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



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

For the fiscal year ended December
31, 2011



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)



Herzliya Business Park

85 Medinat Hayehudim, Building G, PO Box
4033

Herzliya Pituach 46140, Israel



(Address of principal
executive offices)



David Grossman

Chief Executive Officer

85 Medinat Hayehudim, Building G, PO Box
4033

Herzliya Pituach 46140, Israel

Tel: +972-9-955-7080

Fax: +972-9-951-9727



(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  two Ordinary Shares, par value NIS 0.1 | None                                       
|------------------------------------------------------------------------------------- | -------------------------------------------
|(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.



|10,158,081 American Depositary Shares | 204,031,550 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  ̈    No
x



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



Yes  ̈    No x



Indicate by check mark whether the registrant
(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 x    No  ̈



Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files.)



Yes  ̈    No x



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  ̈ | Non-accelerated filer x
|------------------------- | ------------------- | -----------------------



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



|£  U.S. GAAP | x  International Financial Reporting Standards as issued | £Other
|------------ | -------------------------------------------------------- | ------
|             | by 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   ̈   
Item 18  ̈



Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes  ̈    No x











XTL BIOPHARMACEUTICALS LTD.

ANNUAL REPORT ON FORM 20-F



TABLE OF CONTENTS





|                                                                       |                                                                              | Page      
|---------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------
|                                                                       |                                                                              |           
|SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS         |                                                                              | 1         
|                                                                       |                                                                              |           
|PART I                                                                
|ITEM 1                                                                 | Identity of Directors, Senior Management and Advisers                        |           
|ITEM 2                                                                 | Offer Statistics and Expected Timetable                                      |           
|ITEM 3                                                                 | Key Information                                                              |           
|ITEM 4                                                                 | Information on the Company                                                   |           
|ITEM 4A                                                                | Unresolved Staff Comments                                                    |           
|ITEM 5                                                                 | Operating and Financial Review and Prospects                                 |           
|ITEM 6                                                                 | Directors, Senior Management and Employees                                   |           
|ITEM 7                                                                 | Major Shareholders and Related Party Transactions                            |           
|ITEM 8                                                                 | Financial Information                                                        |           
|ITEM 9                                                                 | The Offer and Listing                                                        |           
|ITEM 10                                                                | Additional Information                                                       |           
|ITEM 11                                                                | Quantitative and Qualitative Disclosures About Market Risk                   |           
|ITEM 12                                                                | Description of Securities other than Equity Securities                       |           
|                                                                      
|PART II                                                               
|ITEM 13                                                                | Defaults, Dividend Arrearages and Delinquencies                              |           
|ITEM 14                                                                | Material Modifications to the Rights of Security Holders and Use of Proceeds |           
|ITEM 15                                                                | Controls and Procedures                                                      |           
|ITEM 16                                                                | Reserved                                                                     |           
|ITEM 16A                                                               | Audit Committee Financial Expert                                             |           
|ITEM 16B                                                               | Code of Ethics                                                               |           
|ITEM 16C                                                               | Principal Accountant Fees And Services                                       |           
|ITEM 16D                                                               | Exemptions From The Listing Standards For Audit Committees                   |           
|ITEM 16E                                                               | Purchases Of Equity Securities By The Issuer And Affiliated Purchasers       |           
|ITEM 16G                                                               | Corporate Governance                                                         |           
|                                                                       |                                                                              |           
|PART III                                                              
|ITEM 17                                                                | Financial Statements                                                         |           
|ITEM 18                                                                | Financial Statements                                                         |           
|ITEM 19                                                                | Exhibits                                                                     |           
|                                                                       |                                                                              |           
|SIGNATURES                                                             |                                                                              | 98        
|Consolidated Financial Statements                                      |                                                                              | F1 - F60  
|Report of BDO Ziv Haft Consulting & Management Ltd., dated March, 2012 |                                                                              | F61 - F144





This annual report on Form 20-F contains
trademarks and trade names of XTL Biopharmaceuticals Ltd., including our name and logo.











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, Xtepo Ltd, XTL Biopharmaceuticals, Inc. and XTL Development, Inc. We have prepared our
consolidated financial statements in United States, or US, dollars and in accordance with International Financial Reporting Standards,
or IFRS. 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 tables
below present selected financial data for the fiscal years ended as of December 31, 2011, 2010, 2009, 2008 and 2007. We have derived
the selected financial data for the fiscal years ended December 31, 2011, 2010 and 2009, from our audited consolidated financial
statements, included elsewhere in this report and prepared in accordance with International Financial Reporting Standards (“IFRS”)
issued by the International Accounting Standards Board (“IASB”). Until 2009, we have presented our financial statements
using the accounting standards and principles as set forth under United States Generally Accepted Accounting Principles (“US
GAAP”). Since 2009 and effective since January 1, 2007, we have prepared our consolidated
financial statements in accordance with IFRS. The selected financial data for the fiscal years ended as of December 31, 2011, 2010,
2009 2008 and 2007 are presented in accordance with IFRS. 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.”



Consolidated Statements of Comprehensive income:



|                                                                            |  | Year ended December 31,  |            
|--------------------------------------------------------------------------- |  | ------------------------ | -----------
|                                                                            |  | 2011                     |            
|                                                                            |  | U.S Dollars in thousands |            
|                                                                            |  |                          |            
|Revenues                                                                    |  |                          | -          
|Cost of revenues                                                            |  |                          | -          
|                                                                            |  |                          |            
|Gross profit                                                                |  |                          | -          
|                                                                            |  |                          |            
|Research and development costs                                              |  |                          | 158        
|General and administrative expenses (income)                                |  |                          | 1,078      
|Impairment loss of intangible asset                                         |  |                          | -          
|Other gains (losses), net                                                   |  |                          | 12         
|                                                                            |  |                          |            
|Operating income (loss)                                                     |  |                          | (1,224     
|                                                                            |  |                          |            
|Finance income                                                              |  |                          | 24         
|Finance costs                                                               |  |                          | 7          
|                                                                            |  |                          |            
|Financial income (costs), net                                               |  |                          | 17         
|                                                                            |  |                          |            
|Income (loss) before taxes on income                                        |  |                          | (1,207     
|tax benefit                                                                 |  |                          | -          
|                                                                            |  |                          |            
|Net income (loss) for the year attributable to equity holders of the parent |  |                          | (1,207     
|                                                                            |  |                          |            
|Basic and diluted earnings (loss) per share (in U.S. dollars)               |  |                          | (0.006     
|                                                                            |  |                          |            
|Weighted average number of issued ordinary shares                           |  |                          | 201,825,645



* Including reduced expenses
which result from forfeiture of shares that were contingent on the performance of the former chairman and former CEO, see also
Note 16b to the financial statements.



2







Consolidated Statements of Financial Position
Data:



|                                                                            |  | Year ended December 31,  |      
|--------------------------------------------------------------------------- |  | ------------------------ | -----
|                                                                            |  | 2011                     |      
|                                                                            |  | U.S Dollars in thousands |      
|                                                                            |  |                          |      
|Cash, cash equivalents, bank deposits and trading and marketable securities |  |                          | 1,495
|Working capital                                                             |  |                          | 955  
|Total assets                                                                |  |                          | 4,073
|Long term obligations                                                       |  |                          | -    
|Total shareholders' equity                                                  |  |                          | 3,444



Exclusive License for the patent
on SAM-101



On March 24, 2011, we entered into a Memorandum
of Understanding with MinoGuard, pursuant to which we shall acquire the exclusive rights to SAM-101 by obtaining an exclusive
license to use MinoGuard's entire technology. SAM-101 is based on a combination of anti-psychotic drugs with minocycline, a recognized
medicinal compound. On November 30, 2011, we engaged in a worldwide exclusive license with MinoGuard by which we shall develop and commercialize MinoGuard's technology
for the treatment of psychotic disorders focusing on Schizophrenia. We will conduct clinical trials, develop, register, market,
distribute and sell the drugs that will emerge from MinoGuard's technology, with no limitations for a specific disorder (“the
License”).We shall pay MinoGuard accumulated clinical development and marketing approvals milestone-based payments of approximately
$2.5 million. In addition, we will pay MinoGuard royalty-based payments on products that are based on the Technology, equal to
3.5% of its net sales and/or percentage from the Company third-party out–license receipts in the range of 7.5%-20% according
to the clinical phase of the drug at the time of an out-license transaction. It should be noted that the Company has the
sole discretion to pay any of the above amounts in cash or by way of issuing of its shares to MinoGuard. In addition to the above
payments, if we shall not commence a Phase 2 clinical trial by June 30, 2013, we will pay MinoGuard an annual license fee of $45,000
for the initial year, which will increase by $90,000 per year and up to $675,000 for the eighth year of license. According to
the agreement receipt of an approval to commence such trial or continuance of clinical trials that were conducted or will be conducted
by MinoGuard and/or its researchers, shall be deemed commencement of the Phase 2 clinical trial for this matter.



3







Exclusive License for the use patent
on Erythropoietin



On March 18, 2009, we entered into an asset
purchase agreement with Bio-Gal Ltd. (hereinafter “Bio-Gal”), a private company, for the rights to a use patent on
Recombinant Human Erythropoietin, or rHuEPO, for the treatment of multiple myeloma, or "MM". On December 31, 2009, we
amended the asset purchase agreement with Bio-Gal, so that XTL shall acquire all the issued and outstanding share capital of XTEPO
Ltd. (a special purpose company that was established by Bio-Gal's shareholders who also transferred Bio-Gal's intellectual property
rights on rHuEPO and will raise by way of a private placement approximately $1.5 million) (hereinafter “XTEPO”). 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 74,800 people living with MM, with about 20,520 new cases
diagnosed in 2011 (Facts 2012. The Leukemia & Lymphoma Society), making MM the second most prevalent blood cancer.



On August 3, 2010, the Bio-Gal transaction
was completed according to the outline signed by the parties to the agreement on December 31, 2009, after all the closing conditions
had been met, including, among other things, the signing of an agreement with the Israeli Tax Authority regarding the tax exemption
granted to the share swap transaction pursuant to Sections 104 and 103 to the Israeli Income Tax Ordinance (Revised), 1961.



In accordance with the terms of the amended
asset purchase agreement, we issued to XTEPO's shareholders approximately 133 million ordinary shares representing 69.44% of our
then issued and outstanding ordinary share capital. In addition, the parties agreed to cancel a $10 million cash milestone payment
to Bio-Gal upon the successful completion of a Phase 2 clinical trial, which was under the original asset purchase agreement. We
are also obligated to pay 1% royalties on net sales of the product, as well as a fixed royalty payment in the total amount of $350,000
upon the successful completion of Phase 2. Such payment of $350,000 mentioned above shall be made to Yeda Research and Development
Company Ltd. (“Yeda”) upon the earlier of (i) six months from the successful completion of Phase 2 or (ii) the completion
of a successful fundraising by XTL or XTEPO of a minimum amount of $2 million at any time after the completion of the Phase 2 (See
notes 1b and 9a to the consolidated financial statements: General, Intangible Asset).



4







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, 2011, we had an accumulated
accounting deficit of approximately $143.3 million (our current carry forward tax losses are substantially lower - for our current
carry forward tax losses, see “Item 5. Operating and Financial Review and Prospects - Governmental Economic, Fiscal, Monetary
or Political Policies that Materially Affected or Could Materially Affect Our Operations”). 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 and stages 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.





5







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;
| | - | ----------------------------------------------------------------------------------------



| | · | 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 candidates, Recombinant Human Erythropoietin
(rHuEPO) and SAM-101, are planned for a Phase 2 clinical program and the Diversity Oriented Synthesis, or DOS program, and
according to our knowledge based upon the most current reports we have received from Presidio Pharmaceuticals, Inc., has not
yet been tested in humans (see “Item 10. Additional Information - Material Contracts”). In order for our
candidates to proceed to later stage clinical testing, they must show positive clinical or preclinical data. While 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 licensed to 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. While SAM-101
has shown improvement in the positive symptoms of schizophrenia as well as the patients’ cognitive state, minimizes the
negative symptoms (social parameters and patient cognition) and reduces weight gain side effects among patients, 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.



6







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 and/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.
| | - | ------------------------------------------------------------------------------------------------------



7







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 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 all 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 licensed the rights, patent or otherwise, to our drug candidates from third parties. Specifically, we
have recently licensed a patent on SAM-101 for the treatment of psychotic disorders, focusing on Schizophrenia from MinoGuard,
who in turn licensed it from Mor. Furthermore, we licensed a use patent for the use patent on Recombinant Human Erythropoietin
(rHuEPO) for the prolongation of multiple myeloma patients’ survival and improvement of their quality of life from Bio-Gal,
who in turn licensed it from Mor and Yeda. and we have licensed DOS from VivoQuest, Inc. (see “Item 10. Additional Information-Material
Contracts”), 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.



8







If we do not establish or maintain drug development and
marketing arrangements with third parties, we may be unable to commercialize our drug candidates and technologies into products.



We are an emerging company and do not possess
all of the capabilities to fully commercialize our drug candidates and technologies on our own. From time to time, we may need
to contract with third parties to:



| | · | assist us in developing, testing and obtaining regulatory approval for some of our compounds and
technologies;
| | - | --------------------------------------------------------------------------------------------------------------



| | · | manufacture our drug candidates; and
| | - | ------------------------------------



| | · | market and distribute our products.
| | - | -----------------------------------



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;
| | - | -------------------------------------------------------------------------------------------------------------------------



9







| | · | the cost-effectiveness of our products relative to competing
        products including potential generic competition;
| | - | ----------------------------------------------------------------------------------------------------------------------
| | · | the level of off-label use of our drug candidates;                                                                    
| | · | the availability of government or third-party pay or reimbursement for our products;                                  



| | · | the side effects or unfavorable publicity concerning our products or similar products; and
| | - | ------------------------------------------------------------------------------------------



| | · | the effectiveness of our and/or partners' sales, marketing and distribution efforts.
| | - | ------------------------------------------------------------------------------------



Specifically, Recombinant Human Erythropoietin
or SAM-101, if successfully developed and commercially launched for the treatment of multiple myeloma or schizophrenia, respectively,
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.



We believe that we will either be able to
purchase rHuEPO and the components of the SAM-101 combination 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 programs for the treatment of multiple myeloma and schizophrenia, respectively. 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 will be 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.



10







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 29, 2012, we had three full-time
employees (one of whom is an officer, who is engaged with the Company as a service provider) and three part-time service providers
(one of whom is an officer). 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.



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.



11







Specifically, as per the terms of our amended
agreement with Bio-Gal Ltd. and XTEPO, we issued approximately 133 million ordinary shares par value NIS 0.10 representing 69.44%
of our then issued and outstanding ordinary share capital. Also, on November 30, 2011 we entered into a license agreement with
MinoGuard by which we received an exclusive license to use SAM-101 in return for royalties on sales and milestones that may be
paid in cash or our ordinary shares. (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 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;
| | - | -------------------------------



| | · | injury to our reputation;
| | - | -------------------------



| | · | inability to continue to develop a drug candidate or technology;
| | - | ----------------------------------------------------------------



| | · | withdrawal of clinical trial volunteers; and
| | - | --------------------------------------------



12





| | · | loss of revenues.
| | - | -----------------



Consequently, a product liability claim or product recall may
result in material losses.



Risks Related to Our Financial Condition



The Company has no revenues
from operations and it funds its operations from its own capital and from external sources by way of issuing equity instruments.If we need to raise additional capital and are unable to do so on terms favorable to us, or at
all, we may not be able to continue our operations.



The Company incurred losses amounting to
approximately $ 1.2 million and negative cash flows from operating activities amounting to approximately $ 1.3 million
in the year ended December 31, 2011 (approximately $ 1.3 million and approximately $ 0.75 million, respectively, in the
year ended December 31, 2010). The Company has no revenues from operations at this stage and it is dependent on external financing
sources. The Company's management believes that giving the Company's current business plan, the cash and short term investment
together with the proceeds from the private placement and the exercise of warrants in March 2012, totaled approximately $3.8 million
(see note 24 to the consolidated financial statements), will enable it to fund its activities through at least into 2014. However,
the actual amount of cash that the Company will need to fund its operations is subject to many factors, including, but not limited
to, the timing, design and conduct of the clinical trials of our existing drug candidates, any future projects which may be in-licensed
or any other business development activities. For example, changing circumstances and/or in-licenses of new technologies may cause
us to consume capital significantly faster than we currently anticipate, and we may need to spend more money than currently expected
because of circumstances beyond our control. The Company will incur additional losses in 2012 from research and development activities
and from current operation which will be reflected in negative cash flows from operating activities.  Accordingly, the Company
will need to raise additional cash in the future thru the issuance of equity securities. However, if the Company is not be able
to raise additional capital at acceptable terms, the Company may need to reduce operations or sell or license to third parties
some or all of our technologies.

Our business depends on a number of factors,
some of which are beyond our control. These factors include, among others:



| | · | 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;
| | - | -------------------------------------------------------------------------------------



| | · | the costs and timing of regulatory approvals;
| | - | ---------------------------------------------



| | · | the costs and timing of the clinical trials according to regulatory requirements;
| | - | ---------------------------------------------------------------------------------



| | · | rHuEPO patent expiration in 2019 and failure to obtain orphan drug  designation in Europe; and
| | - | ----------------------------------------------------------------------------------------------
| |   |                                                                                               
| | · | SAM-101 patent expiration in 2027.                                                            





13







The global capital markets have been experiencing
extreme volatility and disruption for the last five years. In recent months, the volatility and disruption has increased mainly
due to the financial instability and debt of some European countries, the uprisings against the regime in some Middle Eastern and
North African countries, and the tension with Iran. Given recent particularly adverse market conditions for small biotechnology
companies, additional financing may not be available to us when we need it. In order to complete the clinical trials to bring a
product to market we will need to raise additional capital. However we may be unable to do so 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 technologies.
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.



We may not be able to utilize our accumulated net losses
owned by the Company in Israel and/or offsetting the tax liability of the Subsidiaries.



We have had a
“permanent establishment” in the United States, or US, which began in 2005 and ended in 2009. As a result,
any income attributable to such US permanent establishment for the years 2005-2009 was 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
carry forwards mentioned in our notes to the 2010 financial statements 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, 2011, US net operating loss carry forwards are approximately $23 million. These losses are subject
to certain significant limitations and/or reductions due to, among other; the shifts in ownership of XTL, resulting from the Bio-Gal
transaction(see “Item 8. Financial Information-Material Contracts”)and subject
to further limitations in case of a future offering or capital raise, resulting in more than 50 percentage point change over a
three year look back period, and expiring through 2029. 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.
Currently we do not have any activity in the US subsidiaries. However, if the subsidiaries commence operations in the future, they
will be subject to the tax rules mentioned above.



We may not be able to utilize our accumulated net losses
owned by our Subsidiaries in the US or offsetting any tax liabilities we may incur in the next years.



As of December 31, 2011, the net operating
tax losses (“NOL”) of the US subsidiaries amounted to approximately $20 million. The utilization of these NOLs is subject
to significant limitations and/or reductions to offset income in the future, if any, due to, among other,
the shifts in ownership of XTL resulting from the Bio-Gal transaction(see “Item 8. Financial Information-Material
Contracts”)and subject to further limitationspursuant to a US tax rule,in case of a future offering or capital raise, resulting in more than 50 percentage point change over a three year look back period,
and expiring through 2029.



14







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.



We pursue patent protection in the US and
in certain foreign countries relating to our development and commercialization of 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, certain countries in Europe (major countries), Israel, Japan, Hong Kong and Canada
and will expire in 2019. However we were granted an Orphan Drug Designation from the FDA in May 2011 in the US, (see “Item
4. Information on the Company - Government and Industry Regulation”). Currently, under the license agreement which is held
by XTEPO, we have the exclusive worldwide rights to the above patent for the use of 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.



15







A PCT application (#PCT/IL2007/001251) relating
to our development and commercialization of SAM-101 for the treatment of schizophrenia was filed in October 2007. The patent will
expire in 2027. Currently, under the license agreement with MinoGuard, we have the exclusive worldwide rights to the above patent
for the use of SAM-101 in schizophrenia. 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.



Litigation or third-party claims of intellectual property
infringement could require us to spend substantial time, money and other resources 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.



16







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, in/out license transactions, 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 as
well as failure to raise required funds for the continued development and operations of the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | · | failure to obtain orphan drug designation status for the relevant drug candidates in the relevant
regions. ;
| | - | ------------------------------------------------------------------------------------------------------------



| | · | increase in costs and lengthy timing of the clinical trials according to regulatory requirements;
| | - | -------------------------------------------------------------------------------------------------



| | · | 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.



17







The Company has no revenues from operations
at this stage and it is dependent on external financing sources. The Company's management believes that given the Company's current
business plan, the cash and short term investment together with the proceeds from the private placement and the exercise of warrants
in March 2012, totaling approximately $3.8 million (see note 24 to the consolidated financial statements), will enable it to fund
its activities through at least into 2014. However, the actual amount of cash that the Company will need to fund its operations
is subject to many factors, including, but not limited to, the timing, design and conduct of the clinical trials of our existing
drug candidates, any future projects which may be in-licensed or any other business development activities. For example, changing
circumstances and/or in-licenses of new technologies may cause us to consume capital significantly faster than we currently anticipate,
and we may need to spend more money than currently expected because of circumstances beyond our control. The Company will incur
additional losses in 2012 from research and development activities and from current operation which will be reflected in negative
cash flows from operating activities.  Accordingly, the Company will need to raise additional cash in the future thru the
issuance of equity securities. However, if the Company is not be able to raise additional capital at acceptable terms, the Company
may need to reduce operations or sell or license to third parties some or all of our technologies.

Also, if we make one or more significant acquisitions in which the consideration includes ordinary shares or other securities,
your portion of shareholders’ equity in us may be significantly diluted. In addition, pursuant to a license agreement with
MinoGuard, we may elect to execute any payment under the agreement resulting from milestone achievements, royalties, and sublicensing
by way of issuing ordinary shares in lieu of cash payments. Also, according to the 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 million
in ordinary shares to VivoQuest in lieu of cash upon achievement of certain milestones. 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. Also, in connection
with our agreement with DOV Pharmaceutical Inc., or DOV, which was terminated (see “Item 4. Information on the Company -
Business Overview - Licensing Agreements and Collaborations,” below), XTL Development committed to pay a transaction advisory
fee to certain third party intermediaries. The advisory fees can be paid in cash or by issuance of shares, at our sole discretion.
Pursuant to the agreement with the certain third party intermediaries, and after we examined the settlement issue, in furtherance
to our financial condition, it is possible that the advisory fees will be paid by way of issuing 1,659,945 shares (equity-settled).

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



There are 3 shareholders (Mssrs. Alex Rabinovitch,
David Bassa and Shalom Manova) who hold more than 5% each of our outstanding ordinary shares (approximately 37.21% cumulative).
As a result, these persons/companies, either acting alone or 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/companies, acting alone or 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.



18







Notwithstanding the aforesaid, in connection
with Section 239 of the Israeli Companies Law that focuses on the number of votes required to appoint external directors, and in
connection with Section 121(c) of the Israeli Companies Law that focuses on the number of votes required to authorize the Chairman
of the Board in a company to act also as the Chief executive officer of such company, the Company will deem these 3 shareholders
as controlling shareholders in the Company, for as long as such individuals are interested parties in the Company. In addition,
any contractual arrangement as detailed in Section 270 (4) of the Israeli Companies Law with any of these 3 shareholders and/or
their relatives will be presented for approval in accordance with the provisions of Section 275 of the Israeli Companies Law. In
all of the aforementioned situations, the Company will consider any of the aforesaid parties, who are not part of the transaction
presented for approval as individual interested parties in such transaction so that their vote will not be included in the quorum
comprising of majority (50%) of the votes who are not interested parties in such transaction.



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 Pink Sheets 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.



Our ADRs are quoted on the Pink Sheets market, which may
result in them being classified as “Penny Stock.”



Our ADRs may become subject to the penny
stock rules, which impose additional sales practice requirements on broker-dealers who sell our securities. If our ADRs become
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 years
ended December 31, 2008, 2009 and 2010. However, we believe that we were a PFIC for the taxable year ended December 31, 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 were likely not a PFIC for the taxable year ended December 31, 2011 but
we may be a PFIC 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.



19







In view of the complexity of the issues
regarding our treatment as a PFIC, US shareholders are urged to consult their own tax advisors for guidance as to our status as
a PFIC. For further discussion of tax consequences of being a PFIC, see “US Federal Income Tax Considerations - Tax Consequences
If We Are A Passive Foreign Investment Company,” below.



Provisions of Israeli corporate law may delay, prevent
or affect a potential acquisition of all or a significant portion of our shares or assets and 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.



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.



20







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 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.



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 most 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, Israel is facing political tension in its relationships with Turkey,
Iran and other Arab neighbor countries. In addition, recently in some Arab countries in the Middle East and North Africa there
were violent uprisings against the regimes in these countries. Consequently, there is a concern for the stability in the region
which may affect the political and security situation in Israel. We cannot insure that the political and security situation will
not impact our business. 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.



21







Further, 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. Until 2008, a substantial amount
of our operating expenses were in US dollars (approximately 96% in 2008). Commencing from 2009 (after the Bicifadine trial did
not meet its endpoints) the Company’s head office moved back to Israel, and thus the portion of our expenses in New Israeli
Shekels (“NIS”) and our cash held in NIS has increased, mainly due to payment to Israeli employees and suppliers.
Additionally, our future activities could lead us to perform a clinical trial in Israel, which may lead us to reassess the US Dollar
as our functional currency. As a result, we could be exposed to the risk that the US dollar will be devalued against the NIS or
other currencies, and consequentially 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 decide in the future
to hold a significant portion of our cash, cash equivalents, bank deposits and marketable securities in NIS, as well as to 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
US dollar or that the timing of any devaluation may lag behind inflation in Israel.



Our results of operations may be adversely affected by
changes in tax policy by the Israeli government



The income of the Company is subject to
corporate tax at the regular rate; the guidance of the amendment to the Income Tax Ordinance, 2005 from August 2008 prescribes
a gradual reduction in the corporate tax rates and the resulting corporate tax rates starting 2008 are as follows: 2008 - 27%,
2009 - 26% and 2010 and thereafter - 25%.



On July 14, 2009, the “Knesset”
(Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and
2010), 2009, which prescribes, among others, an additional gradual reduction in the corporate tax rates starting 2011 to the following
tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.



On December 6, 2011 the reduction in the
corporate tax rates outline abovementioned was revoked by the "Knesset" and it was also resolved that the corporate
tax rate will be 25% for the tax year 2012 and thereafter. We cannot ensure that the "Knesset" will re-implement its
plan for reducing the corporate tax rate in the future and therefore it may adversely affect our results if we will be profitable.
Moreover, we cannot guarantee that there will be no additional changes in the corporate tax rate in the future that may harm the
Company's results.



22







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, most of whom reside outside the US, may be
difficult to obtain within the US. In addition, because substantially most of our assets and most 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.



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, currently for the treatment
of MM, schizophrenia and Hepatitis C. Our lead compound is Recombinant Human Erythropoietin, or rHuEPO, a known compound that we
are planning to develop 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.



Recent Developments



On November 2nd, 2011, the Company
entered into a term sheet by which it will acquire a technology ("NiCure") from Mor, the Technology Transfer Office (TTO)
of Clalit Health Services, by obtaining an exclusive license to use the entire technology and intellectual property in return for
royalties on sales and milestone payments throughout the clinical development process. The agreement that will be signed by the
parties is subject to, among others, the completion of due diligence, examination of the regulatory environment for the continued
development of the drug, and the approval of the Company's board. NiCure's technology is based on the local administration of renin-angiotensin
inhibitors (known drugs for the treatment of hypertension, i.e "Enalaprilat"), as novel treatment for the symptoms of
cartilage-related diseases, such as Osteoarthritis. Osteoarthritis is one of the most frequent causes of physical disability in
adults. The disease involves progressive deterioration of articular cartilage; being loss of the major polysaccharides glycosaminoglycan
(GAGS) a main cause of the disease. The current invention offers a novel therapy focused on increasing or replenishing the level
of GAGs in the synovial fluid and cartilage, thereby relieving or even reversing symptoms of such diseases. Moreover, as GAGs are
an important component of the dermis, the same technology can be used in order to treat skin wrinkles.



On March 24, 2011, we entered into a Memorandum
of Understanding with MinoGuard, pursuant to which we shall acquire the exclusive rights to SAM-101 by obtaining an exclusive
license to use MinoGuard's entire technology. SAM-101 is based on a combination of anti-psychotic drugs with minocycline, a recognized
medicinal compound. On November 30, 2011, we completed our engagement in a worldwide exclusive license with MinoGuard under which
we shall develop and commercialize MinoGuard's technology for the treatment of psychotic disorders focusing on Schizophrenia.
We will conduct clinical trials, develop, register, market, distribute and sell the drugs that will emerge from MinoGuard's technology,
with no limitations for a specific disorder (“the License”).We shall pay MinoGuard accumulated clinical development
and marketing approvals milestone-based payments of approximately $2.5 million. In addition, we will pay MinoGuard royalty-based
payments on products that are based on the Technology, equal to 3.5% of its net sales and/or percentage from the Company third-party
out–license receipts in the range of 7.5%-20% according to the clinical phase of the drug at the time of an out-license
transaction. It should be noted that the Company has the sole discretion to pay any of the above amounts in cash or by way of
issuing of its shares to MinoGuard. In addition to the above payments, if we shall not commence a Phase 2 clinical trial by June
30, 2013, we will pay MinoGuard an annual license fee of $45,000 for the initial year, which will increase by $90,000 per year
and up to $675,000 for the eighth year of license. According to the agreement receipt of an approval to commence such trial or
continuance of clinical trials that were conducted or will be conducted by MinoGuard and/or its researchers, shall be deemed commencement
of the Phase 2 clinical trial for this matter.



23







In March 2011, we raised by public issuance of 12,305,000 Ordinary
shares of NIS 0.1 par value each, 6,152,500 warrants (series 1) and 18,457,500 warrants (series 2) on the Tel-Aviv Stock Exchange
an immediate net amount of approximately $ 1.75 million (approximately NIS 6.3 million) (See “Item 5. Operating
and Financial Review and Prospects-Liquidity and Capital Resources”).



On September 1, 2010, the Company and Yeda
Research and Development Co. Ltd. (“Yeda”) entered into an option agreement granting an exclusive right to examine
a medical technology in the field of the immune system, comprising of two proteins through which target molecules are examined
and may serve as a basis for the development of therapeutics for diseases relating to the immune system, such as acute hepatitis,
rheumatoid arthritis, Chron’s disease and psoriasis. Under the agreement, the Company purchased this exclusive option right
to examine the medical technology for a 15-month period in consideration for $120,000 payable by the Company in the following manner
and at the earlier of:

(i) In the event of raising funds by a prospectus to the public
for more than $2 million, the Company is obligated to settle the payment in cash; or (ii) if 12 months after the date of closing
of the agreement an amount of more than $2 million was not raised, the liability to Yeda can be satisfied, at the Company’s
sole discretion and after obtaining Yeda’s approval to the timing, in cash or by issuance of options with equivalent value
in lieu of that payment.



On December 2011 we notified Yeda that we
do not intend to exercise the right given to us under this option agreement.



Company Information and History



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.



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, and all rights
under the agreement reverted to DOV. Since the failure of the Bicifadine phase 2b clinical trial, XTL Development has ceased the
prosecution and maintenance of those patents relating to Bicifadine, in coordination with DOV. In March 2010, the agreement was
formally terminated.



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 royalties 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.



24







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 December 2009, we amended the asset purchase agreement with Bio-Gal Ltd. so that XTL could acquire from the shareholders
of XTEPO Ltd. (“XTEPO”), a special purpose company that was established by Bio-Gal Ltd.’s shareholders who shall
receive from Bio-Gal all of Bio-Gal’s right on rHuEPO and raised approximately $1.5 million, all of their shares in XTEPO
in exchange for the issuance to XTEPO’s shareholders of ordinary shares of XTL representing approximately 69.44% of our then
issued and outstanding ordinary share capital. In addition, the parties agreed to cancel a $10 million cash milestone payment to
Bio-Gal upon the successful completion of a Phase 2 clinical trial, which was under the original asset purchase agreement. We are
also obligated to pay 1% royalties on net sales of the product, as well as a fixed royalty payment in the total amount of $350,000
upon the success of Phase 2. Such payment of $350,000 mentioned above shall be made to Yeda upon the earlier of (i) six months
from the Successful Completion of Phase 2 or (ii) the completion of a successful fundraising by XTL or XTEPO at any time after
the completion of Phase 2 of an amount of minimum $2 million. On August 3, 2010, the Bio-Gal transaction was completed according
to the outline signed by the parties to the agreement on December 31, 2009, after all the closing conditions had been met, including,
among other things, the signing of an agreement with the Israeli Tax Authority regarding the tax exemption granted to the share
swap transaction pursuant to Section 104 and 103 to the Israeli Tax Ordinance (Revised), 1961 (See note 10a to the consolidated
financial statements: Intangible Asset).



Our ADRs are quoted on the Pink Sheets,
an inter-dealer electronic quotation and trading system in the over-the-counter (OTC) securities market, under the symbol “XTLBY.PK.”
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 and the Exchange Act.



Our principal offices are located at Herzliya
Business Park, 85 Medinat Hayehudim Street, Building G, PO Box 4033, Herzliya 46140, Israel, and our telephone number is +972-9-955-7080.
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, Delaware 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.



In March 2011, we raised by public issuance
of 12,305,000 Ordinary shares of NIS 0.1 par value each, 6,152,500 warrants (series 1) and 18,457,500 warrants (series 2)
on the Tel-Aviv Stock Exchange an immediate net amount of approximately $ 1.75 million (approximately NIS 6.3 million).
Since inception and until the date of the statement of financial position, we have raised net proceeds of approximately $139.2
million to fund our activities, including the net proceeds from the public issuance abovementioned.



For the years ended December 31, 2011, 2010,
and 2009 our capital expenditures were $12,000, $16,000and $0 respectively. During 2011 and 2009, proceeds from disposition of
certain unused assets were immaterial (less than $1,000). In 2010 we did not dispose any of our assets



Business Overview



Introduction



We are a biopharmaceutical company engaged
in the acquisition and development of pharmaceutical products for the treatment of unmet medical needs, currently for the treatment
of MM, schizophrenia, and Hepatitis C.



25







Our lead
compound is rHuEPO, which we intend to develop for the survival extension of MM terminal patients’ lives.



Erythropoietin
(EPO) is a glycoprotein 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.



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.



The median overall survival duration today
with chemotherapy and other novel treatments is about five 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 SAM-101 is based on the
technology we in-licensed from MinoGuard - the development of combination drugs for psychotic diseases, with focus on schizophrenia.
MinoGuard completed a phase 2a study in accordance with the Helsinki guidelines under the Shalvata Medical Center in Israel on
SAM-101, a unique proprietary combination of antipsychotic drugs and a known medicinal compound (minocycline). Schizophrenia is
a chronic disorder that requires lifelong medication. While most of the available drugs are effective in remitting schizophrenia’s
“positive symptoms” (hallucinations, delusions, agitation), even the best available drug is only partially effective
in remitting several of the most disturbing features of the disease, referred to as “negative symptoms” (apathy, poverty
of speech, emotional withdrawal, depression) and severe cognitive impairment. This deficiency results in schizophrenic patients’
poor quality of life. In addition, noncompliance results in aggravation in symptoms, which frequently causes lengthy hospitalization
periods.



Following
in-vivo studies demonstrating the efficacy of minocycline treatment in a schizophrenia murine mode1,
MinoGuard demonstrated in a successful phase 2a clinical study that the combination of atypical antipsychotic drugs and minocycline
improves treatment efficacy and reduces side effects associated with current therapy as compared to antipsychotic treatment alone2.
Two independent clinical research groups in Manchester, UK, Maryland USA and Japan3have replicated these results, further supporting MinoGuard's hypothesis.



Our third 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.








1 Levkovitz Y., Levi U., Braw
Y., and Cohen H., (2007) Brain Research, 1154: 154-162

2 Levkovitz Y, Mendlovic S, et al. J
Clin Psychiatry. 2010 Feb;71(2):138-49

3 Miyaoka T et al. Clinical Neuropharmacology 31,
October 2008 Sep-Oct;31(5):287-92



26







On September 1, 2010, the Company and Yeda entered into an option
agreement granting an exclusive right to examine a medical technology in the field of the immune system, comprising of two proteins
through which target molecules are examined and may serve as a basis for the development of therapeutics for diseases relating
to the immune system, such as acute hepatitis, rheumatoid arthritis, Chron’s disease, and psoriasis. Under the agreement,
the Company purchased this exclusive option right to examine the medical technology for a 15-month period in consideration for
$120,000. In December 2011 we notified Yeda that we do not intend to exercise the right given to us under this option agreement.



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.



Our Strategy



Our objective is to be a leader in developing
novel pharmaceutical and biopharmaceutical products. We continuously identify and in-license therapeutic candidates in order to
maximize our potential for commercial success.



Under our current strategy, we plan to:



| | · | initiate a prospective phase 2 clinical study intended to assess the safety and efficacy of rHuEPO when given to patients with
advanced MM;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | · | initiate a prospective clinical study intended to assess the safety and efficacy of SAM-101 when given to patients with schizophrenia;
| | - | --------------------------------------------------------------------------------------------------------------------------------------



| | · | continually build our pipeline of therapeutic candidates, and
| | - | -------------------------------------------------------------



| | · | develop collaborations with large pharmaceutical companies to market rHuEPO and SAM-101.
| | - | ----------------------------------------------------------------------------------------



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. In the United States alone, there are approximately 74,800
people living with MM, with about 20,520 new cases diagnosed in 2011 (Facts 2012. The Leukemia & Lymphoma Society). 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 65-70 and is also more common in men than women, and in African Americans than
Caucasians.



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 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; Prutchi-Sagiv Medical Hypothesis and Research
2005, Katz Eur. J. Immunol 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.



27







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)).



Development Status



We plan on
performing a prospective, multi-center, double blind, placebo controlled phase 2 study intended to demonstrate its effects on survival,
biological markers related to the disease, immune improvements and quality of life. We intend to initiate the clinical trial/receive
approvals to commence such clinical trial in the second half of 2012. The trial will enroll approximately 50 MM patients over a
period of 2 and a half years. We have begun preliminary discussions with potential clinical sites and third party vendors for the
planned study. The study is expected to cost $1-1.5 million. As part of the preparations,
the Company conducts a research which includes collection of data relating to the level of specific proteins in the blood of a
group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical trial protocol. These collected research
data will be integrated in the Phase 2 clinical trial.



The drug development process is a multi-step
process, including the following steps: pre-clinical, Phase 1, Phase 2, and Phase 3 clinical trials.



Given that we intend to develop a new indication
for rHuEPO, which is already approved for another use, and the fact that the pre-clinical and phase 1 phases are intended to assess
drug toxicity and safety, we may be exempted from carrying out these steps and the drug development process may begin with Phase
2 clinical trial.



28







This is an estimation only and based
on information our group has at the time of writing this report. Actual results may differ from the results implied in this report.
There is no certainty that we may receive an exemption from carrying out one or more phases, nor is there certainty about the results
of these experiments.



SAM-101 for schizophrenia



Market Opportunity



We intend
to develop SAM-101, a patent-protected combination of minocycline and antipsychotic drugs for the treatment of schizophrenia.
According to the US National Institute of Mental Health (NIMH), schizophrenia is the most prevalent severe mental disease in the
USA, affecting 1.1% of the adult population4. Schizophrenia is ranked as the third
most disabling condition, higher than blindness, by the general global population5.



Schizophrenia is a chronic disorder that
requires lifelong medication. While most of the available drugs are effective in remitting schizophrenia’s “positive
symptoms” (hallucinations, delusions, agitation), even the best available drug is only partially effective in remitting several
of the most disturbing features of the disease, known as “negative symptoms” (apathy, poverty of speech, emotional
withdrawal, depression) and severe cognitive impairment. SAM-101 is expected to overcome major limitations of currently available
treatments for schizophrenia by providing an effective treatment, affecting both negative and positive symptoms, therefore preventing
further deterioration in schizophrenic patients. In addition, SAM-101 showed lower side effects in the clinical trial mentioned
below, which is expected to allow for higher compliance and improved patient quality of life. We believe that our innovative combination
drug may open an opportunity for manufacturers to extend ethical drugs marketing time.



The global schizophrenia market in 2010
reached $6.4 billion. The market declined thereafter owing to the launch of generic versions of the leading antipsychotics –
risperidone, olanzapine, quetiapine and ziprasidone, in 2011. According to Datamonitor, pipeline products in phase 3 and 2 clinical
trials are not expected to drive market growth, since most of them offer no or little significant advantage over current medications,
which will shortly become generic. Nevertheless, a number of new companies will enter the schizophrenia market during the upcoming
years. Combination therapies are recognized for clinical advantages including facilitated patient compliance and convenience, along
with increased efficacy. Such developments play a key role in terms of pharmaceutical market contenders’ business strategy,
allowing for extended exclusivity rights. According to DataMonitor (2005), “If a combination treatment is shown to be clinically
superior, pharmaceutical companies will be racing to have the first combination product".



Development Status



We in-licensed
SAM-101 after it successfully completed a Phase 2a prospective, randomized, double-blind, placebo-controlled clinical trial conducted
on about 70 schizophrenics in accordance with the Helsinki guidelines under the Shalvata Medical Center in Israel. The trial met
its endpoints showing that SAM-101 improves the positive symptoms of the disease as well as the patients’ cognitive state,
minimizes the negative symptoms (social parameters and patient cognition) and reduces weight gain side effects among patients.
Schizophrenia is a severe and chronic (psychotic) mental disorder and one of the most common. It affects the majority of social
and mental functions, mood, perception, thought and cognitive functions. According to the United States National Institute of
Mental Health, about 1.1% of the adult population in the United States has Schizophrenia6.
The research company Decision Resources indicates that the Schizophrenia treatment industry in 2010 amounted to approximately
$6.4 billion7.








4The schizophrenia
prevalence estimations ranges from 0.5%-1.5% as reported by DSM-IV(2000). The US Surgeons General reports a prevalence of 1.3%
worldwide, regardless of race (1999) http://www.nimh.nih.gov/statistics/1SCHIZ.shtml

5Ustun et al (1999)
The Global Burden of Mental Disorders. American Journal of Public Health, 89(9), 1315-1318 this is ok







29







Since minocycline and antipsychotics have
been approved in the United States, a combination of the two should be eligible for market approval using the 505(b)(2) route.
This allows the FDA to rely on their own previous finding of safety and efficacy of the active pharmaceutical ingredients for the
purposes of marketing approval of SAM-101.



The phase 2 trial that was conducted in
Israel has shown that SAM-101 has additional clinical benefit compared to the available antipsychotic drug alone. We plan to perform
a multi-center phase 2 clinical trial under the FDA, using our proprietary combination. In order to confirm the scope of work required
for product market approval (New Drug Approval, NDA) and to identify the specific requirements for filing an Investigational New
Drug (IND) application with the FDA and for eventual market approval of the combination drug, we will request a Pre-IND meeting
with the FDA.



This is an estimation only and based
on information our group has at the time of writing this report. Actual results may differ from the results implied in this report.
There is no certainty that we may receive an exemption from carrying out one or more phases, nor is there certainty about the results
of these experiments.



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 130 to 170 million people worldwide, according to the World Health Organization. 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,
of the U.S. population, 1.6 percent, or an estimated 4.1 million Americans, have antibody to HCV (anti-HCV), indicating ongoing
or previous infection with the virus. Hepatitis C causes each year 10,000 to 12,000 people die from HCV in the US alone.



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.
According to our knowledge, as of today, the DOS program compounds are still in preclinical development. See “Item 10. Additional
Information -Material Contracts.”












6http://www.nimh.nih.gov/statistics/1SCHIZ.shtml



8http://www.cancer.org/Cancer/CancerBasics/economic-impact-of-cancer







30







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 Patent



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.





31







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 (Austria, Belgium, France, Germany, Great Britain, Ireland, Italy, Netherlands, Spain, Sweden and
Switzerland), Israel, Japan, Hong Kong and Canada. The issued patent will expire in 2019 (See “Item 4. Government and Industry
Regulation” regarding our granted orphan drug designation). Pursuant to our agreement with Bio-Gal Ltd, we have exclusive
worldwide rights to the above patent for the use of rHuEPO in MM.



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 for the treatment
of anemia is currently owned by Amgen and Johnson & Johnson.



SAM-101 for the Treatment of Schizophrenia



A patent titled “Combined therapies
of antipsychotic drugs and tetracyclines in the treatment of psychiatric disorders” was submitted by Mor on October 2007
(International application number PCT/IL2007/001251). The patent is currently in National Phase and has been filed in USA, Canada,
Europe, Japan, India, Australia and Israel.



