentsur will be leaving XTL imminently.




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. Mr. Kessler
will be leaving XTL in May 2009.




Employment
Agreements




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 currently
entitled to an annual base salary of $135,000. 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 January
2008, our Board of Directors granted options to Mr. Kessler to purchase a total
of 500,000 ordinary shares at an exercise price equal to $0.315 per share (equal
to the closing price of our ADRs on the NASDAQ Stock Market on the date of grant
divided by ten). These options vest over a four-year period, with 25% having
vested on grant date, and with the remainder vesting equally on each of the
one-, two- and three-year anniversaries of the issuance of the options. The
options are exercisable for a period of ten years from the date of issuance, and
were granted under the Share Option Plan 2001. 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 Stock 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. Mr. Kessler will be
leaving XTL in May 2009.




40




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 2008 (eleven persons)
was approximately $1.0 million. This amount includes payments made for social
security, pension, disability insurance and health insurance premiums of
approximately $0.1 million, as well as severance 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.




We
granted our former directors 5,020,000 options to purchase ordinary shares in
2008, pursuant to shareholder meetings, exercisable at a weighted average price
of $0.208 per ordinary share (the closing price of our ADRs on the NASDAQ Stock
Market on the date of grant divided by ten), and expire ten years after date of
grant. As of March 18, 2009, 1,443,874 of these options were forfeited. The
remaining vested options expire three months after March 18, 2009, the
resignation date of the former directors.




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 March
2009, pursuant to a shareholders’ meeting, the monetary compensation was set for
each of Mr. Grossman, Mr. Shweiger, Mr. Allouche, Mr. Yonay, Mr. Diament and Ms.
Cohen as follows: annual consideration of $10,000 (to be paid in 4 equal
quarterly payments), payments of $375 for attendance at each board or committee
meeting in person or held by teleconference and reimbursement of reasonable
out-of-pocket expenses.




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 six members, including our non-executive
Chairman. Other than our two external directors, our 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 Amit Yonay, (chairman of the nomination
committee), Jaron Diament and Dafna Cohen. 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 March 2009, at an extraordinary general meeting of
our shareholders, David Grossman and Boaz Shweiger were re-elected to serve as
directors of our company and Marc Allouche and Amit Yonay were elected to serve
as directors of our company. Dafna Cohen and Jaron Diament were elected to serve
as external directors of our company at the March 2009 extraordinary general
meeting. Dafna Cohen and Jaron Diament are serving as external directors
pursuant to the provisions of the Israeli Companies Law for a three-year term
ending in March 2012. 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.




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.




41




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.




Dafna
Cohen and Jaron Diament serve as external directors pursuant to the provisions
of the Israeli Companies Law. 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.




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.




42




Our audit
committee is currently comprised of three independent non-executive directors.
The audit committee is chaired by Jaron Diament, who serves as the audit
committee financial expert, with Dafna Cohen and Boaz Schweiger 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: Jaron Diament,
Dafna Cohen and Marc Allouche. 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.




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 Stock Market under the symbol
“XTLB.”




43




On
November 20, 2007, we completed a private placement of ordinary shares for an
aggregate consideration of approximately $9.8 million in gross proceeds. 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
March 31, 2009, we had 5 full-time equivalent employees. We and our Israeli
employees are subject, by an extension order of the Israeli Ministry of Welfare,
to a certain 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. See also “Item 5. Operating and Financial Review and Prospects -
2008 Restructuring” and “Item 6. Directors, Senior Management and Employees –
Employment Agreements” above.




For the
years ended December 31, 2008, 2007 and 2006, the number of our employees
engaged in the specified activities, by geographic location, are presented in
the table below.




Year ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Research
      and DevelopmentIsrael
                  
                  
                  2
                  
                  
                  
                  2
                  
                  
                  
                  8US
                  
                  
                  —
                  
                  
                  
                  16
                  
                  
                  
                  182
                  
                  
                  
                  18
                  
                  
                  
                  26Financial
      and general managementIsrael
                  
                  
                  3
                  
                  
                  
                  4
                  
                  
                  
                  4US
                  
                  
                  2
                  
                  
                  
                  2
                  
                  
                  
                  25
                  
                  
                  
                  6
                  
                  
                  
                  6Business
      developmentIsrael
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —US
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  11
                  
                  
                  
                  1
                  
                  
                  
                  1Total
                  
                  
                  8
                  
                  
                  
                  25
                  
                  
                  
                  33Average
      number of full-time employees
                  
                  
                  14
                  
                  
                  
                  29
                  
                  
                  
                  40





44




Share
Ownership




The
following table sets forth certain information as of March 31, 2009, 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 March 31, 2009.




Amount and nature of beneficial ownershipOrdinary
                    shares
                    beneficially
                    owned
                    excluding
                    options
                
                
                Options1
                    exercisable
                    within
                    60 days of
                    March 31,
                    2009
                
                
                Total
                    ordinary
                    shares
                    beneficially
                    owned
                
                
                Percent of
                    ordinary
                    shares
                    beneficially
                    ownedAmit
      Yonay
                  Chairman of the
      Board
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Marc
      Allouche
                  Director
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Dafna
      Cohen
                  Director
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Jaron
      Diament
                  Director
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —David
      Grossman
                  Director and co-Chief
      Executive Officer
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Boaz
      Schweiger
                  Director
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Ron
      Bentsur2
                  Co-Chief Executive
      Officer
                
                
                201,010
                
                
                
                3,583,334
                
                
                
                3,784,344
                
                
                
                1.3
                %Bill
      Kessler3
                  Director of
      Finance
                
                
                50,000
                
                
                
                500,000
                
                
                
                550,000
                
                
                
                *All
      directors and executive officers as a group (7 persons)
                
                
                251,010
                
                
                
                4,083,334
                
                
                
                4,334,344
                
                
                
                1.5
                %





(1)
            Options
      to purchase ordinary shares


(2)
            2,333,334
      options at an exercise price of $0.774 per ordinary share, expiring three
      months after Mr. Bentsur's departure; and 1,250,000 options at an exercise
      price of $0.315, expiring three months after Mr. Bentsur's departure. Mr.
      Bentsur will leaving XTL
imminently.


(3)
            250,000
      options at an exercise price of $0.60 per ordinary share, expiring one
      year after Mr. Kessler's departure; and 250,000 options at an exercise
      price of $0.315, expiring one year after Mr. Kessler's
      departure.


*
            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 7 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, 2008, we have granted to employees, directors and consultants
options that are outstanding to purchase up to 30,825,178 ordinary shares,
pursuant to four share option plans and pursuant to certain grants apart from
these plans also discussed below under Non-Plan Share Options.




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 4,200
are outstanding and exercisable as of December 31, 2008, at an exercise price of
$0.497 per ordinary share. The options are non-transferable.




45




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 will expire. 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 89,800
are outstanding and exercisable as of December 31, 2008, 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 will expire. 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 2001-2008, 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 7,446,177 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, 2008, 3,681,952 options are fully vested. As of December 31, 2008,
the remaining number of options available for future grants under the 2001 Plan
is 2,872,273.




Non-Plan
Share Options




In
addition to the options granted under our share option plans, there are
23,285,001 outstanding options, and 10,725,010 exercisable options, as of
December 31, 2008, which were granted to employees, directors and consultants
not under an option plan during 1997-2008. The options were granted at an
exercise price between $0.20 and $2.11 per ordinary share. The options expire
between 2008 and 2018.





ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS




As of
March 31, 2009, we are not aware of any beneficial owner holding more than 5% of
our outstanding ordinary shares. As of February 28, 2009, there were 20,970,313
ADRs outstanding, held by approximately 5 record holders, whose holdings
represented approximately 72% of the total outstanding ordinary shares, of which
4 record holders were in the US.




Related
Party Transactions




For the
years ended December 31, 2007 and 2006 we leased approximately 100 meters of
office space from Keryx subject to a rent sharing agreement for $4,500 and
$15,000, respectively. The rent sharing agreement was terminated as of March 31,
2007. In addition, our co-Chief Executive Officer had provided consulting
services to Keryx through January 2008 for no compensation, and our Director of
Finance provides consulting services to Keryx; however, the amount of their time
devoted to this endeavor and the compensation they receive, if any, is
immaterial. Our former Chairman of the Board is the Chairman and CEO of Keryx.
During 2007, a company controlled by one of our former directors purchased
$6,500 in lab equipment that we had disposed of in our Israeli
facility.




ITEM
8. FINANCIAL INFORMATION




Consolidated
Statements and Other Financial Information




Our
audited consolidated financial statements are included on pages F-1 through F-40
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.




46




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. 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.





Significant
Changes




In March
2009, we signed an asset purchase agreement to acquire the rights to develop
rHuEPO for the treatment of MM from Bio-Gal Ltd., a private biotechnology
company based in Gibraltar. In accordance with the terms of the asset purchase
agreement, we will issue Bio-Gal Ltd. ordinary shares representing just under
50% of the current issued and outstanding share capital of our company. In
addition, we will make a milestone payment of approximately $10 million in cash
upon the successful completion a Phase 2 clinical trial. Our company’s Board of
Directors may, in its sole discretion, issue additional ordinary shares to
Bio-Gal Ltd in lieu of such milestone payment. We are also obligated to pay 1%
royalties on net sales of the product. The closing of the transaction is subject
to various conditions including XTL’s and Bio-Gal’s shareholders’ approvals, as
well as completion of a financing. Closing is expected to take place in the
second or third quarter of 2009.




ITEM
9. THE OFFER AND LISTING




Markets
and Share Price History




The
primary trading market for our securities is the NASDAQ Capital Market. Since
September 1, 2005, our ADRs have been traded on the NASDAQ Stock Market under
the symbol “XTLB,” with each ADR representing ten ordinary shares. As of July
12, 2005, our ordinary shares are also listed on the Tel Aviv Stock Exchange
under the symbol “XTL.”





In the
past, our primary trading market was the London Stock Exchange, or LSE, where
our shares were listed and traded under the symbol “XTL” since our initial
public offering in September of 2000. On October 31, 2007, our ordinary shares
were delisted from the LSE, pursuant to the October 2, 2007 vote at our
extraordinary general meeting of shareholders.





On
January 27, 2009, we received a Staff Determination Letter from The Nasdaq Stock
Market notifying us that the staff of Nasdaq's Listing Qualifications Department
determined, using its discretionary authority under Nasdaq Marketplace Rule
4300, that our ADRs would be delisted from Nasdaq. The letter further stated
that Nasdaq would suspend trading on our ADRs at the opening of trading on
February 5, 2009, unless we appealed Nasdaq's delisting determination. Nasdaq's
determination to delist our ADRs was based on Nasdaq's belief we are a public
shell, and that we do not meet the stockholder's equity requirement or any of
its alternatives. On February 3, 2009, we appealed the determination by the
Nasdaq Listing Qualification Staff to delist our ADRs from the Nasdaq Capital
Market. The Nasdaq Office of the General Counsel assigned a date of March 19,
2009, for an oral hearing before the Nasdaq Hearings Panel. Nasdaq’s delisting
action has been stayed, pending a final written determination by the Panel
following the hearing. At the hearing, we presented our plan to remedy the
“public shell” determination and for future compliance with all other applicable
Nasdaq listing requirements.





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 Stock Market1 since
September 1, 2005, the date on which our ADRs were initially quoted. Prior to
the initial quotation of our ADRs on the NASDAQ Stock Market on September 1,
2005, our ADRs were not traded in any organized market and were not
liquid.




US DollarHigh
                                          
                                          
                                          LowLast
      Six Calendar MonthsMarch
      2009
                                          
                                          
                                          0.16
                                          
                                          
                                          
                                          0.07February
      2009
                                          
                                          
                                          0.10
                                          
                                          
                                          
                                          0.08January
      2009
                                          
                                          
                                          0.13
                                          
                                          
                                          
                                          0.06December
      2008
                                          
                                          
                                          0.11
                                          
                                          
                                          
                                          0.04November
      2008
                                          
                                          
                                          2.85
                                          
                                          
                                          
                                          0.07October
      2008
                                          
                                          
                                          3.51
                                          
                                          
                                          
                                          1.98Financial
      Quarters During the Past Two Full Fiscal YearsFirst
      Quarter of 2009
                                          
                                          
                                          0.16
                                          
                                          
                                          
                                          0.06Fourth
      Quarter of 2008
                                          
                                          
                                          3.51
                                          
                                          
                                          
                                          0.04Third
      Quarter of 2008
                                          
                                          
                                          4.73
                                          
                                          
                                          
                                          3.29Second
      Quarter of 2008
                                          
                                          
                                          3.88
                                          
                                          
                                          
                                          2.95First
      Quarter of 2008
                                          
                                          
                                          4.24
                                          
                                          
                                          
                                          2.91Fourth
      Quarter of 2007
                                          
                                          
                                          2.85
                                          
                                          
                                          
                                          1.51Third
      Quarter of 2007
                                          
                                          
                                          2.64
                                          
                                          
                                          
                                          1.24Second
      Quarter of 2007
                                          
                                          
                                          4.07
                                          
                                          
                                          
                                          2.29Full
      Financial Years Since Listing2008
                                          
                                          
                                          4.73
                                          
                                          
                                          
                                          0.042007
                                          
                                          
                                          4.99
                                          
                                          
                                          
                                          1.242006
                                          
                                          
                                          8.12
                                          
                                          
                                          
                                          2.08




1
              Our ADRs have been quoted on the
      NASDAQ Capital Market since December 3, 2007 and prior to that were quoted
      on the NASDAQ Global
Market.




47




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 4.188 New Israeli Shekel per US Dollar, as reported by the
Bank of Israel on March 31, 2009.




New Israeli Shekel
                        
                        
                        US DollarHigh
                        
                        
                        Low
                        
                        
                        High
                        
                        
                        LowLast
      Six Calendar MonthsMarch
      2009
                        
                        
                        0.061
                        
                        
                        
                        0.038
                        
                        
                        
                        0.015
                        
                        
                        
                        0.009February
      2009
                        
                        
                        0.048
                        
                        
                        
                        0.042
                        
                        
                        
                        0.011
                        
                        
                        
                        0.010January
      2009
                        
                        
                        0.058
                        
                        
                        
                        0.020
                        
                        
                        
                        0.014
                        
                        
                        
                        0.005December
      2008
                        
                        
                        0.048
                        
                        
                        
                        0.016
                        
                        
                        
                        0.011
                        
                        
                        
                        0.004November
      2008
                        
                        
                        1.065
                        
                        
                        
                        0.043
                        
                        
                        
                        0.254
                        
                        
                        
                        0.010October
      2008
                        
                        
                        1.234
                        
                        
                        
                        0.763
                        
                        
                        
                        0.295
                        
                        
                        
                        0.182Financial
      Quarters During the Past Two Full Fiscal YearsFirst
      Quarter of 2009
                        
                        
                        0.061
                        
                        
                        
                        0.020
                        
                        
                        
                        0.015
                        
                        
                        
                        0.005Fourth
      Quarter of 2008
                        
                        
                        1.234
                        
                        
                        
                        0.016
                        
                        
                        
                        0.295
                        
                        
                        
                        0.004Third
      Quarter of 2008
                        
                        
                        1.707
                        
                        
                        
                        1.041
                        
                        
                        
                        0.408
                        
                        
                        
                        0.249Second
      Quarter of 2008
                        
                        
                        1.291
                        
                        
                        
                        0.967
                        
                        
                        
                        0.308
                        
                        
                        
                        0.231First
      Quarter of 2008
                        
                        
                        1.497
                        
                        
                        
                        0.932
                        
                        
                        
                        0.357
                        
                        
                        
                        0.223Fourth
      Quarter of 2007
                        
                        
                        0.990
                        
                        
                        
                        0.640
                        
                        
                        
                        0.240
                        
                        
                        
                        0.150Third
      Quarter of 2007
                        
                        
                        1.060
                        
                        
                        
                        0.480
                        
                        
                        
                        0.250
                        
                        
                        
                        0.110Second
      Quarter of 2007
                        
                        
                        1.620
                        
                        
                        
                        1.000
                        
                        
                        
                        0.390
                        
                        
                        
                        0.240Full
      Financial Years Since Listing2008
                        
                        
                        1.707
                        
                        
                        
                        0.016
                        
                        
                        
                        0.408
                        
                        
                        
                        0.0042007
                        
                        
                        2.020
                        
                        
                        
                        0.480
                        
                        
                        
                        0.480
                        
                        
                        
                        0.1102006
                        
                        
                        3.660
                        
                        
                        
                        0.960
                        
                        
                        
                        0.870
                        
                        
                        
                        0.230





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 on 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.