The main claims of this
patent include: 1. A pharmaceutical composition comprising as active ingredients at least one tetracycline and at least one antipsychotic
drug; 2. The pharmaceutical composition with modified release formulation; 3. A method for treating a psychotic disorder comprising
administering the pharmaceutical composition to a patient in need.



DOS



The lead molecules that are included in
the VivoQuest license are covered by four issued US patents and three pending US patent applications. As of April 8, 2011, the
Company has determined to maintain these patents in the United States only. 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. Pursuant to the VivoQuest license, we will make royalty payments ranging from 2% to 8%, based on net sales
of the compounds.





32







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



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./XTEPO



We signed an asset purchase agreement to
acquire the rights to develop rHuEPO for the treatment of MM from Bio-Gal, a private biotechnology company based in Gibraltar,
in March 2009. In December, 2009, we amended the asset purchase agreement with Bio-Gal, so that XTL could acquire from the shareholders
of XTEPO all of their shares in XTEPO in exchange for the issuance to XTEPO’s shareholders of ordinary shares of XTL representing
approximately 69.44% of our then issued and outstanding ordinary share capital. In addition, the parties agreed to cancel a $10
million cash milestone payment to Bio-Gal upon the successful completion of a Phase 2 clinical trial, which was under the original
asset purchase agreement. We are also obligated to pay 1% royalties on net sales of the product, as well as a fixed royalty payment
in the total amount of $350,000 upon the successful completion of Phase 2. Such payment of $350,000 mentioned above shall be made
to Yeda upon the earlier of (i) six months from the successful completion of Phase 2 or (ii) the completion of a successful fundraising
by XTL or XTEPO at any time after the completion of the Phase 2 of an amount of minimum $2 million. On August 3, 2010, the Bio-Gal
transaction was completed according to the outline signed by the parties to the agreement on December 31, 2009, after all the closing
conditions had been met, including, among other things, the signing of an agreement with the Israeli Tax Authority regarding the
tax exemption granted to the share swap transaction pursuant to Section 104 and 103 to the Israeli Tax Ordinance (Revised), 1961.
(See note 10a to the consolidated financial statements: Intangible Asset).



MinoGuard License



On March 24, 2011, the Company entered
into a term sheet to acquire the assets of MinoGuard by an exclusive license to use MinoGuard’s entire technology in return
for royalties on sales and milestone payments throughout the clinical development process, without any other payments. MinoGuard
was founded in 2007 in order to commercialize combination therapies for treating psychotic diseases, focusing on schizophrenia.
The transaction was subject, among others, to completion of due diligence studies, examination of the regulatory track for the
continued development of the drug and the approval of the Company’s Board. On November 30, 2011, the agreement with MinoGuard
was completed after all prerequisites abovementioned had fully met. In accordance with the terms of the license agreement we shall
pay MinoGuard accumulated clinical development and marketing approvals milestone-based payments of approximately $2.5 million.
In addition, we will pay MinoGuard royalty-based payments on products that are based on the Technology, equal to 3.5% of its net
sales and/or percentage from the Company third-party out–license receipts in the range of 7.5%-20% according to the clinical
phase of the drug at the time of an out-license transaction. It should be noted that the Company has the sole discretion to
pay any of the above amounts in cash or by way of issuing of its shares to MinoGuard. In addition to the above payments, if we
shall not commence a phase 2 clinical trial by June 30, 2013, we will pay MinoGuard an annual license fee of $45,000 for the initial
year, which will increase by $90,000 per year and up to $675,000 for the eighth year of license. The agreement states that receipt
of an approval to commence such trial or continuance of clinical trials that were conducted or will be conducted by MinoGuard and/or
its researchers, shall be deemed commencement of the Phase 2 clinical trial for this matter.



33







The term of the license commenced upon the
signing of the license agreement and be effective for unlimited time. Upon the expiration of the last payment obligation of XTL
the license will be considered perpetual and fully paid up.



The license may be terminated in by either
XTL without cause upon 30 days notice, or by the licensor for no commercial progress in the event that by the date of June 30th,
2013 neither commencement of phase II Clinical Trial with respect to the licensed product has occurred, nor XTL has entered into
a Sublicense Agreement with a substantial third party.



The patent was filed as National Phase in
Israel, US, Canada, Europe, and India. The table below details the current status of the patent:



|Countries in which application was filed |  | Priority Date |  | Application No.   |  | Patent No. |  | Status      |  | Expiration Date*
|---------------------------------------- |  | ------------- |  | ----------------- |  | ---------- |  | ----------- |  | ----------------
|Canada                                   |  | 18.10.2007    |  | 2666796           |  | -          |  | Filed       |  | 18.10.2027      
|Europe                                   |  | 18.10.2007    |  | 07827225.9        |  | -          |  | Examination |  | 18.10.2027      
|India                                    |  | 18.10.2007    |  | 3100/DELNP/2009   |  | -          |  | Filed       |  | 18.10.2027      
|Israel                                   |  | 18.10.2007    |  | 198134            |  | -          |  | Examination |  | 18.10.2027      
|PCT                                      |  | 29.03.2007    |  | PCT/IL2007/000414 |  | -          |  | Expired     |  |                 
|PCT-1                                    |  | 18.10.2007    |  | PCT/IL2007/001251 |  | -          |  | Expired     |  |                 
|US Prov.                                 |  | 19.10.2006    |  | 60/852646         |  | -          |  | Expired     |  |                 
|USA                                      |  | 18.10.2007    |  | 12/446444         |  | -          |  | Examination |  | 18.10.2027      

* assuming that the patent will be registered
on the basis of the PCT (Patent Cooperation Treaty application).



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 million, $25 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.



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.





34











Bicifadine License



In January
2007, XTL Development had signed an agreement with DOV to in-license the worldwide rights for Bicifadine for the treatment of diabetic
neuropathic pain. 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 would have made milestone payments of up to $126.5 million over the
life of the license. These milestone payments may have been made in either cash and/or our ordinary shares, at our sole discretion,
with the exception of $5 million in cash, which would have been due upon or after regulatory approval. XTL
Development was 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 and all rights under the agreement reverted to DOV. Since the failure of the Bicifadine phase 2b clinical
trial, XTL Development ceased the prosecution and maintenance of those patents relating to Bicifadine, in coordination with DOV.
In March 2010, the agreement was formally terminated.



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.



The anti-cancer
drug market is very large. The National Institute of Health estimated that the total cost of cancer care in the United States
in 2007 was $226.8 billion8.
In 2008, sales of anti-cancer drugs reached a total of approximately $48 Billion9and are expected to grow to 80 billion dollars in 20110.In 2003, a new anti-cancer drug for multiple myeloma called Velcade was approved for use and marketing.



In 2008,
sales of drugs used to treat multiple myeloma in the US, France, Germany, Italy, Spain, England and Japan totaled $2.1 billion
(and is expected to rise to $5.3 billion in 2018)11.
According to their recent financial statements, actual sales of Velcade in 2011 by Johnson & Johnson12(which markets Velcade outside the US) amounted to $1.27 billion. Also, based on the financial statements of the pharmaceutical
Celgene13 (which markets Revlimid),
Revlimid sales in 2011 amounted to $3.21 billion. Velcade sales by the Japanese pharmaceutical Takeda14 (which markets velcade in the US) in 2010 amounted to $0.59
billion.












9IMS Health http://www.reuters.com/article/idUSN1453543620080515

10IMS Health http://www.thepharmaletter.com/file/46150/multiple-myeloma-market-will-more-
than-double-to-53-billion-in-2018.html

11According to IMS Health - http://www.reuters.com/article/idUSN1453543620080515

12http://files.shareholder.com/downloads/JNJ/1746723755x0x552947/211DF99C-D473-47DA-B3AF-8EE1A05361D6/2011-Annual-Report_Final.pdf
(page 32)

13http://ir.celgene.com/phoenix.zhtml?c=111960&p=irol-newsArticle&ID=1653011&highlight=

14http://www.takeda.com/pdf/usr/default/ar2011e_42865_3.pdf (page 55)



35







Competing Products for Treatment
of MM



Although there are
commercially available drugs for the treatment of MM, we plan to conduct our clinical trial so that rHuEPO will be tested and given
only to patients who have been treated with all standard therapy for MM. Thus, the drugs below are not in direct competition to
our drug. However, rHuEPO may improve the current treatments and therefore may be supplementary to them, as follows:



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 revlimid
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.



Lenalidomide (Revlimid) is used with
dexamethasone to treat patients with multiple myeloma who have already had another treatment. It is a small molecular analog of
thalidomide that was originally found based on its ability to effectively inhibit tumor necrosis factor production. Lenalidomide
is 50,000 times more potent than thalidomide in inhibiting tumor necrosis
factor-alpha, and has less severe adverse drug reactions. Nonetheless, lenalidomide, like its parent compound thalidomide,
causes venous thromboembolism (VTE), a potentially serious complication
with their use.



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 on phase
2 clinical results. The drug has several serious side effects, including neuropathy.



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 interferon 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.



36







Competing Products for Treatment
of Schizophrenia



SAM-101, if approved,
will compete with currently available marketed atypical anti-psychotics from Eli Lilly, Johnson & Johnson, Bristol-Myers Squibb/Otsuka
Pharmaceutical Co., Ltd., Pfizer Inc., AstraZeneca and others, as well as with generic brands of typical and atypical anti-psychotics.
In addition there are a number of potentially competitive compounds under development, which includes: Cariprazine, which is being
developed by Forest Laboratories, Inc.; Bifeprunox, which is being developed by Solvay Pharmaceuticals, Inc., and Lurasidone, which
is being developed by Dainippon Sumitomo Pharma Co., Ltd.



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.



SAM-101 for the Treatment of Schizophrenia



We believe that we
will either be able to purchase the selected antipsychotic and minocycline 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 future development for the treatment of schizophrenia.



DOS



Under the terms of the license agreement,
Presidio became 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.



37







If we need to change manufacturers, the
FDA and corresponding foreign regulatory agencies must approve these new manufacturers in advance, which will involve testing and
additional inspections to ensure compliance with FDA regulations and standards and may require significant lead times and delay.
Furthermore, switching manufacturers may be difficult because the number of potential manufacturers is limited. It may be difficult
or impossible for us to find a replacement manufacturer quickly or on terms acceptable to us, or at all.



Government and Industry Regulation



Numerous governmental authorities, principally
the FDA and corresponding state and foreign regulatory agencies, impose substantial regulations upon the clinical development,
manufacture and marketing of our drug candidates and technologies, as well as our ongoing research and development activities.
None of our drug candidates have been approved for sale in any market in which we have marketing rights. Before marketing in the
US, any drug that we develop must undergo rigorous pre-clinical testing and clinical trials and an extensive regulatory approval
process implemented by the FDA, under the Federal Food, Drug and Cosmetic Act of 1938, as amended. The FDA regulates, among other
things, the pre-clinical and clinical testing, safety, efficacy, approval, manufacturing, record keeping, adverse event reporting,
packaging, labeling, storage, advertising, promotion, export, sale and distribution of biopharmaceutical products.



The regulatory review and approval process
is lengthy, expensive and uncertain. We are required to submit extensive pre-clinical and clinical data and supporting information
to the FDA for each indication or use to establish a drug candidate’s safety and efficacy before we can secure FDA approval.
The approval process takes many years, requires the expenditure of substantial resources and may involve ongoing requirements for
post-marketing studies or surveillance. According to the FDA, 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 Company was granted an Orphan-drug designation
from the FDA in May 2011, for its Recombinant Erythropoietin in the US. Orphan-drug designation is granted by the FDA Office of
Orphan Drug Products to novel drugs or biologics that treat a rare disease or condition affecting fewer than 200,000 patients in
the US. The designation provides the drug developer with a seven-year period of US marketing exclusivity if the drug is the first
of its type approved for the specified indication or if it demonstrates superior safety, efficacy, or a major contribution to patient
care versus another drug of its type previously granted the designation for the same indication, as well as with tax credits for
clinical research costs, the ability to apply for annual grant funding, clinical research trial design assistance and waiver of
Prescription Drug User Fee Act (PDUFA) filing fees.



The Company may apply the European Medicines
Agency in order to obtain Orphan-drug designation for its Recombinant Erythropoietin in Europe. Orphan designation is granted by
the European Medicines Agency, following a positive opinion from the Committee
for Orphan Medicinal Products, to a medicinal product that is intended for the diagnosis, prevention or treatment of a life-threatening
or a chronically debilitating condition affecting not more than five in 10,000 persons in the European Community when the
application for designation is submitted. Orphan drug designation provides the sponsor with access to the Centralized Procedure
for the application for marketing authorization, protocol assistance, up to a 100% reduction in fees related to a marketing authorization
application, pre-authorization inspection and post-authorization activities, and could provide ten years of market exclusivity
in the EU, once approved for the treatment of multiple myeloma.



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 (investigational new drug), or at any time prior to receiving marketing approval of the NDA (new drug
application). To receive fast track designation, an applicant must demonstrate that the drug:



38







| | · | 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, and the number of sites participating
in the trial;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring
clinical trials or delays in approvals from a study site’s review board;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | longer treatment time required to demonstrate efficacy or determine the appropriate product dose;
| | - | -------------------------------------------------------------------------------------------------



| | · | insufficient supply of the drug candidates;
| | - | -------------------------------------------



| | · | adverse medical events or side effects in treated patients; and
| | - | ---------------------------------------------------------------



| | · | ineffectiveness of the drug candidates.
| | - | ---------------------------------------



In addition, the FDA may place a clinical
trial on hold or terminate it if it concludes that subjects are being exposed to an unacceptable health risk. Any drug is likely
to produce some toxicity or undesirable side effects when administered at sufficiently high doses and/or for a sufficiently long
period of time. Unacceptable toxicity or side effects may occur at any dose level at any time in the course of studies designed
to identify unacceptable effects of a drug candidate, known as toxicological studies, or clinical trials of drug candidates. The
appearance of any unacceptable toxicity or side effect could cause us or regulatory authorities to interrupt, limit, delay or abort
the development of any of our drug candidates and could ultimately prevent approval by the FDA or foreign regulatory authorities
for any or all targeted indications.



39







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 subsidiary, XTEPO, is an
Israeli privately-held company incorporated in November 2009 for the execution of the Bio-Gal transaction and which holds the exclusive
license of the use patent of rHuEPO drug for multiple myeloma.



40







Our wholly-owned subsidiaries, XTL Biopharmaceuticals,
Inc. and XTL Development, Inc., are each incorporated in Delaware. Since November 2008, these companies
have not been active.



Property, Plant and Equipment



Since August 2010 we lease offices of approximately
255 square meters, in Herzliya, Israel. The basic lease period is for 36 months with an option for an additional 24-month period.
In addition, the Company has the right to terminate the agreement on the date of an alternative tenant in its place, pursuant to
approval of the landlord.



To our knowledge, there are no environmental
issues that affect our use of the properties that we lease.



ITEM 4A. UNRESOLVED STAFF COMMENTS



None.



41







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 IFRS (International Financial Reporting Standards) for the years ended December 31, 2011, 2010 and 2009, and as of December
31, 2011 and 2010, contained in “Item 18. Financial Statements” and with any other selected financial data included
elsewhere in this annual report.



In April 2009, the Company was de-listed
from NASDAQ after the Bicifadine trial did not meet its endpoints. At the same time, the Company became primarily listed on TASE
(Tel Aviv Stock Exchange) and therefore is not entitled to the exemptions previously granted in Israel due to its listing on NASDAQ.



Pursuant to the requirement to comply with
all the Israeli listing requirements, the Company adopted IFRS (International Financial Reporting Standards) as the accounting
policy of the Company starting on 2009 and effective since January 1, 2007.



Selected Financial Data -



The tables below present selected financial
data for the fiscal years ended as of December 31, 2011, 2010 and 2009. We have derived the selected financial data for the fiscal
years ended December 31, 2011, 2010 and 2009 from our audited consolidated financial statements, included elsewhere in this report
and prepared in accordance with IFRS issued by the IASB. You should read the selected financial data in conjunction with “Item
3. Key Information” and “Item 8. Financial Information” and “Item 18. Financial Statements.”



Consolidated Statements of Comprehensive Income:

|                                                                            |  | Year ended December 31,                          |            
|--------------------------------------------------------------------------- |  | ------------------------------------------------ | -----------
|                                                                            |  | 2011                                             |            
|                                                                            |  | U.S dollars in thousands (except per share data) |            
|                                                                            |  |                                                  |            
|Research and development costs                                              |  |                                                  | 158        
|General and administrative expenses (income)                                |  |                                                  | 1,078      
|Other gains (losses), net                                                   |  |                                                  | 12         
|                                                                            |  |                                                  |            
|Operating income (loss)                                                     |  |                                                  | (1,224     
|                                                                            |  |                                                  |            
|Finance income                                                              |  |                                                  | 24         
|Finance costs                                                               |  |                                                  | 7          
|                                                                            |  |                                                  |            
|Financial income (costs), net                                               |  |                                                  | 17         
|                                                                            |  |                                                  |            
|Income (loss) before taxes on income                                        |  |                                                  | (1,207     
|tax benefit                                                                 |  |                                                  | -          
|                                                                            |  |                                                  |            
|Net income (loss) for the year attributable to equity holders of the parent |  |                                                  | (1,207     
|                                                                            |  |                                                  |            
|Basic and diluted earnings (loss) per share (in U.S. dollars)               |  |                                                  | (0.006     
|                                                                            |  |                                                  |            
|Weighted average number of issued ordinary shares                           |  |                                                  | 201,825,645



42







*) Including reduced -expenses
which result from forfeiture of shares that were contingent on the performance of the former chairman and former CEO, see also
Note 15b to the financial statements.



|Consolidated Statements of Financial Position Data:
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|                                                   
|Cash, cash equivalents and bank deposits           
|Working capital                                    
|Total assets                                       
|Total shareholders' equity                         



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
of multiple myeloma, or MM, schizophrenia 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, and private investments in public equities.



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.



We did not generate revenues in 2011, 2010
and 2009 as we are a development stage company, and thus we did not have cost of revenues for those years.



Our research and development expenses in
2011 and 2010 consisted of primarily expenses related to the preparations for the rHuEPO drug clinical trial development plan.
As part of the preparations, the Company is currently conducting a research which includes collection of data relating to the level
of specific proteins in the blood of a group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical
trial protocol. This collected research data will be integrated in the Phase 2 clinical trial. The costs of such preparations
comprise of, among others, costs in connection with medical regulation, patent registration costs, medical consulting costs. Additionally,
we had amortization expenses of the exclusive right to examine a medical technology in the field of the immune system. We did not
have research and development expenses in 2009.



43







Our general and administrative expenses
consist primarily of salaries, consultant fees, 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. In 2009, we recorded a reversal of non cash option compensation
expenses that related to options granted to our former chairman and former CEO in an amount of approximately $ 4.1 million according
to IFRS 2 and as a result the net general and administrative expenses ended with negative expenses (see “non-cash option
compensation” below).



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. According to IFRS, business development expenses are presented based
on the function of expense in general and administrative. 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 was revalued based on the then current
fair value, at each subsequent reporting date. On September 30, 2009, in accordance with IFRS 2 and after the Company's management
examined the issue, in furtherance to the Company’s financial condition, the classification of the transaction was modified
to an equity-settled transaction.



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
according to the Black-Scholes valuation model. The expense is included in the respective categories of expense in the statement
of comprehensive income. In 2009 we reversed a significant amount of $4.1 million related to the former Chairman's and former CEO's
non-cash option compensation expenses granted in August 2005 and March 2006, respectively, and which were subject to a market capitalization/share
price milestone(s)that were not achieved. According to IFRS 2,
due to the fact that these options were linked to market capitalization/share price milestone(s), we were required to reverse the
accumulated related expenses that were recorded over the years since the grant date, immediately after their termination from the
company in March-April 2009 and after we acknowledged that the milestone(s) were not achieved. We experienced a reduction in non-cash
compensation in the fiscal year ended December 31, 2009 (even excluding the reversal of the options related to the former Chairman
and former CEO) due to the restructuring plan of the Company from November 2008 and the reduction in the number of employees (see
note 16b to the consolidated financial statements). We expect to incur significant increase on the non-cash compensation for the
future, primarily due to the increase in the number of employees and additional grants of options to current employees.



For awards of options and warrants to consultants
and other third-parties, according to IFRS 2, the treatment of such options and warrants is the same as employee options compensation
expense (see note 2m to the consolidated financial statements). We record compensation expense based on the fair value of the award
at the grant date according to the Black-Scholes valuation model. According to the IFRS 2, the Company recognizes options expenses
using the graded vesting method (accelerated amortization). Graded vesting means that portions of a single option grant will vest
on several dates, equal to the number of tranches. The company treats each tranche as a separate share option grant; because each
tranche has a different vesting period, and hence the fair value of each tranche is different. Therefore, under this method the
compensation cost amortization is accelerated to earlier periods in the overall vesting period.



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.



44







Results of Operations



Years Ended December 31, 2011, 2010 and 2009



Revenues. The Company did not produce
any revenues for the years ended December 31, 2011, 2010 and 2009. We do not anticipate to recognize material revenue in 2012.



Cost of Revenues. There was no cost
of revenues for the years ended December 31, 2011, 2010 and 2009 as we did not generate revenues in these years. .



Research and Development Costs. Research
and development expenses in 2011 and 2010 amounted to $158 thousand and $64 thousand, respectively and derived mainly from costs
related to the preparations to the rHuEPO drug clinical trial development plan. As part of the preparations, the Company conducts
a research which includes collection of data relating to the level of specific proteins in the blood of a group of patients with
multiple myeloma, which will assist in focusing the Phase 2 clinical trial protocol. These collected research data will be integrated
in the Phase 2 clinical trial. The costs of such preparations comprises of, among others, medical regulation, medical consulting
, expenses relating to clinical insurance and amortization of the exclusive right to examine a medical technology in the field
of the immune system. We had no research and development expenses in 2009. (see “2009 Restructuring” below and also
see Note 10c to the financial statements). The increase in research and development expenses resulted mainly due to the fact
that the Bio-Gal transaction was completed in August 2010, thus we incurred expenses relating to the preparations related to rHuEPO
drug clinical trial development plan only thereafter. Also the increase in research and development expenses is due to amortization
expenses in connection with the technology examination abovementioned which began in September 1, 2010 and ended in November 30,
2011.



Excluding non-cash compensation costs and
amortization expenses, we expect to increase our level of research and development costs during 2012 mainly due to the plan to
receive approval to initiate the phase 2 clinical trial on rHuEPO for the treatment of multiple myeloma, costs related to SAM-101
development, and costs related to new technologies, if in-licensed/acquired.



General and Administrative Expenses.
General and administrative expenses in 2011 totaled approximately $1,078 thousand, compared to $1,222 thousand in 2010 and income
(decrease in expenses) of approximately $2,429 thousand in 2009. The decrease in general and administrative expenses in 2011 compared
to 2010 and the increase in general and administrative expenses in 2010 compared to 2009 were due mainly to the following reasons:



45







The decrease in general and administrative
expenses in 2011, compared to 2010, is mainly due to decline in options expenses which were accounted for by the graded vesting
method under which the expenses are declined over the vesting period, as explained above, decrease in Directors and Officers Liability
Insurance expenses which reflects the decrease in the annual premium in view of the improvement in Company's parameters, decline
in professional services expenses and decline in expenses for maintenance of patents principally for the EPO drug following registration
of patents in all countries where it was filed in 2010, offset by a growth in salary costs/consulting fees of senior officers which
are updated in the second half of 2010 according to the agreements and a growth in rent expenses which reflect the lease agreement
of our permanent offices since august 2010. During 2009, the Company recorded a decrease in general and administrative expenses
after expenses from previous years in respect of options of the former chairman and former CEO of the Company were reversed because
the terms of the options that were contingent on the performance were not met. The effect of the options which were forfeited immediately
after their departure amounted to approximately $4.1 million. General and administrative expenses in 2009 less the effect of the
reverse of expenses in respect of options of the former chairman and former CEO of the Company totaled approximately $1,672 thousand,
compared to approximately $ 1,222 thousand in 2010, a decrease of approximately $450 thousand (27%) which mainly arises from
the decrease in salary expenses following the restructuring plan in the Company in 2009, decrease in office lease expenses (terminating
the US office lease agreement, changing the Israeli offices while reducing office space) and decrease in the Company's operating
expenses as part of the restructuring plan performed by the Company immediately after announcing the failure to achieve the Bicifadine
drug clinical trial endpoints at the end of 2008.



Excluding non-cash compensation costs, we
expect to increase our level of general and administrative costs during 2012 compared to 2011. This is due to the fact that in
2011, we have broadened our product pipeline by in-licensing SAM-101 (see “Item 4. Information on the Company - Business
Overview - Licensing Agreements and Collaborations”) and we may license additional technologies in the upcoming year.



Other gains (losses), net.The Company
derived other gains in the year ended December 31, 2011 of approximately $ 12 thousand which primarily originated from reduced
allowance for suppliers in foreign subsidiaries for previous years based on the aging and condition of the debt, compared to other
gains in the amount of approximately $ 30 thousand for the year ended December 31, 2010.. The Company derived other gains
in 2009 of approximately $ 139 thousand which originated from agreements entered into with different suppliers mainly in the
U.S. in respect of previous years relating to the activity of the clinical trial of Bicifadine which was terminated at the end
of 2008 and which derived to the Company reduced costs.



Net Financial expenses. Finance income
(expenses) for the years ended December 31, 2011, 2010 and 2009 totaled approximately $ 17 thousand, $ (1) thousand and
$ (4) thousand, respectively. The increase in finance income in 2011 compared to 2010 and 2009 derives mainly from interest
income on short-term bank deposits whose carrying amount during 2011 was significantly higher compared to 2010 and 2009 and this
as a result of effecting the issuance in March 2011 (see cash flow report to the consolidated financial statements and note 16a).



“Income Taxes” We had
no income tax expense for the years ended December 31, 2011 and 2010 due to the losses incurred and we did not recognize any deferred
tax benefits, since it is not "more likely than not" that we will be able to generate profits in the future to realize
the deferred taxes.

Tax benefit for the year ended December 31, 2009, amounted to
$23 thousand. In November 2009 Congress passed the Worker Homeownership & Business Assistance Act of 2009 which allows businesses
to carryback operating losses for up to 5 years.  AS a result of this Act the company was able to carry back its 2009 losses
to tax years ended December 31, 2003. This benefit was partially offset by New York State Franchise tax.



46







2009 Restructuring



Following the failure of the Bicifadine
trial in November 2008, we terminated the employment of most of our employees. As a result, we incurred a payment of $420 thousand
during 2009 related to employee dismissal costs, all of which were accrued in 2008. In February 2009, we appointed a Chief Executive
Officer whose terms of employment have been approved in March 2010, effective August 3, 2010, upon the completion of the Bio-Gal
transaction. In July 2009, we appointed a Chief Financial Officer.



Critical Accounting Policies



Basis of presentation of the financial
statements. The financial statements of the Group as of December 31, 2011 and 2010 and for each of the three years in the period
ended December 31, 2011 have been prepared in accordance with International Financial Reporting Standards which are standards and
interpretations issued by the International Accounting Standards Board ("IFRS") and include the additional disclosure
required in accordance with the Israeli Securities Regulations (Annual Financial Statements), 2010.



The significant accounting policies described
below are consistent with those of all periods presented, unless it is indicated otherwise.



The consolidated financial statements have
been prepared under the historical cost convention.



The preparation of financial statements
in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the Group's management to exercise
its judgment in the process of applying the Group's accounting policies. The areas that involve judgment which has significant
effect or complexity or where assumptions and estimates are significant to the consolidated financial statements are disclosed
in Note 3. Actual results could significantly differ from the estimates and assumptions used by the Group's management.



The Group's operating cycle is 12 months.



The Group analyses the expenses recognized
in the statement of comprehensive income by classification based on the function of expense.



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 IFRS (International Financial Reporting Standard). 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:



47







Share-based payment transactions:
The Company operates a number of share-based payment plans to employees and to other service providers who render services that
are similar to employees' services that are settled with the Company's equity instruments. In this framework, the Company grants
employees, from time to time, and, at its election, options to purchase Company's shares. The fair value of services received from
employees in consideration of the grant of options is recognized as an expense in the statement of comprehensive income (loss)
and correspondingly carried to equity. The total amount recognized as an expense over the vesting term of the options (the term
over which all pre-established vesting conditions are expected to be satisfied) is determined by reference to the fair value of
the options granted at grant date, except the effect of any non-market vesting conditions.



Non-market vesting conditions are included
in the assumptions used in estimating the number of options that are expected to vest. The total expense is recognized over the
vesting period, which is the period over which all of the specified vesting conditions of the share-based payment arrangement are
to be satisfied. In each reporting date, the Company revises its estimates of the number of options that are expected to vest based
on the non-market vesting conditions and recognizes the impact of the revision to original estimates, if any, in the statement
of comprehensive income (loss) with a corresponding adjustment in equity.



When the options are exercised, the Company
issues new shares. The proceeds net of any directly attributable transaction costs are credited to share capital (nominal value)
and share premium.



Share-based payments for share appreciation
rights with settlement alternatives, at the Company's sole discretion, which were granted to the Company's service provider, were
accounted in the past as a cash-settled grant. The Company re-measured the value of the liability at each reporting date. On September 30,
2009, in accordance with IFRS 2 and after the Company's management examined the issue, in furtherance to the Company's financial
condition (see Note 1c to the financial statements), the classification of the transaction was modified to an equity-settled
transaction. The Company is not obligated to settle the transaction in cash.



Share-based payment transactions in which
the Company acquired assets as consideration for the Company's equity instruments are measured at the value of the assets acquired.



The fair value of stock
options granted with service conditions is determined using the Black-Scholes valuation model. Such value is recognized
as an expense over the service period, net of estimated forfeitures, using the graded vesting method under IFRS 2. The fair value
of stock options granted to the former Chairman and former CEO with market conditions was determined using a Monte Carlo Simulation
method. Such value is recognized as an expense using the accelerated method under IFRS 2. The options of the former Chairman and
former CEO mentioned above expired after their departure from the Company in March and April, 2009 respectively and the accumulated
expenses related to these options recorded over the years were reversed in year 2009 (see note 16b to the consolidated financial
statements).



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.



Research and development expenses:
research expenditure is recognized as an expense when incurred. Costs arising from a development project are recognized as intangible
assets when the following criteria are met:



| | - | It is technically feasible to complete the intangible asset so that it will be available for use;
| | - | -------------------------------------------------------------------------------------------------

| | - | Management intends to complete the intangible asset and use or sell it;
| | - | -----------------------------------------------------------------------

| | - | There is an ability to use or sell the intangible asset;
| | - | --------------------------------------------------------



48







| | - | It can be demonstrated how the intangible asset will generate probable
future economic benefits;
| | - | ------------------------------------------------------------------------------------------------

| | - | Adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset are available; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | - | The expenditure attributable to the intangible asset during its development can be reliably measured.
| | - | -----------------------------------------------------------------------------------------------------



Other development expenditures that do not
meet these criteria are recognized as an expense as incurred. During the reported period, the Group did not capitalize development
costs to intangible assets.



Unamortized intangible assets - amortization
of an asset on a straight-line basis over its useful life begins when development procedure is complete and the asset is available
for use. These assets are reviewed for impairment once a year or whenever there are indicators of a possible impairment, in accordance
with the provisions of IAS 36, “Impairment of Assets”.



Acquired development assets are not systematically
amortized and are tested for impairment annually in accordance with the provisions of IAS 36, “Impairment of Assets”.



The Company recognizes at fair value an
intangible asset relating to research and development costs acquired from third parties.



Amortized intangible assets - an exclusive
right to examine an acquired technology in the field of the immune system with a finite life of 15 months starting September 1,
2010 that is amortized on a straight-line basis over the useful life of this right. On November 30, 2011, the amortization
of this right ceased.



Government grants for approved projects
were deducted from the relevant expense.



New and amended IFRS standards and IFRIC interpretations:



Below are standards and amendments to existing
standards that have been issued and are effective for reporting periods after January 1, 2011:



Amendment to IFRS 7, "Financial Instruments:
Disclosures". This amendment represents part of the improvements to IFRSs published in May 2010. This amendment changes part
of the quantitative and qualitative disclosures required for the nature and extent of risks associated with financial assets and
clarifies the interaction between these quantitative and qualitative disclosures. This amendment is applied for annual reporting
periods beginning on or after January 1, 2011. The Group adopted this amendment on January 1, 2011 and its initial adoption
had no material impact on the Group's financial statements.



Below are standards and amendments and interpretations
to existing standards that are not yet effective and have not been early adopted by the Group:



49







a)        IFRS
9, "Financial Instruments" ("IFRS 9"). The first part of IFRS 9 which deals with classification and measurement
of financial assets was published in November 2009 and the second part of IFRS 9 which includes guidance on financial liabilities
and derecognition of financial instruments was published in October 2010. IFRS 9 replaces the parts of IAS 39, "Financial
Instruments: Recognition and Measurement" ("IAS 39") that relate to the classification and measurement of financial
instruments. IFRS 9 requires financial assets to be classified into one of the two following categories: financial assets measured
after initial recognition at fair value and financial assets measured after initial recognition at amortized cost. The decision
to which category a financial asset should be classified is made on initial recognition. This classification is driven by the model
the entity manages its financial instruments (its business model) and the contractual characteristics of the cash flows from the
instrument. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements. The main change is that, in cases where
an entity has a financial liability that is designated at fair value through profit or loss, the part of a change in fair value
due to changes in the liability's credit risk (an entity's own credit risk) is recorded directly in other comprehensive income
rather than the statement of income, unless this creates an accounting mismatch. There is not subsequent recycling of the amounts
in other comprehensive income to profit or loss. But, accumulated gains or losses may be transferred within equity.



In December 2011, an amendment to IFRS 9
and to IFRS 7, "Financial Instruments: Disclosures" ("the amendment") was published. The amendment deferred
the mandatory effective date of IFRS 9 and the transitional provisions upon implementation and added certain transition disclosure
requirements ("the additional disclosures").



According to IFRS 9, after its amendment,
as above, both parts of IFRS 9 will apply for annual periods beginning on or after January 1, 2015. Entities may elect to apply
IFRS 9 early but it is not possible to apply the second part of IFRS 9 early without applying at the same time the first part of
IFRS 9. However, the first part of IFRS may be applied earlier without being required to apply at the same time the second part
of IFRS 9.



Entities that adopt IFRS 9 for reporting
periods:



1.          Beginning
before January 1, 2012 - are not required to restate prior periods upon or provide the additional disclosures upon initial
adoption.



2.          Beginning
on or after January 1, 2012 and before January 1, 2013 - may elect to either restate its prior periods or provide the additional
disclosures.



3.          Beginning
on or after January 1, 2013 - are not required to restate prior periods but are required to provide the additional disclosures.



The Group is assessing the possible impact
of IFRS 9 on its financial statements and the timing of its implementation.



50







b)          IFRS
10, "Consolidated Financial Statements" ("IFRS 10"). IFRS 10 replaces all the guidance on control and consolidation
of financial statements in IAS 27, "Consolidated and Separate Financial Statements" ("IAS 27") and SIC-12,
"Consolidation - Special Purpose Entities". IFRS 10 redefines "control". The new definition focuses on the
requirement that control and variable returns should exist in order for control to exist. "Power" is the current ability
to direct the activities which significantly affect the returns. IFRS 10 contains, inter-alia, guidance relating to differentiating
between participating rights and protective rights as well as guidance relating to cases where an investor is acting on behalf
of another party or on behalf of a group of parties (agent/principal relationships). The core principle that a consolidated entity
presents a parent company and its subsidiaries as if they are a single entity remained unchanged as well as the mechanics of consolidation.
IFRS 10 will be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted. If an
entity elects to apply earlier, it shall disclose this fact and early apply IFRS 11, "Joint Arrangements" ("IFRS
11"), IFRS 12, "Disclosures of Interests in Other Entities" ("IFRS 12"), IAS 27 (Revised), "Separate
Financial Statements" ("IAS 27R"), IAS 28 (Revised), "Associates and Joint Ventures" ("IAS 28R")
simultaneously. The initial adoption of this amendment is not expected to have a material impact on the Group's financial statements.



c)           IAS
28R - IAS 28R replaces IAS 28, "Investments in Associates" ("IAS 28") and the key changes contained therein
compared to IAS 28 relate to adding explicit references to the application of the equity method when accounting for investments
in joint ventures as a result of the new guidance prescribed by IFRS 11. IAS 28R will be applied for annual periods beginning on
or after January 1, 2013. Earlier application is permitted. If an entity elects to apply earlier, it shall disclose this fact
and early apply IFRS 10, IFRS 11, IFRS 12 and IAS 27R simultaneously. The Group is assessing the possible impact of IAS 28R on
its financial statements and the timing of its implementation.



d)           IFRS
13, "Fair Value Measurements" ("IFRS 13") - focuses on improving consistency and reducing complexity of fair
value measurement by providing a precise definition of "fair value" and a single source of fair value measurement and
disclosure requirements for use across IFRSs. The requirements of IFRS 13 do not extend the use of fair value accounting but provide
guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. IFRS 13 will
be applied for annual periods beginning on or after January 1, 2013. Earlier application is permitted while disclosing this
fact. IFRS will be applied prospectively as of the beginning of the annual period in which it is initially applied. The disclosure
requirements of IFRS 13 do not need to be applied in comparative information for periods before initial application of IFRS 13.
The Group is assessing the possible impact of IFRS 12 on its financial statements and the timing of its implementation.



e)           The
amendment to IAS 32, "Offsetting Financial Assets and Financial Liabilities" ("the amendment to IAS 32") and
the amendment to IFRS 7, "Disclosures: Offsetting Financial Assets and Financial Liabilities" ("the amendment to
IFRS 7") were published in December 2011. The amendment to IAS 32 does not modify the existing model in IAS 32, "Financial
Instruments: Presentation" regarding offsetting financial assets and financial liabilities ("offsetting") but clarifies
that in order for the criteria of offsetting to exist in the financial statements it is required, inter alia, that the right of
set-off must be available today namely, it should not be contingent on a future event and, in addition, it is required that the
right of set-off will be legally enforceable in all of the following circumstances: in the normal course of business and in the
event of default, insolvency or bankruptcy of the entity and all counterparties. The amendment to IAS 32 also clarifies the circumstances
in which the right of set-off through gross settlement mechanism will meet the criteria of right to set-off by net settlement.



The amendment to IFRS 7 adds new disclosure
requirements that focus on quantitative information about recognized financial instruments that are offset in the statement of
financial position as well as recognized financial instruments that are subject to certain netting arrangements (irrespective of
whether they are offset in the statement of financial position). The amendment to IAS 32 will be retrospectively applied for annual
periods beginning on or after January 1, 2014. Earlier application is permitted. The amendment to IFRS 7 will be retrospectively
applied for annual and interim periods beginning on or after January 1, 2013.



51







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. Since 2009 (after the Bicifadine trial did not meet its endpoints) the Company’s
head office moved to Israel and thus the portion of our expenses in New Israeli Shekels (“NIS”) and our cash held
in NIS has increased, mainly due to payment to Israeli employees and 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. Additionally, our future activities could lead us to perform a clinical trial in Israel, which may lead us to reassess
our use of the US dollar as our functional currency.



Governmental Economic, Fiscal, Monetary or Political Policies
that Materially Affected or Could Materially Affect Our Operations



The income of the Company is subject to
corporate tax at the regular rate; the guidance of the amendment to the Israeli Income Tax Ordinance, 2005 from August 2005 prescribes
a gradual reduction in the corporate tax rates and the resulting corporate tax rates starting 2009 are as follows: 2009 - 26% and
2010 and thereafter - 25%.



On July 14, 2009, the “Knesset”
(Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and
2010), 2009, which prescribes, among others, an additional gradual reduction in the corporate tax rates starting 2011 to the following
tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.



In December 2011, following the enactment
of the Law for the Changing the Tax Burden (Legislative Amendments), 2011(hereafter - "Tax Burden Distribution Law"),
the phased reduction in the corporate tax was eliminated, and corporate tax rate in 2012 and thereafter was set to 25%.



As of December 31, 2011, XTL Biopharmaceuticals
Ltd. did not have any taxable income. As of December 31, 2011, our net operating loss carry forwards for Israeli tax purposes registered
on behalf of XTL Biopharmaceuticals Ltd amounted to approximately $24 million. Under Israeli law, these net-operating losses may
be carried forward indefinitely and offset within XTL Biopharmaceuticals Ltd only, against future taxable income, including capital
gains from the sale of assets used in the business, with no expiration date.



In order to obtain tax exemption for the
share swap transaction with Bio-Gal pursuant to Sections 104 and 103 to the Israeli Income Tax Ordinance (Revised), 1961, we signed
an agreement with the Israeli Tax Authority on July 15, 2010. Below is the summary of the principal conditions for the share swap
and the transfer of the intangible asset:



| | 1. | The balance of the Company's business losses and capital losses for tax purposes was reduced to approximately NIS 80 million
(approximately $ 22 million) and approximately NIS 0.7 million (approximately $ 0.19 million), respectively. This
item is not to derogate from the Tax Assessing Officer's authority to establish that the balance of losses is actually lower than
the abovementioned amounts.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



52







| | 2. | Any losses incurred to the Company prior to the share swap, after their reduction as discussed in paragraph 1 above, will not
be offset against any income originating from Xtepo (the transferred company) or against a capital gain from the sale of shares
of Xtepo.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Xtepo shareholders will not be allowed to sell their shares in the Company for a period of two years from the end of the year
of completion of the transaction (“the Lock-up Period”), subject to any changes in legislation.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The Company and Xtepo both undertake to maintain their main economic activity as it was prior to the transaction during the
Lock-up Period.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | The Company will not be permitted to sell its holdings in Xtepo for the duration of the Lock-up Period.
| | -- | -------------------------------------------------------------------------------------------------------



It is indicated that the guidance to Sections
104 and 103 to the Israeli Income Tax Ordinance which deal with restructuring and mergers impose statutory limitations and various
conditions on the entities participating in the change in structure/merger, among others, restrictions on dilution of holdings
from raising by a prospectus or by private placements. The summary of the principles detailed above does not constitute a substitute
to the overall articles. On February 1, 2012, the Tax Authority published a position circular regarding the limitations in
sections 103 and 104 according to which a relief is granted in the issue of the various limitations under the sections mentioned
above during the lock-up period, inter alia, in instances of allocation of rights to "new" shareholders by private placements.



Since April 7, 2009, we did not have a “permanent
establishment” and activity in the US, and our subsidiaries do not perform any activity. Our board of directors consists
of a majority of Israeli residents and our management is domiciled in Israel. However, for the period we did have a “permanent
establishment” 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 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.



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, option and warrant exercises,
and private investments in public equities. As of December 31, 2011, we had received net proceeds of approximately $77.8 million
from various private placement transactions, including net proceeds of approximately $ 1.5 million from the Bio-Gal transaction
in August 2010, net proceeds of approximately $45.7 million from our initial public offering in September 2000, net proceeds of
approximately $15.4 million from the 2004 placing and open offer transaction, net proceeds of approximately $1.75 million from
our public offering on the Tel Aviv Stock Exchange (TASE) in March 2011 and proceeds of approximately $2.1 million from the exercise
of options and warrants.



As of December 31, 2011, we had approximately
$1.5 million in cash, cash equivalents, and short-term bank deposits, an increase of $0.4 million from December 31, 2010. Cash
used in operating activities for the year ended December 31, 2011, was $1.3 million, as compared to $0.7 million for the year ended
December 31, 2010. This increase in cash used in operating activities is explained by the payment of debt to suppliers, service
providers and other payables in the current period and in previous periods according to the payment terms. For the year ended December
31, 2011, the net cash used in investing activities totaled at approximately $1.4 million, as compared to net cash used in investing
activities of $0.1 million for the year ended December 31, 2010. The increase in cash used in investment activities was primarily
due to the cash received from the fundraising completed on March 7, 2011 that were invested in short-term deposits. For the
year ended December 31, 2011, net cash provided by financing activities totaled approximately $1.7 million and was primarily due
to the mentioned Israeli public fundraising. For the year ended December 31, 2010, net cash provided by financing activities totaled
approximately $1.5 million and was primarily due to the completion of the Bio-Gal transaction under which we received this mentioned
amount.



53







Continuation of our current operations is
dependent upon the generation of additional financial resources through agreements for the monetization of our rHuEPO for multiple
myeloma, SAM-101 for schizophrenia, and residual in the DOS program or through external financing. The Company has no revenues
from operations at this stage and it is dependent on external financing sources. The Company's management believes that given
the Company's current business plan, the cash and short term investment together with the proceeds from the private placement and
the exercise of warrants in March 2012, totaling approximately $3.8 million (see note 24 to the consolidated financial statements),
will enable it to fund its activities through at least into 2014. However, the actual amount of cash that the Company will need
to fund its operations is subject to many factors, including, but not limited to, the timing, design and conduct of the clinical
trials of our existing drug candidates, any future projects which may be in-licensed or any other business development activities.
For example, changing circumstances and/or in-licenses of new technologies may cause us to consume capital significantly faster
than we currently anticipate, and we may need to spend more money than currently expected because of circumstances beyond our control.
The Company will incur additional losses in 2012 from research and development activities and from current operation which will
be reflected in negative cash flows from operating activities.  Accordingly, the Company will need to raise additional cash
in the future thru the issuance of equity securities. However, if the Company is not be able to raise additional capital at acceptable
terms, the Company may need to reduce operations or sell or license to third parties some or all of our technologies.
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 in
future to operate is subject to many factors, some of which are beyond our control. These factors include the following:



| | · | the accuracy of our financial forecasts;
| | - | ----------------------------------------



| | · | the timing and cost 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 candidates that we have
acquired rHuEPO for the treatment of MM, SAM-101 for the treatment of schizophrenia, 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.
| | - | -----------------------------------------------------------------------------------------------------



54







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.”



Research and Development, Patents and Licenses



Research and development costs in 2011 and
2010 substantially derived from costs related to the preparations to the rHuEPO drug clinical trial development plan. As part of
the preparations, the Company is currently conducting a research which includes collection of data relating to the level of specific
proteins in the blood of a group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical trial protocol.
This collected research data will be integrated in the Phase 2 clinical trial. The costs of such preparations comprise of,
among others, costs in connection with medical regulation, patent registration costs, medical consulting costs. Additionally, we
had amortization expenses of the exclusive right to examine a medical technology in the field of the immune system. We had no research
and development expenses in 2009 (see also Note 17 to the financial statements).



rHuEPO for the Treatment of MM



According to the clinical trial’s
preliminary plan we received as part of the Bio-Gal transaction we are planning on performing a prospective, multi-center, double
blind, placebo controlled, 50-patient phase 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 receive approval to commence such trial in the second half of 2012 and we expect it to last two-and-a-half years and
its cost is estimated at $1-1.5 million. We have not yet submitted the preliminary plan, which may be updated, to the authorities
and/or the applicable IRB.



While we have begun preliminary discussions
with potential clinical sites and third party vendors for the planned study, we have not yet determined the final size and scope
of the study, and as a result, we cannot certify the above estimations regarding the clinical trial period and cost to complete
the study.



SAM-101 for the Treatment of Schizophrenia



According to the preliminary development
plan we received as part of the MinoGuard transaction, it is planned to perform a multi-center phase 2b clinical trial under the
FDA, using our proprietary combination. This preliminary plan is subject to changes in accordance with our regulatory advisors
and the FDA/other regulatory agencies requirements.



DOS Program for the Treatment of Hepatitis C



Under the terms of the license agreement,
Presidio became responsible for all further development and commercialization activities and costs relating to the DOS program.
According to our knowledge, as of today, the DOS program compounds are still 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.



55







The information above provides estimates
regarding the costs associated with the current estimated range of the time that will be necessary to complete the development
phase for rHuEPO for the treatment of MM and develop SAM-101 for the treatment of schizophrenia. 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.”



The following table sets forth the research
and development costs for the years 2009-2011 including all costs related to the clinical-stage projects, our pre-clinical activities,
and all other research and development. We did not carry any research and development activity and costs in 2009, after the failure
of the phase 2b clinical trial in November 2008. We have started preparations for rHuEPO clinical development in the last quarter
of 2010 (after the completion of the Bio-Gal transaction on August 2010). We in-licensed SAM-101 in November 2011 (see "Item
4. Licensing Agreements and Collaborations") and we estimate that incur significant costs on its development in the upcoming
years. Whether or not and how quickly we commence and 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 will probably increase significantly.



For a further discussion of factors that
may affect our research and development, see “Item 3. Risk Factors - Risks Related to Our Business,” and “Item
4. Information on the Company - Business Overview - Products Under Development” above.



|                               |  | Research and development Expenses in thousand US$ |    
|------------------------------ |  | ------------------------------------------------- | ---
|                               |  | Years ended December 31,                          |    
|                               |  | 2011                                              |    
|                               |  |                                                   |    
|rHuEPO                         |  |                                                   | 70 
|SAM-101                        |  |                                                   | -  
|Anti TNF (Yeda Option)         |  |                                                   | 88 
|Total Research and development |  |                                                   | 158



Trend Information



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



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, 2011, we had known contractual
obligations, commitments and contingencies of $216 thousands which relate to our offices and vehicle operating lease obligations,
of which $122 thousands is due within the next year, with the remaining balance due as per the schedule below.



56







According to the vehicle operating lease
agreements we have the sole right to terminate these agreements with 1-2 months paid notice. We also have the sole right to extend
such office lease period by additional 24 months.



We do not carry any contractual obligations,
commitments or contingencies relates to research and development operation.



|                            |  | Payment due by period as of December 31, 2011 (in thousands of US$) |    
|--------------------------- |  | ------------------------------------------------------------------- | ---
|Contractual Obligations     |  | Total                                                               |    
|Operating lease obligations |  |                                                                     | 216
|Total                       |  |                                                                     | 216



Additionally, the VivoQuest license agreement
provides for contingent milestone payments triggered by certain regulatory and sales targets. These milestone payments total $34
million, $25 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 sole discretion. 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 Pharmaceutical, Inc. of up to approximately $126.5 million over the life of the license. 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 were also obligated to make royalty payments on future product sales net sales. We ceased
development of Bicifadine in November 2008 and since then both XTL Development and DOV ceased the prosecution and maintenance of
those patents relating to the Bicifadine. In March 2010, we formally terminated the license agreement. Therefore, we will not be
obligated to make any of the aforesaid payments.



Pursuant to our asset purchase agreement
to acquire the rights to develop rHuEPO for the treatment of MM from Bio-Gal Ltd., we are obligated to pay 1% royalties on net
sales of the product, as well as a fixed royalty payment in the total amount of $350,000 upon the successful of Phase 2. Such payment
of $350,000 mentioned above shall be made to Yeda upon the earlier of (i) six months from the Successful Completion of Phase 2
or (ii) the completion of a successful fundraising by XTL or XTEPO at any time after the completion of the Phase 2 of an amount
of minimum $2 million.



According to the agreement with MinoGuard
we are obligated to pay milestone payments to MinoGuard of up to $2.5 million based on development and marketing milesotnes as
well as 3.5% royalty of our net sales of the product and 7.5%-20% from our third-party out-license receipts, depends on the phase
of the drug at the time of an out-license transaction. It should be noted we have the sole discretion to pay any of the above amounts
in cash or by way of issuing of our shares to MinoGuard.



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 2007, 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 1,659,944 ordinary shares NIS 0.1 par value), 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 3,873,203 ordinary shares NIS 0.1 par value), vesting on a certain milestone event. 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 $1.7 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 two, or (ii) the preceding five day ADR closing price average,
divided by two). Any vested SARs will expire on January 15, 2017. As of December 31, 2011, the 3% tranche was vested and recorded
in our financial statements as capital reserve according to IFRS 2 (see note 2m to the financial statements). The 7% tranche was
not vested. In March 2010, we formally terminated the license agreement and therefore all unvested SAR (the 7% tranche) have automatically
expired. See also “Item 10. Additional Information - Material Contracts.”



57







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 29, 2012.



|Name            |  | Age |  | Position                            
|--------------- |  | --- |  | ------------------------------------
|Amit Yonay      |  | 42  |  | Chairman of the Board of Directors  
|Dafna Cohen     |  | 42  |  | Non Executive and External Director 
|Jaron Diament   |  | 44  |  | Non Executive and External Director 
|Marc Allouche   |  | 38  |  | Non Executive Director              
|David Grossman  |  | 37  |  | Director and Chief Executive Officer
|Ronen Twito     |  | 37  |  | Chief Financial Officer             
|Moshe Mittelman |  | 57  |  | Medical Director                    



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. Mr. Yonay received a BSc in Electrical
Engineering from Binghamton University and an MBA from Tel Aviv University in Finance and International Business.



Dafna Cohen has served as a director in
our company since March 2009. From 2010-2011 she served as director of Global Treasury at Mediamind Technologies (Nasdaq: MDMD),
From 2005 to 2009 she served as Director of Investment and Treasurer of Emblaze Ltd. (LSE: BLZ). From 2000 to December 2004, Ms.
Cohen was an Investment Manager for Leumi Partners.. From 1994-2000, Ms. Cohen worked in the derivatives sector of Bank Leumi.
In addition, Ms. Cohen serves as a director of Formula Systems Ltd (Nasdaq: FORTY, TASE: FORTY) since November 2009. Ms. Cohen
serves as a director of Inventech Central (TASE: IVTC) since March 2011 and serves as a Director at Europort (TASE: ERPT.B1) since
January 2012. Ms. Cohen received a BA in economics and political science and an MBA in finance and accounting from Hebrew University,
Jerusalem.



Jaron Diament has served as a director in
our company since March 2009. He has served as the founding partner and Chief Executive Officer of Tagor Capital Ltd., a public
real estate investment company (TASE: TGCP), and a board member of all of its non-Israel real estate investments since December
2009. From September 2006 to December 2009, Mr. Diament served as Chief Financial Officer of Tagor Capital Ltd. 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. In addition, Mr. Diament
serves as an external director of Mega Or Holdings Ltd. (TASE: MGOR) since September 2007 and as an independent director in Danidav
Investments Ltd. since May 2011 (TASE: DNDV). Mr. Diament received a BA in economics and accounting from Tel Aviv University.



58







Marc Allouche has served as a director in
our company since March 2009. He is the founder and managing partner of NFI Consulting, an investment banking & business advisory
firm. NFI focuses on creating and advising investment and business opportunities between Europe and Israel, notably within two
asset classes: private equity and real estate. Previously, he served as the head of the Alternative Investments Division of Harel
Insurance Investments & Financial Services Ltd., from 2008 to 2009, focusing on private equity and real estate investments.
From 2006 to 2007, Mr. Allouche served as Executive Vice President of investments & strategic development of SGPA, a French
private equity group and, concurrently, was CEO of one of its portfolio companies, operating in the retail sector in France, for
turnaround purposes. From 2002 to 2005, from Paris, Mr. Allouche was founder and managing director of the Private Equity Advisory
Group of Russel Bedford International, in charge of international corporate finance, transaction services and restructuring advisory
services. From 2000 to 2001, Mr. Allouche served as Vice President at Nessuah Zannex Venture Capital Company Ltd., in strategic
alliance with US Bancorp Piper Jaffray, managing a life sciences venture capital fund and, concurrently, was also managing director
of one of its med-tech portfolio companies for turnaround purposes. From 1998 to 2000, Mr. Allouche was involved in the creation
and the management of the Technology Group of KPMG International - Somekh Chaikin in Israel, a corporate finance division dedicated
to high-tech and biotech companies. From 1996 to 1998, Mr. Allouche was a Senior Consultant at the Audit and the Transaction Services
divisions of Price Waterhouse in Paris. Mr. Allouche received a BA in economics and a MBA with major in corporate finance and accounting
from Dauphine University, Paris. He is also a Chartered Public Accountant in France.



David Grossman has served as a director
in our company and as Chief Executive Officer of our company since February 2009. He served as a Vice President of Eurocom Investments
LP, a private equity fund, from March 2006 to December 2008.  Also from March 2006 to December 2008, Mr. Grossman was Vice
President of Sahar Investments Ltd, (TASE: SAIN, today Enlight Energy: ENLT) 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 (IHCV), an Israeli
healthcare venture capital fund. Since August 2011, Mr. Grossman serves as an external director and member of the audit committee
of Rosetta Green Ltd. (TASE: RSTG). From January 2009 to April 2011, Mr. Grossman was a director and member of the audit committee
of Bio Light Israeli Life Science Investments Ltd. (TASE: BOLT), 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.



Ronen Twito has served as Chief Financial
Officer in our company since July 2009. Prior to joining XTL, he served as Corporate Finance Director at Leadcom Integrated Solutions
Ltd., an international telecommunications company, specializing in management and implementation of network deployment services
(then listed on the AIM and TASE) from November 2004 to May 2009. Previously he served as an Audit Manager at Ernst & Young
Israel from January 2000 to November 2004. Mr. Twito possesses over 12 years of finance experience in both publicly traded and
private companies, which includes IPOs, dual listings, bonds placement, public fund raising, consolidated financial statement and
M&As. Mr. Twito is an Israeli Certified Public Accountant and is a member of the Institute of CPAs in Israel. He holds a BSc
in Business & Management – Accounting, and a B.Ed in Teaching of accounting, both from the Collman Management College.



59







Prof. Moshe Mittelman has served as
the Medical Director at our company since August 2010. He is also a Hematology consultant and Director of the Department of Medicine
at the Tel Aviv Sourasky (Ichilov) Medical Center, Israel. Since 1997, Moshe has been Clinical Associate Professor of Medicine
at the Sackler School of Medicine, Tel Aviv University. A well-known hematologist focusing on cancer and erythropoietin (EPO) research,
Prof. Mittelman was one of the first hematologists to apply rHuEPO in the clinical practice, which allowed him to make the pioneering
observation of prolonged survival in multiple myeloma (MM) rHuEPO -treated patients . This led to extensive research both in the
lab as well as with patients, showing hithertoo unrecognized immune effects to EPO. This research project has resulted in a series
of scientific papers published in prestigious journals. Prof. Mittelman is also a well-known speaker in international conferences.
Prof. Mittelman’s work led to the founding of Bio-Gal, Ltd. which has now merged with XTL. Prof. Mittelman has also served
as President of the Israel Society of Internal Medicine, Secretary of the Israel Society of Hematology and a Hematology Consultant
for the Israel Ministry of Health. Prof. Mittelman is also a consultant to various biotech companies. During the years 2008-2010,
he has been a member of the national committee of the Health Basket in Israel. Since 2007, Prof. Mittelman serves as director in
Gaon Holdings Ltd. (TASE: GAON), a public holding company.



Employment Agreements



We have an agreement dated January 18, 2010,
which came into effect upon the completion of the Bio-Gal transaction, and effective as of January 1, 2010, with David Grossman,
our Chief Executive Officer. Mr. Grossman is currently entitled to an annual base fee of NIS 480,000. Upon the successful completion
of cash fund raising of at least US$ 10 million in equity on NASDAQ or any other recognized and approved stock exchange (the “Fund
Raising”), Mr. Grossman's Annual fees shall be raised to NIS 580,000. In the event that the Company completes the Fund Raising
and also Another Transaction (as defined below), then Mr. Grossman's annual fee shall be raised to NIS 630,000. (“Another
Transaction” shall mean any business combination transaction, merger or acquisition, intellectual property licensing transaction
or joint venture e.t.c.). In the event that we completed a Fund Raising of a cash amount of more than US$3 million within 24 months
of the signing date, Mr. Grossman would have been entitled to receive a one time bonus equal to 1% of the Fund Raising amount but
not more than US$150,000. However, such an event did not occur and therefore on March 19, 2012 the shareholder meeting approved
a board resolution that if the Company effects any fund raising during the thirty six (36) month period from the date of this resolution,
the Company will pay to Mr. Grossman a bonus equal to 1.2% of the above fund raising amount, up to a maximum amount of $200 thousand.
Mr. Grossman is also entitled to receive benefits comprised of managers' insurance as commonly acceptable for officer holders,
and the use of a company car. There is a non-compete clause surviving one year after termination of employment. The agreement is
not limited in time and may be terminated by either party on a four months prior written notice. In March 2010, our shareholders
approved the agreement and the granting of options to Mr. Grossman to purchase a total of 1,610,000 ordinary shares at an exercise
price equal to NIS 0.075 per share. These options shall vest over a two-year period, with 33.33% having vested on the grant date,
and the remaining 66.67% shall vest on a monthly basis, commencing from the effective date, over a period of 2 years thereafter
for as long as Mr. Grossman's agreement with us is not terminated. Due to the fact that Mr. Grossman served as a CEO from February,
2009 without any consideration, Mr. Grossman received a one time signing payment of NIS 430,000. On 26 and 27 February 2011, the
company's audit committee and board of directors approved, respectively, the company CEO's request and in accordance with the terms
of the Agreement that they signed with him that the contractual arrangement of the CEO will be that of providing management services
as an independent contractor and only if the financial consideration that will be paid to him does not exceed the cost to the company
for his employment as an employee as stipulated above and that the company CEO undertakes to indemnify the company if an employer-employee
relationship will be established between himself and the company.



60







We have an employment
agreement dated July 29, 2009, and effective as of June 24, 2009, with Ronen Twito, our Chief Financial Officer. Mr. Twito is currently
entitled to an annual base salary of NIS 456,000. Upon the successful completion of cash fund raising of at least US$ 10 million
in equity on NASDAQ or any other recognized and approved stock exchange (the “Fund Raising”), Mr. Twito's Annual Salary
shall be raised to NIS 550,000. In the event that the Company completes Fund Raising and also Another Transaction (as defined below),
then Mr. Twito's annual salary shall be raised to NIS 600,000. (“Another Transaction” shall mean any business combination
transaction, merger or acquisition, intellectual property licensing transaction or joint venture e.t.c.). In the event of a Fund
Raising which is of a cash amount more than US$3 million but less than US$10 Million, Mr. Twito's annual salary shall be raised,
to an amount based on a linear calculation of US$3 Million – US$10 Million applied to the annual salary increase of NIS 456,000
– NIS 550,000 (or in the event Another Transaction is achieved, NIS 600,000). In the event that we complete a Fund Raising
of a cash amount of US $15 million, then Mr. Twito shall be entitled to a cash bonus in a NIS amount equal to US$ 200,000 In the
event that the actual fundraising is of an amount of more than US$3 million but less than US $15 million, then Mr. Twito shall
be entitled to a linear portion of the cash bonus calculated based on the actual fundraising between US$3 Million and US$15 Million.
On February 12, 2012 our board of directors passed a resolution that if the Company effects any fund raising during the thirty
six (36) months period from the date of this resolution, the Company will pay to Mr. Twito a bonus equal to 1.2% of the above fund
raising amount, up to a maximum amount of $200 thousand. Mr. Twito is also entitled to receive benefits comprised of managers'
insurance (pension and disability insurance), as commonly acceptable for officer holder, and the use of a company car. There is
a non-compete clause surviving one year after termination of employment. The employment agreement is not limited in time and may
be terminated by either party on three months prior written notice. In July 2009, our Board of Directors granted options to Mr.
Twito to purchase a total of 1,400,000 ordinary shares at an exercise price equal to NIS 0.075 per share. These options shall vest
over a three-year period, with 33.33% having vested after 5 month from the agreement date, and the remaining 66.67% shall vest
on a monthly basis, commencing from the effective date, over a period of 3 years thereafter for as long as Mr. Twito's employment
with the Company is not terminated.



We have an agreement
dated on July 12, 2010, and effective as of August 27, 2010, with Prof. Moshe Mittelman, our Medical Director. Prof. Mittelman
is entitled to a monthly fee of $ 2,500. His entitlement began 90 days after the date of completion of the Bio-Gal transaction,
i.e., November 3, 2010. The agreement is limited to the date of successful completion of the phase 2 clinical trial on the rHuEPO.
A “successful completion of the phase 2 clinical trial” is defined as: six (6) months after the trial of the rHuEPO
on the last patient in accordance with trial protocol, or on an earlier date if XTL notifies Yeda of XTL’s desire to discontinue
the trial. In August 2010, our Board of Directors approved the agreement as well as granting options to Prof. Mittelman to purchase
a total of 640,000 ordinary shares at an exercise price of NIS 0.1 per share. These options shall vest over a twenty four-month
period, on a monthly basis, commencing from August 27, 2010 as long as Prof. Mittelman’s agreement with us is not terminated.
Also, upon the commencement of a Phase 2 clinical trial (first-in-man), 50% of Prof. Mittelman’s unvested options (until
the date of the commencement of the trial) shall vest immediately. If Prof. Mittelman is terminated by XTL without cause, 25% of
the unvested options (until the date of termination) shall vest immediately.



Compensation



The aggregate compensation paid by us to
all persons who served as directors or officers for the year 2011 (7 persons) was approximately $0.5 million. This amount includes
payments of approximately $0.07 million made for social security, pension, disability insurance and health insurance premiums,
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.See “Item
5. Operating and Financial Review and Prospects – 2009 Restructuring”.



61







All members of our Board of Directors who
are not our employees are reimbursed for their expenses for each meeting attended. Our directors 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 2012, we granted to our external
directors, Mr. Diament Jaron and Ms. Dafna Cohen, 150,000 options each, to purchase our ordinary shares of NIS 0.1 par value, pursuant
to the shareholder meeting of March 19, 2012, exercisable at an exercise price of NIS 0.58633 (which is the average of the three-day
closing price on TASE prior to the issuance). 33% of the said options are vested and 67% of said options shall vest and be exercisable
on a monthly basis, commencing from the date of the mentioned shareholders meeting, for the duration of two years.



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, $187.5 for unanimous board resolutions and reimbursement of
reasonable out-of-pocket expenses. Mr. Grossman serves as the Company's Chief Executive Officer since February 11, 2009 and is
entitled to a compensation package as detailed above in the Employment Agreements paragraph, and therefore is not entitled to Directors
fee.



We granted to three of our directors, Mr.
Yonay, Mr. Shweiger (former director) and Mr. Allouche, 150,000 options each, to purchase our ordinary shares of NIS 0.1 par value,
pursuant to the shareholder meeting of March 2, 2010, exercisable at an exercise price of NIS 0.298 (which is the average of the
three-day closing price on TASE prior to the issuance). 33% of the said options are vested and 67% of said options shall vest and
be exercisable on a monthly basis, commencing from March 2, 2010, for the duration of two years. On November 22, 2010, Mr. Shweiger
ceased his directorship in the Company and therefore 63,747 of the total options granted to him were forfeited in accordance. Upon
his departure, Mr. Shweiger exercised the vested 86,253 options.



In accordance with the requirements of Israeli
Law, we determine our directors’ compensation in the following manner:



| | · | first, our compensation committee reviews the proposal for compensation.
| | - | ------------------------------------------------------------------------



| | · | second, provided that the compensation 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.



62







Board Practices



Election of Directors and Terms of Office



Our Board of Directors currently consists
of five members, including our non-executive Chairman. Other than our two external directors, our 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 (chairman of the audit committee) 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 July 2011,
at an annual general meeting of our shareholders, Amit Yonay, Marc Allouche, and David Grossman were re-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. On March 19, 2012 at an annual general meeting of our shareholders, Amit Yonay,
Marc Allouche and David Grossman were re-elected to serve as directors of our company until the next shareholders meeting and our
external directors, Dafna Cohen and Jaron Diament, were re-elected to serve as external directors of our company for an additional
period of three years. After this date, the external directors term of service may be renewed for an additional last three-year
term.



None of our directors or officers has any
family relationship with any other director or officer.



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.



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



63







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 two additional three-year terms. 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.



Audit Committee



The Israeli Companies Law requires public
companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the
management of the company’s business and approving related party transactions as required by law. An audit committee must
consist of at least three directors, including all of its external directors. The chairman of the Board of Directors, any director
employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder,
may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder,
or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and
at least one of the external directors was present at the meeting in which an approval was granted.



Our audit committee is currently comprised
of three independent non-executive directors. The audit committee is chaired by Jaron Diament, who serves as the audit committee
financial expert, with Dafna Cohen and Marc Allouche as members. The audit committee meets at least four times 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.



64







We have adopted a written charter for our
audit committee, setting forth its responsibilities as outlined by 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, SEC 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 the SEC rules.



The Israeli Companies Law regulations require
each public company to appoint a committee that examines the financial statements (the “Committee”) which shall be
compounded from at least Three (3) members, of which the majority among them shall be independent directors and the Committee's
Chairman shall be an external director. The Committee's duties are, among others, to examine the Company's Financial Statements
and to recommend and report to the board of directors of the Company regarding any problem or defect found in such Financial Statements.



In addition to the above-said, all of Committee's members must
apply with the following requirements:



| | · | All members shall be members of the board of directors of the Company.
| | - | ----------------------------------------------------------------------



| | · | At least one of the Committee's members shall have a Financial and Accounting expertise and the rest of the Committee's members
must have the ability to read and understand Financial Statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is in full compliance with the
above-said requirements.



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.



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
directors and the Chief Executive Officer.



The objectives of the compensation committee’s
policies are that such individuals 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.



65







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.



Employees



As of March 29, 2012, we had three full-time
employees (one of whom is an officer, which is engaged with the Company as a service provider). 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 - 2009 Restructuring” and “Item 6. Directors, Senior Management and
Employees – Employment Agreements” above.



For the years ended December 31, 2011, 2010
and 2009, the number of our full-time employees engaged in the specified activities, by geographic location, are presented in the
table below.



|                                      |  | Year ended December 31, |  
|------------------------------------- |  | ----------------------- | -
|                                      |  | 2011                    |  
|Research and Development              |  |                         |  
|Israel                                |  |                         | -
|US                                    |  |                         | -
|                                      |  |                         | -
|Financial and general management      |  |                         |  
|Israel                                |  |                         | 3
|US                                    |  |                         | -
|                                      |  |                         | 3
|                                      |  |                         |  
|Total                                 |  |                         | 3
|Average number of full-time employees |  |                         | 3



66







Share Ownership



The following table sets forth certain information
as of February 29, 2012, regarding the beneficial ownership by our directors and executive officers. All numbers quoted in the
table are inclusive of options to purchase shares that are exercisable within 60 days of February 29, 2012.



|                                                            |  | Amount and nature of beneficial ownership            |          
|----------------------------------------------------------- |  | ---------------------------------------------------- | ---------
|                                                            |  | Ordinary shares beneficially owned excluding options |          
|Amit Yonay Chairman of the Board                            |  |                                                      | —        
|Marc Allouche Director                                      |  |                                                      | —        
|Dafna Cohen External Director                               |  |                                                      | —        
|Jaron Diament External Director                             |  |                                                      | —        
|David Grossman Director and Chief Executive Officer         |  |                                                      | —        
|Ronen Twito Chief Financial Officer                         |  |                                                      | —        
|Moshe Mittelman Medical Director                            |  |                                                      | 5,590,896
|                                                            |  |                                                      |          
|All directors and executive officers as a group (7 persons) |  |                                                      | 5,590,896



|
|




| | (1) | Options to purchase ordinary shares
| | --- | -----------------------------------

| | (2) | 150,000 options at an exercise price of NIS 0.298 per ordinary share of NIS 0.1 par value, exercisable until March 1, 2020.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (3) | 150,000 options at an exercise price of NIS 0.58633 per ordinary share of NIS 0.1 par value, exercisable until March 18, 2022.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| | (4) | 1,610,000 options at an exercise price of NIS 0.075 per ordinary share of NIS 0.1 par value, exercisable until January 17,
2020.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (5) | 1,348,161 options at an exercise price of NIS 0.075 per ordinary share of NIS 0.1 par value, exercisable until June 23, 2019.
| | --- | -----------------------------------------------------------------------------------------------------------------------------

| | (6) | 533,320 options at an exercise price of NIS 0.1 per ordinary share of NIS 0.1 par value, exercisable until August 26, 2020.
| | --- | ---------------------------------------------------------------------------------------------------------------------------



* 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 16b 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.



67







As of December 31, 2011, we have granted
to employees, directors and consultants options that are outstanding to purchase up to 4,269,000 ordinary shares of NIS 0.1 par
value, pursuant to two share option plans and pursuant to certain grants apart from these plans also discussed below under Non-Plan
Share Options.



2001 Share Option Plan



Under a share option plan established in
2001, referred to as the 2001 Plan, we granted options during 2001-2011, at an exercise price between $ 0.0198 and $4.655 per ordinary
share of NIS 0.1 par value. Up to 2,200,000 option of NIS 0.1 par value were available to be granted under the 2001 Plan. On July
29, 2009, the option pool was increased by 5,000,000 unissued additional ordinary shares of NIS 0.1 par value, as well as forfeited
and expired options that reverted to the pool due to departure of employees. As of December 31, 2011, 4,110,000 options 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 three or two year period. As of December
31, 2011, 3,629,725 options of NIS 0.1 par value are fully vested. On May 2, 2011, the 2001 Share Option Plan has expired and no
options may be granted under this plan.



2011 Share Option Plan



On August 29, 2011, the Company's Board
approved the adoption of an employee stock option scheme for the grant of options exercisable into shares of the Company according
to section 102 to the Israeli Tax Ordinance ("2011 Plan"), and to maintain up to 10 million shares in the framework of
the 2011 Plan, for options allocation to employees, directors and Company consultants.



The 2011 Plan shall be subject to section
102 of the Israeli Tax Ordinance. According to the Capital Gain Track, which was adopted by the Company and the abovementioned
section 102, the Company is not entitled to receive a tax deduction that relates to remuneration paid to its employees, including
amounts recorded as salary benefit in the Company's accounts for options granted to employees in the framework of the 2011 Plan,
except the yield benefit component, if available, that was determined on the grant date. The terms of the options which will be
granted according to the 2011 Plan, including option period, exercise price, vesting period and exercise period, shall be determined
by the Company's Board on the date of the actual allocation. As of March 29, 2012 we have granted 300,000 share options under the
2011 Plan.



Non-Plan Share Options



In addition to the options granted under
our share option plans, there are 159,000 of NIS 0.1 par value outstanding and exercisable options, as of December 31, 2011, which
were granted to consultants and a member of our Scientific Advisory Board, not under an option plan during 1997 and 2011. The options
were granted at an exercise price of $2.69 and $0.15. As of December 31, 2011, 63,000 options of NIS 0.1 par value are fully vested.
On January 29, 2012, 39,000 options were expired.



68







ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



As of March 26, 2012, there were 15,869,582
ADRs outstanding, held by approximately 7 record holders, whose holdings represented approximately 14.40% of the total outstanding
ordinary shares, of which 6 record holders were in the US.



The following table sets forth the number
of our ordinary shares owned by any person known to us to be the beneficial owner of 5% or more of our ordinary shares as of March
29, 2012. The information in this table is based on 220,386,912 outstanding ordinary shares as of such date. The number of Ordinary
Shares beneficially owned by a person includes Ordinary Shares subject to options held by that person that were currently exercisable.
None of the holders of the Ordinary Shares listed in this table have voting rights different from other holders of the Ordinary
Shares.



|Name                           |  | Number of shares owned |            |  | Percent of ordinary shares | 
|------------------------------ |  | ---------------------- | ---------- |  | -------------------------- | 
|Alexander Rabinovitch(1)(2)(3) |  |                        | 43,132,361 |  |                            | 
|David Bassa(2)                 |  |                        | 21,705,987 |  |                            | 
|Shalom Manova(2)               |  |                        | 17,175,573 |  |                            | 



| | (1) | 23,574,902 of our ordinary shares are held through Green Forest Ltd., which to the best of our knowledge held jointly by Alexander
Rabinovitch and Sagit Rabinovitch.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Alexander Rabinovitch, David Bassa and Shalom Manova hold our shares since August 3, 2010 as part of the completion of the Bio-Gal
transaction.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | In addition to his holding as stated in the table above, Mr. Alexander Rabinovitch, through Green Forest Ltd., holds 573,750 warrants
(series 2). Each warrant (series 2) is exercisable into one ordinary share of NIS 0.1 par value from the date of registration for
trade on the Tel-Aviv stock exchange (March 9, 2011) to February 27, 2013, at an exercise price equal to NIS 1.0 per share, linked
to the US dollar. On a fully diluted basis, assuming exercise of all outstanding warrants, the total holding shall represent 17.89%
of the share capital of the Company,
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Related Party Transactions



To our knowledge, there are no related party
transactions existing as of March 29, 2012.



Item 8. Financial
Information



Consolidated Statements and Other Financial Information



Our audited consolidated financial statements
appear in this annual report on Form 20-F. See “Item 18. Financial Statements.”



Legal Proceedings



Neither we nor our subsidiaries are a party
to, and our property is not the subject of, any material pending legal proceedings.



Dividend Distributions



We have never declared or paid any cash
dividends on our ordinary shares and do not anticipate paying any such cash dividends in the foreseeable future. Any future determination
to pay dividends will be at the discretion of our Board of Directors. 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.



69









Significant Changes



On January 29, 2012, 39,000 options which had been issued
in 1997 to a former service provider expired.



On March 14, 2012, we entered into a strategic
collaboration framework agreement with Clalit Health Services – Clalit Research Institute Ltd. (the “Institute”)
and Mor Research Applications Ltd., the technology transfer office of Clalit Health Services (“Mor”). Pursuant to the
agreement, the Institute will provide XTL the right to receive content based on data which originates from a database of the Institute
in connection with technologies that stem from inventions and patents of Clalit Health Services’ physicians. The contents
of the specific projects shall be agreed upon by XTL, the Institute and Mor in advance in writing.  XTL, in consideration
for the above, shall pay the Institute the cost of its activity in the collaboration framework of any project plus an additional
10% of the total royalties Mor is entitled pursuant to its agreements with the Company in connection with each technology where
rights were granted to XTL.  The agreement may be terminated by a one hundred and eighty (180) day written notice by each
of the parties, subject to having completed all mutual active projects.  Management estimates that access to data through
this agreement will enable XTL to evaluate safety and efficacy data of technologies in development as well as technologies where
development has not yet commenced.

As of the date of this report, XTL has
the rights to two technologies that were in-licensed from Mor: rHuEPO for the treatment of multiple myeloma blood cancer, and SAM-101
for the treatment of psychotic patients.



On March 19, 2012, the annual meeting of shareholders approved
to grant 300,000 share options to external directors at XTL to purchase 300,000 Ordinary shares of NIS 0.1 par value each
at an exercise price equal to NIS 0.58633 per share. Pursuant to the guidance of IFRS 2, the fair value of all share options
on the date of approval by the annual meeting, using the Black-Scholes model was approximately $ 79 thousand. The option term
is for a period of 10 years from the grant date. 33% of the options are exercisable immediately and the remaining share options
are exercisable in 24 tranches every month over a two-year period. The value of each option is based on the following inputs: expected
dividend of 0%, expected standard deviation of 153%, risk-free interest rate of 4.08% and expected life of 6 years.



On March 19, 2012 the company Annual General
Meeting of shareholders (“AGM”) held in Ramat Gan, Israel. At the AGM, all of the proposals set forth in XTL’s
proxy statement were approved by the required majority of shareholders.



ITEM 9. THE OFFER AND LISTING



Markets and Share Price History



Since July 12, 2005 our shares have been
traded on Tel Aviv Stock Exchange (TASE) under the symbol “XTL”. As of April 17, 2009, when we were delisted from Nasdaq,
then our primary trading market, our dual-listing provisions ceased and since then TASE has become our primary trading market for
our securities, and our ADRs are quoted on the Pink Sheets under the symbol “XTLBY.PK”, with each ADR representing
two NIS 0.1 par value ordinary shares.



70







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 due to the fact we do not meet the stockholders' equity
requirement, or any of its alternatives, and that we had failed to comply with Nasdaq's listing criteria. 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 opposition to Nasdaq's arguments and our business plan that among others enabled compliance with all other applicable
Nasdaq listing requirements. In April 2009, we received a letter from the NASDAQ Stock Market informing us of their final decision
to delist our ADRs from NASDAQ Capital Markets as of April 17, 2009, which has become final and unappealable as of July 2009.



Following the delisting in April 2009, our
ADRs are quoted on the Pink Sheets under the symbol XTLBY.PK). Since September 1, 2005 until April 2009 our primary trading market
was NASDAQ Capital Markets. Our ADRs have been traded on the NASDAQ Stock Market under the symbol “XTLB,” with each
ADR representing ten NIS 0.02 par value ordinary shares (prior to the 1:5 share consolidation, which was resolved on March 18,
2009, and effected in June 2009).



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.



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
and on the Pink Sheets since April 17, 2009, 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 Dollar |     
|-------------------------------------------------------- |  | --------- | ----
|                                                         |  | High      |     
|Last Six Calendar Months                                 |  |           |     
|March 2012 (until March 27)                              |  |           | 0.73
|February 2012                                            |  |           | 0.45
|January 2012                                             |  |           | 0.41
|December 2011                                            |  |           | 0.44
|November 2011                                            |  |           | 0.28
|October 2011                                             |  |           | 0.33
|September 2011                                           |  |           | 0.37
|Financial Quarters During the Past Two Full Fiscal Years |  |           |     
|First Quarter of 2012 (until March 28)                   |  |           |     
|Fourth Quarter of 2011                                   |  |           | 0.44
|Third Quarter of 2011                                    |  |           | 0.43
|Second Quarter of 2011                                   |  |           | 0.38
|First Quarter of 2011                                    |  |           | 0.54
|Fourth Quarter of 2010                                   |  |           | 0.48
|Third Quarter of 2010                                    |  |           | 0.28
|Second Quarter of 2010                                   |  |           | 0.13
|First Quarter of 2010                                    |  |           | 0.15
|Full Five Financial Years                                |  |           |     
|2011                                                     |  |           | 0.54
|2010                                                     |  |           | 0.48
|2009                                                     |  |           | 0.32
|2008                                                     |  |           | 4.96
|2007                                                     |  |           | 4.99








1Our ADRs are quoted on the Pink Sheets since April 17, 2009. Our ADRs were quoted on the NASDAQ Capital Market since December
3, 2007 until April 17, 2009 and prior to that were quoted on the NASDAQ Global Market.







71







The following table sets forth, for the
periods indicated, the high and low sales prices of the NIS 0.1 par value ordinary shares (after the 1:5 share consolidation which
was resolved on June 22, 2009) 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 3.715 New Israeli Shekel per US Dollar, as of March 27, 2012 according to the
Bank of Israel.



|                                                         |  | New Israeli Shekel |       |  | US Dollar | 
|-------------------------------------------------------- |  | ------------------ | ----- |  | --------- | 
|                                                         |  | High               |       |  | Low       | 
|Last Six Calendar Months                                 |  |                    |       |  |           | 
|March 2012 (until March 27)                              |  |                    | 1.260 |  |           | 
|February 2012                                            |  |                    | 0.790 |  |           | 
|January 2012                                             |  |                    | 0.621 |  |           | 
|December 2011                                            |  |                    | 0.580 |  |           | 
|November 2011                                            |  |                    | 0.528 |  |           | 
|October 2011                                             |  |                    | 0.530 |  |           | 
|September 2011                                           |  |                    | 0.609 |  |           | 
|Financial Quarters During the Past Two Full Fiscal Years |  |                    |       |  |           | 
|First Quarter of 2012                                    |  |                    | 1.260 |  |           | 
|Fourth Quarter of 2011                                   |  |                    | 0.580 |  |           | 
|Third Quarter of 2011                                    |  |                    | 0.780 |  |           | 
|Second Quarter of 2011                                   |  |                    | 0.679 |  |           | 
|First Quarter of 2011                                    |  |                    | 0.987 |  |           | 
|Fourth Quarter of 2010                                   |  |                    | 0.700 |  |           | 
|Third Quarter of 2010                                    |  |                    | 0.415 |  |           | 
|Second Quarter of 2010                                   |  |                    | 0.318 |  |           | 
|First Quarter of 2010                                    |  |                    | 0.407 |  |           | 
|Full Financial Years Since 2006                          |  |                    |       |  |           | 
|2011                                                     |  |                    | 0.987 |  |           | 
|2010                                                     |  |                    | 0.700 |  |           | 
|2009                                                     |  |                    | 1.285 |  |           | 
|2008                                                     |  |                    | 8.700 |  |           | 
|2007                                                     |  |                    | 10.20 |  |           | 



2 On June 22, 2009 a 1:5 share consolidation was
resolved. All figures prior to the effective date were adjusted accordingly.



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.



72







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.



73







Approval of Certain Transactions



The Israeli Companies Law codifies the fiduciary
duties that office holders, including directors and executive officers, owe to a company. An office holder, as defined in the Israeli
Companies Law, is a director, general manager, chief business manager, deputy general manager, vice general manager, executive
vice president, vice president, other manager directly subordinate to the managing director or any other person assuming the responsibilities
of any of the foregoing positions without regard to such person's title. An office holder's fiduciary duties consist of a duty
of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder's position
in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity
of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents
relating to the company's affairs which the office holder has received due to his position as an office holder. Each person listed
in the table under “Directors and Senior Management,” which is displayed under “Item 6. Directors, Senior Management
and Employees – Directors and Senior Management,” holds such office in our Company. Under the Israeli Companies Law,
all arrangements as to compensation of office holders who are not directors require approval of the Board of Directors, or a committee
thereof. Arrangements regarding the compensation of directors also require audit committee and shareholders approval, with the
exception of compensation to external directors in the amounts specified in the regulations discussed in “Item 6. Directors,
Senior Management and Employees – Directors and Senior Management – Compensation.”



The Israeli Companies Law requires that
an office holder promptly discloses any personal interest that he or she may have, and all related material information known to
him or her, in connection with any existing or proposed transaction by the company. The disclosure must be made to our Board of
Directors or shareholders without delay and prior to the meeting at which the transaction is to be discussed. In addition, if the
transaction is an extraordinary transaction, as defined under the Israeli Companies Law, the office holder must also disclose any
personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the
spouses of any of the foregoing, or by any corporation in which the office holder is a 5% or greater shareholder, or holder of
5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director
or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on
market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.



In the case of a transaction which is not
an extraordinary transaction (other than transactions relating to a director’s conditions of service), after the office holder
complies with the above disclosure requirement, only board approval is required unless the Articles of Association of the company
provides otherwise. The transaction must not be adverse to the company's interest. If the transaction is an extraordinary transaction,
then, in addition to any approval required by the Articles of Association, the transaction must also be approved by the audit committee
and by the Board of Directors, and under specified circumstances, by a meeting of the shareholders. An office holder who has a
personal interest in a matter that is considered at a meeting of the Board of Directors or the audit committee may not be present
at this meeting or vote on this matter.



The Israeli Companies Law applies the same
disclosure requirements to a controlling shareholder of a public company, which is defined as a shareholder who has the ability
to direct the activities of a company, other than in circumstances where this power derives solely from the shareholder’s
position on the Board or any other position with the company, and includes a shareholder that holds 25% or more of the voting rights
if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder
or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is
an office holder, require the approval of the audit committee, the Board of Directors and the shareholders of the company. The
shareholders’ approval must either include at least the majority 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 two percent of the voting rights in the company.



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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 was 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 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 consisted 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. The share consolidation was effected in June 22, 2009.



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.



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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 holds 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.



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



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The Israeli Companies Law provides specific
rules and procedures for the acquisition of shares held by minority shareholders, if the majority shareholder holds more than 90%
of the outstanding shares. If, as a result of an acquisition of shares, the purchaser will hold more than 90% of a company’s
outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5%
of the outstanding shares are not tendered in the tender offer, all the shares that the purchaser offered to purchase will be transferred
to it. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within three months
following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer,
then the purchaser may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding
shares of the company. Israeli tax law treats specified acquisitions, including a stock-for-stock swap between an Israeli company
and a foreign company, less favorably than does US tax law. These laws may have the effect of delaying or deterring a change in
control of us, thereby limiting the opportunity for shareholders to receive a premium for their shares and possibly affecting the
price that some investors are willing to pay for our securities.



Rights of Shareholders



Under the Israeli Companies Law, our shareholders
have the right to inspect certain documents and registers including the minutes of general meetings, the register of shareholders
and the register of substantial shareholders, any document held by us that relates to an act or transaction requiring the consent
of the general meeting as stated above under “-Approval of Certain Transactions,” our Articles of Association and our
financial statements, and any other document which we are required to file under the Israeli Companies Law or under any law with
the Registrar of Companies or the Israeli Securities Authority, and is available for public inspection at the Registrar of Companies
or the Securities Authority, as the case may be.



If the document required for inspection
by one of our shareholders relates to an act or transaction requiring the consent of the general meeting as stated above, we may
refuse the request of the shareholder if in our opinion the request was not made in good faith, the documents requested contain
a commercial secret or a patent, or disclosure of the documents could prejudice our good in some other way.



The Israeli Companies Law provides that
with the approval of the court any of our shareholders or directors may file a derivative action on our behalf if the court finds
the action is a priori, to our benefit, and the person demanding the action is acting in good faith. The demand to take action
can be filed with the court only after it is serviced to us, and we decline or omit to act in accordance to this demand.



Enforceability of Civil Liabilities



We are incorporated in Israel and most 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78







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



| | · | the judgment is no longer appealable; and
| | - | -----------------------------------------



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



We have irrevocably
appointed XTL Biopharmaceuticals, Inc., our US subsidiary, as our agent to receive service of process in any action against us
in any US federal court or the courts of the State of New York.



Foreign judgments enforced by Israeli courts
generally will be payable in Israeli currency. The usual practice in an action before an Israeli court to recover an amount in
a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of
exchange in force on the date of the judgment. Under existing Israeli law, a foreign judgment payable in foreign currency may be
paid in Israeli currency at the rate of exchange for the foreign currency published on the day before date of payment. Current
Israeli exchange control regulations also permit a judgment debtor to make payment in foreign currency. Pending collection, the
amount of the judgment of an Israeli court stated in Israeli currency ordinarily may be linked to Israel’s consumer price
index plus interest at the annual statutory rate set by Israeli regulations prevailing at that time. Judgment creditors must bear
the risk of unfavorable exchange rates.