48




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.




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.




49




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.




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




Through
March 18, 2009, our authorized share capital is NIS 10,000,000 consisting of
500,000,000 ordinary shares, par value NIS 0.02 per share. On March 18, 2009,
pursuant to a vote at the recent shareholder’s meeting, the share capital of our
company was consolidated and re-divided so that each five (5) shares of NIS 0.02
nominal value was consolidated into one (1) share of NIS 0.1 nominal value so
that following such consolidation and re-division, our authorized share capital
consists of 100,000,000 ordinary shares, par value NIS 0.10 per share. In
addition, the authorized share capital of our company was increased from NIS
10,000,000 to NIS 70,000,000 divided into 700,000,000 ordinary shares, NIS 0.10
nominal value. We expect the change to be effective during April
2009.




50




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.




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.




51




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.




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.




52




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.




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.




53





Material
Contracts




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.




Presidio
Pharmaceuticals, Inc.




In March
2008, and as revised August 2008, we signed an agreement to out-license the DOS
program to Presidio Pharmaceuticals, Inc., or Presidio, a specialty
pharmaceutical company focused on the discovery, in-licensing, development and
commercialization of novel therapeutics for viral infections, including HIV and
HCV. Under the terms of the license agreement, as revised, Presidio becomes
responsible for all further development and commercialization activities and
costs relating to our DOS program. In accordance with the terms of the license
agreement, we received a $5.94 million, non-refundable, upfront payment in cash
from Presidio and will receive up to an additional $59 million upon reaching
certain development and commercialization milestones. In addition, we will
receive a royalty on direct product sales by Presidio, and a percentage of
Presidio’s income if the DOS program is sublicensed by Presidio to a third
party.




Bio-Gal
Ltd.




On March
18, 2009, we announced that we had entered into an asset purchase agreement with
Bio-Gal Ltd, a Gibraltar private company, for the rights to a use patent on
Recombinant Erythropoietin (“rHuEPO”) for the prolongation of multiple myeloma
patients' survival and improvement of their quality of life. In accordance with
the terms of the asset purchase agreement, we will to issue Bio-Gal Ltd.
ordinary shares representing just under 50% of the then current issued and
outstanding share capital of the Company. In addition, XTL will make milestone
payments of approximately $10 million in cash upon the successful completion a
Phase 2 clinical trial. The Company’s Board of Directors may, in its sole
discretion, issue additional ordinary shares to Bio-Gal Ltd in lieu of such
milestone payment. XTL is also obligated to pay 1% royalties on net sales of the
product. The closing of the transaction is subject to various conditions
including XTL’s and Bio-Gal’s shareholders’ approvals, as well as completion of
a financing. Closing is expected to take place in the second or third quarter of
2009.




Bicifadine
License




In
November 2008, we announced that the Phase 2b clinical trial failed to meet its
primary and secondary endpoints, and as a result we ceased development of
Bicifadine for diabetic neuropathic pain in 2008. In January 2007, XTL
Development had signed an agreement with DOV to in-license the worldwide rights
for Bicifadine, a serotonin and norepinephrine reuptake inhibitor (SNRI). XTL
Development was developing Bicifadine for the treatment of diabetic neuropathic
pain - a chronic condition resulting from damage to peripheral nerves. In
accordance with the terms of the license agreement, XTL Development paid an
initial up-front license fee of $7.5 million in cash in 2007. In addition, XTL
Development will make milestone payments of up to $126.5 million over the life
of the license, of which up to $115 million will be due upon or after regulatory
approval of the product. These milestone payments may be made in either cash
and/or our ordinary shares, at our election, with the exception of $5 million in
cash, 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
addition, XTL Development committed to pay a transaction advisory fee to certain
third party intermediaries in connection with the in-license of Bicifadine from
DOV. See “Item 5 – Operating and Financial Review and Prospects – Obligations
and Commitments.”




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.




54




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.




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 2008 is 27% (2007-29%). This rate is currently
scheduled to decrease as follows: in, 2009 - 26%, 2010 and after -
25%.




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.




55




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.




Under the
Israel Income Tax Law (Adjustments for Inflation) (Amendment No. 20), 2008
(hereinafter - the Amendment), the provisions of the Adjustments Law will no
longer apply to our company in the 2008 tax year and thereafter, and therefore,
the results of our company will be measured for tax purposes in nominal terms.
The amendment includes a number of transition provisions regarding the end of
application of the Adjustments Law, which applied to the company through the end
of the 2007 tax year.




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.




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.




56




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;




57




·
            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.




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.




58




·
            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 certain conditions are
    met.




Special
rules, described below, apply if we are a passive foreign investment
company.




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, 2008, 2005 and
2004. However, we believe that we were a PFIC for the taxable years ended
December 31, 2007 and 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 we may be
classified as a PFIC in the 2009 taxable year and possibly in subsequent years.
In addition, even though we may not be a PFIC in any one particular year, the
PFIC taint remains, and the special PFIC tax regime will continue to
apply.




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.




59




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 2007 and 2006 tax years. For this purpose, we
have made our 2007 and 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.




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.




60





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.





US Federal Income Tax
Consequences for XTL





As of
December 31, 2008, we had a “permanent establishment” in the US, which began in
2005 due to the residency of our former Chairman of the Board of Directors and
departing Chief Executive Officer in the US. This may continue into 2009 as
well. 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 we had income
attributable to the permanent establishment in the US, 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 qualified 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 any foreign taxes that may become due in the future against its US tax
liability in connection with income attributable to its US permanent
establishment and subject to both US and foreign income tax. As of the signing
date of our financial statements, there was a change in our Board and senior
management composition, such that the residence of our newly appointed Chairman
and co-Chief Executive Officer were outside of the United States, as of the end
of the first quarter of 2009.




As of
December 31, 2008, we did not earn any taxable income for US federal tax
purposes. If we eventually earn taxable income attributable to our US permanent
establishment, we would be able to utilize accumulated loss carryforwards to
offset such income only to the extent these carryforwards were attributable to
our US permanent establishment. As of December 31, 2008, we estimate that these
US net operating loss carryforwards are approximately $22.6 million. These
losses, subject to limitation in the case of shifts in ownership of the Company,
e.g., a planned offering or capital raise, resulting in a more than 50
percentage point change over a three year lookback period, can be carried
forward to offset future US taxable income and expire through 2028.




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.




61





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, 2008, our
portfolio of financial instruments consists of cash and cash equivalents and
restricted short-term bank deposits with multiple institutions. The average
duration of all of our investments held as of December 31, 2008, 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.




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.


62


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,
2008, an evaluation was performed under the supervision and with the
participation of our management of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on that evaluation, management,
including the chief executive officer and chief financial officer, concluded
that our disclosure controls and procedures as of December 31, 2008, were
effective.





(b) Internal controls over financial
reporting. Management’s responsibilities related to establishing and
maintaining effective disclosure controls and procedures include maintaining
effective internal controls over financial reporting that are designed to
produce reliable financial statements in accordance with accounting principles
generally accepted in the United States. As disclosed in the Report of
Management on Internal Control over Financial Reporting (“Report of Management”)
included in this Annual Report under Exhibit 99.1, management assessed the
Company’s internal control over financial reporting as of December 31, 2008, in
relation to criteria for effective internal control over financial reporting as
described in “Internal Control
— Integrated Framework”, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, management,
including the chief executive officer and chief financial officer, concluded the
Company’s internal control over financial reporting is effective as of December
31, 2008.





The
Report of Management is included in this Annual Report under Exhibit 99.1.
Kesselman & Kesselman, a member of PricewaterhouseCoopers International
Limited, the independent registered public accounting firm that audited the
financial statements included in this Annual Report, has issued an attestation
report of the Company’s effectiveness of internal control over financial
reporting as of December 31, 2008, included in the report of Kesselman &
Kesselman dated April 6, 2009, relating to the financial statements which appear
in this Annual Report on Form 20-F for the year ended December 31,
2008.





(c) Internal controls. There have
been no changes in our internal control over financial reporting that occurred
during the fiscal year ended December 31, 2008 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 Jaron Diament, chairperson 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., PO Box 370, Rehovot 76100,
Israel.




63





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. ("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, 2008 and 2007.





2008
                  
                  
                  2007(in thousands)Audit
      fees
                  
                  $
                  133
                  
                  
                  $
                  174Audit-related
      fees
                  
                  
                  61
                  
                  
                  
                  151Tax
      fees
                  
                  
                  3
                  
                  
                  
                  21Other
      fees
                  
                  
                  36
                  
                  
                  
                  21Total
                  
                  $
                  233
                  
                  
                  $
                  367





The audit
fees for the years ended December 31, 2008 and 2007, 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 for the years ended December 31, 2008 and 2007, respectively,
were for Sarbanes Oxley compliance and were also for assurance and related due
diligence services related to accounting consultations in connection with our
fundraising activities in 2008 and 2007, 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
for the years ended December 31, 2008 and 2007, 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.




Other
fees for the years ended December 31, 2008 and 2007 relate to expense
reimbursement, primarily travel and related.




For the
fiscal year ended December 31, 2008 and 2007, all of our audit-related fees, tax
fees and other fees were pre-approved by our audit committee.




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.




ITEM
16G. CORPORATE GOVERNANCE




There are
no significant differences between our corporate governance practices and those
required of a U.S. domestic issuer under the NASDAQ Stock Market Rules. See also
“Item 6. Directors, Senior Management and Employees – Board practices
–Compliance with NASDAQ Corporate Governance Requirements”


64


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-40 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^10.13
                    
                    1999
      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.†10.20
                    
                    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
                    
                    Securities
      Purchase Agreement, dated March 17, 2006, by and among XTL
      Biopharmaceuticals Ltd., and the purchasers named
  therein10.29
                    
                    Registration
      Rights Agreement, dated March 22, 2006, by and among XTL
      Biopharmaceuticals Ltd. and the purchasers named
therein10.30
                    
                    Form
      of Ordinary Share Purchase Warrants, dated March 22, 2006, issued to the
      purchasers under the Securities Purchase Agreement^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.*10.34
                    
                    Securities
      Purchase Agreement, dated October 25, 2007, by and among XTL
      Biopharmaceuticals Ltd., and the purchasers named
  therein10.35
                    
                    Registration
      Rights Agreement, dated October 25, 2007, by and among XTL
      Biopharmaceuticals Ltd. and the purchasers named
therein10.36
                    
                    License
      Agreement By and Between XTL Biopharmaceuticals Ltd. and Presidio
      Pharmaceuticals, Inc. dated March 19,
2008


65





10.37
                  
                  Amended
      and Restated License Agreement By and Between XTL Biopharmaceuticals Ltd.
      and Presidio Pharmaceuticals, Inc. dated August 4, 2008 >10.38
                  
                  Services
      Agreement, dated as of October 15, 2008, by and among XTL
      Biopharmaceuticals Ltd., Quoque Bioventures LLC and Antecip Bioventures
      LLC.+10.39
                  
                  Stock
      Appreciation Rights Agreement, dated as of October 15, 2008, by and among
      XTL Biopharmaceuticals Ltd., XTL Development Inc., and Quoque Bioventures
      LLC+10.40
                  
                  Registration
      Rights Agreement, dated as of October 15, 2008, by and among XTL
      Biopharmaceuticals Ltd., XTL Development Inc., and Quoque Bioventures
      LLC.+10.41
                  
                  Stock
      Appreciation Rights Agreement, dated as of October 15, 2008, by and among
      XTL Biopharmaceuticals Ltd., XTL Development Inc., and Antecip Bioventures
      LLC.+10.42
                  
                  Registration
      Rights Agreement, dated as of October 15, 2008, by and among XTL
      Biopharmaceuticals Ltd., XTL Development Inc., and Quoque Bioventures
      LLC.+10.43
                  
                  Asset
      Purchase Agreement, dated as of March 18, 2009 between XTL
      Biopharmaceuticals Ltd. and Bio-Gal Ltd. >10.44
                  
                  Research
      and License Agreement Between Yeda Research and Development Company Ltd.,
      Mor Research Applications Ltd., Biogal Ltd. (under its previous name
      Haverfield Ltd.) and Biogal Advanced Biotechnology Ltd. dated January 7,
      2002 >10.45
                  
                  Amendment
      to Research and License Agreement Between Yeda Research and Development
      Company Ltd., Mor Research Applications Ltd., Haverfield Ltd. and Biogal
      Advanced Biotechnology Ltd. effective as of April 1, 2008 >21.1
                  
                  List
      of Subsidiaries23.1
                  
                  Consent
      of Kesselman & Kesselman, a member of PricewaterhouseCoopers
      International Ltd, dated April 6, 200923.2
                  
                  Consent
      of Somekh Chaikin, a member firm of KPMG International, dated April 6,
      200931.1
                  
                  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
      April 6, 200931.2
                  
                  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
      April 6, 200932.1
                  
                  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 April 6, 200999.1
                  
                  Report
      of Management on Internal Control Over Financial Reporting dated April 6,
      2009


†
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.





*
Incorporated by reference from the annual report on Form 20-F filed by XTL
Biopharmaceuticals Ltd. with the Securities and Exchange Commission on March 23,
2007.





+
Incorporated by reference from the current annual report on Form 6-K filed by
XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on
October 24, 2008.




> Confidential
treatment has been requested with respect to the omitted portions of this
exhibit.