Material Contracts



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. The asset purchase was completed in September 2005. In addition, we
entered into a license agreement with VivoQuest pursuant to which we acquired exclusive worldwide, perpetual, irrevocable and non-terminable
rights to VivoQuest’s patents, 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. 
The milestone payments amount to an aggregate of $34 million, $25 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 in the range of 2% to 8%, depending on net product sales. Commercialization of the DOS program has
been out-licensed to Presidio Pharmaceuticals, Inc. (see “Presidio Pharmaceuticals, Inc.” below).



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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 was granted a license for patent rights and technology
relating to the DOS program, and became 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 are eligible to receive up to an additional aggregate amount of $59 million upon reaching certain
development and commercialization milestones. In addition, we will receive a royalty payment in the range of 1% to 10% 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. Presidio is responsible for all further development and commercialization activities relating to the DOS program and, to
our knowledge based upon the most current reports we have received from Presidio, no commercial sales have begun. The license remains
in effect until the expiration of all of Presidio’s payment obligations, including milestone and royalty payments. Presidio’s
royalty obligations continue until a certain number of years from the first commercial sale in such country or until the expiration
date of the last to expire of the licensed patents (currently, 2023), whichever is later. Upon expiration of the agreement, on
a licensed product-by-product and country-by-country basis, the license granted to Presidio shall convert to a non-exclusive, perpetual,
fully paid-up, non-royalty-bearing license. Presidio may terminate the license agreement at any time upon ninety days written notice
to us, after which Presidio must return the licensed intellectual property to us and cease development and commercialization for
a period of ten years.



Bio-Gal Ltd.



On March 18, 2009, we announced that we
had entered into an asset purchase agreement with Bio-Gal Ltd. (“Bio-Gal”), 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. On December 31, 2009, we amended the asset purchase agreement with Bio-Gal, so that XTL
could acquire XTEPO Ltd., a special purpose company that was established by Bio-Gal’s shareholders who received from Bio-Gal
all of Bio-Gal’s rights on rHuEPO and raised approximately $1.5 million. 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. In accordance with the terms of the amended asset purchase agreement, we issued to XTEPO’s shareholders
ordinary shares representing approximately 69.44% of our then issued and outstanding ordinary share capital. In addition, the parties
agreed to cancel a $10 million cash milestone payment to Bio-Gal upon the successful completion of a Phase 2 clinical trial, which
was under the original asset purchase agreement. We are obligated to pay 1% royalties on net sales of the product, as well as a
fixed royalty payment in the total amount of $350,000 upon the successful completion of Phase 2. Such payment of $350,000 mentioned
above shall be made to Yeda Research and Development Company Ltd. (“Yeda”) upon the earlier of (i) six months from
the Successful Completion of Phase 2 or (ii) the completion of a successful fundraising by XTL or XTEPO at any time after the completion
of the Phase 2 of an amount of minimum $2 million. On August 3, 2010, the Bio-Gal transaction was completed according to the outline
signed by the parties to the agreement on December 31, 2009, after all the prerequisites had been met, including, among other things,
the signing of an agreement with the Israeli Tax Authority regarding the tax exemption granted to the share swap transaction pursuant
to article 104 and 103 to the Israeli tax ordinance (Revised), 1961. (See notes 1b and 9a to the consolidated financial statements:
General, Intangible Asset).



MinoGuard Ltd.



On March 24, 2011, the Company entered
into a term sheet to acquire the assets of MinoGuard by an exclusive license to use MinoGuard’s entire technology in return
for royalties on sales and milestone payments throughout the clinical development process, without any other payments. MinoGuard
was founded in 2007 in order to commercialize combination therapies for treating psychotic diseases, focusing on schizophrenia.
The transaction was subject, among others, to completion of due diligence studies, examination of the regulatory track for the
continued development of the drug and the approval of the Company’s Board. On November 30, 2011, the agreement with MinoGuard
was completed after all prerequisites abovementioned had fully met. In accordance with the terms of the license agreement we shall
pay MinoGuard accumulated clinical development and marketing approvals milestone-based payments of approximately $2.5 million.
In addition, we will pay MinoGuard royalty-based payments on products that are based on the Technology, equal to 3.5% of its net
sales and/or percentage from the Company third-party out–license receipts in the range of 7.5%-20% according to the clinical
phase of the drug at the time of an out-license transaction. It should be noted that the Company has the sole discretion to
pay any of the above amounts in cash or by way of issuing of its shares to MinoGuard. In addition to the above payments, if we
shall not commence a phase 2 clinical trial by June 30, 2013, we will pay MinoGuard an annual license fee of $45,000 for the initial
year, which will increase by $90,000 per year and up to $675,000 for the eighth year of license. The agreement states that receipt
of an approval to commence such trial or continuance of clinical trials that were conducted or will be conducted by MinoGuard and/or
its researchers, shall be deemed commencement of the Phase 2 clinical trial for this matter.



80







The term of the license commenced upon the
signing of the license agreement and be effective for unlimited time. Upon the expiration of the last payment obligation of XTL
the license will be considered perpetual and fully paid up.



The license may be terminated in by either
XTL without cause upon 30 days notice, or by the licensor for no commercial progress in the event that by the date of June 30th,
2013 neither commencement of phase II Clinical Trial with respect to the licensed product has occurred, nor XTL has entered into
a Sublicense Agreement with a substantial third party.



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. XTL Development was developing Bicifadine for the treatment of diabetic neuropathic pain. 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 would have been required to make milestone payments of up to $126.5 million over the life of the license.
These milestone payments would have been 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 was also obligated to pay royalties to
DOV on net sales of Bicifadine. Following our announcement of the failure of the phase 2b clinical trial, we ceased development
of Bicifadine for diabetic neuropathic pain in 2008 and all rights under the agreement reverted to DOV. Since the failure of the
Bicifadine phase 2b clinical trial, both XTL Development and DOV ceased the prosecution and maintenance of those patents relating
to Bicifadine. In March 2010, the agreement was formally terminated.



In addition, XTL Development was committed
to pay a transaction advisory fee to certain third party intermediaries in connection with the in-license of Bicifadine from DOV.
Once the Bicifadine license agreement was terminated, the commitment to pay a further transaction advisory fee ceased. In March
2010, we formally terminated the license agreement and therefore all unvested SARs have automatically expired. 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.



Taxation



We issued XTEPO’s shareholders ordinary
shares representing approximately 69.44% of our then issued and outstanding ordinary share capital as part of the Bio-Gal transaction
(see also Israeli Tax Considerations below). As a result of the shifts of ownership, the Company’s US carry back losses are
subject to significant certain limitations and/or reductions. See "Item 3- Key Information – Risk Related to our Financial
Condition."



81







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.



Corporate Tax Rate



The income of the Company is subject to
corporate tax at the regular rate; the guidance of the amendment to the Income Tax Ordinance, 2005 from August 2008 prescribes
a gradual reduction in the corporate tax rates and the resulting corporate tax rates starting 2008 are as follows: 2008 - 27%,
2009 - 26% and 2010 and thereafter - 25%.



On July 14, 2009, the “Knesset”
(Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and
2010), 2009, which prescribes, among others, an additional gradual reduction in the corporate tax rates starting 2011 to the following
tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%, 2015 - 20%, 2016 and thereafter - 18%.



In December 2011, following the enactment
of the Law for the Changing the Tax Burden (Legislative Amendments), 2011 (hereafter - "Tax Burden Distribution Law"),
the phased reduction in the corporate tax was eliminated, and corporate tax rate in 2012 and thereafter was set to 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.



82







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.



The capital gains tax imposed on Israeli
tax resident individuals on the sale of securities was 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%. In December 2011, following the enactment of the Tax Burden Distribution Law, the tax rates mentioned
above were increased to 25% and 30%, respectively, from 2012 and thereafter. 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, 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.



83







Taxation of Dividends



Non-residents of Israel are subject to income
tax on income accrued or derived from sources in Israel.



The tax rate imposed on dividends distributed
by an Israeli company to Israeli tax resident individuals or to non-Israeli residents was set at a rate of 20%. With respect to
“substantial shareholders,” as defined above, the applicable tax rate was 25%. In December 2011, following the enactment
of the Tax Burden Distribution Law, the tax rates mentioned above were increased to 25% and 30%, respectively, from 2012 and thereafter.
The taxation of dividends distributed by an Israeli company to another Israeli corporate tax resident is generally exempt from
tax.



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.



Notwithstanding, dividends distributed by
an Israeli company to Israeli tax resident individuals or to non-Israeli residents was subject to a 20% withholding tax, which
was increased to 25% from 2012 and thereafter, following the enactment of the Tax Burden Distribution Law (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 sourced
in Israel, in which case such dividends are taxed at a rate of 25%.



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:



84







| | · | have elected mark-to-market accounting;
| | - | ---------------------------------------



| | · | hold our ordinary shares as part of a straddle, hedge or conversion transaction with other investments;
| | - | -------------------------------------------------------------------------------------------------------



| | · | own directly, indirectly or by attribution at least 10% of our voting power;
| | - | ----------------------------------------------------------------------------



| | · | are tax exempt entities;
| | - | ------------------------



| | · | are persons who acquire shares in connection with employment or other performance of services; and
| | - | --------------------------------------------------------------------------------------------------



| | · | have a functional currency that is not the US dollar.
| | - | -----------------------------------------------------



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.



85







As described above, we will generally be
required to withhold Israeli income tax from any dividends paid to holders who are not resident in Israel. See “- Israeli
Tax Considerations—Taxation of Dividends” above. If a US holder receives a dividend from us that is subject to Israeli
withholding, the following would apply:



| | · | You must include the gross amount of the dividend, not reduced by the amount of Israeli tax withheld, in your US taxable income.
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | You may be able to claim the Israeli tax withheld as a foreign tax credit against your US income tax liability. However, to
the extent that 25% or more of our gross income from all sources was effectively connected with the conduct of a trade or business
in the US (or treated as effectively connected, with limited exceptions) for a three-year period ending with the close of the taxable
year preceding the year in which the dividends are declared, a portion of this dividend will be treated as US source income, possibly
reducing the allowable foreign tax.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The foreign tax credit is subject to significant and complex limitations. Generally, the credit can offset only the part of
your US tax attributable to your net foreign source passive income. Additionally, if we pay dividends at a time when 50% or more
of our stock is owned by US persons, you may be required to treat the part of the dividend attributable to US source earnings and
profits as US source income, possibly reducing the allowable credit.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A US holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the
ordinary shares to the extent the US holder has not held the ordinary shares for at least 16 days of the 31-day period beginning
on the date which is 15 days before the ex-dividend date or, alternatively, to the extent the US holder is under an obligation
to make related payments with respect to substantially similar or related property. Any days during which a US holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If you do not elect to claim foreign taxes as a credit, you will be entitled to deduct the Israeli income tax withheld from
your XTL dividends in determining your taxable income.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for
the amount of the Israeli income taxes withheld.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | If you are a US corporation holding our stock, the general rule is that you cannot claim the dividends-received deduction with
respect to our dividends. There is an exception to this rule if you own at least 10% of our ordinary shares (by vote) and 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.



86







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, 2010, 2009 and 2008. However, we believe that we were a PFIC
for the taxable year ended December 31, 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 were likely not classified
as a PFIC for the taxable year ended December 31, 2011 and we may be a PFIC 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.



87







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. 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



88







| | · | the amount allocated to each year other than the year of the excess distribution or disposition and pre-PFIC years would be
subject to tax at the highest applicable tax rate, and an interest charge would be imposed with respect to the resulting tax liability;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the US holder would be required to file an annual return on IRS Form 8621 for the years in which distributions were received
on and gain was recognized on dispositions of, our ordinary shares; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any US holder who acquired the ordinary shares upon the death of the shareholder would not receive a step-up to market value
of his income tax basis for such ordinary shares. Instead such US holder beneficiary would have a tax basis equal to the decedent's
basis, if lower.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In view of the complexity of the issues
regarding our treatment as a PFIC, US shareholders are urged to consult their own tax advisors for guidance as to our status as
a PFIC.



US Federal Income Tax Consequences for Non-US holders
of Ordinary Shares



Except as described in “Information
Reporting and Back-up Withholding” below, a Non-US holder of ordinary shares will not be subject to US federal income or
withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:



| | · | the item is effectively connected with the conduct by the Non-US holder of a trade or business in the US and, in the case of
a resident of a country which has a tax treaty with the US, the item is attributable to a permanent establishment in the US;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the Non-US holder is subject to tax under the provisions of US tax law applicable to US expatriates; or
| | - | -------------------------------------------------------------------------------------------------------



| | · | the individual non-US holder is present in the US for 183 days or more in the taxable year of the disposition and certain other
conditions are met.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



Information Reporting and Back-Up Withholding



US holders generally are subject to information
reporting requirements with respect to dividends paid in the US on ordinary shares. Existing regulations impose back-up withholding
on dividends paid in the US on ordinary shares unless the US holder provides IRS Form W-9 or otherwise establishes an exemption.
US holders are subject to information reporting and back-up withholding on proceeds paid from the disposition of ordinary shares
unless the US holder provides IRS Form W-9 or otherwise establishes an exemption.



Non-US holders generally are not subject
to information reporting or back-up withholding with respect to dividends paid on, or upon the disposition of, ordinary shares,
provided that the non-US holder provides a taxpayer identification number, certifies to its foreign status, or otherwise establishes
an exemption to the US financial institution holding the ordinary shares.



Prospective investors should consult their
tax advisors concerning the effect, if any, of these Treasury regulations on an investment in ordinary shares. Back-up withholding
is not an additional tax. The amount of any back-up withholding will be allowed as a credit against a holder's US federal income
tax liability and may entitle the holder to a refund, provided that specified required information is furnished to the IRS on a
timely basis.



89







US Federal Income Tax Consequences for XTL



As of April 7, 2009, we did not have a “permanent
establishment” in the US. Our board of directors consists of a majority of Israeli residents and our CEO is domiciled in
Israel. However, for the period we did have a “permanent establishment” 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 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 December 31, 2011, we did not earn
any taxable income for US federal tax purposes and we do not have a permanent establishment. 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, 2011, the net
operating tax losses (“NOL”) of the US subsidiaries amounted to approximately $23 million, The utilization of these
NOLs is subject to significant limitations and/or reductions to offset income in the future, if any due
to, among other, the shifts in ownership of XTL that result from the Bio-Gal transaction(see “Item 8 financial information-material
contracts”)and subject to further limitations in case of a future offering or capital raise,
resulting in more than 50 percentage point change over a three year look back period, and expiring through 2029. Pursuant
to a US tax rule.



The above comments are intended as a
general guide to the current position. Any person who is in any doubt as to his or her taxation position, and who requires more
detailed information than the general outline above or who is subject to tax in a jurisdiction other than the United States should
consult professional advisers.



Documents on Display



We voluntarily 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 on a voluntary basis 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.



90







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 bank deposits in accordance with our investment policy. As of December 31, 2011, our portfolio of financial instruments
consists of cash and cash equivalents, short-term bank deposits with multiple institutions. The average duration of all of our
investments held as of December 31, 2011, 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 have generated all of our revenues and hold most of our cash, cash equivalents and bank deposits in US dollars. Until 2008,
most of our operating expenses were in US dollars. Commencing from 2009 the Company's head office moved back to Israel and thus
the portion of our expenses in New Israeli Shekels (“NIS”) and our cash held in NIS has increased, mainly due to payment
to Israeli employees and suppliers. Additionally, our future activities could lead us to perform a clinical trial in Israel, which
may lead us to reassess the use of the US dollar as our functional currency. As a result, we are exposed to the risk that the
US dollar will be devalued against the NIS or other currencies, and consequentially 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 decide in the future to hold a significant portion of our cash, cash equivalents, bank deposits
and marketable securities in NIS as well as to 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 US dollar or that the timing of any devaluation may lag behind inflation
in Israel.



Item
12. Description of Securities Other than Equity Securities



American Depositary Shares



Fees Payable By ADS Holders.A copy
of our Form of Deposit Agreement with The Bank of New York Mellon (the “Depositary”) (including the Form of American
Depositary Receipt or “ADR”) was filed with the SEC as an exhibit to our Form F-6 filed on November 28, 2007 (the “Deposit
Agreement”). Pursuant to the Deposit Agreement, holders of our ADSs may have to pay to the Depositary, either directly or
indirectly, fees or charges up to the amounts set forth in the table below.



|Item |  | Associated Fee                                                                                                                                                                                                                                                                                          |  | Depositary Action                                                                                                                                                                   
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.   |  | Taxes and other governmental charges                                                                                                                                                                                                                                                                    |  | As applicable                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                     
|2.   |  | Registration fees in effect for the registration of transfers of shares generally on the share register of XTL or foreign registrar and applicable to transfers of shares to or from the name of the Depositary or its nominee or the custodian or its nominee on the making of deposits or withdrawals |  | As applicable                                                                                                                                                                       
|     |  |                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                                                                     
|3.   |  | Expenses incurred by the Depositary                                                                                                                                                                                                                                                                     |  | •   Cable, telex and facsimile
        transmission (where expressly provided for in the Deposit Agreement)
        
        •   Foreign currency conversion into US
        dollars



91







|4. |  | $5.00 or less per 100 ADSs (or portion thereof)                                                                                                                                                                                                                                 |  | Execution and delivery of ADRs for distributions and dividends in shares and rights to subscribe for additional shares or rights of any other nature and surrender of ADRs for the purposes of withdrawal, including the termination of the Deposit Agreement                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|5. |  | $0.02 or less per ADS (or portion thereof)                                                                                                                                                                                                                                      |  | Any cash distribution made pursuant to the Deposit Agreement,
        including, among other things:
        
        •   cash
        distributions or dividends,
        
        •   distributions
        other than cash, shares or rights,
        
        •   distributions
        in shares, and
        
        •   rights of any other nature,
        including rights to subscribe for additional shares.
|   |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|6. |  | A fee for the distribution of securities equal to the fee for the execution and delivery of ADSs which would have been charged as a result of the deposit of such securities                                                                                                    |  | Distributions of securities other than cash, shares or rights                                                                                                                                                                                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|7. |  | A fee of $.02 or less per ADS (or portion thereof) for depositary services, which will accrue on the last day of each calendar year, provided, however, that no fee will be assessed to the extent a fee of $.02 was charged pursuant to Item 5 above during that calendar year |  | As applicable                                                                                                                                                                                                                                                                                                                                                                                                           
|   |  |                                                                                                                                                                                                                                                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                         
|8. |  | Any other charge payable by the Depositary, any of the Depositary's agents, including its custodian, or the agents of the Depositary's agents in connection with the servicing of shares or other deposited securities                                                          |  | As applicable                                                                                                                                                                                                                                                                                                                                                                                                           



Fees Paid to XTL by the Depositary.
As of January 1, 2011 through March 28, 2012, the Company has not received any fees, direct payments or indirect payments from
The Bank of New York Mellon.



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.



92







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, 2011, 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, 2011 were effective.



(b)          Internal
controls over financial reporting. Our management is responsible for establishing and maintaining
adequate control over financial reporting, as such term is defined in Rule 13a-15(f) of the exchange Act. Under the supervision
and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2011. In making this assessment,
our management used the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, our evaluation was conducted pursuant to section 9b(c) to the Israeli
Securities regulations (Periodic and Immediate Reports), 1970, which came into effect on the reporting for December 31, 2010 for
the first time (as we are traded on the TASE). Based on that evaluation, our management believes our internal control over financial
reporting was effective as of December 31, 2011.



All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not
prevent or detect misstatements and can provide only reasonable assurances with respect to the preparation and presentation of
financial statements.



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 audit report as of December 31, 2011, and dated March
29, 2012 relating to the financial statements which appear in this annual report on Form 20-F for the year ended December 31, 2011.
See “Item 18. Financial Statements.”



(c)          Internal controls. There have
been no significant changes in our internal control over financial reporting that occurred during the fiscal year ended December
31, 2011 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 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 be
obtained, without charge, upon a written request addressed to our investor relations department, XTL Biopharmaceuticals Ltd., PO
Box 4033, Herzliya 46140, Israel.



93







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, 2011 and 2010.



|                   |  | 2011               |    |  | 2010 | 
|------------------ |  | ------------------ | -- |  | ---- | 
|                   |  | (in thousands US$) |   
|Audit fees         |  |                    | 51 |  |      | 
|Audit-related fees |  |                    | -  |  |      | 
|Tax fees           |  |                    | -  |  |      | 
|All Other fees     |  |                    | 4  |  |      | 
|Total              |  |                    | 55 |  |      | 



The audit fees for the years ended December
31, 2011 and 2010, respectively, were for professional services rendered for the audit of our annual consolidated financial statements,
review of interim consolidated financial statements and statutory audits, including Israeli tax reports. Other fees for the year
ended December 31, 2010 were for professional services rendered for the review of our Israeli prospectus.



For the fiscal year ended December 31, 2011
and 2010, 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
16F. cHANGE IN REGISTRANT’S REGISTERED ACCOUNTANT



Not applicable.



ITEM
16G. CORPORATE GOVERNANCE



Not applicable. Our securities are
not traded on a national securities exchange. Our ADRs are traded on the Pink Sheets, an inter-dealer electronic quotation
and trading system in the over-the-counter (OTC) securities market, under the symbol “XTLBY.PK.”  Our ordinary
shares are traded on the Tel Aviv Stock Exchange under the symbol “XTL.”



94







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-60 of this Annual Report.



Item
19. Exhibits



The following exhibits are filed as part
of this annual report:



|Exhibit
        Number |  | Description                                                                                                                                                                                                               
|---------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1                    |  | 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.                                                                                                                                                                    
|10.16                  |  | 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. †                                                
|10.26                  |  | 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 therein. #                                                                                        
|10.29                  |  | Registration Rights Agreement, dated March 22, 2006, by and among XTL Biopharmaceuticals Ltd. and the purchasers named therein. #                                                                                         
|10.30                  |  | Form of Ordinary Share Purchase Warrants, dated March 22, 2006, issued to the purchasers under the Securities Purchase Agreement. ^                                                                                       
|10.32                  |  | License Agreement between XTL Development, Inc. and DOV Pharmaceutical, Inc., dated January 15, 2007. *                                                                                                                   
|10.34                  |  | Securities Purchase Agreement, dated October 25, 2007, by and among XTL Biopharmaceuticals Ltd., and the purchasers named therein. #                                                                                      
|10.35                  |  | Registration Rights Agreement, dated October 25, 2007, by and among XTL Biopharmaceuticals Ltd. and the purchasers named therein. #                                                                                       
|10.36                  |  | License Agreement By and Between XTL Biopharmaceuticals Ltd. and Presidio Pharmaceuticals, Inc. dated March 19, 2008. #                                                                                                   
|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. +                                                                         



95







|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. &, >                 
|10.46 |  | Amended Bio-Gal Agreement, entered into December 31, 2009. @                                                                                                                                                                               
|10.47 |  | Share Transfer Agreement, entered into December 31, 2009.  @                                                                                                                                                                               
|10.48 |  | Termination to Bicifadine License, dated March 2010.  @                                                                                                                                                                                    
|10.49 |  | Employment Agreement, dated as of January 18, 2010, between XTL Biopharmaceuticals Ltd. and David Grossman.  @                                                                                                                             
|10.50 |  | Employment Agreement, dated as of July 29, 2009, between XTL Biopharmaceuticals Ltd. and Ronen Twito.  @                                                                                                                                   
|10.51 |  | Consulting Agreement, dated as of August 27, 2010, between XTL Biopharmaceuticals Ltd. and Moshe Mittelman. ~                                                                                                                              
|10.52 |  | Option to License Agreement, dated as of September 1, 2010, between XTL Biopharmaceuticals Ltd. and Yeda Research and Development Company Limited. ~                                                                                       
|10.53 |  | License Agreement, dated as of November 30, 2011, between XTL Biopharmaceuticals Ltd. and MinoGuard Ltd. >                                                                                                                                 
|21.1  |  | List of Subsidiaries                                                                                                                                                                                                                       
|23.1  |  | Consent of Kesselman & Kesselman,
        a member of PricewaterhouseCoopers International Ltd, dated March 29, 2012.                                                                                                                      
|23.2  |  | Consent of BDO Ziv Haft Consulting
        and Management Ltd, dated March 29, 2012.                                                                                                                                                       
|31.1  |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 29, 2012.                                                                 
|31.2  |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 29, 2012.                                                                 
|32.1  |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 29, 2012                                               



96







† 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 annual report on Form 20-F
filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on March 27, 2008.



+ 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.



& Incorporated by reference from the annual report on Form
20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on April 6, 2009.



@ Incorporated by reference from the annual report on Form 20-F
filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on June 30, 2010.



~ Incorporated by reference from the annual report on Form 20-F
filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on May 30, 2011.



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



97







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:                 
|                     |                            
|                     |                            
|Date: March 29, 2012 |                            



98











XTL BIOPHARMACEUTICALS LTD.



CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2011



INDEX



|                                                                           | Page        
|-------------------------------------------------------------------------- | ------------
|                                                                           |             
|Auditors' Report - Internal Control over Financial Reporting               | F-2         
|                                                                           |             
|Auditors' Report                                                           | F-3         
|                                                                           |             
|Consolidated Financial Statements - in U.S. dollars:                       |             
|                                                                           |             
|Statements of Financial Position                                           | F-4         
|                                                                           |             
|Statements of Comprehensive Income (Loss)                                  | F-5         
|                                                                           |             
|Statements of Changes in Equity                                            | F-6 - F-7   
|                                                                           |             
|Statements of Cash Flows                                                   | F-8 - F-10  
|                                                                           |             
|Notes to Financial Statements                                              | F-11 - F-60 
|                                                                           |             
|Report of BDO Ziv Haft Consulting & Management
    Ltd., dated March, 2012 | F-61 - F-144



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

F-1











AUDITORS' REPORT TO SHAREHOLDERS OF XTL BIOPHARMACEUTICALS
LTD.

ON AUDITING COMPONENTS OF INTERNAL CONTROL
OVER FINANCIAL REPORTING



Pursuant to Section 9b(c) to the Israel Securities
Regulations

(Periodic and Immediate Reports), 1970



We have audited components of internal control
over financial reporting of XTL Biopharmaceuticals Ltd. (hereinafter - the Company), and its subsidiary as of December
31, 2011. These components of internal control were set as explained in the next paragraph. The Company's Board of Directors and
Management are responsible for maintaining effective internal control over financial reporting and for assessing the effectiveness
of components of internal control over financial reporting included in the accompanying interim financial information for the above
date. Our responsibility is to express an opinion on the components of internal control over financial reporting based on our audit.



Components of internal control over financial
reporting were audited by us according to Audit Standard no. 104 of the Institute of Certified Public Accountants in Israel "Audit
of the Internal Control Components over Financial Reporting" (hereafter - "Audit Standard 104"). These components
are: (1) entity level controls, including controls over the preparation process and closing of the financial reporting and general
controls over information systems, (2) controls over the Equity and share based payment process (3) controls over the Intangible
asset valuation and impairment process (all of which hereinafter “Audited control components”).



We conducted our audits in accordance with
Audit Standard 104. This standard requires that we plan and perform the audit to identify the audited control components and to
obtain reasonable assurance whether these control components have been maintained effectively in all material respects. The audit
includes obtaining an understanding of the internal control over financial reporting, identifying the audited control components,
assessing the risk that a material weakness exists in the audited control components, as well as review and assessment of effective
planning and maintaining of these audited control components based on the estimated risk. Our audit, relating to those audited
control components, also included performing such other procedures as we considered necessary under the circumstances. Our audit
referred only to the audited control components, unlike internal control of all material processes over financial reporting, and
therefore our opinion refers only to the audited control components. In addition, our audit did not take into account the mutual
influences between the audited control components and those which are not audited, and therefore our opinion does not take into
account such possible effects. We believe that our audit provides a reasonable basis for our opinion in the context described above.



Due to inherent limitations, internal control
over financial reporting in general and components of internal controls in particular, may not prevent or detect a misstatement.
Also, making projections on the basis of any evaluation of effectiveness is subject to the risk that controls may become inadequate
because of changes in circumstances, or that the degree of compliance with the policies or procedures may be adversely affected.



In our opinion, the Company effectively maintained,
in all material respects, the audited control components as of December 31, 2011.



We also audited the Company's
consolidated financial statements as of December 31, 2011 and 2010 and for each of the three years in the period ended
December 31, 2011, in accordance with auditing standards generally accepted in Israel, and our report, dated March 29, 2012
included an unqualified opinion on those financial statements.



|Tel-Aviv, Israel | Kesselman & Kesselman                                        
|---------------- | -------------------------------------------------------------
|March 29, 2012   | Certified Public Accountants (lsr.)                          
|                 | A member firm of PricewaterhouseCoopers International Limited



Kesselman & Kesselman, Trade Tower, 25 Hamered Street,
Tel-Aviv 68125, Israel, P.O Box 452 Tel-Aviv 61003 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.co.il



F-2















REPORT OF THE AUDITORS

To the shareholders of

XTL BIOPHARMACEUTICALS LTD.



We have audited the consolidated
Statements of Financial Position of XTL Biopharmaceuticals Ltd. (hereafter - the "Company") and its subsidiaries as of
December 31, 2011 and 2010, and the related consolidated statements of Comprehensive Income (Loss), changes in equity and cash
flows for each of the three years ended December 31, 2011. These 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 audits.



We conducted our audits in
accordance with auditing standards generally accepted in Israel, including those prescribed by the Israeli Auditors
Regulations (Mode of Performance), 1973, and in accordance with the standards of the Public Company Accounting Oversight
Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by the Company's Board of Directors and management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, based upon our audits,
the consolidated financial statements referred to above ,present fairly, in all material respects, the consolidated financial position
of the Company and its subsidiaries as of December 31, 2011 and 2010, and the consolidated comprehensive income (loss), changes
in equity and cash flows for each of the three years ended December 31, 2011, in conformity with International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and Israeli
Securities Regulations (Preparation of Annual Financial Statements), 2010.



We have audited, according to Audit
Standard No. 104 “Audit of components of internal control over financial reporting” published by the Israeli Institute
of Certified Public Accountants, components of the internal controls over financial reporting of the Company as of December 31,
2011 and our report dated March 29, 2012 included an unqualified opinion on the effective existence of those components.



|Tel-Aviv, Israel | Kesselman & Kesselman                                        
|---------------- | -------------------------------------------------------------
|March 29, 2012   | Certified Public Accountants (lsr.)                          
|                 | A member firm of PricewaterhouseCoopers International Limited



Kesselman & Kesselman, Trade Tower, 25 Hamered Street,
Tel-Aviv 68125, Israel, P.O Box 452 Tel-Aviv 61003 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.co.il



F-3







|CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|---------------------------------------------



|                                                      |  |      |    |  | December 31,              | 
|----------------------------------------------------- |  | ---- | -- |  | ------------------------- | 
|                                                      |  |      |    |  | 2011                      | 
|                                                      |  | Note |    |  | U.S. dollars in thousands | 
|ASSETS                                                |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|CURRENT ASSETS:                                       |  |      |    |  |                           | 
|Cash and cash equivalents                             |  |      | 5  |  |                           | 
|Short-term deposits                                   |  |      | 6  |  |                           | 
|Accounts receivable                                   |  |      | 7  |  |                           | 
|Restricted deposits                                   |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|NON-CURRENT ASSETS:                                   |  |      |    |  |                           | 
|Property, plant and equipment                         |  |      | 9  |  |                           | 
|Intangible assets                                     |  |      | 10 |  |                           | 
|                                                      |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|Total assets                                          |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|LIABILITIES AND EQUITY                                |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|CURRENT LIABILITIES:                                  |  |      |    |  |                           | 
|Trade payables                                        |  |      | 11 |  |                           | 
|Other accounts payable                                |  |      | 12 |  |                           | 
|                                                      |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY: |  |      | 16 |  |                           | 
|Ordinary share capital                                |  |      |    |  |                           | 
|Share premium and options                             |  |      |    |  |                           | 
|Accumulated deficit                                   |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|Total equity                                          |  |      |    |  |                           | 
|                                                      |  |      |    |  |                           | 
|Total liabilities and equity                          |  |      |    |  |                           | 



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



|                      |  |                  |  |            
|--------------------- |  | ---------------- |  | -----------
|Amit Yonay            |  | David Grossman   |  | Ronen Twito
|Chairman of the Board |  | Director and CEO |  | CFO        



Date of approval of the financial statements
by the Company's Board: March 29, 2012



F-4







|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|------------------------------------------------------



|                                                                                                             |  |      |    |  | Year ended December 31,                           | 
|------------------------------------------------------------------------------------------------------------ |  | ---- | -- |  | ------------------------------------------------- | 
|                                                                                                             |  |      |    |  | 2011                                              | 
|                                                                                                             |  | Note |    |  | U.S. dollars in thousands (except per share data) | 
|                                                                                                             |  |      |    |  |                                                   | 
|Research and development expenses                                                                            |  |      | 17 |  |                                                   | 
|General and administrative expenses                                                                          |  |      | 18 |  |                                                   | 
|Other gains, net                                                                                             |  |      | 19 |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Operating income (loss)                                                                                      |  |      |    |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Finance income                                                                                               |  |      | 20 |  |                                                   | 
|Finance expenses                                                                                             |  |      | 20 |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Finance income (expenses), net                                                                               |  |      |    |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Income (loss) before taxes on income                                                                         |  |      |    |  |                                                   | 
|Tax benefit                                                                                                  |  |      | 21 |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Net income (loss) and comprehensive income (loss) for the year attributable to equity holders of the Company |  |      |    |  |                                                   | 
|                                                                                                             |  |      |    |  |                                                   | 
|Basic and diluted earnings (loss) per share (in U.S. dollars)                                                |  |      | 22 |  |                                                   | 



| | *) | Include reduced expenses which result from forfeiture of share options that were contingent on
the performance of the former chairman and former CEO, see also Note 16b.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



F-5







|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|--------------------------------------------



|                                            |  |      |    |  | Year ended December 31, 2011                                   | 
|------------------------------------------- |  | ---- | -- |  | -------------------------------------------------------------- | 
|                                            |  |      |    |  | Capital attributable to the shareholders of the parent company | 
|                                            |  |      |    |  | Share capital                                                  | 
|                                            |  | Note |    |  | U.S. dollars in thousands                                      | 
|                                            |  |      |    |  |                                                                | 
|Balance at January 1, 2011                  |  |      |    |  |                                                                | 
|Comprehensive loss for the year             |  |      |    |  |                                                                | 
|Issue of shares and warrants                |  |      | 16 |  |                                                                | 
|Share-based payment to employees and others |  |      | 16 |  |                                                                | 
|Exercise of warrants                        |  |      | 16 |  |                                                                | 
|                                            |  |      |    |  |                                                                | 
|Balance at December 31, 2011                |  |      |    |  |                                                                | 



|                                            |  |      |    |  | Year ended December 31, 2010                                   | 
|------------------------------------------- |  | ---- | -- |  | -------------------------------------------------------------- | 
|                                            |  |      |    |  | Capital attributable to the shareholders of the parent company | 
|                                            |  |      |    |  | Share Capital                                                  | 
|                                            |  | Note |    |  | U.S. dollars in thousands                                      | 
|                                            |  |      |    |  |                                                                | 
|Balance at January 1, 2010                  |  |      |    |  |                                                                | 
|Comprehensive loss for the year             |  |      |    |  |                                                                | 
|Issue of shares                             |  |      | 16 |  |                                                                | 
|Share-based payment to employees and others |  |      | 16 |  |                                                                | 
|Exercise of share options                   |  |      | 16 |  |                                                                | 
|                                            |  |      |    |  |                                                                | 
|Balance at December 31, 2010                |  |      |    |  |                                                                | 



| | *) | Represents less than $ 1 thousand.
| | -- | ----------------------------------



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



F-6







|CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|--------------------------------------------



|                                                               |  |      |    |  | Year ended December 31, 2009                                   | 
|-------------------------------------------------------------- |  | ---- | -- |  | -------------------------------------------------------------- | 
|                                                               |  |      |    |  | Capital attributable to the shareholders of the parent company | 
|                                                               |  |      |    |  | Share Capital                                                  | 
|                                                               |  | Note |    |  | U.S. dollars in thousands                                      | 
|                                                               |  |      |    |  |                                                                | 
|Balance at January 1, 2009                                     |  |      |    |  |                                                                | 
|Comprehensive income for the year                              |  |      | 16 |  |                                                                | 
|Share-based payment to employees and others                    |  |      |    |  |                                                                | 
|Transfer to equity for liability for share appreciation rights |  |      | 14 |  |                                                                | 
|                                                               |  |      |    |  |                                                                | 
|Balance at December 31, 2009                                   |  |      |    |  |                                                                | 



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

F-7







|CONSOLIDATED STATEMENTS OF CASH FLOWS
|-------------------------------------



|                                                                                        |  |      |    |  | Year ended December 31,   | 
|--------------------------------------------------------------------------------------- |  | ---- | -- |  | ------------------------- | 
|                                                                                        |  |      |    |  | 2011                      | 
|                                                                                        |  | Note |    |  | U.S. dollars in thousands | 
|                                                                                        |  |      |    |  |                           | 
|Cash flows from operating activities:                                                   |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Net income (loss) for the year                                                          |  |      |    |  |                           | 
|Adjustments to reconcile net income (loss) to net cash used in operating activities (a) |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Net cash used in operating activities                                                   |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Cash flows from investing activities:                                                   |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Decrease (increase) in restricted deposit                                               |  |      |    |  |                           | 
|Increase in short-term bank deposits                                                    |  |      |    |  |                           | 
|Purchase of property, plant and equipment                                               |  |      | 9  |  |                           | 
|Other investments                                                                       |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Net cash used in investing activities                                                   |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Cash flows from financing activities:                                                   |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Issue of shares in Bio-Gal transaction                                                  |  |      | 1a |  |                           | 
|Proceeds from issue of shares and warrants                                              |  |      | 16 |  |                           | 
|Exercise of share options                                                               |  |      | 16 |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Net cash provided by financing activities                                               |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Increase (decrease) in cash and cash equivalents                                        |  |      |    |  |                           | 
|Gains (losses) from exchange differences on cash and cash equivalents                   |  |      |    |  |                           | 
|Cash and cash equivalents at beginning of year                                          |  |      |    |  |                           | 
|                                                                                        |  |      |    |  |                           | 
|Cash and cash equivalents at end of year                                                |  |      |    |  |                           | 



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

F-8







|CONSOLIDATED STATEMENT OF CASH FLOWS
|------------------------------------





|    |                                                                                      |  |      |       |  | Year ended December 31,   | 
|--- | ------------------------------------------------------------------------------------ |  | ---- | ----- |  | ------------------------- | 
|    |                                                                                      |  |      |       |  | 2011                      | 
|    |                                                                                      |  | Note |       |  | U.S. dollars in thousands | 
|    |                                                                                      |  |      |       |  |                           | 
|(a) | Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    | Income and expenses not involving cash flows:                                        |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    | Depreciation and amortization                                                        |  |      | 9, 10 |  |                           | 
|    | Loss from disposal of property, plant and equipment                                  |  |      | 19    |  |                           | 
|    | Share-based payment transactions to employees and others                             |  |      | 16    |  |                           | 
|    | Finance expenses on short-term deposits                                              |  |      |       |  |                           | 
|    | Gains from exchange differences on operating activities                              |  |      |       |  |                           | 
|    | Change in retirement benefit obligation, net                                         |  |      |       |  |                           | 
|    | Change in liability for share appreciation rights                                    |  |      | 14    |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    | Changes in operating asset and liability items:                                      |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    | Decrease (increase) in accounts receivable and income taxes receivable               |  |      | 7     |  |                           | 
|    | Increase (decrease) in trade payables                                                |  |      | 11    |  |                           | 
|    | Increase (decrease) in other accounts payable                                        |  |      | 12    |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 
|    |                                                                                      |  |      |       |  |                           | 











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

F-9







|CONSOLIDATED STATEMENT OF CASH FLOWS
|------------------------------------





|    |                                                                                                                                |  | Year ended December 31,   |   
|--- | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | --
|    |                                                                                                                                |  | 2011                      |   
|    |                                                                                                                                |  | U.S. dollars in thousands |   
|    |                                                                                                                                |  |                           |   
|(b) | Additional information on cash flows from operating activities:                                                                |  |                           |   
|    |                                                                                                                                |  |                           |   
|    | Interest received                                                                                                              |  |                           | 11
|    |                                                                                                                                |  |                           |   
|    | Interest paid                                                                                                                  |  |                           | - 
|    |                                                                                                                                |  |                           |   
|    | Refund of taxes on income                                                                                                      |  |                           | - 
|    |                                                                                                                                |  |                           |   
|    | Payment of taxes on income                                                                                                     |  |                           | - 
|    |                                                                                                                                |  |                           |   
|(c) | Non-cash transactions:                                                                                                         |  |                           |   
|    |                                                                                                                                |  |                           |   
|    | Deferred charges in connection with the Bio-Gal transaction which were recorded in "intangible assets" and "other investments" |  |                           | - 
|    |                                                                                                                                |  |                           |   
|    | Purchase of an intangible asset as consideration for the issuance of the Company's shares under the Bio-Gal transaction        |  |                           | - 
|    |                                                                                                                                |  |                           |   
|    | Purchase of an exclusive right to examine a medical technology for a 15-month period against equity                            |  |                           | - 
|    |                                                                                                                                |  |                           |   
|    | Purchase of property, plant and equipment on suppliers' credit                                                                 |  |                           | - 





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

F-10







|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------



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



| | a. | A general description of the Company and its activity:
| | -- | ------------------------------------------------------



XTL Biopharmaceuticals Ltd. ("the
Company") is engaged in the development of therapeutics, among others, for the treatment of unmet medical needs, improvement
of existing medical treatment and business development in the medical realm. The Company was incorporated under the Israeli Companies
Law on March 9, 1993. The registered office of the Company is located at Medinat Hayehudim 85 Street, Herzliya 46766. The
Company owns 100% of Xtepo Ltd. ("Xtepo") and owns 100% of a U.S. company, XTL Biopharmaceuticals Inc. ("XTL Inc."),
which was incorporated in 1999 under the laws of the State of Delaware.



As of the reporting date, the
Company is in the planning and preparation stages for implementing a Phase 2 clinical trial of rHuEPO drug designed to treat
multiple myeloma cancer patients (for additional details regarding the rHuEPO drug, see Note 10a below). As part of
these preparations, the Company conducts a research which includes collection of data relating to the level of specific
proteins in the blood of a group of patients with multiple myeloma, which will assist in focusing the Phase 2 clinical trial
protocol. These collected research data will be integrated in the Phase 2 clinical trial of rHuEPO drug. The Company's
management and its advisors estimate that receipt of an approval to its commence is expected by the end of 2012.



On April 20, 2011, the Company
has applied to the U.S. Food and Drug Administration (FDA), a sub-unit of the Health and Human Services (HHS) for orphan drug designation
for its rHuEPO drug for the treatment of multiple myeloma blood cancer for which it owns a patent through 2019.



An "orphan drug" is defined
as a drug for treating diseases that affect a small number of people. In U.S. an "orphan drug" is defined as a disease
affecting fewer than 200,000 people a year. To encourage the development of drugs for these diseases, the different regulatory
authorities grant benefits and incentives to developers. The main standard benefit of orphan drugs in the U.S. is receiving seven
years marketing exclusivity from the date of approval by the FDA, as far as the FDA gives such approval. Other benefits are local
U.S. tax breaks on research and development expenses and exemption from paying commissions to the FDA.



On May 29, 2011, the Company announced
that it was granted an orphan drug designation from the FDA for its rHuEPO drug for the treatment of multiple myeloma blood cancer.



On March 24, 2011, the Company
has entered into a term sheet to acquire the activity of MinoGuard Ltd. ("MinoGuard"), which was founded by Mor Research
Applications Ltd. ("Mor"), by an exclusive license to use MinoGuard's entire technology, including the SAM-101 drug,
MinoGuard's lead drug, which is based on a combination of existing anti-psychotic drugs and a recognized medicinal compound (minocycline),
in return for royalties on sales and milestone payments throughout the clinical development process, without making any other payment.



F-11











|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------







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



On November 30, 2011, after
all the closing conditions had been met, MinoGuard transaction was completed (for additional details regarding the MinoGuard agreements,
see Note 15a below).



On August 3, 2010, the Company
completed a share exchange transaction with Bio-Gal shareholders ("the Bio-Gal transaction") under which the Company
acquired 100% of the shares of Xtepo Ltd. which, for the purpose of the transaction, held a license for the exclusive use of the
patent for rHuEPO drug for multiple myeloma and had an amount of approximately $ 1.5 million in its account on the date of
closing and this in return for the allocation of 133,063,688 Ordinary shares of the Company of NIS 0.1 par value each representing
about 69.44% of the Company's issued and outstanding share capital after closing (for additional details regarding the Bio-Gal
transaction, see Note 15a below).



Further, the Company has certain
milestone rights in the development of treatment for hepatitis C ("DOS") from Presidio Pharmaceuticals Inc. ("Presidio
"). Presidio is a U.S. biotechnology company (see Note 15a below).



The following are the Company's
subsidiaries:



Xtepo - an Israeli privately-held
company incorporated in November 2009 by the shareholders of Bio-Gal Ltd. for the execution of the Bio-Gal transaction and which
holds a license for the exclusive use of the patent for rHuEPO drug for multiple myeloma.



XTL Inc. was engaged in development
of therapeutics and business development in the medical realm. XTL Inc. has a wholly-owned subsidiary, XTL Development Inc. ("XTL
Development"), which was incorporated in 2007 under the laws of the State of Delaware and was engaged in development of therapeutics
for the treatment of diabetic neuropathic pain ("Bicifadine") until November 18, 2008, when the Company announced
that the Phase 2b clinical trial of Bicifadine failed to meet its endpoints and, as a result, the development of the drug was ceased.
In March 2010, the Company terminated the agreement with DOV Pharmaceutical Inc. ("DOV"), the owner of the Bicifadine
patent, and all rights under the agreement were reverted to DOV in coordination with it.



As of the date of the approval
of the financial statements, the companies XTL Inc. and XTL Development are inactive.



The Company and its subsidiaries
("the Group") operate in one business segment.



The Company is a public company
traded on the Tel-Aviv Stock Exchange and its American Depository Receipts (ADRs) are quoted on the Pink Sheets.



F-12













|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------





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



| | b. | The Company incurred losses amounting
to approximately $ 1.2 million and negative cash flows from operating activities amounting to approximately $ 1.3 million
in the year ended December 31, 2011 (approximately $ 1.3 million and approximately $ 0.75 million, respectively, in the
year ended December 31, 2010). The Company has no revenues from operations at this stage and it is dependent on external financing
sources. The Company's management believes that given the Company's current businessplan,
the cash and short term deposits together with the proceeds from the private placement and the exercise of warrants in March 2012, totaling approximately $3.8 million (see note 24 below), will enable it to fund its activities through at least into
2014. However, the actual amount of cash that the Company will need to fund its operations is subject to many factors, including,
but not limited to, the timing, design and conduct of the clinical trials of our existing drug candidates, any future projects
which may be in-licensed or any other business development activities. For example, changing circumstances and/or in-licenses of
new technologies may cause the Company to consume capital significantly faster than the management currently anticipation and the
Company may need to spend more money than currently expected because of circumstances beyond its control.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The Company will incur additional losses
in 2012 from research and development activities and from current operation which will be reflected in negative cash flows from
operating activities.  Accordingly,in order to complete the clinical trials to bring a product to marketthe Company will need to raise additional cash in the future thru
the issuance of equity securities. However, if the Company is not be able to raise additional capital at acceptable terms, the
Company may need to reduce operations or sell or license to third parties some or all of our technologies.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | a. | Basis of presentation of the financial statements:
| | -- | --------------------------------------------------



| | 1. | The financial statements of the Group as of December 31, 2011 and 2010 and for each of the three
years in the period ended December 31, 2011 have been prepared in accordance with International Financial Reporting Standards which
are standards and interpretations issued by the International Accounting Standards Board ("IFRS") and include the additional
disclosure required in accordance with the Israeli Securities Regulations (Annual Financial Statements), 2010.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The significant
accounting policies described below are consistent with those of all years presented, unless it is indicated otherwise.

The consolidated
financial statements have been prepared under the historical cost convention.



The preparation
of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires the
Group's management to exercise its judgment in the process of applying the Group's accounting policies. The areas that involve
judgment which has significant effect or complexity or where assumptions and estimates are significant to the consolidated financial
statements are disclosed in Note 3. Actual results could significantly differ from the estimates and assumptions used by the Group's
management.





F-13













|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------





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



| | 2. | The Group's operating cycle is 12 months.
| | -- | -----------------------------------------



| | 3. | The Group analyses the expenses recognized in the statement of comprehensive income by classification
based on the function of expense.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------



| | b. | Consolidated financial statements:
| | -- | ----------------------------------



The consolidated
financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). The Company
wholly owns all subsidiaries. Control exists when the Company has the power, directly or indirectly, to govern the financial and
operating policies of an entity. The consolidation of the financial statements commences on the date on which control is obtained
and ends when such control ceases.



Significant intragroup
balances and transactions and gains or losses resulting from transactions between the Company and the subsidiaries are eliminated
in full in the consolidated financial statements.



| | c. | Foreign currency translation of transactions and balances:
| | -- | ----------------------------------------------------------



| | 1. | Functional currency and presentation currency:
| | -- | ----------------------------------------------



Items included
in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment
in which the entity operates ("the functional currency"). The consolidated financial statements are presented in U.S.
dollars, which is the functional currency of each of the Group's entities and the Company's presentation currency.



Below are the
changes in the reporting periods in the exchange rate of the U.S. dollar ("the dollar") in relation to the NIS:



|                  |  | Change in the |      
|----------------- |  | ------------- | -----
|                  |  | exchange rate |      
|Year ended        |  | of U.S. $ 1   |      
|                  |  | %             |      
|                  |  |               |      
|December 31, 2011 |  |               | 7.66 
|December 31, 2010 |  |               | (5.99
|December 31, 2009 |  |               | (0.71



|                  |  |  | Exchange rate | 
|----------------- |  |  | ------------- | 
|As of             |  |  | of U.S. $ 1   | 
|                  |  |  | NIS           | 
|                  |  |  |               | 
|December 31, 2011 |  |  | 3.821         | 
|December 31, 2010 |  |  | 3.549         | 







F-14













|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------







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



| | 2. | Transactions and balances:
| | -- | --------------------------



Transactions
in a currency other than the functional currency ("foreign currency") are translated into the functional currency using
the exchange rates at the dates of the transactions. After initial recognition, monetary assets and liabilities denominated in
foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date.
Exchange differences are recognized in the statement of comprehensive income in the line item finance income (expenses). Non-monetary
assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of
the transaction.



| | d. | Property, plant and equipment:
| | -- | ------------------------------



Items of property,
plant and equipment are measured at cost with the addition of direct acquisition costs, less accumulated depreciation, less accumulated
impairment losses and excluding day-to-day servicing expenses.



Depreciation of property, plant
and equipment is calculated on a straight-line basis to reduce their cost to their residual value over their useful life as follows:



|                               |  | % |       
|------------------------------ |  | - | ------
|                               |  |   |       
|Computers                      |  |   | 33    
|Office furniture and equipment |  |   | 6 - 15



Leasehold improvements
are depreciated on a straight-line basis over the shorter of the lease term and the expected life of the improvement.



The useful life,
depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted for prospectively
as a change in accounting estimate.



Depreciation
of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized.
An asset is derecognized on disposal or when no further economic benefits are expected from its use. The gain or loss arising from
the derecognition of the asset (determined as the difference between the net disposal proceeds and the carrying amount in the financial
statements) is included when the asset is derecognized in "other gains, net" in the consolidated statements of comprehensive
income (loss).



An asset's carrying
amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable
amount (see f below).



F-15











|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------







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



| | e. | Intangible assets:
| | -- | ------------------



Research and
development -research expenditure is recognized as an expense when incurred. Costs arising from a development project are
recognized as intangible assets when the following criteria are met:



| | - | it is technically feasible to complete the intangible asset so that it will be available for use;
| | - | -------------------------------------------------------------------------------------------------

| | - | management intends to complete the intangible asset and use or sell it;
| | - | -----------------------------------------------------------------------

| | - | there is an ability to use or sell the intangible asset;
| | - | --------------------------------------------------------

| | - | it can be demonstrated how the intangible asset will generate probable future economic benefits;
| | - | ------------------------------------------------------------------------------------------------

| | - | adequate technical, financial and other resources to complete the development and to use or sell
the intangible asset are available; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | - | the expenditure attributable to the intangible asset during its development can be reliably measured.
| | - | -----------------------------------------------------------------------------------------------------



Other development
expenditures that do not meet these criteria are recognized as an expense when incurred. During the reported period, the Group
did not capitalize development costs to intangible assets.



Unamortized
intangible assets - amortization of an asset on a straight-line basis over its useful life begins when development procedure
is complete and the asset is available for use. These assets are reviewed for impairment once a year or whenever there are indicators
of a possible impairment, in accordance with the provisions of IAS 36, "Impairment of Assets".



Amortized
intangible assets - an exclusive right to examine an acquired technology in the field of the immune system with a finite life
of 15 months starting September 1, 2010 that was amortized on a straight-line basis over the useful life of this right. On
November 30, 2011, the amortization of this right ceased.



| | f. | Impairment of non-financial assets:
| | -- | -----------------------------------



Depreciable assets
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets
are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial
assets that suffered an impairment are reviewed for possible reversal of the impairment at each date of the statement of financial
position.



As for testing
impairment of acquired intangible assets, see e above.





F-16













|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------







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



| | g. | Financial assets:
| | -- | -----------------



| | 1. | Classification:
| | -- | ---------------



The Group classifies
its financial assets in the following categories: financial assets at fair value through profit or loss, loans and receivables,
available-for-sale financial assets and held-to-maturity investments. The classification depends on the purpose for which the financial
assets were acquired. The Group's management determines the classification of its financial assets at initial recognition.



| | a) | Financial assets at fair value through profit or loss:
| | -- | ------------------------------------------------------



This category
contains two sub-categories: financial assets held for trading purposes and financial assets at fair value through profit or loss.
A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term or if designated
to this category by management. Derivative financial assets are also classified as held for trading unless they are designated
as financial guarantee contracts or designated and effective hedges. Assets in this category are classified as current assets if
it is probable that they will be disposed of within one year after the date of the statement of financial position. In the reporting
periods, the Group did not hold financial assets at fair value through profit or loss.



| | b) | Loans and receivables:
| | -- | ----------------------



Loans and receivables
are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included
in current assets, except for maturities greater than 12 months after the date of the statement of financial position. These maturities
are classified as non-current assets. The Group's loans and receivables are included in the line items: "accounts receivable",
"cash and cash equivalents", "short-term deposits" and "restricted deposits" on the face of the statement
of financial position.



| | c) | Available-for-sale financial assets:
| | -- | ------------------------------------



Available-for-sale
financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories.
They are included in non-current assets unless management intends to dispose the investment therein within 12 months after the
date of the statement of financial position. In the reporting periods, the Group did not hold available-for-sale financial assets.



F-17











|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------







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



| | d) | Held-to-maturity investments:
| | -- | -----------------------------



Held-to-maturity
investments are non-derivatives financial assets with fixed or determinable payments and fixed maturity that the Group's management
has the positive intention and ability to hold to maturity. If the Group was to sell other than an insignificant amount of held-to-maturity
financial assets, the whole category would be "tainted" and reclassified as available-for-sale. In the reporting periods,
the Group did not hold investments that were classified to this category.



| | 2. | Recognition and measurement:
| | -- | ----------------------------



Regular purchases
and sales of financial assets are recognized in the books of the Group companies on the trade-date which is the date on which the
asset is transferred to the Group or transferred by the Group. Investments are initially recognized at fair value plus transaction
costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through
profit or loss are initially recognized at fair value, and transaction costs are expensed in the statement of comprehensive income
(loss). Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been
transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets
and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity
investments are subsequently carried at amortized cost using the effective interest method.



| | 3. | Offsetting financial instruments:
| | -- | ---------------------------------



Financial assets
and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable
right to offset the recognized amounts and there is an intention to settle the financial assets and liabilities on a net basis
or realize the asset and settle the liability simultaneously.



| | 4. | Impairment of financial assets:
| | -- | -------------------------------



Financial
assets carried at amortized cost:



The Group assesses
at the date of each statement of financial position whether there is objective evidence that a financial asset or group of financial
assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there
is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset
("a loss event") and that loss event (or events) has an impact on the estimated future cash flows of the financial asset
or group of financial assets that can be reliably estimated.



F-18











|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011
|------------------------------------------------------------------





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



| | h. | Cash and cash equivalents:
| | -- | --------------------------



Cash and cash
equivalents include cash in hand, short-term bank deposits with original maturities of three months or less.



| | i. | Share capital:
| | -- | --------------



The Company's
Ordinary shares are classified as share capital. Incremental costs directly attributable to the issue of new shares or options
are shown in equity as a deduction, net of tax, from the issuance proceeds.



| | j. | Trade payables:
| | -- | ---------------



Trade payables
are the Group's obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers.
Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as
non-current liabilities.



Trade payables
are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.



| | k. | Taxes on income:
| | -- | ----------------



Taxes on income
in the statement of comprehensive income (loss) comprise current and deferred taxes.



| | 1. | Current taxes:
| | -- | --------------



The current tax
liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the reporting date as
well as adjustments required in connection with the tax liability in respect of prior years.



| | 2. | Deferred taxes:
| | -- | ---------------



Deferred taxes
are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed
for tax purposes.



Deferred tax
balances are measured at the tax rate that is expected to apply when the taxes are taken to the statement of comprehensive income
(loss), to other comprehensive income or equity based on tax laws that have been enacted or substantively enacted by the reporting
date. The amount for deferred taxes in the statement of comprehensive income (loss) represents the changes in said balances during
the reported period, except for items attributable to other comprehensive income or equity.





F-19











XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



Deferred
tax assets are reviewed at the end of each reporting period and reduced to the extent that it is not probable that they will be
utilized. Also, temporary differences (such as carryforward losses) for which deferred tax assets have not been recognized are
reassessed and deferred tax assets are recognized to the extent that their utilization has become probable. Any resulting reduction
or recognition is recognized in the line item "taxes on income".



Taxes that
would apply in the event of the sale of investments in investees have not been taken into account in computing the deferred taxes,
as long as the sale of the investments in investees is not expected in the foreseeable future. Also, deferred taxes that would
apply in the event of distribution of earnings by investees as dividend have not been taken into account in computing the deferred
taxes, since the distribution of dividend does not involve an additional tax liability or since it is the Company's policy not
to initiate distribution of dividend that triggers an additional tax liability.



Deferred
tax assets and deferred tax liabilities are offset if there is a legally enforceable right to set off a current tax asset against
a current tax liability and the deferred taxes relate to the same taxpayer and the same taxation authority.



Deferred
tax asset has not been recognized in the Group's accounts because the availability of taxable income in the future is not probable.



l.         Employee
benefits:



1.        Employment
benefits for retirement compensation/pension:



Defined contribution
plan is a post-employment employee benefit plan under which the Company pays fixed contributions into a separate and independent
entity so that the Company has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient
assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan
is a post-employment employee benefit plan that is not a defined contribution plan.



The Company
operates various pension plans. The plans are generally funded through payments to insurance companies or trustee-administered
funds. Said pension plans qualify for the criteria of defined contribution plan, as above, based on their terms.



According
to the labor laws and employment agreements in Israel and according to the Company's practice, the Company is obligated to pay
compensation to employees who are dismissed and, under certain circumstances, to employees who retire. The Company's liability
to pay compensation is accounted for as a defined contribution plan.



F-20







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



As abovementioned,
the Company buys insurance policies and makes payments to pension and compensation funds to fund its obligation under defined contribution
plan. The Company has no further payment obligations once the contributions have been paid. The contributions are recognized as
employee benefit expense and, correspondingly, the service which entails the contribution is rendered by the employees. Prepaid
contributions are recognized as an asset to the extent that a cash refund or reduction in the future payments is available.



2.         Paid
annual leave and sick leave:



According to the Law, an employee
is entitled to paid annual leave and sick leave on an annual basis. The entitlement is based on the number of years of service.
The Company recognizes an obligation and expense for paid annual leave and sick leave based on the benefit accumulated for each
employee.



m.        Share-based
payment:



The Company operates a number
of share-based payment plans to employees and to other service providers who render services that are similar to employees' services
that are settled with the Company's equity instruments. In this framework, the Company grants employees, from time to time, and,
at its election, options to purchase Company's shares. The fair value of services received from employees in consideration of the
grant of options is recognized as an expense in the statement of comprehensive income (loss) and correspondingly carried to equity.
The total amount recognized as an expense over the vesting term of the options (the term over which all pre-established vesting
conditions are expected to be satisfied) is determined by reference to the fair value of the options granted at grant date, except
the effect of any non-market vesting conditions.



Non-market vesting conditions
are included in the assumptions used in estimating the number of options that are expected to vest. The total expense is recognized
over the vesting period, which is the period over which all of the specified vesting conditions of the share-based payment arrangement
are to be satisfied. In each reporting date, the Company revises its estimates of the number of options that are expected to vest
based on the non-market vesting conditions and recognizes the impact of the revision to original estimates, if any, in the statement
of comprehensive income (loss) with a corresponding adjustment in equity.



When the options are exercised,
the Company issues new shares. The proceeds net of any directly attributable transaction costs are credited to share capital (par
value) and share premium.



F-21







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



Share-based payments for share
appreciation rights with settlement alternative which were granted to the Group's service provider were accounted in the past as
a cash-settled grant. The Company remeasured the value of the liability at each reporting date. On September 30, 2009, in
accordance with IFRS 2 and after the Company's management examined the settlement issue, in furtherance to the Company's financial
condition, the classification of the transaction was modified to an equity-settled transaction. The Company is not obligated to
settle the transaction in cash.



Share-based payment transactions
in which the Company acquired assets as consideration for the Company's equity instruments are measured at the value of the assets
acquired (see Note 10b).



n.         Leases:



Leases in which a significant
portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under
operating leases are charged to the statement of comprehensive income (loss) on a straight-line basis over the period of the lease.



o.         Earnings
(loss) per share:



Basic earning (loss) per share
is calculated by dividing income or loss attributable to equity holders of the Company by the weighted average number of Ordinary
shares outstanding during the period.



For the purpose of calculating
diluted earnings or loss per share, the number of Ordinary shares shall be the average Ordinary shares calculated in basic earnings
per share plus the weighted average number of shares that would be issued on the conversion of all the dilutive potential shares
into shares. Potential Ordinary shares are taken into account as above only when their conversion is dilutive (decreases the earnings
or increases the loss per share).



q.         New
and amended IFRS standards and IFRIC interpretations:



1.         Standards
and amendments to existing standards that have been issued and are effective for reporting periods after January 1, 2011:



Amendment to IFRS 7, "Financial
Instruments: Disclosures". This amendment represents part of the improvements to IFRSs published in May 2010. This amendment
changes part of the quantitative and qualitative disclosures required for the nature and extent of risks associated with financial
assets and clarifies the interaction between these quantitative and qualitative disclosures. This amendment is applied for annual
reporting periods beginning on or after January 1, 2011. The Group adopted this amendment on January 1, 2011 and its
initial adoption had no material impact on the Group's financial statements.



F-22







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



2.         Standards
and amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group:



| | a) | IFRS 9, "Financial Instruments" ("IFRS 9"). The first part of IFRS 9 which
deals with classification and measurement of financial assets was published in November 2009 and the second part of IFRS 9 which
includes guidance on financial liabilities and derecognition of financial instruments was published in October 2010. IFRS 9 replaces
the parts of IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39") that relate to the
classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into one of the two
following categories: financial assets measured after initial recognition at fair value and financial assets measured after initial
recognition at amortized cost. The decision to which category a financial asset should be classified is made on initial recognition.
This classification is driven by the model the entity manages its financial instruments (its business model) and the contractual
characteristics of the cash flows from the instrument. For financial liabilities, IFRS 9 retains most of the IAS 39 requirements.
The main change is that, in cases where an entity has a financial liability that is designated at fair value through profit or
loss, the part of a change in fair value due to changes in the liability's credit risk (an entity's own credit risk) is recorded
directly in other comprehensive income rather than the statement of income, unless this creates an accounting mismatch. There is
not subsequent recycling of the amounts in other comprehensive income to profit or loss. But, accumulated gains or losses may be
transferred within equity.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In December 2011, an amendment
to IFRS 9 and to IFRS 7, "Financial Instruments: Disclosures" ("the amendment") was published. The amendment
deferred the mandatory effective date of IFRS 9 and the transitional provisions upon implementation and added certain transition
disclosure requirements ("the additional disclosures").



According to IFRS 9, after
its amendment, as above, both parts of IFRS 9 will apply for annual periods beginning on or after January 1, 2015. Entities may
elect to apply IFRS 9 early but it is not possible to apply the second part of IFRS 9 early without applying at the same time the
first part of IFRS 9. However, the first part of IFRS may be applied earlier without being required to apply at the same time the
second part of IFRS 9.



F-23







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



Entities that adopt IFRS 9
for reporting periods:



1.         Beginning
before January 1, 2012 - are not required to restate prior periods upon or provide the additional disclosures upon initial
adoption.



2.         Beginning
on or after January 1, 2012 and before January 1, 2013 - may elect to either restate its prior periods or provide the additional
disclosures.



3.         Beginning
on or after January 1, 2013 - are not required to restate prior periods but are required to provide the additional disclosures.



The Group is assessing the
possible impact of IFRS 9 on its financial statements and the timing of its implementation.



| | b) | IFRS 10, "Consolidated Financial Statements" ("IFRS 10"). IFRS 10 replaces
all the guidance on control and consolidation of financial statements in IAS 27, "Consolidated and Separate Financial Statements"
("IAS 27") and SIC-12, "Consolidation - Special Purpose Entities". IFRS 10 redefines "control". The
new definition focuses on the requirement that control and variable returns should exist in order for control to exist. "Power"
is the current ability to direct the activities which significantly affect the returns. IFRS 10 contains, inter-alia, guidance
relating to differentiatingbetween participating rights and protective rights as well as guidance
relating to cases where an investor is acting on behalf of another party or on behalf of a group of parties (agent/principal relationships).
The core principle that a consolidated entity presents a parent company and its subsidiaries as if they are a single entity remained
unchanged as well as the mechanics of consolidation. IFRS 10 will be applied for annual periods beginning on or after January 1,
2013. Earlier application is permitted. If an entity elects to apply earlier, it shall disclose this fact and early apply IFRS
11, "Joint Arrangements" ("IFRS 11"), IFRS 12, "Disclosures of Interests in Other Entities" ("IFRS
12"), IAS 27 (Revised), "Separate Financial Statements" ("IAS 27R"), IAS 28 (Revised), "Associates
and Joint Ventures" ("IAS 28R") simultaneously. The initial adoption of this amendment is not expected to have a
material impact on the Group's financial statements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-24







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



| | c) | IAS 28R - IAS 28R replaces IAS 28, "Investments in Associates" ("IAS 28") and
the key changes contained therein compared to IAS 28 relate to adding explicit references to the application of the equity method
when accounting for investments in joint ventures as a result of the new guidance prescribed by IFRS 11. IAS 28R will be applied
for annual periods beginning on or after January 1, 2013. Earlier application is permitted. If an entity elects to apply earlier,
it shall disclose this fact and early apply IFRS 10, IFRS 11, IFRS 12 and IAS 27R simultaneously. The Group is assessing the possible
impact of IAS 28R on its financial statements and the timing of its implementation.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | IFRS 13, "Fair Value Measurements" ("IFRS 13") - focuses on improving consistency
and reducing complexity of fair value measurement by providing a precise definition of "fair value" and a single source
of fair value measurement and disclosure requirements for use across IFRSs. The requirements of IFRS 13 do not extend the use of
fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other
standards within IFRSs. IFRS 13 will be applied for annual periods beginning on or after January 1, 2013. Earlier application
is permitted while disclosing this fact. IFRS will be applied prospectively as of the beginning of the annual period in which it
is initially applied. The disclosure requirements of IFRS 13 do not need to be applied in comparative information for periods before
initial application of IFRS 13. The Group is assessing the possible impact of IFRS 12 on its financial statements and the timing
of its implementation.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | The amendment to IAS 32, "Offsetting Financial Assets and Financial Liabilities" ("the
amendment to IAS 32") and the amendment to IFRS 7, "Disclosures: Offsetting Financial Assets and Financial Liabilities"
("the amendment to IFRS 7") were published in December 2011. The amendment to IAS 32 does not modify the existing model
in IAS 32, "Financial Instruments: Presentation" regarding offsetting financial assets and financial liabilities ("offsetting")
but clarifies that in order for the criteria of offsetting to exist in the financial statements it is required, inter alia, that
the right of set-off must be available today namely, it should not be contingent on a future event and, in addition, it is required
that the right of set-off will be legally enforceable in all of the following circumstances: in the normal course of business and
in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendment to IAS 32 also clarifies
the circumstances in which the right of set-off through gross settlement mechanism will meet the criteria of right to set-off by
net settlement.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-25







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE
2:-   SIGNIFICANT ACCOUNTING POLICIES(Cont.)



| |  | The amendment to IFRS 7 adds new disclosure requirements that focus on quantitative information
about recognized financial instruments that are offset in the statement of financial position as well as recognized financial instruments
that are subject to certain netting arrangements (irrespective of whether they are offset in the statement of financial position).
The amendment to IAS 32 will be retrospectively applied for annual periods beginning on or after January 1, 2014. Earlier
application is permitted. The amendment to IFRS 7 will be retrospectively applied for annual and interim periods beginning on or
after January 1, 2013. The Group is assessing the possible impact of IFRS 12 on its financial statements and the timing of
its implementation
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 3:-     CRITICAL ACCOUNTING ESTIMATES
AND JUDGMENTS



Estimates and judgments are
continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.



The Group makes estimates and
assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year are addressed below.



a.         Intangible
assets - in determining the fair value of assets acquired in share-based payment transactions and in testing impairment of these
research and development assets, the Company's management is to estimate, among others, the probable endpoints of trials conducted
by the Company, the commercial technical feasibility of the development and the resulting economic benefits. Actual results and
estimates to be made in the future may significantly differ from current estimates.



b.         Share-based
payments as well as share appreciation rights (see Note 2m) - in evaluating the fair value and the recognition method of share-based
payment, the Company's management is to estimate, among others, different parameters included in the computation of the fair value
of the options and the Company's results and the number of options that will vest. Actual results and estimates to be made in the
future may significantly differ from current estimates.



F-26







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 4:-     FINANCIAL INSTRUMENTS AND
FINANCIAL RISK MANAGEMENT



a.         Financial
risk management:



1.         Financial
risk factors:



The Group's activities expose
it to a variety of financial risks: market risks (including currency risk, fair value interest rate risk, cash flow interest rate
risk and price risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability
of financial markets and seeks to minimize potential adverse effects on the Group's financial performance.



Risk management is carried
out by the Group's management under policies approved by the Board. The Group's treasury identifies, evaluates and defines financial
risks. The Board provides written principles for overall risk management, as well as written policies covering specific areas,
such as foreign exchange risk, interest rate risk and investment of excess liquidity.



a)         Market risk:



Foreign exchange risk:



The Group operates internationally
and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the NIS. Foreign exchange
risk arises from assets and liabilities denominated in currency that is other than the functional currency.



The Group's management has
set up a policy to require Group companies to manage their foreign exchange risk against their functional currency. The Group companies
are required to hedge their entire foreign exchange risk exposure. To manage their foreign exchange risk arising from future commercial
transactions and recognized assets and liabilities, the Group uses short-term deposits denominated in foreign currency. Foreign
exchange risk arises when future commercial transactions or recognized assets or liabilities are measured and denominated in a
currency that is not the entity's functional currency.



The Company
treasury's risk management policy is to hold NIS-denominated cash and cash equivalents and short-term deposits in the amount
of the anticipated NIS-denominated liabilities for nine to twelve consecutive months, from time to time, in line with the
directives of the Company's Board.



F-27







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 4:-    FINANCIAL INSTRUMENTS AND
FINANCIAL RISK MANAGEMENT (Cont.)



As of December 31, 2011, if
the Group's functional currency had weakened by 10% against the NIS with all other variables held constant, post-tax loss for the
year would have been $ 30 thousand lower (2010 - post-tax loss $ 11 thousand higher and 2009 - post-tax income $ 8
thousand lower), mainly as a result of exchange rate changes on translation of accounts receivable net and exchange rate changes
on NIS-denominated cash and cash equivalents. Loss is more sensitive to movement in the exchange rate in relation to the NIS in
2011 than in 2010 mainly because of the increased amount of the NIS-denominated balances in the items cash, receivables and payables
of the Group.



b)        Credit risk:



Credit risk is managed on
group basis. Credit risk arises from cash and cash equivalents, restricted bank deposits as well as outstanding receivables. For
banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted.



See Note 4b(2) for further
disclosure on credit risk.



c)         Liquidity risk:



Cash flow forecasting is performed
by the Group's management both in the entities of the Group and aggregated by the Group. The Group's management monitors rolling
forecasts of the Group's liquidity requirements to ensure it has sufficient cash to meet operation. The Group does not use borrowing
credit facilities. These forecasting takes into consideration several factors such as raising capital to finance operation and
certain liquidity ratios that the Group strives to achieve.



Surplus cash held to finance
operating activities is invested in interest bearing current accounts, time deposits and other solid channels. These channels were
chosen by reference to their appropriate maturities or liquidity to provide sufficient cash balances to the Group as determined
by the abovementioned forecasts.



As of December 31, 2011
and 2010, the maturity of the Group's financial liabilities is less than one year from each of the reporting dates.



F-28







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 4:-   FINANCIAL INSTRUMENTS AND
FINANCIAL RISK MANAGEMENT (Cont.)



2.        Capital
management:



The Group's objectives when
managing capital are to endure the Group's ability to continue as a going concern in order to provide returns on investments for
shareholders and benefits for other interested parties and to maintain an optimal capital structure to reduce the cost of capital.



In order to maintain or adjust
the capital structure, the Group may take variety of measures such as issue new shares or sell assets to reduce liabilities (see
also Note 1b).



b.         Financial
instruments:



1.        Financial
instruments by category:



As of December 31, 2011
and 2010, all financial assets were classified in the category loans and receivables. Likewise, all financial liabilities as of
such dates were classified in the category other financial liabilities at amortized cost.



2.        Credit
quality of financial assets:



The credit quality of financial
assets that are not impaired can be assessed by reference to external credit ratings (if available) or to historical information
about counterparty default rates:



|                                                            |  | December 31,              |      
|----------------------------------------------------------- |  | ------------------------- | -----
|                                                            |  | 2011                      |      
|                                                            |  | U.S. dollars in thousands |      
|Cash at banks, short-term deposits and restricted deposits: |  |                           |      
|AA+                                                         |  |                           | 275  
|AA                                                          |  |                           | 1,237
|AA-                                                         |  |                           | 3    
|                                                            |  |                           |      
|                                                            |  |                           | 1,515
|Cash not in banks                                           |  |                           | 1    
|                                                            |  |                           |      
|                                                            |  |                           | 1,516



F-29







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 5:-      CASH AND CASH EQUIVALENTS



|                                                  |  | December 31,              |    
|------------------------------------------------- |  | ------------------------- | ---
|                                                  |  | 2011                      |    
|                                                  |  | U.S. dollars in thousands |    
|                                                  |  |                           |    
|Cash at bank and on hand                          |  |                           | 51 
|Bank deposits for periods of three months or less |  |                           | 72 
|                                                  |  |                           |    
|                                                  |  |                           | 123



The currencies in which the
cash and cash equivalents are denominated or linked to are:



|                                    |  | December 31,              |    
|----------------------------------- |  | ------------------------- | ---
|                                    |  | 2011                      |    
|                                    |  | U.S. dollars in thousands |    
|                                    |  |                           |    
|U.S. dollar                         |  |                           | 8  
|NIS (not linked to the Israeli CPI) |  |                           | 114
|Other currencies                    |  |                           | 1  
|                                    |  |                           |    
|                                    |  |                           | 123



The carrying amount of cash
and cash equivalents is a reasonable approximation of the fair value because the effect of discounting is immaterial.



NOTE 6:-        SHORT-TERM DEPOSITS



a.         The
currencies in which the short-term deposits are denominated:



|                                    |  | December 31,              |      
|----------------------------------- |  | ------------------------- | -----
|                                    |  | 2011                      |      
|                                    |  | U.S. dollars in thousands |      
|                                    |  |                           |      
|U.S. dollars                        |  |                           | 1,000
|NIS (not linked to the Israeli CPI) |  |                           | 372  
|                                    |  |                           |      
|                                    |  |                           | 1,372



b.         The
dollar-denominated deposits earn interest at the average annual rate of 1.25%. The NIS-denominated deposits earn annual interest
at the average rate of 2.59%.



The carrying amount of short-term
deposits is a reasonable approximation of the fair value because the effect of discounting is immaterial.



F-30







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 7:-      ACCOUNTS RECEIVABLE



a.           Composition:



|                       |  | December 31,              |   
|---------------------- |  | ------------------------- | --
|                       |  | 2011                      |   
|                       |  | U.S. dollars in thousands |   
|                       |  |                           |   
|Government authorities |  |                           | 17
|Prepaid expenses       |  |                           | 43
|Other receivables      |  |                           | 8 
|                       |  |                           |   
|                       |  |                           | 68



b.         The
carrying amount of accounts receivable which represent monetary items is denominated in NIS and amounts to $ 25 thousand and
$ 53 thousand as of December 31, 2011 and 2010, respectively.



The carrying amount of accounts
receivable is a reasonable approximation of the fair value because the effect of discounting is immaterial.



NOTE 8:-    ADDITIONAL INFORMATION ABOUT
INVESTMENT IN SUBSIDIARIES



|Name and country of incorporation                     |  | Date |          |  | Equity
 interests and 
voting rights |  |     | Scope of
investments
(in $ 000) |  |   | Dividends
 received or 
receivable |  
|----------------------------------------------------- |  | ---- | -------- |  | ------------------------------------ |  | --- | ------------------------------- |  | - | ---------------------------------- | -
|                                                      |  |      |          |  |                                      |  |     |                                 |  |   |                                    |  
|Xtepo Ltd., incorporated in Israel                    |  |      | 31.12.11 |  |                                      |  | 100 | %                               |  | $ | 3,867                              |  
|                                                      |  |      | 31.12.10 |  |                                      |  | -   |                                 |  | $ | 3,918                              |  
|                                                      |  |      |          |  |                                      |  |     |                                 |  |   |                                    |  
|XTL Biopharmaceuticals Inc., incorporated in Delaware |  |      | 31.12.11 |  |                                      |  | 100 | %                               |  | $ | (161                               | )
|                                                      |  |      | 31.12.10 |  |                                      |  | 100 | %                               |  | $ | (218                               | )



F-31







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 9:-        PROPERTY, PLANT AND EQUIPMENT



a.         Composition
of property, plant and equipment and accumulated depreciation, by major classes, and the movement therein in 2011 are:



|                                   |  | Cost                          |     |  | Accumulated
    depreciation |  |   |            | 
|---------------------------------- |  | ----------------------------- | --- |  | ---------------------------- |  | - | ---------- | 
|                                   |  | Opening                       |     |  | Additions                    |  |   | Disposals  | 
|                                   |  | book                          |     |  | during the                   |  |   | during the | 
|                                   |  | amount                        |     |  | year                         |  |   | year       | 
|                                   |  | U.S.
    dollars in thousands |    
|                                   |  |                               |     |  |                              |  |   |            | 
|Office furniture
    and equipment |  |                               | 62  |  |                              |  | 5 |            | 
|Computers                          |  |                               | 98  |  |                              |  | 1 |            | 
|                                   |  |                               |     |  |                              |  |   |            | 
|                                   |  |                               | 160 |  |                              |  | 6 |            | 



| |  | Composition of property, plant and equipment and accumulated depreciation, by major classes, and
the movement therein in 2010 are:
| |  | ----------------------------------------------------------------------------------------------------------------------------------



|                                   |  | Cost                          |     |  | Accumulated
    depreciation |  |    |                | 
|---------------------------------- |  | ----------------------------- | --- |  | ---------------------------- |  | -- | -------------- | 
|                                   |  | Opening                       |     |  | Additions                    |  |    | Disposals      | 
|                                   |  | book                          |     |  | during
    the               |  |    | during
    the | 
|                                   |  | amount                        |     |  | year                         |  |    | year           | 
|                                   |  | U.S.
    dollars in thousands |    
|                                   |  |                               |     |  |                              |  |    |                | 
|Office furniture
    and equipment |  |                               | 46  |  |                              |  | 16 |                | 
|Computers                          |  |                               | 92  |  |                              |  | 6  |                | 
|                                   |  |                               |     |  |                              |  |    |                | 
|                                   |  |                               | 138 |  |                              |  | 22 |                | 



F-32







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 9:-   PROPERTY, PLANT AND EQUIPMENT
(Cont.)



Composition
of property, plant and equipment and accumulated depreciation, by major classes, and the movement therein in 2009 are:



|                                   |  | Cost                          |     |  | Accumulated
    depreciation |  |   |                | 
|---------------------------------- |  | ----------------------------- | --- |  | ---------------------------- |  | - | -------------- | 
|                                   |  | Opening                       |     |  | Additions                    |  |   | Disposals      | 
|                                   |  | book                          |     |  | during
    the               |  |   | during
    the | 
|                                   |  | amount                        |     |  | year                         |  |   | year           | 
|                                   |  | U.S.
    dollars in thousands |    
|                                   |  |                               |     |  |                              |  |   |                | 
|Office furniture
    and equipment |  |                               | 61  |  |                              |  | - |                | 
|Computers                          |  |                               | 101 |  |                              |  | - |                | 
|Leasehold
    improvements         |  |                               | 141 |  |                              |  | - |                | 
|                                   |  |                               |     |  |                              |  |   |                | 
|                                   |  |                               | 303 |  |                              |  | - |                | 



b.         Additional
information:



In 2011, 2010 and 2009, depreciation
of property, plant and equipment has been charged to general and administrative expenses.



F-33







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 10:-      INTANGIBLE ASSETS



a.         As
stated in Note 1a above, on August 3, 2010, the Bio-Gal transaction was completed.



Following the closing of the
transaction, the Company recognized in its accounts an intangible asset representing the license for the exclusive use of the patent
for rHuEPO drug for multiple myeloma as well as all the research data and accumulated know-how underlying the patent in a total
of approximately $ 2,265 thousand (excluding transaction costs of approximately $ 187 thousand), based on its fair value
as of the date of closing of the transaction according to an independent external valuation.



According to the guidance of
IAS 38, this asset is not systematically amortized and the Company reviews the asset for impairment once a year or more frequently
if indicators show that the asset may be impaired.



In December 2011, the Company
tested for impairment with the assistance of an external valuer (BDO Ziv Haft Consulting and Management Ltd.) in accordance with
the guidance of IAS 36. According to the valuation performed, there is no need to reduce the value of the asset in relation to
its book value. Since there is no reference to similar transactions in which the fair value of the patent can be determined, the
value of the patent was determined by the value in use on the basis of the discounted future cash flow method for the years 2012
to 2025. The discount period was determined on the basis of the schedules to perform the clinical trials in order to approve the
drug for marketing and under the limitation of the years of patent and the orphan drug designation as above.



The key assumptions used in
the valuation in measuring value in use as of December 31, 2011 are: life of Phase 2 and 3 clinical trials of 2.5 and 3.5
years, respectively, expected penetration levels of 10% in 2019 to 55% in 2025 out of an estimate of 45,000 new cases of multiple
myeloma diagnosis each year, royalties at the rate of 12.5% and (pre-tax) discount rate of 25%.



b.         On
September 1, 2010, the Company and Yeda Research and Development Co. Ltd. ("Yeda") entered into a license agreement of
an exclusive right to examine a medical technology in the field of the immune system, comprising two proteins through which target
molecules are examined and may serve as a basis for the development of therapeutics for diseases relating to the immune system,
such as acute Hepatitis, rheumatoid arthritis, the Chron's disease, psoriasis and etc. Under the agreement, the Company purchased
this exclusive right to examine the medical technology for a 15-month period ("the right") in consideration of $ 120
thousand ("the option fee") payable by the Company in the following manner and at the earlier of (i) In the event of
raising by a prospectus to the public more than $ 2 million, the Company is obligated to settle the payment to Yeda in cash; or
(ii) If 12 months after the date of closing of the agreement an amount of
more than $ 2 million was not raised, the liability to Yeda can be satisfied, at the Company's election and after obtaining
Yeda's approval to the timing, in cash or by issuance of options with equivalent value.



The Company's
option to purchase said technology expired on November 30, 2011 and the Company elected not to exercise the option.



F-34







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 10:-      INTANGIBLE ASSETS (Cont.)



In the years
ended December 31, 2011 and 2010, the Company recognized in its accounts amortization expenses of $ 88 thousand and $ 32
thousand, respectively relating to the right to examine a medical technology over the option period. These expenses were recorded
in research and development expenses item.



c.         On
November 18, 2008, the Company received the results of Phase 2b clinical trial of Bicifadine for diabetic neuropathic pain
which did not meet its endpoints and, therefore, the development activity of this drug was ceased.



In March 2010, the Company
terminated the agreement with DOV from which the Bicifadine compound had been acquired, and all the rights under the agreement
were reverted to DOV in coordination with it.



NOTE 11:-     TRADE PAYABLES



a.           Composition:



|               |  | December 31,              |   
|-------------- |  | ------------------------- | --
|               |  | 2011                      |   
|               |  | U.S. dollars in thousands |   
|               |  |                           |   
|Open accounts  |  |                           | 83
|Checks payable |  |                           | 5 
|               |  |                           |   
|               |  |                           | 88



The carrying amount of trade
payables is a reasonable approximation of their fair value because the effect of discounting is immaterial.



b.         The
carrying amount of trade payables is denominated in the following currencies:



|                                    |  | December 31,              |   
|----------------------------------- |  | ------------------------- | --
|                                    |  | 2011                      |   
|                                    |  | U.S. dollars in thousands |   
|                                    |  |                           |   
|U.S. dollar                         |  |                           | 75
|NIS (not linked to the Israeli CPI) |  |                           | 12
|Others                              |  |                           | 1 
|                                    |  |                           |   
|                                    |  |                           | 88



F-35







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 12:-    OTHER ACCOUNTS PAYABLE



a.           Composition:



|                               |  | December 31,              |    
|------------------------------ |  | ------------------------- | ---
|                               |  | 2011                      |    
|                               |  | U.S. dollars in thousands |    
|                               |  |                           |    
|Employees and payroll accruals |  |                           | 206
|Accrued expenses               |  |                           | 329
|Other                          |  |                           | 6  
|                               |  |                           |    
|                               |  |                           | 541



The carrying amount of other
accounts payable is a reasonable approximation of their fair value because the effect of discounting is immaterial.



b.         The
carrying amount of other accounts payable is denominated in the following currencies:



|                                    |  | December 31,              |    
|----------------------------------- |  | ------------------------- | ---
|                                    |  | 2011                      |    
|                                    |  | U.S. dollars in thousands |    
|                                    |  |                           |    
|U.S. dollar                         |  |                           | 325
|NIS (not linked to the Israeli CPI) |  |                           | 216
|                                    |  |                           |    
|                                    |  |                           | 541



NOTE 13:-     RETIREMENT BENEFIT OBLIGATION



a.          According
to the effective labor laws and employment agreements in Israel and overseas, the Company and the subsidiaries are obligated to
pay compensation and/or pension to employees who are dismissed and, under certain circumstances, to employees who retire.



b.         The
Company's obligation for pension payment in Israel and the Company's obligation for compensation payments to employees in Israel
for whom the applicable obligation is pursuant to section 14 to the Severance Pay Law, are covered by fixed contributions into
defined contribution plans. The amounts contributed as above are not reflected in the statements of financial position. In 2011,
section 14 to the Severance Pay Law applied to all of the Company's employees.



The amount
recognized as an expense for defined contribution plans in 2011, 2010 and 2009 was $ 22 thousand, $ 22 thousand and $ 23
thousand, respectively.



F-36







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 13:-    RETIREMENT BENEFIT OBLIGATION
(Cont.)



Since that
as of December 31, 2011, section 14 to the Severance Pay Law applies to the Company's employees, as above, pursuant to which
they are covered by fixed contributions into defined contribution plans, no contributions in defined benefit plans are expected
for the year ending December 31, 2012.



NOTE 14:-   LIABILITY FOR SHARE APPRECIATION
RIGHTS



In January
2007, a subsidiary had committed to pay advisory fee to a third party in connection with the DOV transaction. In October 2008,
in furtherance to the above commitment, the Company and the subsidiary entered into an agreement with the third party according
to which advisory fee is structured in the form of stock appreciation rights in the amount equivalent to as follows:



(i)         3%
of the Company's fully diluted shares at the close of the transaction, representing 1,659,945 shares after the capital consolidation
of June 2009 (see Note 16a(2)) exercisable one year after the close of the transaction;



(ii)        7%
of the Company's fully diluted shares at the close of the transaction, representing 3,873,204 shares after the capital consolidation
of June 2009 vesting on the "date of milestone event."



Payment of
the share appreciation rights can be satisfied, at the Company's election, in cash or by issuance of the Company's shares. Upon
the exercise of share appreciation rights, the amount paid will be an amount equal to the amount by which the market value (the
greater of the share price on the exercise date or the preceding five day average share price) exceeds the $ 1.7. The share
appreciation rights expire on January 15, 2017.