66


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)Signature:
                          /s/ Ron BentsurRon
      BentsurCo-Chief
      Executive
Officer


Date:
April 6, 2009


67




XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


2008
ANNUAL REPORT





TABLE OF
CONTENTS




PageReport
      of Independent Registered Public Accounting Firm
                  F-2Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  F-5Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006, and the period from March 9, 1993 to December 31,
    2008
                  F-6Consolidated
      Statements of Changes in Shareholders’ Equity for the years ended December
      31, 2008, 2007 and 2006, and the period from March 9, 1993 to December 31,
      2008
                  F-7Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006, and the period from March 9, 1993 to December 31,
    2008
                  F-11Notes
      to the Consolidated Financial Statements
                  F-13








Kesselman & Kesselman
                Certified Public Accountants
                Trade Tower, 25 Hamered Street
                Tel Aviv 68125 Israel
                P.O Box 452 Tel Aviv 61003
                Telephone +972-3-7954555
                Facsimile +972-3-7954556





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Shareholders of


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)




We have
completed integrated audits of XTL Biopharmaceuticals Ltd. and its subsidiaries
(collectively – the “Company”) consolidated financial statements and of its
internal control over financial reporting as of December 31, 2008, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Our opinions, based on our audits, are presented below.




Consolidated financial
statements




We have
audited the consolidated balance sheets of the Company as of December 31, 2008
and 2007 and the Consolidated Statements of Operations, Consolidated Statements
of Changes in Shareholders’ Equity and the Consolidated Statements of Cash Flows
for the years ended December 31, 2008, 2007 and 2006, and for the cumulative
period from January 1, 2001 to December 31, 2008. 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. 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 financial
statements based on our integrated audits.




We
conducted our audits in accordance with auditing 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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 provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of the Company at
December 31, 2008 and 2007, and the results of their operations, changes in
shareholders’ equity and their cash flows for each of the three years in the
period ended December 31, 2008 and for the cumulative period from March 9, 1993
to December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.





The
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in note 1a(3) to the financial statements, the
Company incurred significant losses from operations and has an accumulated
deficit at December 31, 2008 which raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1a(3). The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.





Internal control over financial
reporting




Also, in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).




F-2




The
Company’s Board of Directors and management are responsible for maintaining
effective internal control over financial reporting and management is
responsible for the assessment of the effectiveness of internal control over
financial reporting included in Report of the Company’s Management on Internal
Control over Financial Reporting appearing under Item 15. Our responsibility is
to express an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our integrated audit. We conducted our audit
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 effective internal control
over financial reporting was maintained in all material respects. Our audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
includes performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.




A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Tel-Aviv,
      Israel
              /s/
      Kesselman & KesselmanApril
      6, 2009
              Certified
      Public Accountants (Isr.)A
      member of PricewaterhouseCoopers
                International
      Limited


F-3




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-4


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Consolidated
Balance Sheets


(in
thousands of US dollars, except share amounts)





December
      312008
              
              
              2007AssetsCurrent
      assets:Cash
      and cash equivalents
              
              
              2,924
              
              
              
              2,377Short-term
      bank deposits
              
              
              —
              
              
              
              10,600Short-term
      employee severance pay funds
              
              
              40
              
              
              
              —Restricted
      short-term deposits
              
              
              71
              
              
              
              —Other
      receivables and prepaid expenses
              
              
              354
              
              
              
              924Total
      current assets
              
              
              3,389
              
              
              
              13,901Employee
      severance pay funds
              
              
              —
              
              
              
              48Restricted
      long-term deposits
              
              
              —
              
              
              
              61Property
      and equipment – net
              
              
              41
              
              
              
              106Intangible
      assets – net
              
              
              —
              
              
              
              11Total
      assets
              
              
              3,430
              
              
              
              14,127Liabilities
      and shareholders’ equityCurrent
      liabilities:Accounts
      payable
              
              
              416
              
              
              
              2,144Accrued
      expenses
              
              
              1,058
              
              
              
              1,665Liability
      in respect of employee severance obligations
              
              
              523
              
              
              
              —Other
      current liabilities (Note 2)
              
              
              7
              
              
              
              1,560Total
      current liabilities
              
              
              2,004
              
              
              
              5,369Liability
      in respect of employee severance obligations
              
              
              —
              
              
              
              194Commitments
      and contingencies (Note 8)Total
      liabilities
              
              
              2,004
              
              
              
              5,563Shareholders’
      equity:Ordinary
      shares of NIS 0.02 par value (500,000,000 authorized at December 31,
      2008 and 2007, 292,805,326 and 292,654,785 issued and outstanding, at
      December 31, 2008 and 2007, respectively)
              
              
              1,445
              
              
              
              1,444Additional
      paid in capital
              
              
              149,089
              
              
              
              146,982Deficit
      accumulated during the development stage
              
              
              (149,108
              )
              
              
              (139,862
              )Total
      shareholders’ equity
              
              
              1,426
              
              
              
              8,564Total
      liabilities and shareholders’ equity
              
              
              3,430
              
              
              
              14,127





/s/
      Amit Yonay
                  
                  /s/
      Ron BentsurAmit
      Yonay
                  
                  Ron
      BentsurChairman
      of the Board of Directors
                  
                  Co-Chief
      Executive Officer





Date of
approval of the financial statements: April 6, 2009.





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


F-5


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Consolidated
Statements of Operations


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





Period fromMarch 9, 1993+Year ended December 31
                    
                    
                    to December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2008Revenues:Reimbursed
      out-of-pocket expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,012License
                    
                    
                    5,940
                    
                    
                    
                    907
                    
                    
                    
                    454
                    
                    
                    
                    7,9405,940
                    
                    
                    
                    907
                    
                    
                    
                    454
                    
                    
                    
                    13,952Cost of
      revenues:Reimbursed
      out-of-pocket expenses
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,012License
      (with respect to royalties)
                    
                    
                    —
                    
                    
                    
                    110
                    
                    
                    
                    54
                    
                    
                    
                    250—
                    
                    
                    
                    110
                    
                    
                    
                    54
                    
                    
                    
                    6,262Gross
      margin
                    
                    
                    5,940
                    
                    
                    
                    797
                    
                    
                    
                    400
                    
                    
                    
                    7,690Research and development costs(includes $7,500 initial upfront license fee in 2007 and also
      includes non-cash stock option compensation of $78, $141, and $173, in
      2008, 2007 and 2006, respectively)
                    
                    
                    11,490
                    
                    
                    
                    18,998
                    
                    
                    
                    10,229
                    
                    
                    
                    123,607Less
      – participations
                    
                    
                    —
                    
                    
                    
                    56
                    
                    
                    
                    —
                    
                    
                    
                    11,00611,490
                    
                    
                    
                    18,942
                    
                    
                    
                    10,229
                    
                    
                    
                    112,601In-process
      research and development costs
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,783General and administrative
      expenses(includes non-cash stock option compensation of $1,735,
      $1,784, and $1,992, in 2008, 2007 and 2006, respectively)
                    
                    
                    5,143
                    
                    
                    
                    5,582
                    
                    
                    
                    5,576
                    
                    
                    
                    45,313Business development
      costs (includes stock appreciation rights compensation (income) of
      ($1,553) and $1,560 in 2008 and 2007, respectively, and also includes
      non-cash stock option compensation of $85, $22, and $15, in 2008, 2007 and
      2006, respectively)
                    
                    
                    (1,102
                    )
                    
                    
                    2,008
                    
                    
                    
                    641
                    
                    
                    
                    6,060Operating
      loss
                    
                    
                    9,591
                    
                    
                    
                    25,735
                    
                    
                    
                    16,046
                    
                    
                    
                    158,067Financial and other income,net
                    
                    
                    314
                    
                    
                    
                    590
                    
                    
                    
                    1,141
                    
                    
                    
                    9,188Loss
      before taxes on income
                    
                    
                    9,277
                    
                    
                    
                    25,145
                    
                    
                    
                    14,905
                    
                    
                    
                    148,879Taxes
      on income
                    
                    
                    (31
                    )
                    
                    
                    (206
                    )
                    
                    
                    227
                    
                    
                    
                    229Loss
      for the period
                    
                    
                    9,246
                    
                    
                    
                    24,939
                    
                    
                    
                    15,132
                    
                    
                    
                    149,108Basic
      and diluted loss per ordinary share
                    
                    $
                    0.03
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.08Weighted
      average number of shares used in computing basic and diluted loss per
      ordinary share
                    
                    
                    292,769,320
                    
                    
                    
                    228,492,818
                    
                    
                    
                    201,737,295





+   Incorporation
date, see Note 1a.





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


(in
thousands of US dollars, except share amounts)





Preferred shares
              
              
              Ordinary sharesNumber of
              
              
              
              
              
              Number ofshares
              
              
              Amount
              
              
              shares
              
              
              AmountChanges
      during the period from March 9, 1993 (date of incorporation) to
      December 31, 2005:Comprehensive
      loss - loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Employee
      stock options expenses
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Non-employee
      stock option expenses
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Exercise
      of share warrants in 2000
              
              
              —
              
              
              
              —
              
              
              
              1,499,980
              
              
              
              7Exercise
      of share warrants in 2001
              
              
              —
              
              
              
              —
              
              
              
              208,000
              
              
              
              1Exercise
      of employee stock options in 1999
              
              
              15,600
              
              
              
              **
              
              
              
              —
              
              
              
              —Exercise
      of employee stock options in 2000
              
              
              —
              
              
              
              —
              
              
              
              162,500
              
              
              
              1Exercise
      of employee stock options in 2001
              
              
              —
              
              
              
              —
              
              
              
              59,138
              
              
              
              **Exercise
      of employee stock options in 2002
              
              
              —
              
              
              
              —
              
              
              
              38,326
              
              
              
              **Exercise
      of employee stock options in 2003
              
              
              —
              
              
              
              —
              
              
              
              854,100
              
              
              
              4Exercise
      of employee stock options in 2004
              
              
              —
              
              
              
              —
              
              
              
              50,000
              
              
              
              **Exercise
      of employee stock options in 2005
              
              
              —
              
              
              
              —
              
              
              
              3,786,825
              
              
              
              17Issuance
      of share capital in 1993, net of $912 issuance expenses
              
              
              7,705,470
              
              
              
              45
              
              
              
              —
              
              
              
              —Issuance
      of share capital in 1994, net of $22 issuance expenses
              
              
              717,500
              
              
              
              5
              
              
              
              —
              
              
              
              —Issuance
      of share capital in 1996, net of $646 issuance expenses
              
              
              6,315,810
              
              
              
              49
              
              
              
              —
              
              
              
              —Issuance
      of share capital in 1998, net of $1,650 issuance expenses
              
              
              26,319,130
              
              
              
              139
              
              
              
              —
              
              
              
              —Issuance
      of share capital in 1999, net of $49 issuance expenses
              
              
              2,513,940
              
              
              
              12
              
              
              
              —
              
              
              
              —Issuance
      of share capital in 2000
              
              
              —
              
              
              
              —
              
              
              
              15,183,590
              
              
              
              75Issuance
      of shares in 2004, net of $2,426 issuance expenses
              
              
              —
              
              
              
              —
              
              
              
              56,009,732
              
              
              
              247Issuance
      of ordinary shares in 2005 in respect of license and purchases of assets
      (Note 3)
              
              
              —
              
              
              
              —
              
              
              
              1,314,420
              
              
              
              6Bonus
      shares
              
              
              7,156,660
              
              
              
              41
              
              
              
              19,519,720
              
              
              
              97Conversion
      of preferred shares into ordinary shares
              
              
              (50,744,110
              )
              
              
              (291
              )
              
              
              50,744,110
              
              
              
              291Receipts
      in respect of share warrants (expired in 1999)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Initial
      public offering (“IPO”) of the Company’s shares under a prospectus dated
      September 20, 2000, net of $5,199 issuance expenses
              
              
              —
              
              
              
              —
              
              
              
              23,750,000
              
              
              
              118Balance
      at December 31, 2005
              
              
              —
              
              
              
              —
              
              
              
              173,180,441
              
              
              
              864





**
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)





DeficitaccumulatedAdditional
                
                
                during thepaid-in
                
                
                developmentcapital
                
                
                stage
                
                
                TotalChanges during the period from March 9, 1993 (date of incorporation)to
                  December
      31, 2005 :Comprehensive
      loss - loss for the period
                
                
                —
                
                
                
                (99,791
                )
                
                
                (99,791
                )Employee
      stock options expenses
                
                
                3,095
                
                
                
                —
                
                
                
                3,095Non-employee
      stock option expenses
                
                
                183
                
                
                
                —
                
                
                
                183Exercise
      of share warrants in 2000
                
                
                340
                
                
                
                —
                
                
                
                347Exercise
      of share warrants in 2001
                
                
                74
                
                
                
                —
                
                
                
                75Exercise
      of employee stock options in 1999
                
                
                **
                
                
                
                —
                
                
                
                **Exercise
      of employee stock options in 2000
                
                
                —
                
                
                
                —
                
                
                
                1Exercise
      of employee stock options in 2001
                
                
                26
                
                
                
                —
                
                
                
                26Exercise
      of employee stock options in 2002
                
                
                20
                
                
                
                —
                
                
                
                20Exercise
      of employee stock options in 2003
                
                
                —
                
                
                
                —
                
                
                
                4Exercise
      of employee stock options in 2004
                
                
                19
                
                
                
                —
                
                
                
                19Exercise
      of employee stock options in 2005
                
                
                1,494
                
                
                
                —
                
                
                
                1,511Issuance
      of share capital in 1993, net  of $912 issuance
      expenses
                
                
                5,545
                
                
                
                —
                
                
                
                5,590Issuance
      of share capital in 1994, net of $22 issuance expenses
                
                
                2,103
                
                
                
                —
                
                
                
                2,108Issuance
      of share capital in 1996, net of $646 issuance expenses
                
                
                5,314
                
                
                
                —
                
                
                
                5,363Issuance
      of share capital in 1998, net  of $1,650 issuance
      expenses
                
                
                12,036
                
                
                
                —
                
                
                
                12,175Issuance
      of share capital in 1999, net of $49 issuance expenses
                
                
                1,189
                
                
                
                —
                
                
                
                1,201Issuance
      of share capital in 2000
                
                
                16,627
                
                
                
                —
                
                
                
                16,702Issuance
      of shares in 2004, net of $2,426 issuance expenses
                
                
                15,183
                
                
                
                —
                
                
                
                15,430Issuance
      of ordinary shares in 2005 in respect of license and purchases of assets
      (Note 3)
                
                
                1,385
                
                
                
                —
                
                
                
                1,391Bonus
      shares
                
                
                (138
                )
                
                
                —
                
                
                
                —Conversion
      of preferred shares into ordinary shares
                
                
                —
                
                
                
                —
                
                
                
                —Receipts
      in respect of share warrants (expired in 1999)
                
                
                89
                
                
                
                —
                
                
                
                89Initial
      public offering (“IPO”) of the Company’s shares under a prospectus dated
      September 20, 2000, net of $5,199 issuance expenses
                
                
                45,595
                
                
                
                —
                
                
                
                45,713Balance
      at December 31, 2005
                
                
                110,179
                
                
                
                (99,791
                )
                
                
                11,252





**
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)





Ordinary shares
              
              
              AdditionalNumber of
              
              
              
              
              
              paid-inshares
              
              
              Amount
              
              
              capitalBalance at December 31, 2005-brought
      forward
              
              
              173,180,441
              
              
              
              864
              
              
              
              110,179Changes
      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 $681 issuance expenses
              
              
              —
              
              
              
              —
              
              
              
              4,565Issuance
      of shares, net of $2,956 issuance expenses
              
              
              46,666,670
              
              
              