The share
appreciation rights in the amount equivalent to 3% are vesting, as stated in 1 above, and presented in equity in accordance with
IFRS 2; the share appreciation rights in the amount equivalent to 7%, as stated in 2 above, expired in March 2010 with the termination
of the Company's license agreement with DOV for the Bicifadine compound.



As stated
in Note 2m, since September 30, 2009 the share appreciation right instrument is carried to equity.



The Company
used a Black & Scholes model as the fair value pricing model for the share appreciation rights in all reporting periods through
September 30, 2009. The following assumptions were used for the economic valuation of the share appreciation rights on September 30,
2009: standard deviation of: 124%; discount coefficient of 3.3%; expected dividend of 0% and expected remaining contractual life
of 7.3 years.



F-37







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 15:-   COMMITMENTS AND CONTINGENT
LIABILITIES



a.         Royalty
and contingent milestone payments:



1.         As
stated in Note 1a above, on November 30, 2011, the Company completed the MinoGuard transaction according to which an exclusive
license to the SAM-101 drug (combination drug to treat mental disorders focusing on schizophrenia) has been transferred to the
Company. According to the terms of the agreement with MinoGuard, the Company will act to conduct clinical trials, develop, register,
market, distribute and sell the drug candidates that will emerge from the technology, with no limitations to a specific disorder.



In return
for the receipt of the license, as above, the Company will pay MinoGuard milestone payments throughout the research and development
and the approval of the drug of an aggregate of approximately $ 2.5 million. In addition, the Company will make royalty payments
to MinoGuard of 3.5% on sales net of products derived from the license and/or a percentage of the Company's net income of any third-party
sublicense in the range of 7.5% to 20% depending on the clinical phase of the drug at the time of the above out-license transaction.



In addition
to the above payments, if the Company does not commence a Phase 2 clinical trial by June 30, 2013 (the agreement sets that receipt
of an approval to commence such trial or continuance of the clinical trials that were conducted/will be conducted by MinoGuard
and/or its researchers, shall be deemed commencement of Phase 2 clinical trial for this matter), the Company will then pay MinoGuard
an annual license fee of $ 45 thousand for the first payment and its cost will increase in $ 90 thousand per year (should
the trial not commence) up to $ 675 thousand for the eighth year of license



The Company
can pay any of the above amounts in cash or by issuance of shares to MinoGuard, at its sole discretion.



The licensed
technology transferred to the Company is protected by a registered patent through 2027. If the Company does not commence a Phase
2 clinical trial (as described above) during 9.5 years from the date of the license agreement, the license will expire.



F-38







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



NOTE 15:-   COMMITMENTS AND CONTINGENT
LIABILITIES (Cont.)



2.         On
November 2, 2011, the Company entered into a term sheet by which it will acquire a technology ("NiCure" - "the technology")
from Mor Research Applications Ltd., the Technology Transfer Office of Clalit Health Services, by obtaining an exclusive license
to use the entire technology in return for royalties on sales and milestone payments throughout the clinical development process.
The agreement that will be signed by the parties is subject to, among others, the completion of due diligence, examination of the
regulatory environment for the continued development of the technology and the approval of the Company's Board.



| |  | The technology mentioned above is based on the local administration of renin-angiotensin inhibitors
(a known drug for the treatment of hypertension, "Enalaprilat") and is a novel treatment for the symptoms of cartilage-related
diseases (such as Osteoarthritis). The therapy focuses on increasing or replenishing the level of glycoaminoglycans (GAGs) in the
synovial fluid and cartilage, thereby relieving or even reversing symptoms of such diseases. Moreover, the same technology can
be used to treat skin wrinkles.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | According to estimates of the scientists who have invented this technology, the technology may
enter a phase 2 clinical trial for the continuance of the clinical development based on this technology, as the drug mentioned
above was approved for the treatment of reducing hypertension and is being provided to patients for already approximately 20 years.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As of the date of the approval of the financial statements, the transaction was not closed.
| |  | -------------------------------------------------------------------------------------------



3.         As
stated in Note 1a above, on August 3, 2010, the Company closed the Bio-Gal transaction. According to this agreement,
the Company is obligated to pay 1% royalties on net sales of the product and $ 350 thousand upon the successful completion
of a Phase 2 clinical trial. The payment conditions for the above amount are at the earlier of occurrence of the following events:



(i)        Raising
at least $ 2 million by the Company or Xtepo after a successful completion of a Phase 2 clinical trial;



(ii)        Six
months after the successful completion of a Phase 2 clinical trial.



4.         In
accordance with the terms of the license agreement with DOV, the subsidiary was obligated to pay milestone payments of up to $ 126.5
million, in cash or its shares (at its election) over the life of the license, of which up to $ 115 million will be due upon
regulatory approval for the marketing of the Bicifadine compound. The subsidiary was also obligated to pay royalties to DOV on
sales of Bicifadine.



F-39











XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 15:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
| | --------- | ----------------------------------------------



In November
2008, the Company announced that the Phase 2b clinical trial Bicifadine failed to meet its endpoints and, as a result, the Company
ceased to develop the drug.



In March 2010, the Company
terminated the agreement with DOV, in the issue of the Bicifadine candidate, and all rights under the agreement were reverted
to DOV in coordination with it.



| | 5. | The subsidiary is committed to pay an advisory fee (in cash or by issuance of shares) to a third
party in connection with the DOV transaction (see Note 14 above).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | During September 2005, the Company acquired from VivoQuest patent rights and other assets (DOS
program), covering a proprietary compound library, which includes hepatitis C compounds, laboratory equipment and employment agreements
with research and development employees in consideration of approximately $ 1,939 thousand (including transaction costs of
$ 148 thousand), of which an amount of $ 1,391 thousand was paid by issuance of Ordinary shares of the Company. According
to the agreement with VivoQuest, the Company is obligated to contingent milestone payments triggered by certain regulatory and
sales targets, totaling as of the reporting date $ 34 million, of which $ 25 million due upon regulatory approval or
actual product sales, and payable in cash or issuance of shares at the Company's election. No contingent consideration has been
paid pursuant to the license agreement as of December 31, 2011 because none of the milestones have been achieved. The Company
is also obligated to make royalty payments to VivoQuest on future product sales.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In March 2008 (and as revised
in August 2008), the Company signed an agreement to out-license the DOS program to the U.S. Presidio in consideration of $ 5.94
million payment in cash. Under this agreement, Presidio becomes responsible for all further development and commercialization activities
relating to the DOS program. Presidio is also obligated to pay the Company up to $ 59 million upon reaching certain milestones
and royalty payments in the range of 1% to 10% on Presidio product sales. Presidio is also obligated to pay the Company for any
milestone consideration owed to VivoQuest pursuant to the VivoQuest license agreement.



F-40







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 15:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
| | --------- | ----------------------------------------------



| | b. | Operating lease commitments:
| | -- | ----------------------------



| | 1. | As of December 31, 2011, the Company leases three vehicles under an operating lease. The lease
agreements expire in 2013-2014. Vehicle lease expense for the years ended December 31, 2011, 2010 and 2009 were $ 32 thousand,
$ 26 thousand and $ 25 thousand, respectively. The lease fees are stated in NIS and are linked to the Israeli CPI. Expected
lease fees for the years 2012, 2013 and 2014 under the lease fees as of December 31, 2011 are approximately $ 32 thousand,
$ 30 thousand and $ 7 thousand, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The Company entered into an operating lease agreement on the offices it uses. The agreement is
in effect until August 2013 with a renewal option of additional 24 months. The lease fees are stated in NIS and are linked to the
Israeli CPI. To secure the lease, the Company provided a bank guarantee which is secured by a restricted NIS deposit of approximately
$ 21 thousand.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The expected lease fees and
management fees for subsequent years under the prevailing lease fees as of December 31, 2011 are as follows:



|                           |  | U.S. dollars in thousands |   
|-------------------------- |  | ------------------------- | --
|                           |  |                           |   
|2012                       |  |                           | 90
|2013 (through August 2013) |  |                           | 56



The Company entered into a
sub-lease agreement on space in its offices for approximately $ 35 thousand a year. The agreements are in effect until August-December
2012 with a renewal option of additional 12 months.



F-41







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS
| | --------- | ---------------------------------------------



| | a. | Share capital:
| | -- | --------------



| | 1. | Composition:
| | -- | ------------



|                              |  | Number of shares |         |  | Amount                 | 
|----------------------------- |  | ---------------- | ------- |  | ---------------------- | 
|                              |  | Authorized       |         |  | Issued and
outstanding | 
|                              |  | December 31,     |         |  | December 31,           | 
|                              |  | 2011             |         |  | 2010                   | 
|                              |  | Thousand         |         |  | NIS in thousand        | 
|                              |  |                  |         |  |                        | 
|Ordinary shares of NIS 0.1 *) |  |                  | 700,000 |  |                        | 



| | *) | Traded on the Tel-Aviv Stock Exchange. The share price was NIS 0.535 as of December 31, 2011.
| | -- | ---------------------------------------------------------------------------------------------



| | 2. | Ordinary shares confer upon their holders voting rights and right to participate in the shareholders'
meeting, right to receive earnings and the right to participate in the excess of assets upon liquidation of the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 18, 2009, the
extraordinary shareholders' meeting approved the following:



| | a) | that the share capital of the Company be consolidated so that each 5 shares of NIS 0.02 par
value shall be consolidated into one (1) share of NIS 0.1 par value.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | that the authorized share capital of the Company be increased from NIS 10,000,000 par value
divided into 100,000,000 Ordinary shares of NIS 0.1 par value to NIS 70,000,000 divided into 700,000,000 Ordinary shares
of NIS 0.1 par value.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | that the ADR ratio be amended from one (1) ADR representing two (2) Ordinary shares of NIS 0.1
par value to one (1) ADR representing twenty (20) Ordinary shares of NIS 0.1 par value.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | The consolidation of the Company's share capital triggered a change in the number of options granted
before the capital consolidation and a corresponding change in exercise price.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On June 22,
2009, the share capital was consolidated and the authorized share capital of the Company was increased, as stated above. The change
in the conversion ratio of ADR was not effected because the Board accepted a decision that such change is not required. On July 10,
2009, the SEC informed that the Company's ADRs were delisted from NASDAQ. The Company's ADRs continue to be quoted on the Pink
Sheets.



F-42







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



| | 3. | On August 3, 2010, upon the closing of the Bio-Gal transaction, 133,063,688 Ordinary shares
of NIS 0.1 par value each were allocated to Xtepo's shareholders in return for 100% of the shares of Xtepo whom, before closing,
held a license for the exclusive use of the patent for rHuEPO drug for multiple myeloma and approximately $ 1.5 million in
its account.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | On March 7, 2011, the Company raised by public issuance of 12,305,000 Ordinary shares of NIS 0.1
par value each, 6,152,500 warrants (series 1) and 18,457,500 warrants (series 2) on the Tel-Aviv Stock Exchange a net immediate
amount of approximately NIS 6.3 million (approximately $ 1.75 million) net of issuance expenses of approximately $ 68
thousand.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Warrants (series 1) are exercisable
into one Ordinary share of NIS 0.1 par value from the date of registration for trade on the Stock Exchange (March 9,
2011) to November 27, 2011 an exercise price equal to NIS 0.7 per share, linked to the U.S. dollar. On July 21,
2011, a Company's warrant holder exercised 15,544 warrants (series 1) into 15,544 Ordinary share of NIS 0.1 par value each
for the total exercise price of approximately $ 3 thousand. The remaining warrants (series 1) expired on November 27,
2011.



Warrants (series 2) are exercisable
into one Ordinary share of NIS 0.1 par value from the date of registration for trade on the Stock Exchange (March 9,
2011) to February 27, 2013 at an exercise price equal to NIS 1 per share, linked to the U.S. dollar (as of December 31,
2011, the exercise price was equal to approximately NIS 1.06 per share). As for the exercise of warrants (series 2) after
the reporting period, see Note 24 below.



| | 5. | On March 22, 2011, 4,666,667 warrants (unregistered) which had been issued in 2006 under a
private placement to American investors, expired.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | After the reporting date, in March 2012, the Company issued through a private placement 11,560,362
Ordinary shares of the Company of NIS 0.1 par value each, 3,853,454 warrants (series A) and 1,926,727 warrants (series B).
Further details on the private placement are given in Note 24 below.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Share-based payment:
| | -- | --------------------



On August 29, 2011, the Company's
Board approved the adoption of an employee share option plan for the grant of options exercisable into shares of the Company in
accordance with section 102 to the Israeli Tax Ordinance ("2011 Plan") in lieu of the option plan established in 2011
("2001 Plan") which has ended after 10 years and to maintain up to 10 million shares in the framework of the 2011 Plan,
for options allocation to employees, directors and Company consultants.



F-43







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



The 2011 Plan shall be subject
to the directives determined for this purpose in section 102 to the Income Tax Ordinance. Under the capital track which was adopted
by the Company and the abovementioned directives, the Company is not entitled to receive a tax deduction that relates to remuneration
paid to employees, including amounts recorded as salary benefit in the Company's accounts for options granted to employees in the
framework of the plan, except the yield benefit component, if available, that was determined on the grant date.



The terms of the options which
will be granted according to the 2011 Plan, including option period, exercise price, vesting period and exercise period shall be
determined by the Company's Board on the date of the actual allocation.



As of December 31, 2011,
no share options were granted under the 2011 Plan. For details regarding grants after the reporting period, see Note 24 below.



Below is
information about share-based payments granted to the Group's directors, employees and service providers during the reported years
in accordance with section 102 to the Income Tax Ordinance based on the Company's plan from 2001 which was reconfirmed in 2003
and options granted without a plan in accordance with section 3i to the Income Tax Ordinance (all data presented herein reflect
the capital consolidation of June 22 (see a above)):



| | 1. | In July 2009, the Company's Board approved to grant 1,400,000 share options (unlisted) to the Company's
CFO to purchase 1,400,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal to NIS 0.075 per share.
The fair value of all share options using the Black-Scholes model on the date the Board accepted the decision was approximately
$ 148 thousand. The option term is for a period of 120 months from the grant date, such that 33.33% of the share options are
exercisable immediately and the remaining 66.67% share options are exercisable on a straight-line basis every month of the grant
date over a three-year period.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The value
of each option is based on the following inputs: expected dividend of 0%, expected standard deviation of 175%, risk-free interest
rate of 3.85% and expected life of five years. The volatility is based on the historical volatility of the Company's share for
comparative periods that commensurate with the expected term of the option.



Also, the
Company has committed to supplement the difference between the par value of the share and the exercise price in this plan on the
actual exercise date by allocating amounts from share premium to share capital.



F-44







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



| | 2. | On January 18, 2010, the Company's Board approved to grant 450,000 share options to directors
in the Company to purchase 450,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal to NIS 0.298
per share. On March 2, 2010, the annual meeting of shareholders approved to grant options to the directors. Pursuant to the
guidance of IFRS 2, the fair value of all share options on the date of approval by the annual meeting, using the Black-Scholes
model was approximately $ 36 thousand. The option term is for a period of 10 years from the grant date. 33% of the options
are exercisable immediately and the remaining share options are exercisable in 24 tranches every month over a two-year period.
On November 22, 2010, one of the optionees discontinued serving as a director and, accordingly, the 63,747 options granted
to him have been forfeited.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The value
of each option is based on the following inputs: expected dividend of 0%, expected standard deviation of 175%, risk-free interest
rate of 3.9%-4.3% and expected life of five to six years.



| | 3. | On January 18, 2010, the Company's Board approved to grant 1,610,000 share options to the
Company's CEO to purchase 1,610,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal to NIS 0.075
per share. On March 2, 2010, the annual meeting of shareholders approved to grant options to the Company's CEO with approval
of his employment terms, subject to the closing of Bio-Gal transaction (whose closing occurred on August 3, 2010). Pursuant
to the guidance of IFRS 2, the fair value of all share options on the date of approval by the annual meeting, using the Black-Scholes
model was approximately $ 133 thousand. The option term is for a period of 10 years from the grant date. 33% of the options
are exercisable immediately and the remaining options are exercisable in 24 tranches every month over a two-year period.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The value
of each option is based on the following inputs: expected dividend of 0%, expected standard deviation of 175%, risk-free interest
rate of 3.87%-4.11% and expected life of five to six years.



Also, the
Company has committed to supplement the difference between the par value of the share and the exercise price in this plan on the
actual exercise date by allocating amounts from share premium to share capital.



| | 4. | On January 26, 2010, the Company's Board approved to grant 100,000 share options to an employee
in the Company to purchase 100,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal to NIS 0.1 per
share. Pursuant to the guidance of IFRS 2, the fair value of all share options on the date the Board accepted the decision using
the Black-Scholes model was approximately $ 10 thousand. The option term is for a period of 10 years from the grant date.
The options are exercisable in equal quarterly tranches over a three-year period.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-45







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



The value
of each option is based on the following inputs: expected dividend of 0%, expected standard deviation of 175%, risk-free interest
rate of 4.3% and expected life of five to six years.



| | 5. | On August 27, 2010, the Company's Board approved the employment agreement of Professor Moshe Mittelman
as an executive officer - Medical Director of the development plan of the rHuEPO drug designed to treat multiple myeloma. It also
approved the allocation of 640,000 share options (unlisted) to purchase 640,000 Ordinary shares of NIS 0.1 par value each
at an exercise price equal to NIS 0.1 per share. The fair value of all share options on the date the Board accepted the decision
using the Black-Scholes model was approximately $ 50 thousand. The option term is for a period of 10 years from the grant
date. The options are exercisable in equal monthly tranches over a 24-month period.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Also, upon
the commencement of a Phase 2 clinical trial (first-in-man), 50% of the unvested options (until the date of the commencement of
the said trial) of Prof. Mittelman shall vest immediately. In addition, upon the termination by the Company (with no cause) of
the Prof. Mittelman's employment agreement, 25% of Prof. Mittelman's unvested options (until the date of the said termination)
shall vest immediately.



The value of each option is
based on the following inputs: expected dividend of 0%, expected standard deviation of 160%, risk-free interest rate of 3.54%-3.68%
and expected life of five to six years.



| | 6. | On June 1, 2011, the Company's Board approved to allocate to the Company's external consultant
options that are exercisable into 120,000 Ordinary shares of the Company of NIS 0.1 par value each at an exercise price equal
to NIS 0.572 per share. According to the provisions of IFRS 2, the fair value of all options on the grant date using the Black-Scholes
model was approximately $ 19 thousand. The option term is for a period of 10 years from the grant date. The options are exercisable
on a straight-line basis every month of the grant date over a 30-month period.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The value of each option is
based on the following inputs: expected dividend of 0%, expected standard deviation of 155%, risk-free interest rate of 4.83% and
expected life of 6.25 years.



Ordinary
shares issued upon the exercise of options of all grants will have identical rights to Ordinary shares of the Company immediately
after their allocation.



F-46









XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



On March
18, 2009, at an extraordinary shareholders' meeting, new Board members were elected to the Company and the former Board members
resigned. As a result of the above, 306,443 unvested options that were granted to the former directors in 2008 were forfeited.
The remaining 659,224 vested options expired. Similarly, with the resignation of the Chairman on March 18, 2009, 616,667 options
(with performance-related conditions) that were granted to him in December 2007 at an exercise price equal to $ 1.8 per share
expired. The remaining 1,233,333 unvested options (with performance-related conditions) granted to him in December 2007 at an exercise
price equal to $ 1.8 per share were forfeited. The effect of the forfeiture of these options for the year ended December 31,
2009 totaled approximately $ 2.65 million and it was included as a deduction of general and administrative expenses in the
statement of comprehensive income (loss).



In addition,
933,333 options (with performance-related conditions) of the Company's former CEO who resigned in April 2009 were forfeited. The
effect of the forfeiture of these options totaled approximately $ 1.45 million and it was included as a deduction of general
and administrative expenses in the statement of comprehensive income (loss). Further, 466,667 options that were granted to him
in March 2006 at an exercise price equal to $ 3.85 per share expired.



Movements
in the number of share options and their related weighted average exercise prices (in dollars) are as follows:



|                                 |  | Year ended December 31, |          
|-------------------------------- |  | ----------------------- | ---------
|                                 |  | 2011                    |          
|                                 |  | Number of options       |          
|                                 |  |                         |          
|Outstanding at beginning of year |  |                         | 4,149,000
|Granted                          |  |                         | 120,000  
|Exercised *)                     |  |                         | -        
|Expired                          |  |                         | -        
|Forfeited                        |  |                         | -        
|                                 |  |                         |          
|Outstanding at end of year       |  |                         | 4,269,000
|                                 |  |                         |          
|Exercisable at end of year       |  |                         | 3,692,725



| | *) | Total proceeds received from these exercises aggregated $ 7 thousand in 2010.
| | -- | -----------------------------------------------------------------------------



The weighted
average share price at the time of exercise was $ 0.14 per share in 2010.



No shares
were exercised in 2011 and 2009.



F-47







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 16:- | SHARE CAPITAL, RESERVES AND RETAINED EARNINGS (Cont.)
| | --------- | -----------------------------------------------------



Options exercised
in 2010 resulted in 86,253 shares being issued at $ 0.08 for each option.



In May 2011,
after 10 years, the above 2001 Plan has ended and, accordingly, since that date no new options can be granted under this plan.
In August 2011, the 2011 Plan has been approved (see details above). As of December 31, 2011, the remaining number of options
available for grant under the 2011 Plan is 10 million options (as for new grants under the 2011 Plan, see note on events after
the reporting period).



Below is
information about the exercise price (in dollars) and the remaining contractual life (in years) for options outstanding at end
of year:



|December 31, 2011                  |           |  | December 31, 2010         |              
|---------------------------------- | --------- |  | ------------------------- | -------------
|Options
outstanding at
end of year |           |  | Range of 
exercise prices |              
|                                   |           |  |                           |              
|                                   | 4,170,000 |  |                           | 0 - 0.500    
|                                   | -         |  |                           | 0.500 - 1.499
|                                   | 60,000    |  |                           | 1.500 -2.499 
|                                   | 39,000    |  |                           | 2.500 - 3.495
|                                   |           |  |                           |              
|                                   | 4,269,000 |  |                           |              



Net expenses
(income) recognized for grant of options to employees were $ 73 thousand, $ 219 thousand and $ (4,180) thousand
in the statements of comprehensive income (loss) for the years ended December 31, 2011, 2010 and 2009, respectively.



These plans
are administered in accordance with the principles set forth in this issue in section 102 to the Income Tax Ordinance.



According
to the track which was adopted by the Company (capital track) and these principles, the Company is not entitled to receive a tax
deduction that relates to remuneration paid to its employees, including amounts recorded as salary benefit in the Company's accounts
for options granted to employees in the framework of the plan, except the yield benefit component, if available, that was determined
on the grant date.



As for share-based
payment under the Yeda transaction, see Note 10b above.



F-48







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 17:- | RESEARCH AND DEVELOPMENT EXPENSES
| | --------- | ---------------------------------



|                                                                  |  | Year ended December 31,   |    
|----------------------------------------------------------------- |  | ------------------------- | ---
|                                                                  |  | 2011                      |    
|                                                                  |  | U.S. dollars in thousands |    
|                                                                  |  |                           |    
|Salaries and expenses relating to employees and service providers |  |                           | 26 
|Expenses relating to options to employees and service providers   |  |                           | 20 
|Professional consulting                                           |  |                           | 9  
|Depreciation and amortization                                     |  |                           | 88 
|Other                                                             |  |                           | 15 
|                                                                  |  |                           |    
|                                                                  |  |                           | 158



| | NOTE 18:- | GENERAL AND ADMINISTRATIVE EXPENSES
| | --------- | -----------------------------------



|                                                                  |  | Year ended December 31,   |      
|----------------------------------------------------------------- |  | ------------------------- | -----
|                                                                  |  | 2011                      |      
|                                                                  |  | U.S. dollars in thousands |      
|                                                                  |  |                           |      
|Salaries and expenses relating to employees and service providers |  |                           | 421  
|Expenses relating to options to employees and service providers   |  |                           | 53   
|Patents and fees                                                  |  |                           | 25   
|Expenses relating to share appreciation rights                    |  |                           | -    
|Directors' fees                                                   |  |                           | 63   
|Foreign services, public relation and travel                      |  |                           | 2    
|Rent and office maintenance                                       |  |                           | 115  
|Vehicle maintenance                                               |  |                           | 44   
|Insurance                                                         |  |                           | 57   
|Professional services                                             |  |                           | 233  
|Depreciation and amortization                                     |  |                           | 6    
|Other                                                             |  |                           | 59   
|                                                                  |  |                           |      
|                                                                  |  |                           | 1,078



| | *) | Include reduced expenses which result from forfeiture of shares that were contingent on the performance
of the former chairman and CEO, see also Note 16b.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



F-49







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 19:- | OTHER GAINS, NET
| | --------- | ----------------



|                                                    |  | Year ended December 31,   |   
|--------------------------------------------------- |  | ------------------------- | --
|                                                    |  | 2011                      |   
|                                                    |  | U.S. dollars in thousands |   
|                                                    |  |                           |   
|Loss from disposal of property, plant and equipment |  |                           | (3
|Other                                               |  |                           | 15
|                                                    |  |                           |   
|                                                    |  |                           | 12



| | NOTE 20:- | FINANCE EXPENSES (INCOME), NET
| | --------- | ------------------------------





|                                 |  | Year ended December 31,   |   
|-------------------------------- |  | ------------------------- | --
|                                 |  | 2011                      |   
|                                 |  | U.S. dollars in thousands |   
|Finance expenses:                |  |                           |   
|                                 |  |                           |   
|Interest charge                  |  |                           | - 
|Management fees and commissions  |  |                           | 7 
|                                 |  |                           |   
|Total finance expenses           |  |                           | 7 
|                                 |  |                           |   
|Finance income:                  |  |                           |   
|                                 |  |                           |   
|Interest income on bank deposits |  |                           | 24
|Exchange differences             |  |                           | - 
|                                 |  |                           |   
|Total finance income             |  |                           | 24
|                                 |  |                           |   
|Finance income (expenses), net   |  |                           | 17



F-50









XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME
| | --------- | ---------------



| | a. | Taxation in Israel:
| | -- | -------------------



| | 1. | Since the 2008 tax year, the results for tax purposes of the Company and its Israeli subsidiary
are measured in nominal values. Until the end of the 2007 tax year, the results for tax purposes of the Company were adjusted for
the changes in the Israeli CPI pursuant to the Income Tax (Inflationary Adjustments) Law, 1985 ("the inflationary adjustments
law"). According to the transition provisions of the scope of the inflationary adjustments law, it is determined that adjustments
to the Israeli CPI relating to carryforward tax losses, deduction for depreciation and real loss from sale of a depreciable asset
or security continue to apply until the end of the 2007 tax year and starting that date they will no longer apply.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Tax rates:
| | -- | ----------



The income
of the Company and its Israeli subsidiary is subject to corporate tax at the regular rate; the guidance of the amendment to the
Income Tax Ordinance, 2005 from August 2005 prescribes a gradual reduction in the corporate tax rates and the resulting corporate
tax rates starting 2009 are as follows: 2009 - 26%, 2010 and thereafter - 25%.



On July 14,
2009, the "Knesset" (Israeli Parliament) passed the Law for Economic Efficiency (Amended Legislation for Implementing
the Economic Plan for 2009 and 2010), 2009 ("the 2009 amendment"), which prescribes, among others, an additional gradual
reduction in the corporate tax rates starting 2011 to the following tax rates: 2011 - 24%, 2012 - 23%, 2013 - 22%, 2014 - 21%,
2015 - 20%, 2016 and thereafter - 18%.



On December 6,
2011, the Law for Tax Burden Reform (Legislative Amendments), 2011 was published in the records ("the 2011 amendment"),
which prescribes a halt in the scheduled reduction in the corporate tax rate as in the 2009 amendment, as above, and an increase
in the corporate tax rate to 25% in 2012 and thereafter.



Capital gains
in the hands of the Company are taxable according to the corporate tax rate applicable in the tax year. However, tax at the rate
of 26% in 2009, 25% in 2010 and 24% in 2011 applies on capital gains arising before January 1, 2003. Starting 2012, the tax rate
applicable to all capital gains in the hands of the Company will be 25%.



F-51









XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME (Cont.)
| | --------- | -----------------------



| | b. | Foreign subsidiaries:
| | -- | ---------------------



The subsidiaries
whose place of incorporation is the U.S. are taxed according to the tax laws in their countries of residence. The principal tax
rates applicable to subsidiaries, including the Federal tax in the country of registration, is 42%.



As a rule,
intragroup transactions between the Company and the foreign subsidiaries are subject to the guidance and reporting of the Income
Tax Regulations (Determination of Market Conditions), 2006.



| | c. | Carryforward tax losses and real loss on sale of marketable securities:
| | -- | -----------------------------------------------------------------------



Deferred
tax assets for carryforward tax losses are recognized to the extent that the realization of the related tax benefit through future
taxable income is probable.



As
stated in Note 1a above, on August 3, 2010, the Bio-Gal transaction was completed after all the closing conditions had
been met including, inter alia, the signing of an agreement with the Israeli Tax Authority regarding the tax exemption
granted to the share exchange transaction pursuant to sections 104 and 103 to the Income tax Ordinance (New Version),
1961.



Below is
the summary of principal conditions of the agreement signed with the Israeli Tax Authority:



| | 1. | The balance of the Company's business losses and capital losses for tax purposes was reduced to
approximately NIS 80 million (approximately $ 22 million) and approximately NIS 0.7 million (approximately $ 0.19
million), respectively. This item is not to derogate from the Tax Assessing Officer's authority to establish that the balance of
losses is lower than the abovementioned amounts.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Any losses incurred to the Company prior to the share exchange, after their reduction as discussed
in 1 above, will not be offset against any income originating from Xtepo (the transferred company) or against a capital gain from
the sale of shares of Xtepo.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Xtepo shareholders will not be allowed to sell their shares in the Company for a period of two
years from the end of the year of completion of the transaction ("the lock-up period"), subject to any changes in legislation.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | The Company and Xtepo undertake to maintain their main economic activity as it was prior to the
transaction during the lock-up period.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------



| | 5. | The Company will not be permitted to sell its holdings in Xtepo for the duration of the lock-up
period.
| | -- | -------------------------------------------------------------------------------------------------------



F-52









XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME (Cont.)
| | --------- | -----------------------



It is
indicated that the guidance to sections 104 and 103 to the Israeli Income Tax Ordinance which deal with restructuring and
mergers impose statutory limitations and various conditions on the entities participating in the change in structure/merger
during the lock-up period, inter alia, restrictions on dilution of holdings from raising by a prospectus or by private
placements. The summary of the principal restrictions detailed above does not constitute a substitute to the overall
articles.



On February 1,
2012, the Israeli Tax Authority published a position circular regarding the limitations in sections 103 and 104 according to which a relief
is granted in the issue of the various limitations under the sections mentioned above during the lock-up period, inter alia, in
instances of allocation of rights to "new" shareholders by private placements.



The
Company's carryforward  Israeli tax losses as of December 31, 2011 and 2010, after giving effect to the agreement
with the  Israeli Tax Authority in connection with the Bio-Gal transaction, as above, totaled approximately $ 24 million
for each of the years. The carryforward tax losses of the U.S. subsidiaries as of December 31, 2011 totaled approximately
$ 20 million (approximately $ 15 million as of December 31, 2010). These losses of the U.S. subsidiaries are
limited in use and they may be even significantly reduced due to state tax laws that deal in cases of "change of
control" which is, among other, the outcome of the carrying out the Bio-Gal transaction as above. The Company does not
recognize deferred taxes for tax losses because their utilization in the foreseeable future is not probable.



Carryforward
capital losses on securities which were not offset (including carryforward losses on securities that were reversed after January 1,
2006) and other carryforward capital losses total approximately $ 0.18 million as of December 31, 2011 after giving effect
to the agreement with the Tax Authority in connection with the Bio-Gal transaction, as above. These losses may be used only against
capital gains (including, since 2006, against gains on marketable securities).



A real loss
for tax purposes from sale of securities through December 31, 2005 which was not offset by December 31, 2011 total approximately
$ 13 thousand. This loss is deductible in the coming years only against real gain on marketable securities, if available in these
years.



The Company
did not recognize deferred taxes for carryforward losses, as well as capital losses and real losses, because their utilization
in the foreseeable future is not probable.



F-53









XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME (Cont.)
| | --------- | -----------------------



| | d. | Taxes on income included in the statements of comprehensive income (loss) for the years presented:
| | -- | --------------------------------------------------------------------------------------------------



| | 1. | The Company did not record tax expenses or benefits in the years 2011 and 2010. In 2009, the Group
recorded a tax benefit of $ 23 thousand in respect of prior years.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Below is a reconciliation between the "theoretical" tax expense, assuming that all the
income were taxed at the regular tax rate applicable to companies in Israel (see a(2) above) and the taxes recorded in the statement
of comprehensive income in the reported year:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                        |  | Year ended December 31,   |       
|----------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------
|                                                                                                                        |  | 2011                      |       
|                                                                                                                        |  | U.S. dollars in thousands |       
|                                                                                                                        |  |                           |       
|Income (loss) before taxes on income, as reported in the statements of comprehensive income (loss)                      |  |                           | (1,207
|                                                                                                                        |  |                           |       
|Theoretical tax (tax saving) on this income (loss)                                                                      |  |                           | (290  
|Increase (decrease) in taxes resulting from different tax rates for foreign subsidiaries                                |  |                           | (3    
|Expenses not deductible for tax purposes                                                                                |  |                           | 18    
|Adjustments under the agreement with the Tax Authority in connection with the Bio-Gal transaction                       |  |                           | -     
|Tax exempt income                                                                                                       |  |                           | -     
|Increase in taxes resulting mainly from taxable losses in the reported year for which no deferred taxes were recognized |  |                           | 275   
|Taxes in respect of prior year                                                                                          |  |                           | -     
|                                                                                                                        |  |                           |       
|Tax benefit                                                                                                             |  |                           | -     



| | 3. | Since the balance of carryforward tax losses exceeds other temporary differences (net), and considering
that the Company can not assess with certainty that it will have sufficient income in the future to allow the losses to be used
in the foreseeable future due to the nature of the Company as a research and development company, in 2011, the Company did not
record deferred taxes on these losses.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-54







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME (Cont.)
| | --------- | -----------------------



| | e. | The effect of the adoption of IFRS in Israel on the tax liability:
| | -- | ------------------------------------------------------------------



Since January 1, 2009,
the Company prepares its financial statements in accordance with IFRS.



IFRS differ from generally
accepted accounting principles in Israel and, accordingly, the preparation of financial statements in accordance with IFRS could
reflect a financial position, operating results and cash flows that differ significantly from those presented in accordance with
Israeli GAAP.



According to the Amendment
to the Income Tax Ordinance (No. 174 and Temporary Provision for the Tax Years 2007, 2008 and 2009), 2010 which was passed by the
Knesset on January 25, 2010 and published in the records on February 4, 2010 and the Law for the Amendment to the Income
Tax Ordinance (No. 188), 2012 which was passed by the Knesset on January 9, 2012 and published in the records on January 12,
2012 (both will be referred to as "temporary order"), Accounting Standard No. 29 of the Israel Accounting Standards Board
does not apply to taxable income for the tax years 2007 to 2011 even if it was adopted in the financial statements for those years.
The implication of the temporary order is that, practically, IFRS do not apply to the computation of income reported for tax purposes
for the above tax years.



On October 31, 2011, a
bill of the Law for the Amendment to the Income Tax Ordinance ("the bill") which derives from the adoption of IFRS in
the financial statements was published. The bill, in general, adopts IFRS. However, the bill proposes several amendments to the
Income Tax Ordinance which will clarify and determine the method for measuring taxable income in unclear cases where IFRSs does
not comply with the principles of the Israeli tax method. Simultaneously, the bill adopts, as a rule, IFRS. Since the temporary
order applies to the tax years 2007 to 2011, as above, the Company's management estimates that, currently, the new legislation
will not take effect to tax years before 2012.



The Company's management computed
its taxable income for the tax years 2009 to 2011 based on Israeli GAAP that existed before IFRS was adopted in Israel, subject
to certain adjustments and, accordingly, the temporary order had no impact on the measurement of the current and deferred taxes
in the financial statements.



F-55







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 21:- | TAXES ON INCOME (Cont.)
| | --------- | -----------------------



| | f. | Tax assessments:
| | -- | ----------------



The Company filed self assessments
that are deemed final through tax year 2007. The subsidiary, Xtepo, has not received tax assessments since its incorporation in
November 2009. The U.S. subsidiaries filed self assessments that are deemed final through tax year 2007. However, the IRS may examine
the tax reports for the years in which the U.S. subsidiaries claimed tax refunds for operating losses offset against taxes paid
in the past for tax years 2003 to 2005. This examination is limited to the amount of tax refunds that the Company received ($ 72
thousand in 2003-2004 and $ 77 thousand in 2005).



| | NOTE 22:- | EARNINGS PER SHARE
| | --------- | ------------------



| | a. | Basic:
| | -- | ------



Basic earnings (loss) per share
is calculated by dividing income attributable to equity holders of the parent by the weighted average number of issued Ordinary
shares including the retroactive consolidation of shares effected on June 22, 2009 (see also Note 16a above).



|                                                                                       |  | Year ended December 31, |            
|-------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                       |  | 2011                    |            
|                                                                                       |  |                         |            
|Income (loss) attributable to equity holders of the parent (U.S. dollars in thousands) |  |                         | (1,207     
|                                                                                       |  |                         |            
|Weighted average number of issued Ordinary shares                                      |  |                         | 201,825,645
|                                                                                       |  |                         |            
|Basic earnings (loss) per share (in U.S. dollars)                                      |  |                         | (0.006     



F-56







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 22:- | EARNINGS PER SHARE (Cont.)
| | --------- | --------------------------



| | b. | Diluted:
| | -- | --------



Diluted earnings per share
is calculated by adjusting the weighted average number of Ordinary shares outstanding to assume conversion of all dilutive potential
Ordinary shares. For the share options, a calculation is done to determine the number of shares that could have been acquired at
fair value (determined as the average annual market price of the Company's shares) based on the monetary value of the terms attached
to outstanding options. The number of shares calculated as above is compared with the number of shares that would have been issued
assuming the exercise of the options.



|                                                                                                                                                                                                       |  | Year ended December 31,   |       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | ------
|                                                                                                                                                                                                       |  | 2011                      |       
|                                                                                                                                                                                                       |  | U.S. dollars in thousands |       
|                                                                                                                                                                                                       |  |                           |       
|Total income (loss) for the year attributable to equity holders of the parent according to the statements of comprehensive income (loss) used to determine basic and diluted earnings (loss) per share |  |                           | (1,207



|                                                                                      |  | Year ended December 31, |            
|------------------------------------------------------------------------------------- |  | ----------------------- | -----------
|                                                                                      |  | 2011                    |            
|                                                                                      |  | Number of shares        |            
|                                                                                      |  |                         |            
|Weighted average number of shares used to determine basic earnings (loss) per share   |  |                         | 201,825,645
|Adjustment for incremental shares due to exercise of share options                    |  |                         | -          
|                                                                                      |  |                         |            
|Weighted average number of shares used to determine diluted earnings (loss) per share |  |                         | 201,825,645
|                                                                                      |  |                         |            
|Diluted earnings (loss) per share (in U.S. dollars)                                   |  |                         | (0.006     



F-57







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 23:- | TRANSACTIONS AND BALANCES WITH RELATED PARTIES
| | --------- | ----------------------------------------------



"Interested party"
- as the term is defined in the Israeli Securities Regulations (Annual Financial Statements), 2010.



"Related party" -
as the term is defined in IAS 24, "Related Party Disclosures" ("IAS 24").



The Company's key management
personnel who are included, along with other factors, in the definition of related party, as above in IAS 24, includes directors
and executive officers.



| | a. | Compensation to interested parties:
| | -- | -----------------------------------



|                                                                  |  | Year ended December 31,   |    
|----------------------------------------------------------------- |  | ------------------------- | ---
|                                                                  |  | 2011                      |    
|                                                                  |  | U.S. dollars in thousands |    
|                                                                  |  |                           |    
|Wages and salaries to interested parties employed by the Group *) |  |                           | 226
|Number of individuals to whom the benefit relates                 |  |                           | 1  
|                                                                  |  |                           |    
|Compensation to directors not employed by the Group **)           |  |                           | 66 
|Number of individuals to whom the benefit relates                 |  |                           | 4  



| | *) | In 2009 includes expenses reduced by approximately $ 1.45 million which result from forfeiture
of share options that were contingent on the performance of the former CEO.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | **) | In 2009 includes expenses reduced by approximately $ 2.65 million which result from forfeiture
of share options that were contingent on the performance of the former chairman.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-58







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011





| | NOTE 23:- | TRANSACTIONS AND BALANCES WITH RELATED PARTIES (Cont.)
| | --------- | ------------------------------------------------------



| | b. | Compensation to key management personnel:
| | -- | -----------------------------------------



The compensation to key management
personnel for employee services provided to the Group is shown below:



|                                                                       |  | Year ended December 31,   |    
|---------------------------------------------------------------------- |  | ------------------------- | ---
|                                                                       |  | 2011                      |    
|                                                                       |  | U.S. dollars in thousands |    
|                                                                       |  |                           |    
|Salaries, management and consulting fees and other short-term benefits |  |                           | 493
|Post-employment benefits                                               |  |                           | -  
|Share-based payments                                                   |  |                           | 59 
|                                                                       |  |                           |    
|                                                                       |  |                           | 552



| | *) | Include reduced expenses which result from forfeiture of share options that were contingent on
the performance of the former chairman and former CEO. See also Note 16b.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



It should be noted that
following completion of the private placement and exercise of warrants by shareholders after the date of the statement of
financial position (see Note 24 Sections C and D), executive officers are eligible for grants totaling approximately $80
thousand. These amounts will  be recorded as an expense in 2012.





As of December 31, 2011 and
2010, balances with related parties total approximately $ 246 thousand (of which $ 159 thousand are linked to the NIS)
and $ 359 thousand (of which $ 228 thousand are linked to the NIS), respectively.



| | NOTE 24: | EVENTS AFTER THE REPORTING PERIOD
| | -------- | ---------------------------------



| | a. | On January 29, 2012, 39,000 options which had been issued in 1997 to a former service provider
expired.
| | -- | -------------------------------------------------------------------------------------------------------



| | b. | On March 14, 2012, the Company signed a strategic collaboration framework agreement with Clalit
Health Services - Clalit Research Institute Ltd. ("the Institute") and Mor Research Applications Ltd. according to which
the Institute provides the Company with the right to receive data which are based on the Institute's database in connection with
technologies that stem from inventions and patents of Clalit Health Services' physicians, in projects whose content shall be agreed
upon by the Company, the Institute and Mor in advance and in writing.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In consideration for the above,
the Company shall pay the Institute the cost basis related to the Institute's activity in the framework of any project plus an
additional 10% of the total royalties Mor is entitled pursuant to its agreements with the Company in connection with each technology
where rights were granted to the Company.



F-59







XTL BIOPHARMACEUTICALS LTD.



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2011



| | NOTE 24: | EVENTS AFTER THE REPORTING PERIOD (Cont.)
| | -------- | -----------------------------------------



This agreement may be terminated
by giving a written and advance notice of 180 days by any of the parties on condition that all joint active projects have reached
their end.



As of the date of the approval
of the financial statements, the Company has the rights to two technologies that were in-licensed from Mor, rHuEPO drug for the
treatment of multiple myeloma cancer and SAM-101 drug for the treatment of psychotic patients.



| | c. | In March 2012, a warrant holders of the Company exercised 4,795,000 warrants (series 2) into 4,795,000
Ordinary share of NIS 0.1 par value each at an exercise price equal to NIS 1.05 per share for the total of approximately
$ 1.35 million (approximately NIS 5.0 million).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | On March 18, 2012, the Company's Board approved a private placement to institutional and private
investors (foreign as well as Israeli) for the total of approximately $ 2.4 million (approximately NIS 9.1 million).
According to the private placement, the Company allocated 11,560,362 Ordinary shares of the Company of NIS 0.1 par value each,
3,853,454 warrants (series A) and 1,926,727 warrants (series B).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Warrants (series A) are exercisable
into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to September 17, 2013
at an exercise price equal to NIS 1.046 per share, linked to the U.S. dollar.



Warrants (series B) are exercisable
into one Ordinary share of NIS 0.1 par value from the date of allocation (March 18, 2012) to March 17, 2015 at an
exercise price equal to NIS 1.124 per share, linked to the U.S. dollar.



| | e. | On March 19, 2012, the annual meeting of shareholders approved to grant 300,000 share options to
external directors in the Company to purchase 300,000 Ordinary shares of NIS 0.1 par value each at an exercise price equal
to NIS 0.58633 per share. Pursuant to the guidance of IFRS 2, the fair value of all share options on the date of approval
by the annual meeting, using the Black-Scholes model was approximately $ 79 thousand. The option term is for a period of 10
years from the grant date. 33% of the options are exercisable immediately and the remaining share options are exercisable in 24
tranches every month over a two-year period.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The value
of each option is based on the following inputs: expected dividend of 0%, expected standard deviation of 153%, risk-free interest
rate of 4.08% and expected life of 6 years.



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



F-60











Strictly private and confidential

XTL Biopharmaceuticals Ltd.

Impairment
Study - As Of December 31, 2011



March, 2012







F-61







| | BDO Ziv Haft
        Amot Bituach House Building B, 48
        Menachem Begin Road, Tel Aviv
        66180
        Israel
| | -------------------------------------------------------------------------------------------------------------------------



Dear Madams/Sirs,



We were requested by XTL Biopharmaceuticals
Ltd. (Hereinafter: “XTL” or the "Company") to perform an Impairment Examination Study (Hereinafter:
“the Study”) of its Intangible asset (Hereinafter: the “Intangible Asset” or the "IP")
as of December 31, 2011 (Hereinafter: the "Valuation Date") under the requirements of Statement of International
Accounting standards 38 (IAS 38) and Statement of International Accounting standards 36 (IAS 36). To the best of our knowledge
there is no prevention, legal or other, to perform the Study enclosed herein.



The Study was prepared for XTL and its
management (Hereinafter: the "Management") for the purpose of reporting its financial statements as of December
31, 2011 and may be provided to their external auditors. Unless required by applicable law (for instance, reference to a performance
of an impairment test and its implications in the financial statements), it is not to be used or quoted in a prospectus and/or
any other document without receiving our prior written consent.



The principal sources of information used
in performing our Study include:



| | · | The
                                                                                                         Company's audited financial
                                                                                                         statements for the fiscal
                                                                                                         years ended, 2009 and
                                                                                                         2010;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Company's unaudited financial
                                                                                                         statements for the period
                                                                                                         ended September 30, 2011;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Company's budget for
                                                                                                         2012;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                         Company's Phase II budget,
                                                                                                         which was approved by
                                                                                                         the board of directors;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Discussions
                                                                                                         with Management;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



F-62







| | · | Additional
                                                                                                         data, which was delivered
                                                                                                         to us by Management;
                                                                                                         and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Publicly
                                                                                                         available information
                                                                                                         (articles, websites).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In forming our opinion we have relied
on sources, which appeared to us as reliable, and nothing came to our attention, which is likely to indicate the lack of reasonability
of the data we used. We did not examine the data in an independent manner and, therefore, our work does not constitute verification
of the correctness, completeness or accuracy of the data.



We preformed number of analysis of the
data that we had received from the Company, as described below:



| | · | An
                                                                                                         analysis of the Company's
                                                                                                         potential revenues from
                                                                                                         the Intangible Asset;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                                                                                         analysis of the predicted
                                                                                                         expenses of the Company
                                                                                                         due to its Intangible
                                                                                                         Asset;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This report summarizes the findings of
our Study. The accompanying report provides a detailed explanation of our analysis.



The valuation of companies and businesses
is not a precise science and the conclusions arrived at in many cases will of necessity be subjective and dependent on the exercise
of individual judgment. There is therefore no indisputable single value and we normally express our opinion on the value as falling
within a likely range. However, as purpose requires the expression of a single value, we have adopted a value at the mid-point
of our valuation range. Whilst we consider our value/range of values to be both reasonable and defensible based on the information
available to us, others may place a different value on the business.



F-63







It is emphasized that we do not have any
personal interest in the Company and our fee is not conditioned on the results of the opinion.



According to the assumptions detailed
in this report, we have arrived to the conclusion that the Recoverable amount of the Intangible Asset is greater than its Carrying
amount, as of valuation Date. Therefore, the Intangible Asset is not deemed to be impaired.



Details regarding the valuation specialist



BDO Consulting and Management Ltd. were
founded by the partners of BDO Certified Public Accountants.



BDO Consulting and Management is part
of the international BDO network, provides a full range of business services required for national and international businesses
in any sector. Our company has vast experience in the following fields: business valuations, financial and tax due diligence,
goodwill and intangible assets valuations, financial analyses, business plans, project finance PFI/PPP advisory, M&A, investment
banking and more.



Respectfully submitted,

BDO Ziv Haft



Consulting & Management Ltd.



F-64







|Contents                                          |   
|------------------------------------------------- | --
|                                                  |   
|Company Overview                                  | 4 
|                                                  |   
|Market Overview                                   | 11
|                                                  |   
|Financial Data                                    | 20
|                                                  |   
|Methodology                                       | 22
|                                                  |   
|Estimating an Impairment Loss of Intangible Asset | 28
|                                                  |   
|Determining an Impairment Loss                    | 48



|Contents: Company Overview |XTL
    Biopharmaceuticals Ltd. | | 
|------------------------------------------------------------- | 



F-65







Section 1

Company Overview



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-66







Company Overview1



General



XTL was incorporated in Israel on 9 March,
1993 as a private company in accordance with the Israeli Companies Law 1999 (Hereinafter: the "Companies Law"),
under the name Xenograft Technologies Ltd. On 3 July 1995, the company has changed its name to its current name, with its defined
objectives being the practice of any legal activity. As of today, the Company is engaged in the development, acquisition, sale,
sub-license and business ventures in the medical realm and in therapeutics for the treatment of unmet medical needs as well as
improvement of existing medical treatment.



In September 2000, the Company shares
were listed on the main stock exchange London and the Company raised approximately $ 50.9 million in a public offering. In August
2004, the Company raised $ 17.8 million in another offering in the London Stock Exchange. Between that date and October 2007,
the Company shares were listed on the main stock exchange in London. In October 2007, the Company was de-listed from the main
stock exchange in London and its shares were no longer traded there.



In July 2005, the Company performed a
dual listing of its shares on the Tel-Aviv Stock Exchange Ltd. (Hereinafter: "TASE"). Since that date and to
the date of this report, the Company shares are listed on the TASE. Accordingly, since its' listing date on the TASE and until
July 2009, the company reported in compliance with the provisions of the foreign law (by virtue of Chapter E3 of the Law).










1 XTL BioPharmaceuticals
Ltd.'s annual report for the fiscal year 2010 and for the period ended September 30, 2011 and the Company's reports which were
published in the Tel-Aviv stock exchange's website on November 30, 2011 and August 29, 2011.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-67









Company Overview1





General



On September 1, 2005, the Company filed
with the Securities & Exchange Commission in the United States (Hereinafter: the "SEC") an application to
list the Company's American Depositary Receipts (Hereinafter: "ADR") on Nasdaq under the list known as Nasdaq
Global Market. Beginning on that date and until 17 April 2009, the Company's ADRs were traded on Nasdaq.



In 2005, the Company acquired from VivoQuest
Inc. (Hereinafter: "VivoQuest"), the exclusive worldwide and perpetual rights to VivoQuest's intangible assets,
covering a compound library including certain compounds (Hereinafter: "DOS") for the treatment of hepatitis C
and other assets. In the course of 2008, the Company out-licensed the use of the DOS technology to Presidio Pharmaceuticals Inc.



In July 2009, the Company shares were
de-listed from Nasdaq due to a claim of the Nasdaq Audit Committee that the Company has failed to comply with some of the listing
criteria. Shortly after, the Company's ADR began being quoted over the counter (OTC) on the Pink Sheets, and accordingly, from
this date on, the Company reports in accordance with Chapter F of the Securities Law and simultaneously reports in compliance
with the obligation to report in accordance with the U.S. Securities Exchange Act of 1934 regarding a foreign private issuer whose
securities are held by the public. Since the de-listing of the company's ADR from Nasdaq, the company is no longer subject to
Nasdaq.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-68







Company Overview



General



The Company holds 100% of the issued and
paid-up share capital of the U.S company XTL Biopharmaceuticals Inc. (Hereinafter: "XTL Inc."), which was founded
in 1999 in accordance with the laws of the state of Delaware in the United States as well as 100% of XTEPO Ltd. (Hereinafter:
"XTEPO"), which was founded in Israel in November 2009 as a part of the Bio Gal transaction.



Until the start of 2008, the Company was
involved in the development of drugs primarily used to treat Hepatitis C and B. At the end of 2007, the Company ceased the research
and development plans of these drugs (with the exception of development of DOS technology) and an agreement was signed with Yeda
Research and Development Ltd. (the technology-transfer entity of the Weizmann Institute of Science) (Hereinafter: "Yeda")
to revert all the rights to the company's original technologies.



XTL Inc. was involved in the development
of activities and business pertaining pharmaceutical development. XTL Inc. has a fully owned company, XTL Development Inc.. (Hereinafter:
"XTL Development"), which was founded in 2007 in accordance with the laws of the State of Delaware in the US,
was involved in business development, pharmaceutical development and primarily in clinical trial management of Bicifadine, a drug
for diabetic neuropathic pain. As of the date of this report, XTL Inc. and XTL Development have no business activity.



In 2007, the Company signed an agreement
with DOV Pharmaceutical Inc. (Hereinafter: "DOV") to obtain an international license for the Bicifadine.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-69







Company Overview





General



On 18 November, 2008 the Company announced
that phase 2b of the trial that was conducted on Bicifadine for treating diabetic neuropathic pain did not meet the clinical endpoints
that had been established in advance and as such, the trial had failed. As a result of the failure to meet the clinical endpoints
of the said trial, the Company halted the development of Bicifadine for treating diabetic neuropathic pain, terminated the employment
of most of its employees and stopped all maintenance of patents related to Bicifadine in coordination with DOV.



In addition, in December 2008, the Company
underwent reorganization in order to develop the Company's business (Hereinafter: the "Plan"). The plan included,
inter alia, the layoff of most company employees (who were employed in the Bicifadine development project), investment activities,
cooperation and acquisition of holdings particularly in companies involved in applicable life science research and in pharmaceutical
research and development (biotechnology and pharmaceuticals).



On 8 March, 2010 XTL Development ended the
formal contractual arrangement with DOV with regards to Bicifadine, in which all intellectual property rights to Bicifadine were
reverted to DOV. As of today, the Company has certain rights based on milestones in the development plans of drugs for treating
Hepatitis C based on DOS technology acquired in 2005 from VivoQuest and that were sold in sub-license to Presidio in 2008 for
a cash payment, development milestone payments totaled $59 million by Presidio and royalties from sales.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-70







Company Overview



General



On 19 March, 2009 the Company entered
an asset purchase agreement with Bio Gal Ltd. (Hereinafter: "Bio Gal") to purchase assets, rights to the patent
to use Recombinant Erythropoietin to extend the lives of terminal Multiple Myeloma patients as well as improve the quality of
their lives. The parties signed several extensions for the completion date of the transaction, with the last one being valid until
31 August 2010, in order to enable completion of the transaction.



On 31 December, 2009 the Company's board
of directors approved the Company's asset purchase agreement to acquire 100% of the shares of XTEPO, a private Israeli company
founded by the shareholders of the Bio Gal in order to carry out the aforementioned transaction, which will receive a license
for exclusive use of a patent on the Recombinant EPO drug from Bio Gal, while simultaneously investing in XTEPO $1.5 million from
private investors (based on exercise of the options they were given).



In order to execute said acquisition, the
Company issued approximately 133 million ordinary shares to XTEPO shareholders against 100% of their holdings in XTEPO and by
issuing the Company's ordinary shares at an exceptional private offering in accordance with the Securities Regulations (Private
Offering of Securities in a Listed Company) to XTEPO shareholders (Hereinafter: "Exchange of Shares Agreement")
that was approved by an extraordinary shareholders meeting on 2 March 2010 so that upon completion of said Exchange of Share Agreement,
XTEPO shareholders held (along with their holdings of company share on the eve prior to the exchange of shares) approximately
70.64% of the issued and paid-up share capital of the company and the balance, of 29.36%, were held by company shareholders on
the eve of implementation of the Exchange of Shares Agreement.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-71









Company Overview





General



On March 24, 2011 the Company has
entered into a term sheet to acquire the activity of MinoGuard Ltd. (Hereinafter: "MinoGuard") by an exclusive
license to use MinoGuard's entire technology in return for royalties on sales and milestone payments throughout the clinical development
process, without making any other payments in cash.



On November 30, 2011 the Company signed
on the exclusive license with MinoGuard, according to which the Company will develop and commercialize the technology to treat
patients who suffer from mental illnesses focusing on the schizophrenia illness. According to the terms of the agreement, the
Company will perform clinical trials, develop, sign, market and sale the technology out coming drugs with no restriction on specific
illness (Hereinafter: the "License").



On
May 29, 2011, the Company announced that it was granted an orphan drug designation from the FDA for its EPO drug for the treatment
of multiple myeloma blood cancer (which is in the planning and preparation towards Phase II clinical trial). The
main standard benefit of orphan drugs in the U.S. is receiving seven years marketing exclusivity from the date of approval by
the FDA, as far as the FDA gives such approval. Other benefits are local U.S. tax breaks on research and development expenses
and exemption from paying commissions to the FDA.



On
August 29, 2011 the Company decided to perform a research, which includes preliminary data collection concerning the appearance
of specific protein in the blood of a group of patients with multiple myeloma illness. This study will assist focusing the Company's
Phase II clinical trail's protocol of the Recombinant EPO drug (Hereinafter: the "Research"). According
to theCompany's management and its advisors, the statutory approval to
start phase II clinical trial is predicted to be accepted at the second half of 2012.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-72







Company Overview



General



Holdings Structure



The following chart presents the structure
of the Company's holdings as of December 31, 2011:







|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-73









Company Overview



Field of Activity



General



Given the completion of the exchange of
shares agreement the Company (the Company, subsidiaries, including XTEPO, hereinafter jointly: "Group") is focused
on the planning, research and development for the commercialization of a new indication for use of Recombinant EPO for the treatment
of multiple myeloma patients.



Along with compliance with all pending conditions
and completion of the exchange of shares agreement, transferred to the Group, via XTEPO, was exclusive usage license of a patent
for using the drug Recombinant EPO to treat patients with multiple myeloma that is based on a series of studies that included,
inter alia, an empirical observation of patients treated with Recombinant EPO by Prof. Moshe Mittelman. Prof. Moshe Mittelman
who serves as a medical director in the Company is an internationally renowned haematologist who found in empirical observations
that treatment with recombinant EPO may extend the life expectancy of patients with multiple myeloma while significantly improving
their quality of life while causing less side effects than those caused by current treatments. During their lab work, Prof. Mittelman
and his team found that recombinant EPO had an anticancer effect based on the strengthening of the immune system.



|Section 1:
    Company Overview |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-74







Company Overview



Field of Activity



Recombinant EPO Drug



Recombinant EPO is a drug that is, as
of the date of this report, used to treat (i) anemia in patients with renal failure (dialysis) and (ii) anemia in cancer patients.
Recombinant EPO was developed, manufactured and marketed by Johnson & Johnson, Hoffman La Roche and Amgen, and generates billions
of dollars in sales every year, and is therefore considered a drug with an extremely large market scope. The drug has been administered
to millions of patients over the past 20 years, resulting in extensive clinical experience with the drug and safety information
about it. As of December 31, 2011 the Company began preparing for a Phase II clinical trial on multiple myeloma patients.



The Company has exclusive license of the
patents and patent applications, as detailed in the table below:



|Patent Name       |  | Countries
in which
Application
Was Filed |  | Priority Date |            |  | Application
No. |  |              | Patent No. |  |  | Status    |  | Expiration
Date |        
|----------------- |  | ---------------------------------------- |  | ------------- | ---------- |  | --------------- |  | ------------ | ---------- |  |  | --------- |  | --------------- | -------
|BIOGAL-001 EP (*) |  | Europe                                   |  |               | 30.03.1999 |  |                 |  | 99 91 2039.7 |            |  |  | 1 067 955 |  |                 | Granted
|BIOGAL-001 CA     |  | Canada                                   |  |               | 30.03.1999 |  |                 |  | 2,366,674    |            |  |  | -         |  |                 | Allowed
|BIOGAL-001 IL2    |  | Israel                                   |  |               | 30.03.1999 |  |                 |  | 138705       |            |  |  | 138705    |  |                 | Granted
|BIOGAL-001 JP     |  | Japan                                    |  |               | 30.03.1999 |  |                 |  | 2000-543153  |            |  |  | 4456271   |  |                 | Granted
|BIOGAL-001 HK     |  | Hong-Kong                                |  |               | 30.03.1999 |  |                 |  | 01104635.2   |            |  |  | HK1033910 |  |                 | Granted
|BIOGAL-001 US     |  | USA                                      |  |               | 30.03.1999 |  |                 |  | 09/647,761   |            |  |  | 6,579,525 |  |                 | Granted



*Valid in Austria, Belgium, France, Germany, Britain, Ireland, Italy, Holland, Spain, Switzerland and Sweden (Hereinafter: "Europe").



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-75







Company Overview







Patent List



Licensing Agreement with Bio Gal



On 31 December, 2009 the Group, through
XTEPO, entered a contractual arrangement with Bio Gal in an agreement to an exclusive license for a patent, that was signed between
Bio Gal and Yeda and Mor Research Applications (Hereinafter: "Mor") (Yeda and Mor hereinafter jointly known as
"License Owners") in 2002 (Hereinafter: "Original Licensing Agreement"), for exclusive use of
the registered patent of the license owners for the drug recombinant EPO in order to develop a new indication that aims to extend
the life of patients with multiple myeloma as well as improve their quality of life (Hereinafter: the "Patent").



In accordance with the terms of the original
licensing agreement, Bio Gal undertook to manage the study in terms of further development of patents owned by the license owners,
including full financing of the study extension, and will own exclusive international licensing rights to development use, marketing,
distribution and sale of drugs used to treat multiple myeloma and other types of cancer, as much as the study permits. According
to the licensing agreement, Bio Gal will bear all expenses related to preparation, filing, preserving and protecting every patent
that will be registered as a result of the study. The exclusive license given to the Company (via XTEPO) as previously stated
will remain valid for 15 years from the first commercial sale of the drug by Bio Gal or until the end of the patent period in
the countries where the patent is registered (whichever is later).



It should be noted that the patent is
a registered patent in the US since 1999 and in Europe, Israel and Hong Kong, Japan and others as well as in Canada, it should
be noted that the Company obtained approval for all patent registration requests that it requested. The patent validity is expected
to expire in countries in which it is registered in 2019.



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-76







Company Overview



Licensing Agreement with Bio Gal



In return for said assignment of license
and in accordance with the amendments made to the original licensing agreement (the last of which was made in April 2008), the
Group will pay Yeda:



| | · | Annual
                                                                                                         licensing fee of one
                                                                                                         percent (1%) of net sales
                                                                                                         of the EPO drug ;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A
                                                                                                         one-time payment of $
                                                                                                         350 thousands at the
                                                                                                         successful completion
                                                                                                         of Phase II of the clinical
                                                                                                         trial. The Payment's
                                                                                                         conditions are according
                                                                                                         to the earlier of:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ü | Capital
                                                                                                              raising of at least
                                                                                                              $ 2 million by the
                                                                                                              Company or by XTEPO
                                                                                                              following successful
                                                                                                              completion of Phase
                                                                                                              II clinical trial;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ü | Six
                                                                                                              months from the
                                                                                                              date of successful
                                                                                                              completion of Phase
                                                                                                              II clinical trial.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Section 1: Company Overview
    |XTL Biopharmaceuticals Ltd. | | 
|-------------------------------------------------------------- | 



F-77







Section 2

Market Overview



|Section 2: Market Overview |XTL
    Biopharmaceuticals     Ltd. | | 
|----------------------------------------------------------------- | 



F-78







Market Overview



General



As described above, the Company is focused
on the planning, research and development for the commercialization of a new indication for use of Recombinant EPO for the treatment
of multiple myeloma patients. Accordingly, trends and events in the cancer drug market, in general, and in the multiple myeloma
drug market in particular, have an essential affect on the Company's operation and financial outcomes. Following is an overview
of the market in which the Company operates.



The Multiple Myeloma Drug Market



General



The cancer drugs market in general, and
the treatment of multiple myeloma in particular that is the focus of the Company's drug, is facing an increasing need for new
developments to treat patients with various forms of cancer. Despite the progress of the pharmaceutical industry in general, and
its impressive achievements over the past several decades drugs for many diseases, including various cancers, are still insufficient
treatment both in terms of limited range of action, inefficacy and serious side effects. The increase in average age of the population,
which is accompanied by a parallel increase in the number of cancer patients in general, and multiple myeloma cancer in particular,
increases the need for new drugs in this field.



|Section 2: Market Overview |XTL
    Biopharmaceuticals     Ltd. | | 
|----------------------------------------------------------------- | 



F-79









Market Overview



The Multiple Myeloma Drug Market



In the Western world, the cancer drug market
in general, and the market for multiple myeloma in particular, is characterized by drugs that have been approved for use generally
for specific indications. For example, a drug will not be approved to treat multiple myeloma without a specific definition of
the type of patients entitled to receive the drug. This definition includes the stage of the disease the patient is in, definition
of patients based on previous therapies, etc. The result essentially is that the cancer drug market is composed of multiple patient
populations. One of the challenges in developing cancer drugs is the definition of the field being targeted by the drug since
there are numerous forms of cancer, each of which has several different stages of disease progression. Any drug that is approved
for use is designed for a specific stage in the progression of the type of disease the drug was designed for.



In cancer, there are
many patient populations for whom there is no suitable treatment and the diseases they have do not have any suitable therapy.
Furthermore, the efficiency of all currently available drugs is limited. Every one of the existing drugs has a significant percentage
of patients who fail to respond to them. In addition, the response of many of the patients considered to be responders was extremely
partial, not long-lasting, and required taking several drugs concomitantly to achieve the desired clinical result. Cancerous tumours
are occasionally so violent that the average life expectancy of patients is limited to months, or occasionally, a mild improvement
in the patients' quality of life is sufficient reason for the drug to be considered efficient. Based on the aforementioned, there
is a clinical need for drugs to treat multiple myeloma that will be, on the one hand, efficient and have limited side effects
on the other hand. The new indication that the Company intends to develop for recombinant EPO in the treatment of patients with
multiple myeloma will try to provide a certain response to this need.



The target market of the Company's drug
is unique. The Company believes that the ability of any drug to capture a market share depends on the drug's short-term and long-term efficacy as well as on its side
effects, both absolutely and relative to its competing drugs.



|Section 2: Market Overview |XTL
    Biopharmaceuticals     Ltd. | | 
|----------------------------------------------------------------- | 



F-80







Market Overview



The Multiple Myeloma Drug Market



Multiple Myeloma



Multiple myeloma is a form of blood cancer.
The disease is characterized by uncontrollable proliferation of a type of white blood cells known as plasma cells in the bone
marrow that causes the accumulation of malignant cells that damage and destroy parts of the bone. This disease has a multiple
nature that is expressed in the creation of a large number of accumulations of malignant cells. The malignant cells and the secreted
proteins are responsible for a series of clinical expressions and complications, including bone damage with pain and breaks, bone
marrow damage accompanied by anemia (blood deficiency), sensitivity to infections, weakening of the immune system, nervous system
damage, kidney failure, clotting disorders, etc. The disease is incurable, and the average life expectancy of patients is 3-5
years.



|Section 2: Market Overview |XTL
    Biopharmaceuticals     Ltd. | | 
|----------------------------------------------------------------- | 



F-81







Market Overview







The Multiple Myeloma Drug Market



The Market Size



Multiple myeloma is a blood cancer that comprises
10% of all blood cancers. As of the year 2012 in the US alone there are 74,814 multiple myeloma patients1, and Every
year, 21,700 new cases are diagnosed2. This number increases in direct proportion with the average life expectancy
around the world. Accordingly, approximately 10,710 patients die in the US every year3. Multiple myeloma is largely
considered an old person's cancer, since the disease largely appears between the ages of 65-70, although diagnosis of the disease
in 50 year olds is not uncommon. In addition, multiple myeloma comprises approximately 1% of all cancer cases and approximately
2% of all cancer-related deaths4.



The following chart presents the estimated
number of multiple myeloma incidences in the USA and the number of multiple myeloma deaths in 2012:







Source: Cancer & Figures 2012, American
Cancer Society.










1 Myeloma facts
and statistics from facts 2012, The Leukemia & Lymphoma Society Fighting Blood Cancer.

2 National Cancer
institute, Cancer Facts & Figures – 2012, American Cancer Society (ACS) Atlanta, Georgia, 2012.

3National
Cancer institute, Cancer Facts & Figures – 2012, American Cancer Society (ACS) Atlanta, Georgia, 2012.

4 National Cancer
institute, Cancer Facts & Figures – 2012, American Cancer Society (ACS) Atlanta, Georgia, 2012.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-82







Market Overview



The Multiple Myeloma Drug Market



Drug Development Processes



Drug development is a complex process
that generally includes the following primary stages. Each stage must comply with the health agencies' criteria before the next
stage can begin, as follows:



| | · | Preclinical
                                                                                                         Phase - this phase
                                                                                                         includes trials in labs
                                                                                                         and on animals in order
                                                                                                         to demonstrate the efficiency
                                                                                                         of the drugs in models
                                                                                                         that simulate the disease
                                                                                                         for which the drug is
                                                                                                         being investigated. The
                                                                                                         preclinical phase also
                                                                                                         includes trials under
                                                                                                         meticulous conditions
                                                                                                         in order to determine
                                                                                                         whether the drug has
                                                                                                         any toxic adverse events
                                                                                                         and to learn about the
                                                                                                         various characteristics
                                                                                                         in animals. In addition,
                                                                                                         the preclinical stage
                                                                                                         includes development
                                                                                                         of manufacturing methods
                                                                                                         under GMP (Good Manufacturing
                                                                                                         Practice - which is a
                                                                                                         collection of manufacturing
                                                                                                         requirements that the
                                                                                                         drug must comply with
                                                                                                         in order to allow the
                                                                                                         administration of the
                                                                                                         drug to patients in the
                                                                                                         future).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Phase
                                                                                                         I - this is the first
                                                                                                         clinical phase in drug
                                                                                                         development in which
                                                                                                         an initial test is carried
                                                                                                         out on humans. The phase
                                                                                                         is designed to assess
                                                                                                         the safety of the drug
                                                                                                         as well as the maximum
                                                                                                         dosage that can be safely
                                                                                                         administered to patients.
                                                                                                         This phase may also include
                                                                                                         additional tests such
                                                                                                         as drug dispersal in
                                                                                                         the body and how long
                                                                                                         the drug remains in the
                                                                                                         blood, measurements that
                                                                                                         will help assess its
                                                                                                         biological availability,
                                                                                                         etc. There are instances
                                                                                                         in which this trial phase
                                                                                                         is carried out on healthy
                                                                                                         individuals and in other
                                                                                                         cases; the trial is carried
                                                                                                         out on patients with
                                                                                                         the investigated disease.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-83









Market Overview



The Multiple Myeloma Drug Market



| | · | Phase
                                                                                                         II - In this phase,
                                                                                                         an initial test of the
                                                                                                         efficiency of the drug
                                                                                                         is carried out in patients.
                                                                                                         In addition, this phase
                                                                                                         attempts to determine
                                                                                                         the optimal dosage of
                                                                                                         the drug to treat patients.
                                                                                                         At the same time, the
                                                                                                         phase continues to test
                                                                                                         its safety. These Several
                                                                                                         Phase II trials are often
                                                                                                         carried out while the
                                                                                                         first Phase II trial
                                                                                                         (Phase 2a) is designed
                                                                                                         to serve as proof of
                                                                                                         concept and the second
                                                                                                         Phase II trial (Phase
                                                                                                         2b) is a broader trial
                                                                                                         that includes a larger
                                                                                                         number of patients and
                                                                                                         that is carried out in
                                                                                                         a larger number of medical
                                                                                                         centers than was Phase
                                                                                                         2a.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Phase
                                                                                                         III - the decisive
                                                                                                         phase of multinational,
                                                                                                         multicenter, randomized,
                                                                                                         placebo controlled, double
                                                                                                         blind trials. This phase
                                                                                                         includes the largest
                                                                                                         number of subjects (hundreds
                                                                                                         and even thousands) and
                                                                                                         the trial is carried
                                                                                                         out in a large number
                                                                                                         of medical centers around
                                                                                                         the world. The purpose
                                                                                                         of this phase is to prove
                                                                                                         the efficiency and safety
                                                                                                         of the drug in a large
                                                                                                         number of patients in
                                                                                                         a way which simulates
                                                                                                         as much as possible (more
                                                                                                         than the previous phases)
                                                                                                         the manner in which the
                                                                                                         drug will be used in
                                                                                                         the clinical practice.
                                                                                                         Following successful
                                                                                                         conclusion of this phase,
                                                                                                         applications can be submitted
                                                                                                         to the health agencies
                                                                                                         for receipt of approval
                                                                                                         to register the drug.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



It should be emphasized that the conduct
of clinical trials on human beings in each of the phases, Phase I, Phase II and Phase III requires the prior approval of the Helsinki
Committee/ IRB and of the regulatory agencies in the countries where the clinical trials are being conducted. It should be noted
that only successful results in the preliminary phases will guarantee the possibility of moving on to the next stage.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-84







Market Overview



The Multiple Myeloma Drug Market



Once all of the said phases (including
completion of Phase III) have been successfully completed, the Company can submit an application for approving the drug's registration
by the relevant regulatory agency, e.g. the FDA in the US.



The development process, as previously
mentioned, takes many years and requires extensive funding due to the prolonged duration of the trials, the process for obtaining
approval, and obtaining information and results from the trials, at the end of which the Group will be able to submit an application
for approval to register the drug by the FDA or any corresponding regulatory agency in any other country. Occasionally, the clinical
development, including the conduct of clinical trials, is carried out with the assistance of expert subcontractors who are entrusted
with operating under the meticulous professional standards dictated by the regulatory requirements.



In light of the fact that the Company is
developing a new indication for EPO, a drug that already exists and that has been approved for treatment of anemia, the Company
expects to receive an exemption for the preclinical trials as well as from the Phase I clinical trial. The Company has a preliminary
plan to initiate Phase II clinical trial in patients with multiple myeloma. It should be noted that the company received a preliminary
plan as part of the assignment of the patent license agreement. At the same time, and in light of the fact that a prolonged period
of time has passed since the date of the preparation of this report, the Company immediately began completion of the transaction
in preparation of the trial that includes, inter alia, updating the plan that will be brought before medical agencies for approval
prior its implementation.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-85









Market Overview





The Multiple Myeloma Drug Market



Orphan Drug



There is a special track for approval
and marketing of pharmaceutical preparations that is designed to respond to the need to develop drugs for certain populations
and for incurable and relatively rare diseases.



In the USA this approval is given to drugs
for diseases with a maximum number of patients of 200,000. Recognition of a drug as an orphan drug in the USA grants the manufacturer
with a regulatory exclusivity in marketing the drug for a period of 7 years6.



In Europe this approval is given to drugs
for diseases with a maximum number of patients of 185,000. Recognition of a drug as an orphan drug in Europe grants the manufacturer
with a regulatory exclusivity in marketing the drug for a period of 10 years7.



In Japan this approval is given to drugs
for diseases with a maximum number of patients of 50,000. Recognition of a drug as an orphan drug in Japan grants the manufacturer
with a regulatory exclusivity in marketing the drug for a period of 10 years8.



As mentioned in the company overview section,
on May 29, 2011 the Company announced that it was granted an orphan drug designation from the FDA for its EPO drug for the treatment
of multiple myeloma blood cancer.










6Canadian Organization for Rare Disorders, "Canadian Orphan Drugs Policy", 2005.

7Canadian Organization for Rare Disorders, "Canadian Orphan Drugs Policy", 2005.

8 Pacific Bride
in Asia, "Orphan Drugs in Asia", September/October 2006.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-86







Market Overview



The Multiple Myeloma Drug Market



Competition in the Multiple Myeloma
Drug Market



As of today, there are several recognized
therapies used to treat multiple myeloma, including chemotherapy, radiation therapy, bone marrow transplantation and new drugs.
Chemotherapy kills cancer cells but also healthy cells in the patient's body, especially active cells such as mucous cells, connective
tissue cells, blood cells including immune system cells, reproductive ells, etc. This damage is caused by the treatment, which
damages the cancer cells but also the healthy cells in the body and is accompanied by serious side effects, including nausea,
vomiting, hair loss, acute pain, etc.



In addition, there are biological drugs
that are more to cancer cells that are known to have milder adverse events than chemotherapy. The leading drugs in the market
are: Revlimid, manufactured by Celgene Corporation (Hereinafter: "Celgene"), Velcade (Bortezomid) developed by
Millennium Pharmaceuticals (Hereinafter: "Millennium"), and Thalidomide/Thalomid, manufactured by Celgene. These
biological drugs are characterized by extremely high prices. It should be noted that despite the aforementioned, not one of these
drugs cures the disease.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 







F-87













Market Overview



The Multiple Myeloma Drug Market



In 2003, the Velcade drug had approved
for use as a treatment for the multiple myeloma illness and its marketing begun. In 2006, the Revlimid and Thalidomide drugs had
approved for use as a treatment for the multiple myeloma illness and their marketing begun.



According to Decision Resources report
published in 2010, in 2008, the total sales of the multiple myeloma drugs in the USA, France, Germany, Italy, Spain, England and
Japan were amounted to $2.1 billion and predicted to increase to $5.3 billion in 20189.



According to Decision Resources estimations
published in 2011, the multiple myeloma market is predicted to grow by a Compounded Average Growth Rate of 5.6% between the years
2010 and 2020 in the leading markets in USA, France, Italy, Spain, England and Japan10.



According to Bloomberg company's analyst
report11, the Velcade Sales were 40% out of the total sales of multiple myeloma drugs, while the actual sales of Johnson
& Johnson company, which markets the Velcade drug outside the USA, and the Takada company, which markets the Velcade drug
in the USA, were $ 1.2 billion. In addition, according to Celgene financial reports, the total sales of Revlimid in 2010 were
approximately $ 2.47 billion12.










9
The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", December 21, 2011.

10The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", December 21,
2011.

11http://bloomberg.com/apps/news?pid=newsarchive&sid=aQHENps19ldg.

12http://ir.celegene.com/phoenix.zhtml?c=111960&p=irol-newsArticle&ID=1520733&highlight=



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-88







Market Overview



The Multiple Myeloma Drug Market



The following chart presents the current
Revlimid, Velcade and Thalomid market share by line of therapy, as of January 2010:







Source: Bernstein Research, "Celgene:
SCB MM Survey Pt II – Maintenance is Key Driver for Revlimid Growth and Upside; Raising Estimates, TP $78, February 16,
2010.



According to SCB survey's data, across
all lines of therapy, Velcade and Revlimid have both increased their share since February 2007. Some of Velcade's and Revlimid's
market share increases have come from increased use of combination regimens.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-89









Market Overview



The Multiple Myeloma Drug Market



The following chart presents the current
Revlimid, Velcade and Thalomid market share across all lines of therapy, as of January 2010:







Source: Bernstein Research, "Celgene:
SCB MM Survey Pt II – Maintenance is Key Driver for Revlimid Growth and Upside; Raising Estimates, TP $78, February 16,
2010.



An analysis that was published
by Pharma Letter on December 201113 found that despite the continued expansion of Velcade in the first-line settings,
sales of Velcade will be rapidly eclipsed by Revlimid's dramatic growth. The approval of Revlimid in the first-line setting will
also aggressively erode patient share and sales of Celgene's Thalidomide. In 2020, Revlimid will hold a 62% market share of the
total myeloma market.



13The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", 21 December,
2011.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-90







Market Overview



The Multiple Myeloma Drug Market



According to the aforementioned analysis'
findings, Revlimid and Velcade will experience increasing uptake in the relapsed/refractory setting as they will be used in combination
with emerging therapies. Revlimid will be used in combination with Onyx Pharmaceuticals/Ono Pharmaceutical's carfilzomib, anticipated
to be approved by the US Food and Drug Administration as early as 2012, and Bristol-Myers Squibb/Abbott's elotuzumab, which will
launch later (in 2015) in the USA and Europe. Velcade will also experience increased uptake in combination with AEterna Zentaris/Keryx
Biopharmaceuticals/Yakult Honsha's perifosine, Merck & Co.'s Zolinza (vorinostat) and Novartis's panobinostat14.



In
addition, overall, Revlimid will emerge as the clear market leader in the multiple myeloma market over the next decade. Velcade
will remain the second highest selling agent but will suffer from the entry of generics towards the end of 202015.
In addition, emerging therapies for multiple myeloma, Carfilzomib and Pomalidomide, are commercially promising, and together are
expected to reach sales to $ 800 million in 20209.



The findings also reveal that significant
opportunity lies in the development of agents that improve survival and reduce toxicities compared with currently available therapies16.










14The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", 21 December,
2011.

15The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", 21 December,
2011.

16The Pharma Letter, "5.6% Annual Growth Forecast for Multiple Myeloma Drug Market to 2020", 21 December,
2011.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-91







Market Overview





The Multiple Myeloma Drug Market



Recently, a number of screening methods
have been developed to identify small molecules that might mimic the biological effects of hematopoietic growth factors. The potential
advantages of small molecule mimics include lack of immunogenicity, fewer drug side-effects, and non-parenteral routes of administration.
Small molecules might also be less expensive to produce17.



Methods to Cope with Competition



Studies conducted by Prof. Mittelman revealed
that use of recombinant EPO in patients in advanced stages of multiple myeloma significantly contributed to suppression of symptoms
of the disease, improved the immune system, stabilized patients health, prolonged their survivability and significantly improved
their lives, without causing serious side effects.



These properties grant this drug an advantage
in most therapeutic properties for which the drug is designed. The Company anticipates that if these properties are expressed
in clinical trials as well, a medical agency criteria for drug approval, the drug will capture a large market share in the drug
market for treatment of multiple myeloma, including providing a solution to terminally ill patients in the advanced stage of the
disease who do not respond well or who demonstrate an insufficient response to currently available treatments.










17K. Kaushansky, "Small molecule Mimics of Hematopoietic Growth Factors: Improving on Mother Nature?", April,
2001.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-92







Market Overview



The Multiple Myeloma Drug Market



In addition, the
Company expects the drug to capture another market share of combining the drug with currently available drugs and therapies. If
these projects are realized, the drug's market is estimated at hundreds of millions of dollars a year.



However, it should be emphasized that
clinical studies include many elements of uncertainty, and the possibility of the Company not succeeding in its attempts to continue
to demonstrate the efficiency and safety of the drug or that the drug will prove to be less efficient than expected cannot be
ruled out. In addition, the possibility of the development of other drugs by the competition that will compete with the Company's
drugs cannot be ruled out.



In order to successfully cope with the
anticipated competition, the Company must position its drug by emphasizing its advantages over the competition. According to the
Company, the anticipated advantages of its drug, once it is approved, is based on the premise of a longer life expectancy of patients
who take the drug coupled with improved quality of life without any significant side effects. The Company believes that the fact
that the drug's possible efficacy in a combination treatment with or after other currently available therapies will reinforce
the drug's position and give the Company a marketing advantage. Later on, if and when the drug is approved for marketing, these
advantages are expected to provide the Company with a significant preference that, with the right marketing, will guarantee, according
to the Company's estimation, an advantage in the multiple myeloma therapy market.



In addition, among the main factors affecting
the ability of a new product to penetrate the drug market and the competition in it are clinical advantages that the product provides
and the ability to protect its intellectual property rights. In light of the fact that the Company has the license for exclusive
use of the patent for the drug recombinant EPO to treat patients with multiple myeloma, the Company believes that its drugs contains
the right properties to withstand expected competition.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 





F-93











Market Overview



The Multiple Myeloma Drug Market



Several years will pass until the Company's
product reaches the market but until it reaches this stage, the chances are that one of the giant pharmaceuticals in the field
will try to seek collaboration with the Company in the drug's development and/or marketing.



|Section 2: Market Overview |XTL Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-94







Section 3



Financial Data



|Section 3: Financial Data |XTL
    Biopharmaceuticals     Ltd. | | 
|---------------------------------------------------------------- | 



F-95







Financial Data



Balance Sheet



The following table
presents the Company's balance sheets as of 31/12/09, 31/12/10 30/09/10, and 30/09/11 (dollars in thousands):



|Dollars in thousands          |  |  | 31.12.09 |  |  |  | 31.12.10 |  |  |  | 30.09.10 |  |  |  | 30.09.11 | 
|----------------------------- |  |  | -------- |  |  |  | -------- |  |  |  | -------- |  |  |  | -------- | 
|Assets                        |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Cash and Cash Equivalents     |  |  | 412      |  |  |  | 1,066    |  |  |  | 1,377    |  |  |  | 200      | 
|Short-Term Deposits           |  |  |          |  |  |  |          |  |  |  |          |  |  |  | 1,590    | 
|Taxes                         |  |  | 72       |  |  |  |          |  |  |  |          |  |  |  |          | 
|Account Receivable            |  |  | 33       |  |  |  | 110      |  |  |  | 19       |  |  |  | 49       | 
|Restricted Deposits           |  |  | 40       |  |  |  | 46       |  |  |  |          |  |  |  | 21       | 
|Total Current Assets          |  |  | 557      |  |  |  | 1,222    |  |  |  | 1,396    |  |  |  | 1,860    | 
|                              |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Non-Current Assets            |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Restricted Deposits           |  |  |          |  |  |  |          |  |  |  | 20       |  |  |  |          | 
|Property, Plant and Equipment |  |  | 23       |  |  |  | 35       |  |  |  | 15       |  |  |  | 36       | 
|Intangible Assets             |  |  |          |  |  |  | 2,540    |  |  |  | 2,564    |  |  |  | 2,468    | 
|Other Investments             |  |  | 135      |  |  |  |          |  |  |  |          |  |  |  |          | 
|Total Non-Current Assets      |  |  | 158      |  |  |  | 2,575    |  |  |  | 2,599    |  |  |  | 2,504    | 
|Total Assets                  |  |  | 715      |  |  |  | 3,797    |  |  |  | 3,995    |  |  |  | 4,364    | 
|                              |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Current Liabilities           |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Trade Payables                |  |  | 192      |  |  |  | 203      |  |  |  | 200      |  |  |  | 118      | 
|Other Account Payables        |  |  | 516      |  |  |  | 760      |  |  |  | 687      |  |  |  | 525      | 
|Total Current Liabilities     |  |  | 708      |  |  |  | 963      |  |  |  | 887      |  |  |  | 643      | 
|                              |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Total Equity                  |  |  | 7        |  |  |  | 2,834    |  |  |  | 3,108    |  |  |  | 3,721    | 
|                              |  |  |          |  |  |  |          |  |  |  |          |  |  |  |          | 
|Total Liabilities and Equity  |  |  | 715      |  |  |  | 3,797    |  |  |  | 3,995    |  |  |  | 4,364    | 



Source: The Company's Financial
Statements.



|Section 3: Financial Data |XTL
    Biopharmaceuticals     Ltd. | | 
|---------------------------------------------------------------- | 



F-96









Financial Data





Profit & loss



The following table
presents the Company's income statements for 2009-2010 and for the period ended September 30 in the years 2010-2011 (dollars in
thousands):



|Dollars in thousands                 |  | 2009 |        |   | 2010 |  |        | 1-9/2010 |  |  | 1-9/2011 |  
|------------------------------------ |  | ---- | ------ | - | ---- |  | ------ | -------- |  |  | -------- | -
|Research and Development Expenses    |  |      |        |   |      |  | 64     |          |  |  |          |  
|General and Administration Expenses  |  |      | (2,429 | ) |      |  | 1,222  |          |  |  | 948      |  
|Other Gains, Net                     |  |      | 139    |   |      |  | 30     |          |  |  |          |  
|Operating Profit (Loss)              |  |      | 2,568  |   |      |  | (1,256 | )        |  |  | (948     | )
|Finance Income                       |  |      | 6      |   |      |  | 6      |          |  |  | 11       |  
|Finance Expenses                     |  |      | 10     |   |      |  | 7      |          |  |  | 5        |  
|Finance Income (Expenses), Net       |  |      | (4     | ) |      |  | (1     | )        |  |  | 6        |  
|Profit (Loss) Before Taxes on Income |  |      | 2,564  |   |      |  | (1,257 | )        |  |  | (942     | )
|Tax Benefit                          |  |      | 23     |   |      |  |        |          |  |  |          |  
|Net Profit (Loss)                    |  |      | 2,587  |   |      |  | (1,257 | )        |  |  | (942     | )



Source: The
Company's Financial Statements.



|Section 3: Financial Data |XTL
    Biopharmaceuticals     Ltd. | | 
|---------------------------------------------------------------- | 



F-97







Section 4

Methodology



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-98







Methodology



IAS 38



General



The objective of this Standard is to prescribe
the accounting treatment for intangible assets that are not dealt with specifically in another Standard. This Standard requires
an entity to recognise an intangible asset if, and only if, specified criteria are met. The Standard also specifies how to measure
the carrying amount of intangible assets and requires specified disclosures about intangible assets.



Definitions



The following terms are used in this Standard
with the meanings specified:

An asset is a resource:

(a) Controlled by an entity as a result of
past events; and

(b) From which future economic benefits
are expected to flow to the entity.