              207
              
              
              
              19,591Balance
      at December 31, 2006
              
              
              220,124,349
              
              
              
              1,072
              
              
              
              136,611Changes
      during 2007:Comprehensive
      loss - loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —Non-employee
      stock option compensation expenses
              
              
              —
              
              
              
              —
              
              
              
              13Employee
      stock option compensation expenses
              
              
              —
              
              
              
              —
              
              
              
              1,934Exercise
      of stock options
              
              
              45,416
              
              
              
              **
              
              
              
              4Issuance
      of shares, net of $993 issuance expenses
              
              
              72,485,020
              
              
              
              372
              
              
              
              8,420Balance
      at December 31, 2007
              
              
              292,654,785
              
              
              
              1,444
              
              
              
              146,982Changes
      during 2008:Comprehensive
      loss - loss for the period
              
              
              —
              
              
              
              —
              
              
              
              —Non-employee
      stock option compensation expenses
              
              
              —
              
              
              
              —
              
              
              
              13Employee
      stock option compensation expenses
              
              
              —
              
              
              
              —
              
              
              
              1,885Exercise
      of stock options
              
              
              150,541
              
              
              
              1
              
              
              
              32Return
      of stamp tax paid on 2004 share issuance
              
              
              —
              
              
              
              —
              
              
              
              177Balance
      at December 31, 2008
              
              
              292,805,326
              
              
              
              1,445
              
              
              
              149,089





**
              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 Changes in Shareholders' Equity (continued)


(in
thousands of US dollars, except share amounts)


Deficitaccumulatedduring thedevelopmentstage
                    
                    
                    TotalBalance at December 31, 2005-brought
      forward
                    
                    
                    (99,791
                    )
                    
                    
                    11,252Changes
      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 $681 issuance expenses
                    
                    
                    —
                    
                    
                    
                    4,565Issuance
      of shares, net of $2,956 issuance expenses
                    
                    
                    —
                    
                    
                    
                    19,798Balance
      at December 31, 2006
                    
                    
                    (114,923
                    )
                    
                    
                    22,760Changes
      during 2007:Comprehensive
      loss - loss for the period
                    
                    
                    (24,939
                    )
                    
                    
                    (24,939
                    )Non-employee
      stock option compensation expenses
                    
                    
                    —
                    
                    
                    
                    13Employee
      stock option compensation expenses
                    
                    
                    —
                    
                    
                    
                    1,934Exercise
      of stock options
                    
                    
                    —
                    
                    
                    
                    4Issuance
      of shares, net of $993 issuance expenses
                    
                    
                    —
                    
                    
                    
                    8,792Balance
      at December 31, 2007
                    
                    
                    (139,862
                    )
                    
                    
                    8,564Changes
      during 2008:Comprehensive
      loss - loss for the period
                    
                    
                    (9,246
                    )
                    
                    
                    (9,246
                    )Non-employee
      stock option compensation expenses
                    
                    
                    —
                    
                    
                    
                    13Employee
      stock option compensation expenses
                    
                    
                    —
                    
                    
                    
                    1,885Exercise
      of stock options
                    
                    
                    —
                    
                    
                    
                    33Return
      of stamp tax paid on 2004 share issuance
                    
                    
                    —
                    
                    
                    
                    177Balance
      at December 31, 2008
                    
                    
                    (149,108
                    )
                    
                    
                    1,426





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


(in
thousands of US dollars)





Period fromMarch 9, 1993 +Year ended December 31
                
                
                to December 31,2008
                
                
                2007
                
                
                2006
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Loss
      for the period
                
                
                (9,246
                )
                
                
                (24,939
                )
                
                
                (15,132
                )
                
                
                (149,108
                )Adjustments
      to reconcile loss to net cash used in operating
activities:Depreciation
      and amortization
                
                
                39
                
                
                
                108
                
                
                
                243
                
                
                
                3,219Linkage
      difference on restricted deposits
                
                
                —
                
                
                
                (2
                )
                
                
                (10
                )
                
                
                (9
                )Acquisition
      of in-process research and development
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,783Gain
      on disposal of property and equipment
                
                
                (288
                )
                
                
                (40
                )
                
                
                (57
                )
                
                
                (367
                )Increase
      (decrease) in liability in respect of employee severance
      obligations
                
                
                333
                
                
                
                (70
                )
                
                
                8
                
                
                
                1,499Impairment
      charges
                
                
                —
                
                
                
                105
                
                
                
                —
                
                
                
                485Gain
      from sales of investment securities
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (410
                )Other
      income related to exchange of shares
                
                
                —
                
                
                
                —
                
                
                
                (100
                )
                
                
                (100
                )Loss
      (gain) from trading securities
                
                
                —
                
                
                
                48
                
                
                
                (2
                )
                
                
                46Stock
      option based compensation expenses
                
                
                1,898
                
                
                
                1,947
                
                
                
                2,180
                
                
                
                9,303Stock
      appreciation rights compensation expense (income)
                
                
                (1,553
                )
                
                
                1,560
                
                
                
                —
                
                
                
                7Loss
      (gain) on amounts funded in respect of employee severance pay
      funds
                
                
                4
                
                
                
                (2
                )
                
                
                (1
                )
                
                
                (90
                )Deferred
      tax asset
                
                
                —
                
                
                
                48
                
                
                
                (48
                )
                
                
                —Changes
      in operating assets and liabilities:Decrease (increase) in other
      receivables and prepaid expenses
                
                
                570
                
                
                
                (315
                )
                
                
                (178
                )
                
                
                (354
                )Increase (decrease) in accounts
      payable and accrued expenses
                
                
                (2,335
                )
                
                
                892
                
                
                
                910
                
                
                
                1,474Decrease in deferred
      gain
                
                
                —
                
                
                
                (797
                )
                
                
                (400
                )
                
                
                —Net
      cash used in operating activities
                
                
                (10,578
                )
                
                
                (21,457
                )
                
                
                (12,587
                )
                
                
                (132,622
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Decrease
      (increase) in short-term bank deposits
                
                
                10,600
                
                
                
                10,245
                
                
                
                (20,845
                )
                
                
                —Decrease
      (increase) in restricted deposits
                
                
                (10
                )
                
                
                113
                
                
                
                (52
                )
                
                
                (62
                )Investment
      in investment securities
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (3,363
                )Proceeds
      from sales of investment securities
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,773Proceeds
      from sales of trading securities
                
                
                —
                
                
                
                54
                
                
                
                —
                
                
                
                54Employee
      severance pay funds
                
                
                —
                
                
                
                (17
                )
                
                
                (18
                )
                
                
                (926
                )Purchase
      of property and equipment
                
                
                (2
                )
                
                
                (65
                )
                
                
                (21
                )
                
                
                (4,109
                )Proceeds
      from disposals of property and equipment
                
                
                327
                
                
                
                308
                
                
                
                103
                
                
                
                887Acquisition
      in respect of license and purchase of assets
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (548
                )Net
      cash provided by (used in) investing activities
                
                
                10,915
                
                
                
                10,638
                
                
                
                (20,833
                )
                
                
                (4,294
                )





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


F-11


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Consolidated
Statements of Cash Flows (continued)


(in
thousands of US dollars)




Period fromMarch 9, 1993+Year ended December 31
                              
                              
                              to December 31,2008
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2008CASH
      FLOWS FROM FINANCING ACTIVITIES:Issuance
      of share capital and warrants - net of share issuance
    expenses
                              
                              
                              —
                              
                              
                              
                              8,792
                              
                              
                              
                              24,363
                              
                              
                              
                              137,526Return
      of stamp tax paid on 2004 share issuance
                              
                              
                              177
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              177Exercise
      of share warrants and stock options
                              
                              
                              33
                              
                              
                              
                              4
                              
                              
                              
                              97
                              
                              
                              
                              2,137Proceeds
      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
                              
                              
                              210
                              
                              
                              
                              8,796
                              
                              
                              
                              24,460
                              
                              
                              
                              139,840NET
      INCREASE (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
                              
                              
                              547
                              
                              
                              
                              (2,023
                              )
                              
                              
                              (8,960
                              )
                              
                              
                              2,924BALANCE
      OF CASH AND CASH EQUIVALENTSAT
      BEGINNING OF PERIOD
                              
                              
                              2,377
                              
                              
                              
                              4,400
                              
                              
                              
                              13,360
                              
                              
                              
                              —BALANCE
      OF CASH AND CASH EQUIVALENTSAT
      END OF PERIOD
                              
                              
                              2,924
                              
                              
                              
                              2,377
                              
                              
                              
                              4,400
                              
                              
                              
                              2,924Supplementary
      information on investing andfinancing
      activities not involving cash flows:Issuance
      of ordinary shares in respect of license and purchase of
      assets
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,391Conversion
      of convertible subordinated debenture into shares
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,700Supplemental
      disclosures of cash flow information:Income
      taxes paid, net of refunds
                              
                              
                              (260
                              )
                              
                              
                              165
                              
                              
                              
                              136
                              
                              
                              
                              362Interest
      paid
                              
                              
                              3
                              
                              
                              
                              4
                              
                              
                              
                              —
                              
                              
                              
                              357




+
                Incorporation
      date, see Note 1a.




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


F-12


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”) is a biopharmaceutical company
      engaged in the acquisition and development of therapeutics for the
      treatment of unmet medical needs. 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 has a wholly-owned subsidiary in the United States (“US”), 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. Unless the context requires otherwise, references to the
Company refer to XTL Biopharmaceuticals Ltd. and our wholly owned
subsidiaries.





In
December 2008, the Company implemented a restructuring plan following the
failure of its then lead clinical compound, Bicifadine, in a Phase 2b clinical
trial. The remaining employees of the Company were tasked with seeking potential
assets or a company to merge into XTL, or for assisting in the liquidation
and/or disposition of the Company's remaining assets (see also Note 10 –
Restructuring). As of December 31, 2008, the Company had no active development
activities, but held a residual interest in the DOS program that was
out-licensed to Presidio Pharmaceuticals, Inc. earlier in 2008.





In March
2009, the Company announced that it had entered into an asset purchase agreement
with Bio-Gal Ltd. (“Bio-Gal”), a Gibraltar private company, for the rights to
use a use patent on Recombinant Erythropoietin (“rHuEPO”) for the prolongation
of multiple myeloma patients' survival and improvement of their quality of life.
The closing of the transaction is subject to certain other closing conditions
including a financing (see also Note 13 – Subsequent
Events).





2)
            In
      2005, the Company licensed from VivoQuest Inc. (“VivoQuest”), a US
      privately-held company, 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
      (the “DOS program”). In addition, the Company also acquired from VivoQuest
      certain assets. In 2008, the Company out-licensed the rights to the DOS
      program to Presidio Pharmaceuticals, Inc. (“Presidio”), a US
      privately-held company.





In 2007,
XTL Development signed an agreement with DOV Pharmaceutical, Inc. (“DOV”) to
in-license the worldwide rights for Bicifadine, a serotonin and norepinephrine
reuptake inhibitor (SNRI) (the “DOV Transaction”) for the treatment of diabetic
neuropathic pain. In November 2008, the Company announced that the Phase 2b
clinical trial failed to meet its primary and secondary endpoints, and as a
result the Company ceased development of Bicifadine for the treatment of
diabetic neuropathic pain.





The
Company had licensed its former product candidate HepeX-B to Cubist
Pharmaceuticals, Inc. (hereinafter “Cubist”) during 2004. In July 2007, Cubist
terminated the license agreement.





3)
            Through
      December 31, 2008, the Company has incurred losses in an aggregate amount
      of US $149.1 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
      July 2009. Continuation of the Company’s current operations after
      utilizing its current cash reserves is dependent upon the generation of
      additional financial resources either through agreements for the
      commercialization of its remaining out-licensed program or through
      external financing. As noted above, in March 2009, the Company signed an
      agreement with Bio-Gal, subject to certain other closing conditions
      including a financing (see also Note 13 – Subsequent Events). These
      matters raise substantial doubt about the Company’s ability to continue as
      a going concern.


F-13


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





The
Company has not generated any revenues from its planned principal operations and
is dependent upon significant financing to provide the working capital necessary
to execute its business plan. There can be no assurance that the Company will be
able to obtain any such funding on terms that are acceptable to it, if at
all.





4)
            The
      consolidated financial statements are prepared in accordance with
      generally accepted accounting principles in the United States (“US
      GAAP”).





5)
            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 US dollar (“$” or “dollar”). 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 the consolidated
statements of 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 its
subsidiaries. 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. For the year ended December 31, 2007, the Company reported an impairment
charge in the amount of $105,000 (see Note 5).





e.
              Cash
      equivalents





Highly
liquid investments, including 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-14


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)




f.
            Marketable
      securities




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.” At December 31, 2006, the Company had trading
securities, which were 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 were included in “financial
and other income - net.” The Company disposed of these trading securities during
2007. As of December 31, 2008, the Company held no marketable
securities.





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 and is classified as “held-for-sale” 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 consisted of the assembled workforce in respect of the license and
purchase of certain assets from VivoQuest. The intangible assets were amortized
using the straight- line method over its estimated useful life of three years.
As of December 31, 2008, the intangible assets were fully
amortized.





i.
              Uncertainty
      in income taxes





On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”). FIN 48 clarifies the criteria for recognizing tax benefits related
to uncertain tax positions under SFAS No. 109, “Accounting for Income Taxes,”
(“SFAS 109”) and requires additional financial statement disclosure. FIN 48
prescribes a new recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also specifies how tax benefits related to
uncertain tax positions are to be recognized, measured, and derecognized in
financial statements, and provides transition and interim-period guidance, among
other provisions. The adoption of FIN 48 has had no impact on the Company’s
consolidated results of operations and financial position, since the Company has
had no uncertain tax positions that fall within FIN 48.





j.
              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 (see also Note 9 – Income
Taxes).


F-15


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





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.





Income
taxes which would apply in the event ofdisposal of
non-Israeli subsidiaries have not been taken intoaccount in
computing the deferred taxes, as it is the Company’s intention tohold, and not
to realize, these assets.





k.
              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 for development of approved projects were recognized as a reduction
of expense as the related costs are incurred.





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.





Effective
January 1, 2008, the Company adopted Emerging Issues Task Force (“EITF”) No.
07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services
Received for Use in Future Research and Development Activities” (“EITF 07-3”).
EITF 07-3 requires that nonrefundable advance payments for goods or services
that will be used or rendered for future research and development activities be
deferred and amortized over the period that the goods are delivered or the
related services are performed, subject to an assessment of recoverability. The
Company’s adoption of EITF 07-3 did not have a material effect on the Company’s
consolidated financial statements.





l.
                Revenue
      recognition





The
Company recognized the revenue from its licensing agreements with Presidio (see
Note 3) and Cubist (see Note 4) under the provisions of the Emerging Issues Task
Force(“EITF”) No.
00-21 “Revenue Arrangements with Multiple Deliverables” and Staff Accounting
Bulletin (“SAB”) No. 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 did not have the ability 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, and the Company
recognized each payment on the Cubist agreement ratably over the expected life
of the arrangement.





The
Company recognizes revenue on upfront payments and milestone payments over the
period of significant involvement under the related agreements unless the fee is
in exchange for products delivered or services rendered that represent the
culmination of a separate earnings process and no further performance obligation
exists under the contract. The Company may recognize milestone payments in
revenue upon the achievement of specified milestones if (1) the milestone
is substantive in nature, and the achievement of the milestone was not
reasonably assured at the inception of the agreement and (2) the fees are
nonrefundable.





In
addition, through 2005, Cubist had requested that the Company provide
development services to be reimbursed by Cubist. As required by EITF No. 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.





The
Company recognizes revenue net of any value added taxes.


F-16


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





m.
            Business
      development costs





Costs
associated with business development are comprised of costs related to seeking
new development collaborations and in-licensing opportunities and to partnering
activities for the Company’s drug programs (see also Note 2). Business
development costs are expensed as incurred.





n.
              Loss
      per share





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 anti-dilutive for all the years presented.
The total weighted average number of ordinary shares related to outstanding
options, warrants and stock appreciation rights excluded from the calculations
of diluted loss per share were 51,624,903, 48,634,047, and 34,921,782 for the
years ended December 31, 2008, 2007, and 2006, respectively. These figures
exclude performance condition or market-related condition options and stock
appreciation rights that had not vested during the applicable
periods.





o.
              Comprehensive
      loss





Comprehensive
loss, included in shareholders' equity, consists of the loss for each period
presented, and for years prior to 2005, also includes the net unrealized gains
or losses on available-for-sale investment securities.





p.
              Stock- based
      compensation





The
Company accounts for equity instruments issued to employees and directors in
accordance with SFAS No. 123R “Share - Based Payment” (“SFAS 123R”). 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.
SFAS 123R requires that such transactions be accounted for using the grant-date
fair value based method.





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. SFAS 123R eliminated 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”). 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 remained 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”).





Prior to
the adoption of SFAS 123R, 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.





Under
SFAS 123R, 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
Monte Carlo Simulation method. Such value is recognized as an expense using the
accelerated method under SFAS123R.  Both the Black-Scholes model and
the Monte Carlo simulation method take into account a number of valuation
parameters.


F-17


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





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.





The
Company accounts for equity instruments issued to third party service providers
(non-employees) in accordance with the fair value method prescribed by SFAS
123R, and the provisions of EITF 96-18. Unvested options are revalued at every
reporting period and amortized over the vesting period in order to determine the
compensation expense.





The
following table illustrates the effect on loss 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:





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





*
Incorporation date, see Note 1a.





In
January 2007, XTL Development committed to pay a transaction advisory fee to
third party intermediaries in regards to the DOV Transaction. The Company
accounts for the transaction advisory fee in the form of stock appreciation
rights (“SAR”) (see Note 2) in accordance with the provisions of EITF No.
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services”
(“EITF 96-18”) and by the provisions of EITF No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock” (“EITF 00-19”). In accordance with EITF 96-18 and EITF
00-19, the Company records SAR compensation expense based on the fair value of
the SAR at the reporting date, and the related liability has been recorded as
“other current liabilities” on its Consolidated Balance Sheet. The SAR
compensation will be revalued, based on the then current fair value, at each
subsequent reporting date, until payment of the stock appreciation rights have
been satisfied.





q.
              Fair value
      measurements





As of
January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”), and the related effective FSPs. SFAS 157 defines fair value,
establishes a framework for measuring fair value and enhances fair value
measurement disclosure. Under this standard, fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability (i.e.,
the “exit price”) in an orderly transaction between market participants at the
measurement date.





In
determining fair value, a company uses various valuation approaches, including
market, income and/or cost approaches. SFAS157 establishes a hierarchy for
inputs used in measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability developed based
on market data obtained from sources independent of the Company. Unobservable
inputs are inputs that reflect the Company’s assumptions about the assumptions
market participants would use in pricing the asset or liability developed based
on the best information available in the circumstances.


F-18


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





The
hierarchy is broken down into three levels based on the reliability of inputs
and disclosed in one of the following three categories:





Level 1
–
quoted prices in active markets for identical assets and
liabilities;





Level 2
–
inputs other than Level 1 quoted prices that are directly or indirectly
observable; and





Level 3
–
unobservable inputs that are not corroborated by market data.





The
adoption of SFAS 157 and the related FSP's did not have a material effect on the
Company’s consolidated financial position and operating results. As of December
31, 2008, the Company held cash and cash equivalents and current assets and
liabilities and therefore SFAS 157 had no impact on the Company's consolidated
balance sheet.





In
addition, effective January 1, 2008, the Company adopted  SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial Liabilities”,
 including an amendment of FASB Statement No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” which permits an entity to measure
certain financial assets and financial liabilities at fair value. The Company
has not elected the fair value option to any eligible assets or liabilities.
Thus, the adoption of this Statement did not affect the company's consolidated
financial position and operating results.





r.
              Recently
      issued accounting pronouncements in the United
  States





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141R”). SFAS 141R changes the accounting for business
combinations. Among the more significant changes, it expands the definition of a
business and a business combination, changes the measurement of acquirer shares
issued in consideration for a business combination, the recognition of
contingent consideration, the accounting for contingencies, the recognition of
capitalized in-process research and development, the accounting for
acquisition-related restructuring cost accruals, the treatment of acquisition
related transaction costs and the recognition of changes in the acquirer’s
income tax valuation allowance and income tax uncertainties. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early application is prohibited.  The Company will
be required to adopt SFAS 141R on January 1, 2009. The Company is currently
assessing the impact that SFAS 141R may have on its consolidated financial
statements in the event of a future acquisition.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. An ownership interest in subsidiaries held by parties other than the
parent should be presented in the consolidated statement of financial position
within equity, but separate from the parent's equity. SFAS 160 requires that
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary should be accounted for
similarly as equity transactions. When a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary should be
initially measured at fair value, with any gain or loss recognized in earnings.
SFAS 160 requires consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the noncontrolling interest. It
also requires disclosure, on the face of the consolidated income statement, of
the amounts of consolidated net income attributable to the parent and to the
noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. The statement shall be
applied prospectively as of the beginning of the fiscal year in which it is
initially applied, except for the presentation and disclosure requirement which
shall be applied retrospectively for all periods presented. The Company will be
required to adopt SFAS 160 on January 1, 2009. The Company does not expect the
adoption of this Statement to have a material effect on the Company’s
consolidated financial statements, since as of December 31, 2008, the Company
did not have any non-controlling interests.








F-19


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 1 - SIGNIFICANT ACCOUNTING
POLICIES(continued)





In
December 2007, the FASB ratified EITF Issue No. 07-1, “Accounting for
Collaborative Arrangements” (“EITF 07-1”).  EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years beginning
after December 15, 2008.  EITF 07-1 shall be applied using a modified
version of retrospective transition for those arrangements in place at the
effective date. Companies are required to report the effects of applying
EITF-07-1 as a change in accounting principle through retrospective application
to all prior periods presented for all arrangements existing as of the effective
date, unless it is impracticable to apply the effects of the change
retrospectively. The Company will be required to adopt EITF 07-1 on January 1,
2009. The Company does not expect the adoption of EITF 07-1 to have a material
effect on the Company’s consolidated financial statements.





In
February 2008, the FASB issued FSP FAS 157-2, “Effective Date of FASB Statement
No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 delays the effective date of SFAS 157
from 2008 to 2009 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually).





In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions on legal and contractual provisions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for
fiscal years beginning after December 15, 2008. The Company will be required to
adopt FSP 142-3 on January 1, 2009. The Company does not expect the adoption of
this FSP to have a material effect on its Consolidated Financial
Statements.





In
November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets,” (“EITF 08-7”). EITF 08-7 applies to defensive intangible
assets, which are acquired intangible assets that the acquirer does not intend
to actively use but intends to hold to prevent its competitors from obtaining
access to them. As these assets are separately identifiable, EITF 08-7 requires
an acquiring entity to account for defensive intangible assets as a separate
unit of accounting. A defensive intangible asset shall be assigned a useful life
in accordance with paragraph 11 of Statement 142. EITF 08-7 is effective for
intangible assets acquired on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier application is
not permitted. The Company will be required to adopt EITF 08-7 on January 1,
2009. The Company does not expect the adoption of EITF 08-7 to have a material
effect on its Consolidated Financial Statements.





NOTE
2 - BICIFADINE TRANSACTION





a.
            License
      Agreement with DOV Pharmaceutical,
Inc.





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





In
accordance with the terms of the license agreement, XTL Development paid an
initial up-front license fee of $7.5 million in cash, which was expensed in
“Research Development Costs” in the Company’s consolidated statements of
operations for the year ended December 31, 2007. In addition, XTL Development
would need to make milestone payments of up to $126.5 million over the life of
the license, of which up to $115 million will be due upon or after regulatory
approval of the product. These milestone payments may be made in either cash
and/or ordinary shares of the Company, at the Company’s election, with the
exception of $5 million in cash, 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
November 2008, the Company announced that the Phase 2b clinical trial failed to
meet its primary and secondary endpoints, and as a result the Company ceased
development of Bicifadine for the treatment of diabetic neuropathic
pain.


F-20


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 2 - BICIFADINE
TRANSACTION (continued)





b.
            Transaction
      Advisory Fee Structured in the Form of Stock Appreciation
      Rights





In
January 2007, XTL Development entered into a binding term sheet whereby it
committed to pay a transaction advisory fee to certain third party
intermediaries in connection with the DOV Transaction. In October 2008, the
Company and XTL Development entered into definitive agreements with the third
party intermediaries with respect to the binding term sheets signed in 2007 (the
“Definitive Agreements”). Under the terms of the Definitive Agreements, the
transaction advisory fee is structured in the form of Stock Appreciation Rights,
or SARs, in the amount equivalent to (i) 3% of the Company’s fully diluted
ordinary shares at the close of the transaction (representing 8,299,723 ordinary
shares), vesting immediately and exercisable one year after the close of the
transaction, and (ii) 7% of the Company’s fully diluted ordinary shares at the
close of the transaction (representing 19,366,019 ordinary shares), vesting on
the “Date of Milestone Event.” The “Date of Milestone Event” shall mean the
earlier to occur of (i) positive (i.e., a statistically significant difference
between the placebo arm and (x) at least one drug arm in the trial, or (y) the
combined drug arms in the trial in the aggregate) results from any
adequately-powered trial that is intended from its design to be submitted to the
US Food and Drug Administration as a pivotal trial of Bicifadine conducted by
the Company or XTL Development, or by a licensee thereof, which included the
recent Phase 2b randomized, double blind, placebo controlled study in diabetic
neuropathic pain (regardless of indication or whether the study is the first
such pivotal trial for Bicifadine conducted thereby), (ii) the filing of a New
Drug Application for Bicifadine by the Company or XTL Development, or by a
licensee thereof, or (iii) the consummation of a merger, acquisition or other
similar transaction with respect to the Company or XTL Development whereby
persons or entities holding a majority of the equity interests of the Company or
XTL Development prior to such merger, acquisition or similar transaction no
longer hold such a majority after the consummation of such merger, acquisition
or similar transaction. Payment of the SARs by XTL Development can be satisfied,
at the Company’s discretion, in cash and/or by issuance of the Company’s
registered ordinary shares. Upon the exercise of a SAR, the amount paid by XTL
Development will be an amount equal to the amount by which the fair market value
of one ordinary share on the exercise date exceeds the $0.34 grant price for
such SAR (fair market value equals (i) the greater of the closing price of an
American Depositary Receipt (“ADR”) on the exercise date, divided by ten, or
(ii) the preceding five day ADR closing price average, divided by ten). The SARs
expire on January 15, 2017. As of December 31, 2008, the 3% tranche was vested
and the 7% tranche was not vested. In the event of the termination of the
Company’s license agreement for the Bicifadine compounds, any unvested SARs will
expire.





In
accordance with EITF 96-18 and EITF 00-19, the Company records SAR compensation
expense which is included in Business Development Costs based on the fair value
of the SAR at the reporting date, and the related liability has been recorded as
“other current liabilities” on its Consolidated Balance Sheet. The SAR
compensation will be revalued, based on the then current fair value, at each
subsequent reporting date, until payment of the stock appreciation rights have
been satisfied (see Note 1p).





The
Company used a Black & Scholes model as the fair value pricing model for the
SAR as described above. The following assumptions under this method were used
for the valuation of the SAR as of December 31, 2008 and 2007: expected
volatility of: 87% and 59%; risk-free interest rates (in dollar terms) of 2.9%
and 4.2%; dividend yield of 0% and 0%; and remaining contractual life of 8 and 9
years, respectively.





NOTE
3 –VIVOQUEST AND PRESIDIO TRANSACTIONS





a.
            License
      and Asset Purchase Agreement with
Vivoquest





During
September 2005, the Company licensed from VivoQuest 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 (the Diversity Oriented Synthesis, or DOS program). 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. See also b. below, for the out-licensing of the DOS program in
2008.


F-21


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 3 - VIVOQUEST AND PRESIDIO
TRANSACTIONS(continued)





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;





(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 No. 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





For the
years ended December 31, 2008, 2007 and 2006, amortization of the assembled
workforce was $11,000, $14,000 and $14,000, respectively.  As of
December 31, 2008, the assembled workforce was fully amortized.





b.
            License
      Agreement with Presidio Pharmaceuticals,
Inc.





In March 2008, and as revised in August
2008, the Company signed an agreement to out-license the DOS program to
Presidio, a specialty pharmaceutical company focused on the discovery,
in-licensing, development and commercialization of novel therapeutics for viral
infections, including HIV and HCV. Under the terms of the license agreement, as
revised, Presidio becomes responsible for all further development and
commercialization activities and costs relating to the Company's DOS program.
The Company has no further development responsibilities relating to the DOS
Program. In accordance with the terms of the license agreement, the Company
received a $5.94 million, non-refundable, upfront payment in cash from Presidio
and will receive up to an additional $59 million upon reaching certaindevelopment and commercialization milestones. Presidio is also obligated
to pay the Company for any contingent milestone consideration owed to VivoQuest
pursuant to the XTL and VivoQuest license agreement. In addition, the Company
will receive a royalty on direct product sales by Presidio, and a percentage of
Presidio’s income if the DOS program is sublicensed by Presidio to a third
party. The $5.94 million payment from Presidio was recorded as license revenue
for the year ended December 31, 2008.


F-22




XTL BIOPHARMACEUTICALS
LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE
4 - LICENSE AGREEMENT WITH CUBIST





The
Company entered into a licensing agreement with Cubist in June 2004, and as
amended in August 2005, under which the Company granted Cubist an exclusive,
worldwide license to commercialize HepeX-B against hepatitis B. In July 2007,
Cubist terminated the HepeX-B license agreement with the Company.





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 $1
million collaboration support payment, out of which $907,000 and $454,000 was
recorded as revenue in the years ended December 31, 2007 and 2006, respectively.
The payments were recorded as deferred revenue upon receipt and were to be
amortized through 2008 or the date upon which regulatory approval was to be
reached, if earlier. The deferred revenue was subsequently fully recognized in
2007, with the termination of the agreement. In addition, the Company was
responsible for certain clinical and product development activities of HepeX-B
through August 2005, at the expense of Cubist. See Note 1L for the revenue
recognition treatment.





Under a
research and license agreement with Yeda Research and Development Company Ltd.
(“Yeda”) (see also Note 8a(2)), the Company paid Yeda $250,000 with respect to
the $1 million up-front fee received by the Company from Cubist in 2004, out of
which $110,000 and $54,000 was recorded as cost of revenues in 2007 and 2006,
respectively.





NOTE
5 - PROPERTY AND EQUIPMENT




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





December
      312008
                  
                  
                  2007($
      in thousands)Property
      and equipment Cost:Laboratory
      equipment
                  
                  
                  —
                  
                  
                  
                  119Computers
                  
                  
                  101
                  
                  
                  
                  220Leasehold
      improvements
                  
                  
                  141
                  
                  
                  
                  141Furniture
      and office equipment
                  
                  
                  61
                  
                  
                  
                  98303
                  
                  
                  
                  578Accumulated
      depreciation and amortization:Laboratory
      equipment
                  
                  
                  —
                  
                  
                  
                  115Computers
                  
                  
                  83
                  
                  
                  
                  172Leasehold
      improvements
                  
                  
                  141
                  
                  
                  
                  141Furniture
      and office equipment
                  
                  
                  38
                  
                  
                  
                  44262
                  
                  
                  
                  47241
                  
                  
                  
                  106


F-23


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 5 - PROPERTY AND
EQUIPMENT (continued)





b.
            In
      2007 the Company downsized its facilities in Rehovot, Israel, and
      determined to dispose of certain unused assets (primarily lab equipment).
      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 “research and development
      costs” in the amount of $105,000 for the year ended December 31, 2007. The
      Company completed the disposition of its assets held for sale during 2007,
      with $308,000 in proceeds from disposals of property and equipment in
      2007.  Subsequent to out-licensing the DOS program to Presidio,
      the Company completed the disposition of certain assets (primarily lab
      equipment) associated with the DOS program during 2008, with $327,000 in
      proceeds from disposals of those assets in 2008. As of December 31, 2008
      and 2007, there were no assets held for
sale.





c.
            Depreciation
      totaled $28,000, $94,000 and $229,000 for the years ended December 31,
      2008, 2007 and 2006, respectively.





NOTE
6 - 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, or subsequently on the date of employment, the Company
      entered into an agreement with each of its Israeli employees 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 and XTL Development





The
severance obligations of the Subsidiary are calculated based upon applicable
employment and related agreements.


F-24


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 6 -EMPLOYEE SEVERANCE OBLIGATIONS(continued)





c.
            Severance





Gain
(loss) on employee severance pay funds in respect of employee severance
obligations totaled ($4,000), $2,000 and $1,000 for the years ended December 31,
2008, 2007 and 2006, respectively. See also Note 10 – Restructuring, regarding
severance expenses incurred in 2008.





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





For the
years ended December 31, 2008, 2007 and 2006, the Company contributed to
insurance companies, in respect of its severance obligations to its Israeli
employees, $35,000, $57,000 and $82,000, respectively, and expects to
contribute, in 2009, $15,000 to insurance companies in respect of its severance
obligations to its Israeli employees.





NOTE
7 - SHAREHOLDERS’ EQUITY





a.
              Share
      Capital and Warrants





As of
December 31, 2008, American Depositary Receipts, representing the Company’s
ordinary shares (“ADRs”), trade on the NASDAQ Capital Market, with each ADR
representing ten ordinary shares. As of December 31, 2008, the Company’s
ordinary shares are also traded on the Tel Aviv Stock Exchange
(“TASE”).  On October 31, 2007, the Company's ordinary shares were
delisted from the London Stock Exchange (“LSE”), pursuant to the October 2, 2007
vote at the Company’s extraordinary general meeting of
shareholders.





On
October 2, 2007, the registered share capital of the Company was increased to
500,000,000 ordinary shares, NIS 0.02 nominal value each, from 300,000,000
ordinary shares, NIS 0.02 nominal value each, pursuant to the vote at the
Company’s extraordinary general meeting of shareholders.





On August
15, 2008, the Company filed a shelf registration statement on Form F-3 with the
SEC that was declared effective by the SEC on September 11, 2008. When legally
in effect, the registration statement provides for the offering of up to 80
million ordinary shares, which can be offered from time to time in response to
market conditions or other circumstances. Due to SEC rules, the Company may no
longer utilize the shelf registration statement described in this
paragraph.





On
November 20, 2007, the Company completed a private placement of 72,485,020
ordinary shares (equivalent to 7,248,502 ADRs) at $0.135 per ordinary share
(equivalent to $1.35 per ADR). The private placement was announced on October
25, 2007. Total proceeds to the Company from this private placement were
approximately $8.8 million, net of offering expenses of approximately $1.0
million.





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
(equivalent to $8.75 per ADR). The warrants expire on March 22, 2011. The
private placement closed on May 25, 2006. Total proceeds to the Company from
this private placement were approximately $24.4 million, net of offering
expenses of approximately $3.6 million.





As of
December 31, 2008, 2007 and 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 in 2006. 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.





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


F-25


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - SHAREHOLDERS’ EQUITY(continued)





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) on the LSE. Total proceeds to the Company from the transaction were
approximately $15.4 million, net of offering expenses of approximately $2.4
million.





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 on the
LSE 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.





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.





As of
December 31, 2008, the Company has granted to employees, directors and
consultants options that are outstanding to purchase up to 30,825,178 ordinary
shares, under the four remaining 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. All of the options granted under this plan
expired during the year ended December 31, 2008. 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 4,200 are outstanding and exercisable as of
December 31, 2008, 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. There are no options available for grant under this
plan.





(c)
            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 89,800 are outstanding and exercisable as of
December 31, 2008, 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. There are no options available for grant under this
plan.





(d)
            2001
      Share Option Plan


Under a
share option plan established in 2001 (“the 2001 Plan”), the Company has granted
options during 2001-2008, 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 7,446,177 are outstanding as of December 31, 2008. 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 vest over a three to four year period. As of December 31, 2008,
3,681,952 options are fully vested. As of December 31, 2008, the remaining
number of options available for future grants under the 2001 Plan is
2,872,273.


F-26


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - SHAREHOLDERS’ EQUITY(continued)





(e)
            Non-Plan
      Share Options


In
addition to the options granted under the Company’s share option plans, there
are 23,285,001 outstanding options, and 10,725,010 exercisable options, as of
December 31, 2008, which were granted by the Company to employees, directors and
consultants not under an option plan during 1997-2008. The options were granted
at an exercise price between $0.198 and $2.110 per ordinary share. The options
expire between 2009 and 2018.





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





Year ended December 312008
                  
                  
                  2007
                  
                  
                  2006Weighted
                  
                  
                  
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  Weightedaverage
                  
                  
                  
                  
                  
                  average
                  
                  
                  
                  
                  
                  averageexercise
                  
                  
                  
                  
                  
                  exercise
                  
                  
                  
                  
                  
                  exerciseNumber
                  
                  
                  price
                  
                  
                  Number
                  
                  
                  price
                  
                  
                  Number
                  
                  
                  price$
                  
                  
                  
                  
                  
                  
                  $
                  
                  
                  
                  
                  
                  
                  $Balance
      outstanding at beginning of year
                  
                  
                  28,434,947
                  
                  
                  
                  0.62
                  
                  
                  
                  32,475,238
                  
                  
                  
                  0.63
                  
                  
                  
                  24,268,975
                  
                  
                  
                  0.59Changes during the
      year:Granted1
                  
                  
                  9,565,300
                  
                  
                  
                  0.26
                  
                  
                  
                  9,620,000
                  
                  
                  
                  0.36
                  
                  
                  
                  11,740,000
                  
                  
                  
                  0.70Exercised2
                  
                  
                  (32,833
                  )
                  
                  
                  0.11
                  
                  
                  
                  (45,416
                  )
                  
                  
                  0.11
                  
                  
                  
                  (277,238
                  )
                  
                  
                  0.35Cancelled
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,250,000
                  )
                  
                  
                  0.35
                  
                  
                  
                  —
                  
                  
                  
                  —Reclassified3
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (125,000
                  )
                  
                  
                  0.25Expired
                  
                  
                  (4,523,822
                  )
                  
                  
                  0.62
                  
                  
                  
                  (3,947,536
                  )
                  
                  
                  0.70
                  
                  
                  
                  (2,074,505
                  )
                  
                  
                  0.60Forfeited
                  
                  
                  (3,259,441
                  )
                  
                  
                  0.41
                  
                  
                  
                  (417,339
                  )
                  
                  
                  0.60
                  
                  
                  
                  (1,056,994
                  )
                  
                  
                  0.57Balance
      outstanding at year end4
                  
                  
                  30,184,151
                  
                  
                  
                  0.53
                  
                  
                  
                  28,434,947
                  
                  
                  
                  0.62
                  
                  
                  
                  32,475,238
                  
                  
                  
                  0.63Balance
      exercisable at year end4
                  
                  
                  14,084,935
                  
                  
                  
                  0.59
                  
                  
                  
                  12,477,311
                  
                  
                  
                  0.72
                  
                  
                  
                  14,145,370
                  
                  
                  
                  0.72





1
            In
      2008, the exercise price of the options granted to employees and directors
      was equal to the share price on the grant date. In 2007, the exercise
      price of the options granted to employees and directors was greater than,
      equal to, or less than the share price on the grant date (see (b) and (c)
      below). In 2006, the exercise price of options granted to directors was
      equal to or less than the share price on the grant date (see (a) and (c)
      below).


2
            The
      total intrinsic value of options exercised during 2008, 2007 and 2006 was
      $12,000, $14,000 and $167,000,
respectively.


3
            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.


4
            The
      aggregate intrinsic value as of December 31, 2008 is $0 for outstanding
      options, and $0 for exercisable
options.





The
following table summarizes information about stock options granted to employees
and directors outstanding and exercisable at December 31,
2008:





Options outstanding
                    
                    
                    Options exercisableRange of
                      exercise prices
                    
                    Number
                      outstanding
                    
                    
                    Weighted-
                      average
                      remaining
                      contractual
                      life (years)
                    
                    
                    Weighted-
                      average
                      exercise
                      price
                    
                    
                    Number
                      exercisable
                    
                    
                    Weighted-
                      average
                      remaining
                      contractual
                      life (years)
                    
                    
                    Weighted-
                      average
                      exercise
                      price$0.100-$0.299
                    
                    
                    4,878,301
                    
                    
                    
                    9.5
                    
                    
                    $
                    0.206
                    
                    
                    
                    3,344,420
                    
                    
                    
                    9.4
                    
                    
                    $
                    0.198$0.300-$0.399
                    
                    
                    14,195,559
                    
                    
                    
                    1.7
                    
                    
                    $
                    0.347
                    
                    
                    
                    5,153,834
                    
                    
                    
                    1.5
                    
                    
                    $
                    0.349$0.400-$0.499
                    
                    
                    54,200
                    
                    
                    
                    2.3
                    
                    
                    $
                    0.497
                    
                    
                    
                    54,200
                    
                    
                    
                    2.3
                    
                    
                    $
                    0.497$0.500-$0.699
                    
                    
                    2,170,291
                    
                    
                    
                    2.7
                    
                    
                    $
                    0.600
                    
                    
                    
                    1,507,791
                    
                    
                    
                    2.1
                    
                    
                    $
                    0.600$0.700-$0.899
                    
                    
                    7,199,400
                    
                    
                    
                    7.1
                    
                    
                    $
                    0.776
                    
                    
                    
                    2,338,290
                    
                    
                    
                    6.8
                    
                    
                    $
                    0.781$0.900-$1.100
                    
                    
                    411,400
                    
                    
                    
                    0.9
                    
                    
                    $
                    0.968
                    
                    
                    
                    411,400
                    
                    
                    
                    0.9
                    
                    
                    $
                    0.968$2.110
                    
                    
                    1,275,000
                    
                    
                    
                    1.7
                    
                    
                    $
                    2.110
                    
                    
                    
                    1,275,000
                    
                    
                    
                    1.7
                    
                    
                    $
                    2.11030,184,151
                    
                    
                    
                    4.3
                    
                    
                    $
                    0.528
                    
                    
                    
                    14,084,935
                    
                    
                    
                    4.3
                    
                    
                    $
                    0.590


F-27


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - SHAREHOLDERS’ EQUITY
(continued)





(a)
            In
      December 2007, the Company canceled 9,250,000 options that were granted to
      its then Chairman of the Board (the “Chairman”) in August 2005, at an
      exercise price of $0.354 per share (the “Original Options”), and granted
      to the Chairman 9,250,000 options (the “New Options”) on the exact same
      remaining terms and conditions as the Original Options (including the
      remainder of the exercise period of the Original Options), with the
      exception of the exercise price, which is equal to $0.36 per option (a
      price greater than the closing price on the date of grant of the New
      Options). Since the exercise price of the New Options are greater than the
      exercise price of the Original Options and were granted on the exact same
      remaining terms and conditions, in accordance with SFAS 123R, no
      incremental compensation cost is recognized and the compensation cost
      continues to be recognized according to the Original Options as described
      below. As of December 31, 2008, 3,083,333 options that were granted to the
      Chairman are vested (the first market condition milestone was reached and
      therefore 1/3 of the options were vested). With the resignation of the
      Chairman in March 2009, the remaining unvested options were forfeited in
      2009 (see also Note 13 – Subsequent
Events).





In August
2005, the Company’s shareholders granted its Chairman the Original Options at an
exercise price equal to $0.354 per ordinary share (which was below market price
on the date of grant). These Original Options were 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 Original Options 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, 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 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. The compensation expenses are amortized using
the accelerated method.





In August
2005, the Company’s shareholders granted one of its non-executive directors,
options to purchase a total of 2,000,000 ordinary shares at an exercise price
equal to $0.354 per ordinary share (which was below market price on the date of
grant). These options were 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 were to  vest upon achievement of certain market
conditions (in each case, 1/3 of the options will vest upon achievement of a
certain market condition). As of December 31, 2008, 666,667 options that were
granted to one of the Company's non-executive directors were vested (the first
market condition milestone was reached and therefore 1/3 of the options were
vested). With the resignation of the non-executive director in November 2008,
the remaining unvested options were forfeited, and the remaining vested portion
expired in February 2009. The compensation expenses were amortized using the
accelerated method.





The
Company used 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 in 2005: 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 7 - SHAREHOLDERS’ EQUITY
(continued)





(b)
            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 Company’s ADRs on last trading day prior to official
      appointment, divided by ten; closing price of the Company’s ADRs on grant
      date, divided by ten 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, 2008, 2,138,890 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 accelerated method. Upon the imminent departure of the
      CEO, the unvested market and performance condition options shall be
      forfeited.





The
Company used a Monte Carlo Simulation method as the fair value option pricing
model for the market condition tranche of the CEO’s options grant in 2006, 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.





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





(c)
            In
      October 2008, the Company’s shareholders granted options to directors to
      purchase 4,700,000 ordinary shares, at an exercise price equal to $0.198
      per ordinary share (a price equal to the closing price of the Company’s
      ADRs on the grant date, divided by ten) of which 2,916,668 options were
      vested immediately on issuance. The options are exercisable for a period
      of ten years from date of grant.





In August
2008, the Company granted options to a non-executive director to purchase 20,000
ordinary shares, at an exercise price equal to $0.368 per ordinary share (a
price equal to the closing price of the Company’s ADRs on the grant date,
divided by ten). The options are exercisable for a period of ten years from date
of grant.





In July
2008, the Company’s shareholders granted options to a non-executive director to
purchase 300,000 ordinary shares, at an exercise price equal to $0.350 per
ordinary share (a price equal to the closing price of the Company’s ADRs on the
grant date, divided by ten). The options are exercisable for a period of ten
years from date of grant.





In March
2008, the Company’s board of directors granted options to an employee to
purchase a total of 250,000 ordinary shares at an exercise price equal to $0.319
per ordinary share (a price equal to the closing price of the Company’s ADRs on
the grant date, divided by ten). These options are exercisable for a period of
10 years from the date of issuance, and were granted under the Company’s 2001
Plan.


F-29


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - SHAREHOLDERS’ EQUITY
(continued)





In
January 2008, the Company’s board of directors granted options to its employees
to purchase a total of 4,295,300 ordinary shares at an exercise price equal to
$0.315 per ordinary share (a price equal to the closing price of the Company’s
ADRs on the grant date, divided by ten). 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
2007, the Company granted options to a non-executive director to purchase 20,000
ordinary shares, at an exercise price equal to $0.204 per ordinary share (a
price equal to the closing price of the Company’s ADRs on the grant date,
divided by ten). The options are exercisable for a period of ten years from date
of grant.





In April
2007, the Company’s board of directors granted options to its employees to
purchase a total of 350,000 ordinary shares at an exercise price equal to $0.374
per ordinary share (a price equal to the closing price of the Company’s ADRs on
the grant date, divided by ten). 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
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 of the
Company’s ADRs on the grant date, divided by ten). 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 of the Company’s ADRs on the grant date,
divided by ten). 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 of the Company’s ADRs on the grant date,
divided by ten). 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 of the
Company’s ADRs on the grant date, divided by ten). The options were exercisable
through December 31, 2007.





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 Stock Market, with the future
grants being contingent on such non-executive directors being members of the
Company's board of directors at such time.





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 during the years ended
December 31, 2008, 2007 and 2006: weighted average expected volatility of: 72%,
51% and 48%, respectively; weighted average risk-free interest rates (in dollar
terms) of 2.4%, 4.6% and 5.0%, respectively; dividend yield of 0%, respectively;
and weighted average expected life of 3.7, 6.0 and 5.7 years, respectively. The
weighted average fair value of options granted during the years ended December
31, 2008, 2007 and 2006 using the model was $0.13, $0.20 and $0.27 per option,
respectively.


F-30


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - SHAREHOLDERS’ EQUITY
(continued)




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).





(d)
            For
      the years ended December 31, 2008, 2007 and 2006, non-cash compensation
      relating to options granted to employees and directors was $1,885,000 (of
      which $78,000 was charged to research and development costs, $1,722,000
      was charged to general and administrative expenses and $85,000 was charged
      to business development costs), $1,934,000 (of which $134,000 was charged
      to research and development costs, $1,778,000 was charged to general and
      administrative expenses and $22,000 was charged to business development
      costs), and $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),
      respectively.  The total compensation costs related to nonvested
      awards not recognized as of December 31, 2008 was $2,469,000, and the
      weighted average period over which it is expected to be recognized is 1.3
      years.





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:





Year ended December 312008
                
                
                2007
                
                
                2006Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                Weightedaverage
                
                
                
                
                
                average
                
                
                
                
                
                averageexercise
                
                
                
                
                
                exercise
                
                
                
                
                
                exerciseNumber
                
                
                price
                
                
                Number
                
                
                price
                
                
                Number
                
                
                price$
                
                
                
                
                
                
                $
                
                
                
                
                
                
                $Balance
      outstanding at beginning of year
                
                
                732,708
                
                
                
                0.35
                
                
                
                760,000
                
                
                
                0.31
                
                
                
                525,000
                
                
                
                0.33Changes
      during the year:Granted1
                
                
                360,000
                
                
                
                0.31
                
                
                
                150,000
                
                
                
                0.37
                
                
                
                120,000
                
                
                
                0.29Exercised
                
                
                (117,708
                )
                
                
                0.25
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Reclassified2
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                125,000
                
                
                
                0.25Expired
                
                
                (150,000
                )
                
                
                0.20
                
                
                
                —
                
                
                
                —
                
                
                
                (10,000
                )
                
                
                0.50Forfeited
                
                
                (183,973
                )
                
                
                0.34
                
                
                
                (177,292
                )
                
                
                0.20
                
                
                
                —
                
                
                
                —Balance
      outstanding at year end3
                
                
                641,027
                
                
                
                0.38
                
                
                
                732,708
                
                
                
                0.35
                
                
                
                760,000
                
                
                
                0.31Balance
      exercisable at year end3
                
                
                416,027
                
                
                
                0.42
                
                
                
                507,708
                
                
                
                0.35
                
                
                
                448,334
                
                
                
                0.36




1
              The
      options exercise price was equal to the share price on the grant
      date.


2
            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.


3
            The
      aggregate intrinsic value as of December 31, 2008 is $0 for outstanding
      options, and $0 for exercisable
options.





The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2008:




Options outstanding
                  
                  
                  Options exercisableRange of
                    exercise prices
                  
                  Number
                    outstanding
                  
                  
                  Weighted-
                    average
                    remaining
                    contractual
                    life (years)
                  
                  
                  Weighted-
                    average
                    exercise
                    price
                  
                  
                  Number
                    exercisable
                  
                  
                  Weighted-
                    average
                    remaining
                    contractual
                    life (years)
                  
                  
                  Weighted-
                    average
                    exercise
                    price0.100-0.299
                  
                  
                  57,056
                  
                  
                  
                  1.0
                  
                  
                  $
                  0.286
                  
                  
                  
                  57,056
                  
                  
                  
                  1.0
                  
                  
                  $
                  0.2860.300-0.399
                  
                  
                  388,971
                  
                  
                  
                  7.2
                  
                  
                  $
                  0.322
                  
                  
                  
                  163,971
                  
                  
                  
                  4.6
                  
                  
                  $
                  0.3310.500-0.699
                  
                  
                  195,000
                  
                  
                  
                  3.0
                  
                  
                  $
                  0.538
                  
                  
                  
                  195,000
                  
                  
                  
                  3.0
                  
                  
                  $
                  0.538641,027
                  
                  
                  
                  5.4
                  
                  
                  $
                  0.384
                  
                  
                  
                  416,027
                  
                  
                  
                  3.4
                  
                  
                  $
                  0.422


F-31


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 7 - 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 2008:
      weighted average expected volatility of 67%; weighted average risk-free
      interest rates (in dollar terms) of 2.8%, dividend yield of 0%, and
      weighted average expected life of 3.8 years. The weighted average fair
      value of options granted during the year using the model was $0.16 per
      option. The following assumptions under this method on grant date were
      used in 2007: weighted average expected volatility of 51%; weighted
      average risk-free interest rates (in dollar terms) of 4.5%; dividend yield
      of 0%; and weighted average expected life of 3.0 years. The weighted
      average fair value of options granted during the year using the model was
      $0.14 per option. 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 weighted 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.





(b)
            For
      the years ended December 31, 2008, 2007 and 2006, non-cash compensation
      relating to options granted to consultants were $13,000 (of which $0 was
      charged to research and development costs, $13,000 was charged to general
      and administrative expenses and $0 was charged to business development
      costs), $13,000 (of which $7,000 was charged to research and development
      costs, $6,000 was charged to general and administrative expenses and $0
      was charged to business development costs), and $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), respectively.  The total compensation costs
      related to nonvested awards not recognized as of December 31, 2008 was $0,
      and the weighted average period over which it is expected to be recognized
      is 0 years.





4)
            In
      regards to the transaction advisory fee in the form of stock appreciation
      rights see Note 2b.





NOTE
8 - COMMITMENTS AND CONTINGENCIES





a.
            Royalty
      and Contingent Milestone Payments





1)
            The
      Company has licensed the patent rights to its drug candidates from others.
      These license agreements require the Company to make contingent milestone
      payments to its licensors. In addition, under these agreements, the
      Company must pay royalties on sales of products resulting from licensed
      technologies.





In
accordance with the terms of the license agreement with DOV, 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 to DOV on net sales of Bicifadine. In November
2008, the Company announced that the Phase 2b clinical trial failed to meet its
primary and secondary endpoints, and as a result the Company ceased development
of Bicifadine.





XTL
Development is also committed to pay a transaction advisory fee to third party
intermediaries in regards to the DOV Transaction (see also Note
2).


The
VivoQuest license agreement provides for 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 the
Company's election. In addition, the license agreement requires that we make
royalty payments on product sales. Pursuant to the Company's out-licensing
agreement, Presidio is obligated to pay the Company for any contingent milestone
consideration owed to VivoQuest pursuant to the XTL and VivoQuest license
agreement (see also Note 3).





F-32


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 8 - COMMITMENTS AND
CONTINGENCIES (continued)





2)
            On
      December 31, 2007, the Company and Yeda mutually terminated the Research
      and License agreement dated April 7, 1993, as amended. As of December 31,
      2007, and subject to certain closing conditions, all rights in and to the
      licensed technology and patents revert to Yeda (collectively the “Yeda
      Technology”).





In March
2008, all of the closing conditions related to the termination of the Research
and License agreement dated April 7, 1993, as amended between Yeda and the
Company were completed. As the per termination agreement, Yeda assumed all of
the Company's contingent liabilities related to the Office of the Chief
Scientist of the Government of Israel (the “OCS”). As of December 31, 2007, the
maximum amount of the contingent liability in respect of royalties related to
those projects to the OCS was $17,426,000. As of December 31, 2008, there were
no further contingent liability owed to the OCS.





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 $440,000 in 2009 (See also Note 13 – Subsequent
      Events).





To secure
the lease agreement in Israel, the Company provided a bank guarantee in the
amount of $68,000 linked to the Israeli Consumer Price Index (“CPI”). As of
December 31, 2008, the guarantee is secured by a pledge on restricted deposits
amounting to $71,000 (December 31, 2007 - $61,000), renewing automatically on a
quarterly and semi-annual basis at a weighted average rate of 2.1%, which is
included in the balance sheet as restricted deposits.





Rental
expenses for the years ended December 31, 2008, 2007 and 2006 were $500,000,
$607,000 and $755,000, respectively.





2)
            The
      Company leases two vehicles under the terms of certain operating lease
      agreements that expire in 2010, aggregating $24,000 ($17,000 in 2009 and
      $7,000 in 2010). Vehicle lease expense for the years ended December 31,
      2008, 2007 and 2006 were $26,000, $15,000 and $41,000,
      respectively.





NOTE
9 - 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”).  Through December 31, 2007, the Company was taxed under this
law. Results for tax purposes were measured on a real basis and were 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 1j).





Under the
Israel Income Tax Law (Adjustments for Inflation) (Amendment No. 20), 2008
(hereinafter - the Amendment), the provisions of the Adjustments Law will no
longer apply to the Company in the 2008 tax year and thereafter, and therefore,
the results of the Company will be measured for tax purposes in nominal terms.
The amendment includes a number of transition provisions regarding the end of
application of the Adjustments Law, which applied to the company through the end
of the 2007 tax year.


F-33


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 9 - INCOME TAXES(continued)





Tax
rates in Israel applicable to income





For the
years ended December 31, 2008, 2007, and 2006, the corporate rates were 27%, 29%
and 31%, respectively. The corporate tax rates thereafter are as follows: 2009 –
26% and for 2010 and thereafter – 25%.





US
Federal Income Tax Consequences





As of
December 31, 2008, the Company had a “permanent establishment” in the US, which
began in 2005 due to the residency of the former Chairman of the Board
of Directors and the Chief Executive Officer in the US.  Any income
attributable to such US permanent establishment would be subject to US corporate
income tax in the same manner as if the Company was 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 the Company had income attributable to the permanent establishment
in the US, 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 any foreign taxes that may become due in the future against its US tax
liability in connection with income attributable to its US permanent
establishment and subject to both US and foreign income tax. As of the signing
date of the these financial statements, there was a change in the Company’s
Board and senior management composition, such that the residence of the
Company’s newly appointed Chairman of the Board and its Co-Chief Executive
Officer were outside of the United States as of the end of the first quarter of
2009.





As of
December 31, 2008, the Company did not earn any taxable income for US federal
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, subject
to limitation in the case of shifts in ownership of the Company, e.g. a planned
offering or capital raise, resulting in more than 50 percentage point change
over a three year lookback period.  For the year ended December 31,
2008, the Company was subject to a State franchise tax of $10,000 in regards to
the permanent establishment.





b.
            The
      Subsidiary and XTL Development





The
Subsidiary and XTL Development are each 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, 2008 are approximately $153.5 million, 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. However, any
income attributable to the “permanent establishment” in the US would be subject
to US corporate income tax and, possibly, branch profit taxes.  If
this is the case, the Company may not be able to utilize any of the accumulated
Israeli loss carryforwards as of December 31, 2008, since these losses were not
attributable to the US permanent establishment.


F-34


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 9 - INCOME TAXES(continued)





2)
            Subsidiary
      and XTL Development





The
Subsidiary and XTL Development are taxed under applicable US tax laws. The
Subsidiary is remunerated under a cost plus agreement with the Company. The
Subsidiary and XTL Development will file consolidated returns for US federal
income tax purposes. Because the group consisting of the Subsidiary and XTL
Development has incurred net operating losses for 2008, the group will file a
carryback claim for those losses to the year ended December 31, 2004 in
order to receive a refund for US federal income taxes paid for that year.
Similarly, because the group consisting of the Subsidiary and XTL Development
had incurred net operating losses for 2007, the group filed a carryback claim
for those losses to the years ended December 31, 2006 and 2005, and in 2008
received a refund for US federal income taxes paid for those years. These
refunds are reflected on the Company’s consolidated balance sheet in “other
receivables and prepaid expenses.”





Prior to
2007, the Subsidiary had incurred taxable income and recorded tax expenses.
As of December 31, 2008, Subsidiary and XTL Development have consolidated net
operating losses of $13.4 million, expiring through 2028.





The
following tables summarize the taxes on income for the Company and its
subsidiaries for 2008, 2007 and 2006:





2008
                                
                                
                                2007
                                
                                
                                2006($ in thousands)
                                
                                
                                ($ in thousands)
                                
                                
                                ($ in thousands)Company
                                
                                
                                Subsidiaries1
                                
                                
                                Company
                                
                                
                                Subsidiaries1
                                
                                
                                Company
                                
                                
                                Subsidiaries1Net
      loss (income) before income taxes
                                
                                
                                514
                                
                                
                                
                                8,763
                                
                                
                                
                                10,354
                                
                                
                                
                                14,791
                                
                                
                                
                                15,363
                                
                                
                                
                                (458
                                )Income
      taxes (benefit)
                                
                                
                                10
                                
                                
                                
                                (41
                                )
                                
                                
                                —
                                
                                
                                
                                (206
                                )
                                
                                
                                —
                                
                                
                                
                                227Net
      loss (income) for the year
                                
                                
                                524
                                
                                
                                
                                8,722
                                
                                
                                
                                10,354
                                
                                
                                
                                14,585
                                
                                
                                
                                15,363
                                
                                
                                
                                (231
                                )





1Subsidaries
      include Subsidiary and XTL Development for the years ended December 31,
      2008 and 2007, and includes Subsidiary for the year ended December 31,
      2006.





2008
                
                
                2007
                
                
                2006Subsidiaries2
                
                ($
      in thousands)Income
      taxes for the reported year:Current
                
                
                (41
                )
                
                
                (254
                )
                
                
                275Deferred
      (in respect of the reporting period)
                
                
                —
                
                
                
                48
                
                
                
                (48
                )(41
                )
                
                
                (206
                )
                
                
                227
 2Subsidiaries
include Subsidiary and XTL Development for the years ended December 31, 2008 and
2007, and includes Subsidiary for the year ended December 31, 2006.


d.
            Deferred
      income taxes





The
composition of the deferred tax assets at balance sheets dates are as
follows:





December 31, 2008
                  
                  
                  December 31, 2007($ in thousands)Deferred
      tax assets:In
      respect of tax loss carryforwards
                  
                  
                  43,818
                  
                  
                  
                  38,003Research
      and development
                  
                  
                  749
                  
                  
                  
                  2,206Intangible
      assets due to different amortization methods
                  
                  
                  2,778
                  
                  
                  
                  2,890Stock
      appreciation rights compensation
                  
                  
                  3
                  
                  
                  
                  624Property
      and equipment
                  
                  
                  56
                  
                  
                  
                  63Employee
      related provisions
                  
                  
                  889
                  
                  
                  
                  380Other
      temporary differences
                  
                  
                  8
                  
                  
                  
                  3Net
      deferred tax asset, excluding valuation allowance
                  
                  
                  48,301
                  
                  
                  
                  44,169Less
      valuation allowance
                  
                  
                  (48,301
                  )
                  
                  
                  (44,169
                  )Net
      deferred tax assets
                  
                  $
                  —
                  
                  
                  $
                  —


F-35


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 9 - INCOME TAXES(continued)





The
      changes in the valuation allowances for the years ended December 31, 2008,
      2007 and 2006 are as follows:





2008
                  
                  
                  2007
                  
                  
                  2006($
      in thousands)Balance
      at the beginning of the year
                  
                  
                  44,169
                  
                  
                  
                  32,700
                  
                  
                  
                  25,239Change
      during the year
                  
                  
                  4,132
                  
                  
                  
                  11,469
                  
                  
                  
                  7,461Balance
      at end of year
                  
                  
                  48,301
                  
                  
                  
                  44,169
                  
                  
                  
                  32,700





e.
            Reconciliation
      of the theoretical tax expense to actual
expense





Following
      is a reconciliation of the theoretical tax expense, assuming all income is
      taxed at the regular tax rates applicable to companies in Israel (see a.
      above), and the actual tax expense:





2008
                
                
                2007
                
                
                2006($
      in thousands)Loss
      before income taxes as reported in the consolidated statement of
      operations
                
                
                9,277
                
                
                
                25,145
                
                
                
                14,905Computed
      “expected” tax benefit
                
                
                (2,505
                )
                
                
                (7,292
                )
                
                
                (4,621
                )Increase
      (decrease) in income taxes resulting from:Change
      in the balance of the valuation allowance for deferred tax assets
      allocated to income tax expense (mainly in respect of carryforward tax
      losses)
                
                
                4,132
                
                
                
                11,469
                
                
                
                7,461Permanent
      differences
                
                
                405
                
                
                
                761
                
                
                
                1,284Differences
      in the basis of measurement for tax purposes (Israeli CPI) and for
      financial reporting purposes (dollar) and other
                
                
                (1,450
                )
                
                
                (4,404
                )
                
                
                (3,911
                )Effect
      of foreign operations
                
                
                (613
                )
                
                
                (740
                )
                
                
                14Income
      taxes as reported
                
                
                (31
                )
                
                
                (206
                )
                
                
                227





f.
            Tax
      assessments





1)
            Income
      taxes





The
Company files income tax returns in Israel. The Company received tax assessments
for the years up to and including the 1998 tax year. The Company’s tax returns
until 2004 are considered final.





The
Company and Subsidiary have filed income tax returns in the US federal
jurisdiction and in various states. The Company files US income tax returns
since it had a permanent establishment in the US, which began in 2005. For
Subsidiary tax returns, the general three year statute of limitations has
expired for years prior to and including 2004. Tax years 2005 through 2008 are
subject to examination by the federal and state taxing authorities,
respectively. There are no income tax examinations currently in process, and the
Company and Subsidiary have not been audited for tax purposes since
incorporation.





2)
            Uncertain
      tax positions





As noted
in Note 1i above, the Company adopted the provisions of FIN 48 on January 1,
2007. The adoption of FIN 48 has had no impact on the Company’s consolidated
results of operations and financial position, since the Company has had no
uncertain tax positions that fall within FIN 48.





3)
            Withholding
      taxes





In 2006,
the Company paid $48,000 to settle an assessment received from the Israeli tax
authorities in 2005 related to withholding taxes for the periods of
2001-2004.


F-36


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE
10 - RESTRUCTURING





During
the first half of 2008, the Company terminated the employment of 11 research and
development employees in the DOS program, which was out-licensed to Presidio in
2008. As a result, the Company incurred a charge of $191,000 in research and
development during 2008 related to employee dismissal costs, all of which were
paid in 2008.





In
December 2008, the Company implemented a restructuring plan following the
failure of the Bicifadine Phase 2b clinical trial. The Company notified nine of
its remaining employees (six in research and development, two in general and
administrative and one in business development) that they will be terminated,
representing approximately 75% of its remaining workforce. In addition, in
December 2008, the Company announced that its Chief Executive Officer would be
departing the Company in 2009. The remaining employees were tasked with seeking
potential assets or a company to merge into XTL, or for assisting in the
liquidation and/or disposition of XTL’s remaining assets. As a result, the
Company took a charge of $420,000 in 2008 relating to employee dismissal costs,
$110,000 of which was included in research and development costs, $305,000 of
which was included in general and administrative expenses and $5,000 was
included in business development expenses.





As of
December 31, 2008, 5 employees left the Company under the 2008 Restructuring and
$0 of dismissal costs were paid. As of December 31, 2008 approximately $420,000
in employee dismissal obligations were included in liability in respect to
employee severance obligations, which were all subsequently paid in the first
quarter of 2009.





NOTE
11 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION





a.
            Short-term
      bank deposits





There
were no short-term bank deposits as of December 31, 2008. For the year ended
December 31, 2007, the short-term deposits were denominated in dollars and bore
a weighted average annual interest rate of 4.89%.





b.
            Other
      receivables and prepaid expenses:




December
      312008
                  
                  
                  2007($
      in thousands)Prepaid
      expenses (research and development)
                  
                  
                  73
                  
                  
                  
                  440Prepaid
      expenses (general and administrative)
                  
                  
                  138
                  
                  
                  
                  113Value
      added tax authorities
                  
                  
                  69
                  
                  
                  
                  21Interest
      receivable
                  
                  
                  **
                  
                  
                  
                  61Income
      taxes receivable
                  
                  
                  49
                  
                  
                  
                  270Other
                  
                  
                  25
                  
                  
                  
                  19354
                  
                  
                  
                  924




**
Represents an amount less than $1,000





c.
            Accrued
      expenses:





Accrued
      expenses
                  
                  
                  899
                  
                  
                  
                  1,116Accrued
      compensation and related liabilities
                  
                  
                  159
                  
                  
                  
                  5491,058
                  
                  
                  
                  1,665


F-37


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 11 - SUPPLEMENTARY FINANCIAL
STATEMENT INFORMATION (continued)





d.
            Financial
      and other income - net




March 9, 1993Year ended December 31
                
                
                to December 31,2008
                
                
                2007
                
                
                2006
                
                
                2008($ in thousands)Interest
      income
                
                
                317
                
                
                
                668
                
                
                
                1,058
                
                
                
                11,271Interest
      expense
                
                
                (3
                )
                
                
                (4
                )
                
                
                —
                
                
                
                (381
                )Foreign
      exchange differences-gain (loss)
                
                
                14
                
                
                
                (10
                )
                
                
                2
                
                
                
                (1,751
                )Gain
      (loss) from trading securities*
                
                
                —
                
                
                
                (48
                )
                
                
                2
                
                
                
                (47
                )Other
      income*
                
                
                —
                
                
                
                —
                
                
                
                100
                
                
                
                100Other
      expense
                
                
                (14
                )
                
                
                (16
                )
                
                
                (21
                )
                
                
                (4
                )314
                
                
                
                590
                
                
                
                1,141
                
                
                
                9,188
  * 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 was recorded on the Company's balance sheet under
trading securities. During 2007, the Company disposed of the Oragenics
stock.





NOTE
12 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT





a.
            Linkage
      terms of balances in non-dollars
currency





1)
              As
      follows:


December 31, 2008Israeli currency
                    
                    
                    OtherUnlinked($ in thousands)Assets
                    
                    
                    97
                    
                    
                    
                    2Liabilities
                    
                    
                    161
                    
                    
                    
                    2





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 312008
                  
                  
                  2007
                  
                  
                  2006Devaluation
      (evaluation) of the Israeli currency against the dollar
                  
                  
                  (1.1
                  )%
                  
                  
                  (9.0
                  )%
                  
                  
                  (8.2
                  )%Changes
      in the Israeli CPI
                  
                  
                  3.8
                  %
                  
                  
                  3.4
                  %
                  
                  
                  (0.1
                  )%Exchange
      rate of one dollar (at end of year)
                  
                  NIS
      3.802
                  
                  
                  NIS
      3.846
                  
                  
                  NIS
      4.225





b.
            Concentration
      of credit risks





Most of
the Company’s cash and cash equivalents and bank deposits at the balance sheet
dates were deposited with Israel or Israel-related 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
13 - SUBSEQUENT EVENTS





On April
6, 2009, the Company's wholly owned subsidiary, XTL Biopharmaceuticals, Inc.,
delivered a termination notice to Suga Development, L.L.C., with respect to the
leasing of approximately 33,200 sq. ft. located at 711 Executive Boulevard,
Suite Q, Valley Cottage, New York 10989.  The Company believes that
the notice provided a clear indication of the termination of XTL
Biopharmaceuticals, Inc.’s  obligations under the lease, effective as
of the date of the notice.  In addition, XTL Biopharmaceuticals, Inc.
informed Suga Development that upon receipt of the notice, they should use their
best effort to re-rent the premises and to mitigate any damages. There can be no
assurance that the landlord will not dispute the termination of the lease, and
attempt to hold XTL Biopharmaceuticals, Inc. responsible for the full amount of
all future unpaid lease payments, approximately $335,000.





On March
18, 2009, the Company announced that it had entered into an asset purchase
agreement with Bio-Gal Ltd, a Gibraltar private company, for the rights to a use
patent on Recombinant Erythropoietin (“rHuEPO”) for the prolongation of multiple
myeloma patients' survival and improvement of  their quality of life.
In accordance with the terms of the asset purchase agreement, XTL will issue
Bio-Gal Ltd. ordinary shares representing just under 50% of the then current
issued and outstanding share capital of the Company. In addition, XTL will make
milestone payments of approximately $10 million in cash upon the successful
completion of a Phase 2 clinical trial.  The Company’s Board of
Directors may, in its sole discretion, issue additional ordinary shares to
Bio-Gal Ltd in lieu of such milestone payment. XTL is also obligated to pay 1%
royalties on net sales of the product.  The closing of the transaction
is subject to certain conditions including XTL’s and Bio-Gal’s shareholders’
approvals, as well as completion of a financing. Closing is expected to take
place in the second or third quarter of 2009. The Company is currently
evaluating the impact of the transaction on its financial results.





On March
18, 2009, at an Extraordinary General Meeting (the "Meeting"), a new slate of
board members was elected to the Company’s Board of
Directors.  Following the first Meeting, the Company’s former Board
members all resigned from XTL's Board of Directors.





As a
result of the resignation of the former directors, 1,443,874 options that were
granted to the former directors in 2008 were forfeited, and the remaining
3,576,126 vested options granted to the former directors in 2008 will expire
three months thereafter. Similarly, with the resignation of the Company’s former
Chairman on March 18, 2009, 3,083,333 options that were granted to him in
December 2007 at an exercise price of $0.36 per option will expire three months
thereafter and the remaining 6,166,667 unvested options granted to him in
December 2007 at an exercise price of $0.36 per option were
forfeited.





In
addition, the Company’s shareholders approved the following resolutions at the
Meetings:





1.
            THAT
      the share capital of the Company be consolidated and re-divided so that
      each five (5) shares of NIS 0.02 nominal value shall be consolidated into
      one (1) share of NIS 0.1 nominal
value.





2.
            THAT
      the registered share capital of the Company be increased from NIS
      10,000,000 divided into 100,000,000 ordinary shares, NIS 0.1 nominal
      value, to NIS 70,000,000 divided into 700,000,000 ordinary shares, NIS 0.1
      nominal value.





3.
            THAT
      the ADR ratio be amended from one (1) ADR representing two (2) ordinary
      shares, NIS 0.1 nominal value, to one (1) ADR representing twenty (20)
      ordinary shares, NIS 0.1 nominal
value.





With the
approval of the shareholders, the Company will take the necessary steps to
implement and effect the reverse split, increase in registered share capital and
the ratio change of the Company's ADRs.


F-39


XTL
BIOPHARMACEUTICALS LTD.


(A
Development Stage Company)


Notes to
the Consolidated Financial Statements (continued)





NOTE 13 - SUBSEQUENT EVENTS(continued)





On
January 27, 2009, the Company received a Staff Determination Letter (the
"Letter") from The Nasdaq Stock Market ("Nasdaq") notifying the Company that the
staff of Nasdaq's Listing Qualifications Department determined, using its
discretionary authority under Nasdaq Marketplace Rule 4300, that the Company's
American Depository Shares ("ADRs") would be delisted from Nasdaq. The Letter
further stated that Nasdaq would suspend trading in the Company's ADRs at the
opening of trading on February 5, 2009 and then file a Form 25-NSE with the
Securities and Exchange Commission ("SEC") to deregister the Company's ADRs,
unless the Company appeals Nasdaq's delisting determination. Nasdaq's
determination to delist the ADRs was based on Nasdaq's belief that the Company
was a public shell and that the Company does not meet the stockholder's equity
requirement or any of its alternatives. The Letter also indicated that, in
accordance with the procedures set out in Marketplace Rule 4800 Series, the
Company would have seven (7) calendar days, or until February 3, 2009, to appeal
the delisting from Nasdaq to a Listing Qualifications Panel. On February 3,
2009, the Company appealed the determination by the Nasdaq Listing Qualification
Staff to delist the Company’s American Depository Shares from the Nasdaq Capital
Market.  On March 19, 2009, the Company participated in an oral
hearing before the Nasdaq Hearings Panel (the “Panel”). Nasdaq’s delisting
action has been stayed, pending a final written determination by the Panel
following the hearing. At the hearing, the Company presented its plan to remedy
its “public shell” determination and for future compliance with all other
applicable Nasdaq listing requirements.


F-40