Carrying amountis the amount at
which an asset is recognised in the statement of financial position after deducting any accumulated amortisation and accumulated
impairment losses thereon.



Fair value of an asset is the amount
for which that asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction.



An intangible asset is an identifiable
non-monetary asset without physical substance.



Useful life is:

(a) The period over which an asset is
expected to be available for use by an entity; or

(b) The number
of production or similar units expected to be obtained from the asset by an entity.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-99









Methodology



IAS 38



Identifiability



According to Section 12, an asset
is identifiable if it either:

| | (a) | Is separable, i.e. is capable of being
                                                           separated or divided from the entity and sold, transferred, licensed,
                                                           rented or exchanged, either individually or together with a related
                                                           contract, identifiable asset or liability, regardless of whether the
                                                           entity intends to do so; or
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Arises from contractual or other legal
                                                           rights, regardless of whether those rights are transferable or separable
                                                           from the entity or from other rights and obligations.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



According to Section 17, the future
economic benefits flowing from an intangible asset may include revenue from the sale of products or services, cost savings, or
other benefits resulting from the use of the asset by the entity. For example, the use of intellectual property in a production
process may reduce future production costs rather than increase future revenues.



According to Section 21, an intangible
asset shall be recognised if, and only if:

| | (a) | It is probable that the expected future
                                                           economic benefits that are attributable to the asset will flow to the
                                                           entity; and
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The cost of the asset can be measured
                                                           reliably.
| | --- | ----------------------------------------------------------------------------------------------------------



According to Section 22,
an entity shall assess the probability of expected future economic benefits using reasonable and supportable assumptions that
represent management’s best estimate of the set of economic conditions that will exist over the useful life of the asset.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-100







Methodology



IAS 38



According to section 57, an intangible
asset arising from development (or from the development phase of an internal project) shall be recognised if, and only if, an
entity can demonstrate all of the following:

| | (a) | The technical feasibility of completing
                                                            the intangible asset so that it will be available for use or sale.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Its intention to complete the intangible
                                                            asset and use or sell it.
| | --- | ------------------------------------------------------------------------------------------------------------------------------

| | (c) | Its ability to use or sell the intangible
                                                            asset.
| | --- | ------------------------------------------------------------------------------------------------------------

| | (d) | How the intangible asset will generate
                                                            probable future economic benefits. Among other things, the entity
                                                            can demonstrate the existence of a market for the output of the intangible
                                                            asset or the intangible asset itself or, if it is to be used internally,
                                                            the usefulness of the intangible asset.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | The availability of adequate technical,
                                                            financial and other resources to complete the development and to use
                                                            or sell the intangible asset.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | Its
                                                            ability to measure reliably the expenditure attributable to the intangible
                                                            asset during its development.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



IAS 36



General



The International Accounting
Standard 36 Impairment of Assets (Hereinafter "IAS 36") objective is to prescribe the procedures that an entity
applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable
amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset
is described as impaired and the Standard requires the entity to recognize an impairment loss.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-101









Methodology



IAS 36



This Standard shall be applied in accounting
for the impairment of all assets (other than exceptions as they appear in the standard content) or cash generating unit(s) including
goodwill acquired from business combination. Goodwill acquired in business combination represents the value of the intangible
assets which cannot be separately identified or separately recognized.



Definitions



The following terms are used in this Standard
with the meanings specified:



Carrying amount is the amount at
which an asset is recognized after deducting any accumulated depreciation (amortization) and accumulated impairment losses thereon



A cash-generating unit is the smallest
identifiable group of assets that generates cash inflows that are independent of the cash inflows from other assets or groups
of assets.



Fair value less costs to sell is
the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable,
willing parties, less the costs of disposal.



The recoverable amount of an asset or
a cash-generating unit is the higher of its fair value less costs to sell and its value in use.



Value in use is the present value of the
future cash flows expected to be derived from an asset or cash-generating unit.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-102







Methodology



IAS 36



Determining An Impairment Loss



Timing of impairment
tests for goodwill



The Standard permits:



| | (a) | The annual impairment test for a cash-generating
                                                           unit (group of units) to which goodwill has been allocated to be performed
                                                           at any time during an annual reporting period provided the test is
                                                           performed at the same time every year.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Different cash-generating units (groups
                                                           of units) to be tested for impairment at different times. However,
                                                           if some of the goodwill allocated to a cash-generating unit (group
                                                           of units) was acquired in a business combination during the current
                                                           annual period, the Standard requires that unit (group of units) to
                                                           be tested for impairment before the end of the current period.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Standard permits the most recent detailed
calculation made in a preceding period of the recoverable amount of a cash-generating unit (group of units) to which goodwill
has been allocated to be used in the impairment test for that unit (group of units) in the current period, provided specified
criteria are met.



The Standard defines number of steps for
the identification, recognition and measurement of value loss of an asset or cash generating unit. Moving on to the next step
is subjected to the fulfillment of the previous step.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-103









Methodology



IAS 36



Identifying an asset that may be
impaired



An entity shall assess at each reporting
date whether there is any indication that an asset may be impaired. In assessing whether there is any indication that an asset
may be impaired, an entity shall consider, as a minimum, the following indications:



External sources of information



| | § | During
                                                                                                           the period, an asset’s
                                                                                                           market value has declined
                                                                                                           significantly more
                                                                                                           than would be expected
                                                                                                           as a result of the
                                                                                                           passage of time or
                                                                                                           normal use.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Significant
                                                                                                           changes with an adverse
                                                                                                           effect on the entity
                                                                                                           have taken place during
                                                                                                           the period, or will
                                                                                                           take place in the near
                                                                                                           future, in the technological,
                                                                                                           market, economic or
                                                                                                           legal environment in
                                                                                                           which the entity operates
                                                                                                           or in the market to
                                                                                                           which an asset is dedicated.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | § | Market
                                                                                                           interest rates or other
                                                                                                           market rates of return
                                                                                                           on investments have
                                                                                                           increased during the
                                                                                                           period, and those increases
                                                                                                           are likely to affect
                                                                                                           the discount rate used
                                                                                                           in calculating an asset’s
                                                                                                           value in use and decrease
                                                                                                           the asset’s recoverable
                                                                                                           amount materially.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The carrying amount of the net assets
of the entity is more than its market capitalization.



Internal sources of information



| | · | Evidence
                                                                                                          is available of obsolescence
                                                                                                          or physical damage of
                                                                                                          an asset.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Significant
                                                                                                          changes with an adverse
                                                                                                          effect on the entity
                                                                                                          have taken place during
                                                                                                          the period, or are expected
                                                                                                          to take place in the
                                                                                                          near future, in the
                                                                                                          extent to which, or
                                                                                                          manner in which, an
                                                                                                          asset is used or is
                                                                                                          expected to be used.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-104







Methodology



IAS 36



| | · | Evidence
                                                                                                          is available from internal
                                                                                                          reporting that indicates
                                                                                                          that the economic performance
                                                                                                          of an asset is, or will
                                                                                                          be, worse than expected.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If any indication of value loss exists,
the entity shall estimate the recoverable amount of the asset. In case the value of the recoverable amount found is lower than
the respective Carrying amount, the entity shall depreciate the value of the asset or the Cash-generating unit accordingly.



The standard requires an intangible asset
with an indefinite useful life or not yet available for use and goodwill to be tested for impairment, once a year, regardless
to the existence of indication of value loss.



Measuring Recoverable Amount



General



This Standard defines recoverable amount
as the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use.



It is not always necessary to determine
both an asset’s fair value less costs to sell and its value in use. If either of these amounts exceeds the asset’s
carrying amount, the asset is not impaired and it is not necessary to estimate the other amount.



If
there is no reason to believe that an asset’s value in use materially exceeds its fair value
less costs to sell, the asset’s fair value less costs to sell may be used as its recoverable amount.







|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 





F-105









Methodology



IAS 36



This will often be the case for an asset
that is held for disposal. This is because the value in use of an asset held for disposal will consist mainly of the net disposal
proceeds, as the future cash flows from continuing use of the asset until its disposal are likely to be negligible.



Fair value less costs to sell



The best evidence of an asset’s
fair value less costs to sell is a price in a binding sale agreement in an arm’s length transaction, adjusted for incremental
costs that would be directly attributable to the disposal of the asset.



If there is no binding sale agreement
but an asset is traded in an active market, fair value less costs to sell is the asset’s market price less the costs of
disposal.



If there is no binding sale agreement
or active market for an asset, fair value less costs to sell is based on the best information available to reflect the amount
that an entity could obtain, at the end of the reporting period, from the disposal of the asset in an arm’s length transaction
between knowledgeable, willing parties, after deducting the costs of disposal. In determining this amount, an entity considers
the outcome of recent transactions for similar assets within the same industry.



Costs of disposal, other than those that
have been recognized as liabilities, are deducted in determining fair value less costs to sell.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-106







Methodology



IAS 36



Value in use



The following elements shall be reflected
in the calculation of an asset’s value in use:



| | (a) | An estimate of the future cash flows
                                                           the entity expects to derive from the asset;
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Expectations about possible variations
                                                           in the amount or timing of those future cash flows;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The time value of money, represented
                                                           by the current market risk-free rate of interest;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The price for bearing the uncertainty
                                                           inherent in the asset; and
| | --- | ---------------------------------------------------------------------------------------------------------------------------



| | (e) | Other factors, such as illiquidity,
                                                           that market participants would reflect in pricing the future cash flows
                                                           the entity expects to derive from the asset.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Estimating the value in use of an asset
involves the following steps:



| | (a) | Estimating the future cash inflows
                                                           and outflows to be derived from continuing use of the asset and from
                                                           its ultimate disposal; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Applying the appropriate discount rate
                                                           to those future cash flows.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-107









Methodology



IAS 36



In measuring value in use an entity shall:



| | (a) | Base cash flow projections on reasonable
                                                            and supportable assumptions that represent management’s best
                                                            estimate of the range of economic conditions that will exist over
                                                            the remaining useful life of the asset. Greater weight shall be given
                                                            to external evidence.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Base cash flow projections on the
                                                            most recent financial budgets/forecasts approved by management, but
                                                            shall exclude any estimated future cash inflows or outflows expected
                                                            to arise from future restructurings or from improving or enhancing
                                                            the asset’s performance. Projections based on these budgets/forecasts
                                                            shall cover a maximum period of five years, unless a longer period
                                                            can be justified.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Estimate cash flow projections beyond
                                                            the period covered by the most recent budgets/forecasts by extrapolating
                                                            the projections based on the budgets/forecasts using a steady or declining
                                                            growth rate for subsequent years, unless an increasing rate can be
                                                            justified. This growth rate shall not exceed the long-term average
                                                            growth rate for the products, industries, or country or countries
                                                            in which the entity operates, or for the market in which the asset
                                                            is used, unless a higher rate can be justified.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When the carrying amount of an asset does
not yet include all the cash outflows to be incurred before it is ready for use or sale, the estimate of future cash outflows
includes an estimate of any further cash outflow that is expected to be incurred before the asset is ready for use or sale.



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-108







Methodology



IAS 36



Estimates of future cash flows shall not
include estimated future cash inflows or outflows that are expected to arise from:



| | (a) | A future restructuring to which an
                                                           entity is not yet committed; or
| | --- | -----------------------------------------------------------------------------------------------------------------------------



| | (b) | Improving or enhancing the asset’s
                                                           performance.
| | --- | ----------------------------------------------------------------------------------------------------------



| | (c) | Cash inflows or outflows from financing
                                                           activities; or
| | --- | -----------------------------------------------------------------------------------------------------------------



| | (d) | Income tax receipts or payments.
| | --- | --------------------------------



Future cash flows are estimated in the
currency in which they will be generated and then discounted using a discount rate appropriate for that currency. An entity translates
the present value using the spot exchange rate at the date of the value in use calculation.



Discount rate



The discount rate (rates) shall be a pre-tax
rate (rates) that reflect(s) current market assessments of:



| | (a) | The time value of money; and
| | --- | ----------------------------



| | (b) | The risks specific to the asset for
                                                           which the future cash flow estimates have not been adjusted.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-109









Methodology



IAS 36



Recognizing and measuring an impairment
loss



If, and only if, the recoverable amount
of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That
reduction is an impairment loss.



An impairment loss shall be recognized
immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another Standard.



The impairment loss shall be allocated
to reduce the carrying amount of the assets of the unit (group of units) in the following order:



| | (a) | First, to reduce the carrying amount
                                                           of any goodwill allocated to the cash-generating unit (group of units);
                                                           and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Then, to the other assets of the unit
                                                           (group of units) pro rata on the basis of the carrying amount of each
                                                           asset in the unit (group of units).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In allocating an impairment loss, an entity
shall not reduce the carrying amount of an asset below the highest of:



| | (a) | Its fair value less costs to sell (if
                                                           determinable);
| | --- | ---------------------------------------------------------------------------------------------------------------



| | (b) | Its value in use (if determinable);
                                                           and
| | --- | --------------------------------------------------------------------------------------------------



| | (c) | Zero.
| | --- | -----



|Section 4: Methodology |XTL
    Biopharmaceuticals Ltd. | | 
|--------------------------------------------------------- | 



F-110













Section 5

Estimating an Impairment Loss of Intangible
Asset



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 







F-111









Estimating an Impairment Loss of Intangible
Asset



General



Frequency of impairment testing



As requested by XTL management, We were
performed the Impairment Examination Study of its Intangible asset under the requirements of Statement of International Accounting
standards 38 (IAS 38) and Statement of International Accounting standards 36 (IAS 36).



In accordance with IAS 36, the recoverable
amount of an intangible asset with an indefinite useful life to be measured annually, provided that the annual examination will
be performed in the same date. The company's management determined the annual impairment testing date, to December 31, 2011.



Identifying an intangible asset



In accordance with IAS 38, an intangible
asset is an identifiable non-monetary asset without physical substance. The recognition of an item as an intangible asset requires
an entity to demonstrate that the item meets the two recognition criteria (please see section 4 – Methodology).



In accordance with IAS 38 and IAS 36, we
tested the Company’s IP impairment loss, namely the Patents for using the EPO drug to treat patients with Multiple Myeloma.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-112









Estimating an Impairment Loss of Intangible
Asset





General



Identifying the cash-generating unit
to which an asset belongs



IAS 36, defines A cash-generating unit as
the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other
assets or groups of assets. According to the company's management, the smallest cash-generating unit for which the test was performed
is the group of patents expected to generate positive cash flows (Hereinafter: the "IP").



Recoverable amount of a cash-generating
unit



According to IAS 36, the value in use of
IP shall comprise its recoverable amount. This amount will be compared to the carrying amount of the IP.



As of December 31, 2011, the fair value
from the sale of the asset cannot be estimated; the Company is not aware of the sale of an identical asset, and the asking price
in sale transactions of a similar asset - namely IP in the biopharmaceuticals sector executed recently, varies within a very wide
range, as the price is dependent on various factors, differing significantly from one asset to another - such as the drug treatment
administered, side effects, number of potential patients, etc.



As no fair value less costs to sell of
the IP was found, the recoverable amount of the IP will be determined by calculating its value in use.



We applied the discounted cash flow (DCF)
approach to estimate the IP’s value in use, based on the Management’s valuations of the data and documents provided
by the Company and its consultants, coupled with our own assumptions as discussed below. The cash flows were discounted at the
pre-tax price of capital considered to be proper for the IP activity. The DCF expense is the value in use of the IP



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-113







Estimating an Impairment Loss of Intangible
Asset



General



Book value of a cash-generating unit



According to IAS 36, the carrying amount
of a cash-generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash-generating
unit is determined. The carrying amount of a cash-generating unit includes the carrying amount of only those assets that can be
attributed directly, or allocated on a reasonable and consistent basis, to the cash-generating unit and will generate the future
cash inflows used in determining the cash-generating unit’s value in use.



According to the financial statement of
the Company as of December 31, 2011 the carrying amount of the IP is in the amount of $2,452 thousands. Thus amount includes capitalized
current expenses on behalf of the IP (e.g. legal expenses, advisors, fees, etc.) which capitalized in accordance to IAS 38.



An impairment of an intangible asset



According to IAS 36, impairment will perform
by comparing the carrying amount of the asset, with its recoverable amount. If the recoverable amount of the asset exceeds its
carrying amount, the asset shall be regarded as not impaired. If the carrying amount of the asset exceeds its recoverable amount,
the entity shall recognize an impairment loss.



As mentioned above, the value in use of IP
shall comprise its recoverable amount. This amount will be compared to the carrying amount of the IP, accordingly to the company's
financial statements, as of December 31, 2011.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-114









Estimating an Impairment Loss of Intangible
Asset





General



Estimating IP Value in Use in the DCF
Method



As aforesaid, we applied the discounted
cash flow (DCF) approach to estimate the IP’s value in use.



To establish IP value, we estimated the
Company’s future cash inflows from use of the EPO in Multiple Myeloma patients in advanced stages of the disease for the
period between 2012 (the Valuation Date) and 2025 (the end of the recognition of the drug as an orphan drug) .



The future cash inflows were built under
the assumption that the Company will sign on a distribution agreement only after the completion of the drug's development, meaning
the completion of Phase III clinical trial. After the completion of phase III clinical trial the Company will receive from the
distributor a down payment and royalties from the distributor's drug sales.



To succeed in the trial and generate future
cash flows, a number of milestones must be met. The probability of each was estimated separately, when compliance with each milestone
of the following items is dependent on all the milestones preceding it. The milestones are:



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-115









Estimating an Impairment Loss of Intangible
Asset



Estimating IP Value in Use in the DCF Method



| | · | Completing Phase II of EPO development
and obtaining approvals to move to Phase III;
| | - | ------------------------------------------------------------------------------------



| | · | Completing Phase III of EPO development;
| | - | ----------------------------------------



| | · | Successful completion of all the clinical
trial stages and registrations and the drug’s entry into the market for worldwide sales;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| | · | Recognizing EPO as an “Orphan Drug”
in the rest of the world (as described in the company overview section, the Company's drug was recognized as an orphan drug in
USA).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The revenues flow takes into consideration
the successes expectancy of drugs development in each of the milestones described above by multiplying the predicted revenues by
the probability to successes. For example, the predicted down payment was multiplied by the accumulated probability to success
in phase II and phase III clinical trials. Eventually, the Company's predicted revenues are the expectancy of revenues.



The expenses on behalf of the development
of a new indication for the EPO drug include the Company's predicted expenses due to the performance of Phase II and Phase III
clinical trials. In addition, it was taken under account that the Company will bear a general and administration expenses, which
reflects its operational existence. These expenses reflect the Company's necessity to manage a collection system for future covenants,
to maintain its patents, to identify new technologies, etc.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-116









Estimating an Impairment Loss of Intangible
Asset



Estimating IP Value in Use in the DCF Method



In addition to these expenses and according
to the Bio Gal transaction, the Company will pay Yeda a onetime payment at the completion of the Phase II clinical trial and a
yearly payment of 1% of the Company's and/or its distributors' net revenues from the EPO drug's sales.



The predicted expenses
were multiplied by the accumulated probability to success in each of the milestones. Eventually, the Company's predicted expenses
are the expectancy of expenses.



The cash flow multiplied by the accumulated
probability of success was discounted at the relevant price of capital estimated by us. The discounted cash flow constitutes the
IP's value in use.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-117











Estimating an Impairment Loss of Intangible
Asset



Estimating IP Value in Use in
the DCF Method



The following table presents the Company's
predicted future cash flows from its IP for the years 2012-2025 (dollars in thousands):





|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  | Filing and |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|---------------------------------------------------------------------- |  | ----------- | ---- | - | ---- |  | ------ | ---- |  |  | ------------ | - |  | ---- | ------ | - | ---- |  | ------ | --------- |  |  | ---------- | - |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ------ |  |  | ---- | ------ |  | ---------- | 
|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  | Beginning  |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|                                                                       |  |             |      |   |      |  |        |      |  |  | End of Phase |   |  |      |        |   |      |  |        |           |  |  | of the     |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  | End of the | 
|                                                                       |  |             |      |   |      |  |        |      |  |  | II and       |   |  |      |        |   |      |  |        |           |  |  | Orphan     |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  | Orphan     | 
|                                                                       |  | Beginning   |      |   |      |  |        |      |  |  | Beginning of |   |  |      |        |   |      |  |        | End of    |  |  | Drug       |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  | Drug       | 
|                                                                       |  | of Phase II |      |   |      |  |        |      |  |  | Phase III    |   |  |      |        |   |      |  |        | Phase III |  |  | Immunity   |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  | Immunity   | 
|Dollars in
    thousands                                               |  | 2012        |      |   | 2013 |  |        | 2014 |  |  | 2015         |   |  | 2016 |        |   | 2017 |  |        | 2018      |  |  | 2019       |   |  | 2020 |       |  | 2021 |  |       | 2022 |  |  | 2023   |  |  | 2024 |        |  | 2025       | 
|Royalties Potential                                                    |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Royalties Potential – USA                                              |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  | 3,174 |      |  |  | 9,521  |  |  |      | 20,629 |  |            | 
|Royalties Potential
    - Rest of the World                            |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  | 3,408 |      |  |  | 10,223 |  |  |      | 22,150 |  |            | 
|Total
    Royalties Potential                                          |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  | 6,581 |      |  |  | 19,744 |  |  |      | 42,778 |  |            | 
|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Revenues Expectancy                                                    |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Covenants Expectancy                                                   |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      | 5,795 |  |      |  | –     |      |  |  |        |  |  |      |        |  |            | 
|Royalties Expectancy – USA                                             |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  | 669   |      |  |  | 2,008  |  |  |      | 4,351  |  |            | 
|Royalties Expectancy
    – Rest of the World                           |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  | 482   |      |  |  | 1,445  |  |  |      | 3,130  |  |            | 
|Total
    Revenues' Expectancy                                         |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      | 5,795 |  |      |  | 1,151 |      |  |  | 3,453  |  |  |      | 7,482  |  |            | 
|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Expectancy Expenses                                                    |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Expectancy Cost Phase II                                               |  |             | 150  |   |      |  | 600    |      |  |  | 600          |   |  |      | 150    |   |      |  | –      |           |  |  | –          |   |  |      | –     |  |      |  | –     |      |  |  | –      |  |  |      | –      |  |            | 
|Expectancy Cost Phase III                                              |  |             | –    |   |      |  | –      |      |  |  | –            |   |  |      | 1,303  |   |      |  | 1,737  |           |  |  | 1,737      |   |  |      | 1,303 |  |      |  | –     |      |  |  | –      |  |  |      | –      |  |            | 
|Expectancy R&D (excluding clinical trails' costs) and G&A
    Expenses |  |             | 500  |   |      |  | 500    |      |  |  | 500          |   |  |      | 190    |   |      |  | 190    |           |  |  | 190        |   |  |      | 116   |  |      |  | 91    |      |  |  | 91     |  |  |      | 91     |  |            | 
|Expectancy Payment to YEDA if Phase II is successfully completed       |  |             | –    |   |      |  | –      |      |  |  | –            |   |  |      | 133    |   |      |  | –      |           |  |  | –          |   |  |      | –     |  |      |  | –     |      |  |  | –      |  |  |      | –      |  |            | 
|Royalties Expectancy
    to Yeda                                       |  |             | –    |   |      |  | –      |      |  |  | –            |   |  |      | –      |   |      |  | –      |           |  |  | –          |   |  |      | 58    |  |      |  | 12    |      |  |  | 35     |  |  |      | 75     |  |            | 
|Total
    Expectancy Expenses                                          |  |             | 650  |   |      |  | 1,100  |      |  |  | 1,100        |   |  |      | 1,776  |   |      |  | 1,927  |           |  |  | 1,927      |   |  |      | 1,477 |  |      |  | 102   |      |  |  | 125    |  |  |      | 166    |  |            | 
|                                                                       |  |             |      |   |      |  |        |      |  |  |              |   |  |      |        |   |      |  |        |           |  |  |            |   |  |      |       |  |      |  |       |      |  |  |        |  |  |      |        |  |            | 
|Profit (Loss) Before
    Tax                                           |  |             | (650 | ) |      |  | (1,100 | )    |  |  | (1,100       | ) |  |      | (1,776 | ) |      |  | (1,927 | )         |  |  | (1,927     | ) |  |      | 4,318 |  |      |  | 1,049 |      |  |  | 3,328  |  |  |      | 7,316  |  |            | 







General Note



In the projection the expression
"rest of the world" is attributed to the countries in which the Company has patent and therefore it intends to sale the
drug, including: Germany, England, Italy, France, Spain, Austria, Belgium, Ireland, the Netherlands, Swiss, Sweden, Japan, Canada
and Israel.



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Revenues Expectancy Forecast



Drug Development processes and Revenues'
Timeline



The FDA'S Drugs approval process is strict
and obligating performance and completion of three clinical trials.



The following table presents the drugs
development processes' timeline:



|                         |  | Length of         |      
|------------------------ |  | ----------------- | -----
|Development Stage        |  | Development Stage |      
|Discovery                |  |                   | 1    
|Patent Process Initiated |  |                   | 4-5  
|Pre-Clinical Trials      |  |                   | 4-15 
|Phase I                  |  |                   | 1-2  
|Phase II                 |  |                   | 2-3  
|Phase III                |  |                   | 3    
|Total Clinical Trials    |  |                   | 6-8  
|Registration             |  |                   | 1-4  
|Total                    |  |                   | 12-28



Source: www.pfizer.com,
Kellogg and Charnes, 2000, Myers and Howe, 1997.



The date of launching the EPO on the market
is likely to change significantly, and ranges over a relatively wide span of years. Accordingly, the Company’s revenues from
manufacturing and marketing the drug depend critically on the success of its clinical trials and on obtaining all the necessary
permits.



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As described in the market overview section,
in light of the fact that the Company is developing a new indication for EPO, a drug that already exists and that has been approved
for treatment of anemia, the Company expects to receive an exemption for the preclinical trials as well as from the Phase I clinical
trial.



As
described in the Company overview section, according to Managementand the Company's advisors, the statutory approval to start phase II clinical trial is predicted to be accepted at the second half
of 2012. Accordingly, the Company estimates that Phase II clinical trial will begin in the fourth quarter of 2012 and will last
2.5 years, meaning will end in the first quarter of 2015.



According to Management and the Company's
medical advisors, phase III clinical trial is predicted to start (under the assumption that the Company will complete Phase II
clinical trial) at the second half of 2015 and to last 3-4 years. For the purpose of this analysis it was assumed that the Company's
Phase III clinical trial will last 3.5 years and will end in the third quarter of 2018.





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At the beginning of 2019, it was assumed that
the Company will receive all regulatory registration and start to market the drug. In this year the Company's patents will expire,
but since the Company was granted an orphan drug designation from the FDA for its EPO drug for the treatment of multiple myeloma
blood cancer on May 29, 2011 the Company gained seven years marketing exclusivity from the date of approval by the FDA. Accordingly,
the Company will benefit from marketing exclusivity of its drug in the USA until 2025. In addition, based on discussion with the
Management, the Company intends to act to receive an orphan drug recognition in the rest of the world immediately after it
will successfully complete Phase II clinical trial. In light of the fact that the Company's drug received from the FDA an orphan
drug designation, there is a better chance that the Company's drug will recognized as an orphan drug in the rest of the world.
Despite of the fact that the orphan drug designation in Europe and Japan grants a ten years of marketing exclusivity, since as
of the Analysis Date the Company's drug recognized as an orphan drug only in the USA we assumed in our analysis an exclusivity
period of seven years. Since at the end of 7 years, the price of the drug and number of patients taking it will be considerably
reduced; hence the Company’s cash inflow from the EPO will not be significant, it was assumed that the Company won't have
revenues from the EPO drug starting 2026.



The following table summarizes the drug
development stages' and revenues acceptance from the sale of the recombinant EPO's timeline:



|Development Stages and commercialization of the EPO Drug |  |        
|-------------------------------------------------------- |  | -------
|Beginning of Phase II                                    |  | Q4 2012
|End of Phase II and Beginning of Phase III               |  | Q1 2015
|End of Phase III                                         |  | Q3 2018
|Filing and Beginning of the Orphan Drug Immunity         |  | Q1 2019
|End of the Orphan Drug Immunity                          |  | Q4 2025



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Size of Relevant Market



As described in the company overview section,
the Company is focused on the planning, research and development for the commercialization of a new indication for use of Recombinant
EPO for the treatment of terminal multiple myeloma patients.



To evaluate the size of the target market,
we assumed that the number of U.S. patients comprises almost half that number globally, to whom the Company intends to sell its
products.



As described in the market overview section,
as of the year 2012 in the USA alone 21,700 new cases of multiple myeloma are diagnosed18. Accordingly, the number of
new cases diagnosed with Multiple Myeloma globally, which is the basis for calculating the overall number of patients treated with
the drug therapy developed by the Company, is estimated by us at approximately 45,000 persons per annum.



It should be noted that in estimating the
number of potential patients requiring the treatment, we have not taken into consideration those diagnosed with the disease at
present, as Multiple Myeloma is considered to be incurable, and patients’ mean survival rate does not exceed 3-5 years.










18National
Cancer institute, Cancer Facts & Figures – 2012, American Cancer Society (ACS) Atlanta, Georgia, 2012.



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The Company's Number of Potential
Patients



The Company's Market Share



From the revenue aspect,
in order to estimate the number of new patients who will be treated with the drug each year, we have assumed that the Company’s
penetration rate in each of the Company's markets activity will gradually increase.



As described in the market overview section,
the penetration rate of the leading drugs in the market for the treatment of Multiple Myeloma (Revlimid and Velcade) reached 40%
during the initial 3-4 years of their market launch. Since according to the Company's management and its medical advisors the EPO
prices are expected to be lower than similar drugs available at present and with fewer side effects we have assumed a 10% penetration
rate in the first year’s market launch, gradually increasing to 55% in the fifth year and on.



The Average Continued Drug Use



As the medication offered by the Company must
be given to patients throughout their entire life after the start of therapy, we have estimated the life expectancy predicted by
the Company for patients treated with EPO. Based on the results of the latest survey conducted by the Company, coupled with the
Management’s forecasts and expectations, we have assumed that the average life expectancy of Multiple Myeloma patients during
the period of treatment with EPO is about 4 years. The implication is that patients treated with this drug will, on average, live
4 years longer, in the course of which the Company will sell them EPO.



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The following table presents the Company's
accumulated potential patients in the years 2019-2025:



|                                                       |  | 2019 |        |   | 2020 |  |        | 2021 |  |  | 2022   |   |  | 2023 |        |   | 2024 |  |        | 2025 | 
|------------------------------------------------------ |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | - |  | ---- | ------ | - | ---- |  | ------ | ---- | 
|Accumulated Number of Patients                         |  |      |        |   |      |  |        |      |  |  |        |   |  |      |        |   |      |  |        |      | 
|Accumulated Number of Patients – USA                   |  |      |        |   |      |  |        |      |  |  |        |   |  |      |        |   |      |  |        |      | 
|Number of New Potential Patients                       |  |      | 21,700 |   |      |  | 21,700 |      |  |  | 21,700 |   |  |      | 21,700 |   |      |  | 21,700 |      | 
|Penetration Rage                                       |  |      | 10     | % |      |  | 20     | %    |  |  | 35     | % |  |      | 45     | % |      |  | 55     | %    | 
|The Company’s New Potential Patients                   |  |      | 2,170  |   |      |  | 4,340  |      |  |  | 7,595  |   |  |      | 9,765  |   |      |  | 11,935 |      | 
|Accumulated Number of
    Patients – USA               |  |      | 2,170  |   |      |  | 6,150  |      |  |  | 14,105 |   |  |      | 23,870 |   |      |  | 33,635 |      | 
|                                                       |  |      |        |   |      |  |        |      |  |  |        |   |  |      |        |   |      |  |        |      | 
|Accumulated Number of Patients – Rest
    of the World |  |      |        |   |      |  |        |      |  |  |        |   |  |      |        |   |      |  |        |      | 
|Number of New Potential Patients                       |  |      | 23,300 |   |      |  | 23,300 |      |  |  | 23,300 |   |  |      | 23,300 |   |      |  | 23,300 |      | 
|Penetration Rage                                       |  |      | 10     | % |      |  | 20     | %    |  |  | 35     | % |  |      | 45     | % |      |  | 55     | %    | 
|The Company’s New Potential Patients                   |  |      | 2,330  |   |      |  | 4,660  |      |  |  | 8,155  |   |  |      | 10,485 |   |      |  | 12,815 |      | 
|Accumulated Number of
    Patients – Rest of the World |  |      | 2,330  |   |      |  | 6,990  |      |  |  | 15,145 |   |  |      | 25,630 |   |      |  | 36,115 |      | 



Royalties Potential



The Drug's
Selling Price



The drug’s selling price depends
on competitive market conditions. Extensive off-label use of the EPO might lead to a sharp drop in prices, which could also be
affected by the launch of new competitive products. Also, launching competitive products on the market could affect the EPO’s
selling price. According to Management and the Company's medical advisors the selling price of the EPO drug will amount to approximately
$11,700 per treatment for an individual patient yearly, as a function of the required dosage and the drug's frequency of use.



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Revenues Expectancy's
Forecast



As described in the
market overview section, the selling prices of other drugs for the treatment of Multiple Myeloma are significantly higher than
the predicted selling price of the EPO drug (Revlimid - $108,000 per year, Velcade - $120,000 per year and Thalidomide - $12,000
per year).



Accordingly, it was
assumed that the selling price of the recombinant EPO drug will amount to $11,700 per treatment for an individual patient yearly
in each of the forecasted years, when the Company will be entitled to fixed royalty payments on sales by a large pharmaceutical
company. This assumption is in line with Management’s expectations.



Royalties Rate



The total
royalties paid to a R&D company for a drug depends on a variety of factors, and primarily:



| | · | The risk level of the anticipated development;
| | - | ----------------------------------------------



| | · | Future development costs and the company’s
financial position;
| | - | --------------------------------------------------------------



| | · | Potential of market targeted by the drug;
| | - | -----------------------------------------



| | · | Competition level and substitute products
available in the market.
| | - | ------------------------------------------------------------------



Furthermore, as customary in this
type of transactions, there is a certain exchange ratio between the advance payment/lump sum paid to the company at the time
of signing the agreement, and the royalty rate payable
to the company from future revenues.



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As the Company may reasonably sign a distribution
agreement only after R&D completion (Phase III), the Company's management expects that given the commercial conditions prevailing
in the market and once all the approvals have been issued, a lump sum of $25 million (Hereinafter: the "Down Payment")
will be paid to the Company along with a fixed royalty rate of 12.5% on EPO sales.



In order to base Management's Down Payment
forecast we based on Recaps' data, as described in the following table:



|Dollars in millions |  | Upfront |   
|------------------- |  | ------- | --
|Phase II Deals      |  |         | 30
|Phase III Deals     |  |         | 25
|Average             |  |         | 28



Source: www.recap.com.



In
order to base Management's royalty rate forecast, we based on number
of data sources, as described in the following tables.



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The following table presents the average
royalties rate in Phase III deals, as published by Medius:



|Development Stage |  |  | Royalties Range | 
|----------------- |  |  | --------------- | 
|Pre-Clinical      |  |  | 0% - 5%         | 
|Phase I           |  |  | 5% - 10%        | 
|Phase II          |  |  | 8% - 15%        | 
|Phase III         |  |  | 10% - 20%       | 
|Launched Products |  |  | 20%+            | 



Source: www.medius-associates.com.



The
following chart presentsthe frequency of royalty rates paid by pharmaceutical
companies:







Source: Nigel Borshell and Adrian Dawkes,
"Pharmaceutical royalties in licensing deals: No place for the 25 per cent rule of thumb".

http://www.palgrave-journals.com/jcb/journal/v16/n1/fig_tab/jcb200913f1.html#figure-title.



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The following chart sets out the royalty
rates actually paid per individual product, split according to the development phase in which the agreement was signed:







Source: Nigel Borshell and Adrian Dawkes,
"Pharmaceutical royalties in licensing deals: No place for the 25 per cent rule of thumb"

.
http://www.palgrave-journals.com/jcb/journal/v16/n1/fig_tab/jcb200913f1.html#figure-title.



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The following table presents the Company's
potential royalties from the sale of its recombinant EPO in the USA and in the rest of the world in the years 2019-2025 (Dollars
in thousands):



|Dollars in thousands                                      |  | 2019 |        |   | 2020 |  |        | 2021 |  |  | 2022    |   |  | 2023 |         |   | 2024 |  |         | 2025 | 
|--------------------------------------------------------- |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------- | - |  | ---- | ------- | - | ---- |  | ------- | ---- | 
|The Company’s Royalties Potential –
    USA               |  |      |        |   |      |  |        |      |  |  |         |   |  |      |         |   |      |  |         |      | 
|Accumulated Patients                                      |  |      | 2,170  |   |      |  | 6,510  |      |  |  | 14,105  |   |  |      | 23,870  |   |      |  | 33,635  |      | 
|The Drug’s Selling Price Per Patient                      |  |      | 11.7   |   |      |  | 11.7   |      |  |  | 11.7    |   |  |      | 11.7    |   |      |  | 11.7    |      | 
|Total Drug’s Sales                                        |  |      | 25,389 |   |      |  | 76,167 |      |  |  | 165,029 |   |  |      | 279,279 |   |      |  | 393,530 |      | 
|Royalties Rate                                            |  |      | 12.5   | % |      |  | 12.5   | %    |  |  | 12.5    | % |  |      | 12.5    | % |      |  | 12.5    | %    | 
|The Company’s Royalties
    Potential – USA               |  |      | 3,174  |   |      |  | 9,521  |      |  |  | 20,629  |   |  |      | 34,910  |   |      |  | 49,191  |      | 
|                                                          |  |      |        |   |      |  |        |      |  |  |         |   |  |      |         |   |      |  |         |      | 
|The Company’s Royalties Potential –
    Rest of the World |  |      |        |   |      |  |        |      |  |  |         |   |  |      |         |   |      |  |         |      | 
|Accumulated Patients                                      |  |      | 2,330  |   |      |  | 6,990  |      |  |  | 15,145  |   |  |      | 25,630  |   |      |  | 36,115  |      | 
|The Drug’s Selling Price Per Patient                      |  |      | 11.7   |   |      |  | 11.7   |      |  |  | 11.7    |   |  |      | 11.7    |   |      |  | 11.7    |      | 
|Total Drug’s Sales                                        |  |      | 27,261 |   |      |  | 81,783 |      |  |  | 177,197 |   |  |      | 299,871 |   |      |  | 422,546 |      | 
|Royalties Rate                                            |  |      | 12.5   | % |      |  | 12.5   | %    |  |  | 12.5    | % |  |      | 12.5    | % |      |  | 12.5    | %    | 
|The Company’s Royalties
    Potential – USA               |  |      | 3,408  |   |      |  | 10,223 |      |  |  | 22,150  |   |  |      | 37,484  |   |      |  | 52,818  |      | 
|                                                          |  |      |        |   |      |  |        |      |  |  |         |   |  |      |         |   |      |  |         |      | 
|The Company’s Total
    Royalties Potential               |  |      | 6,581  |   |      |  | 19,744 |      |  |  | 42,778  |   |  |      | 72,394  |   |      |  | 102,009 |      | 



Revenues Expectancy



As aforementioned,
the Company's revenues forecast comprised of revenues from covenants, revenues from royalties in the USA and revenues from royalties
in the rest of the world. Each of the mentioned categories was weighted by its accumulated probability to successes. At this manner,
the predicted revenues from covenants were multiplied by the accumulated probability to success in Phase II and Phase III clinical
trials and the predicted revenues from royalties were multiplied by the accumulated probability to success in Phase II and Phase
III clinical trials and in the filling process.



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We assessed the Company’s success
in the following drug development phases (Phase II, Phase III and registration with the authorities) on the basis of DiMasi's small
molecule drugs19 research, as described in the following table:



|          |  | Small Molecule
|--------- |  | --------------
|          |  | Probability to
|          |  | Success       
|Phase I   |  |               
|Phase II  |  |               
|Phase III |  |               
|Filling   |  |               



Source: DiMasi et Al. (2010).



As described in the market overview section,
in light of the fact that the Company is developing a new indication for EPO, a drug that already exists and that has been approved
for treatment of anemia, the Company expects to receive an exemption for the preclinical trials as well as from the Phase I clinical
trial. Accordingly, based on DiMasi's data research the Company's probability of success in each of the development stages and
the accumulated probability are, as described in the following table:










19 There is a distinction between
large molecule and small molecule. The Company's drug is a small molecule.



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|          |  | Small Molecule |   
|--------- |  | -------------- | --
|          |  | Probability to |   
|          |  | Success        |   
|Phase II  |  |                | 38
|Phase III |  |                | 61
|Filling   |  |                | 91



Furthermore, besides the probabilities of
success of the said phases, we estimated the Company’s prospects of obtaining Orphan Drug Designation in the rest of the
world (as described in the company overview section, it received an orphan drug designation on May 2011). From discussions with
Management and our own examinations it appears that the probability that the Company's drug will recognize as an orphan drug in
Europe is higher thanks to the fact the Company's drug already recognized as an orphan drug in the USA. Accordingly, we estimated
the probability that the Company's drug will recognized as an orphan drug in the rest of the world at 67%. Consequently, the Company's
Accumulated probability to receive royalties was multiplied by this rate.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



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Asset



Estimating IP Value in Use in
the DCF Method



The following table presents the Company's
revenues expectancy from the sale of the recombinant EPO in the USA and in the rest of the world in the years 2018-2025 (Dollars
in thousands):



|Dollars in thousands                                                        |  |  | 2018   |   |  |  | 2019  |   |  |  | 2020   |   |  |  | 2021   |   |  |  | 2022   |   |  |  | 2023   |   |  |  | 2024   |   |  |  | 2025   |  
|--------------------------------------------------------------------------- |  |  | ------ | - |  |  | ----- | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | - |  |  | ------ | -
|Revenue Expectancy                                                          |  |  |        |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Covenants Expectancy                                                        |  |  |        |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Down Payment                                                                |  |  | 25,000 |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Probability to Success                                                      |  |  | 61     | % |  |  | 91    | % |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Accumulated Probability                                                     |  |  | 23     | % |  |  | 21    | % |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Covenants Expectancy                                                        |  |  | 5,795  |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|                                                                            |  |  |        |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Revenue Expectancy – USA                                                    |  |  |        |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|The Company’s Potential Royalties                                           |  |  |        |   |  |  | 3,174 |   |  |  | 9,521  |   |  |  | 20,629 |   |  |  | 34,910 |   |  |  | 49,191 |   |  |  | 60,299 |   |  |  | 66,646 |  
|Accumulated Probability                                                     |  |  |        |   |  |  | 21    | % |  |  | 21     | % |  |  | 21     | % |  |  | 21     | % |  |  | 21     | % |  |  | 21     | % |  |  | 21     | %
|Total Revenues Expectancy – USA                                             |  |  |        |   |  |  | 669   |   |  |  | 2,008  |   |  |  | 4,351  |   |  |  | 7,364  |   |  |  | 10,376 |   |  |  | 12,719 |   |  |  | 14,058 |  
|Revenues Expectancy – Rest of the World                                     |  |  |        |   |  |  |       |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|The Company’s Potential Royalties                                           |  |  |        |   |  |  | 3,408 |   |  |  | 10,223 |   |  |  | 22,150 |   |  |  | 37,484 |   |  |  | 52,818 |   |  |  | 64,745 |   |  |  | 71,560 |  
|Probability to receive Orphan Drug Designation                              |  |  |        |   |  |  | 67    | % |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |   |  |  |        |  
|Accumulated Probability (Orphan Drug-Success in the Development
    Stages) |  |  |        |   |  |  | 14.1  | % |  |  | 14.1   | % |  |  | 14.1   | % |  |  | 14.1   | % |  |  | 14.1   | % |  |  | 14.1   | % |  |  | 14.1   | %
|Total Revenues Expectancy – Rest of the
    World                           |  |  |        |   |  |  | 482   |   |  |  | 1,445  |   |  |  | 3,130  |   |  |  | 5,298  |   |  |  | 7,465  |   |  |  | 9,150  |   |  |  | 10,113 |  
|Total Revenues Expectancy                                                   |  |  | 5,795  |   |  |  | 1,151 |   |  |  | 3,453  |   |  |  | 7,482  |   |  |  | 12,661 |   |  |  | 17,481 |   |  |  | 21,870 |   |  |  | 24,172 |  



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



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Asset



Estimating IP Value in Use in the DCF
Method



Expenses Expectancy



Cost of Phase II and Phase III Clinical
Trails



According to Management's
estimation, the cost of Phase II clinical trial will amount to $1.5 million, last 2.5 years, and spread evenly over the period
between the fourth quarter of 2012 and the first quarter of 2015.



According to the Company's
management estimation based on its medical advisors and conversations with companies in its field, which are in the stage of recruiting
cancer patients for their Phase III clinical trial, the cost of Phase III clinical trial will amount approximately $10-20 million
and last 3-4 years. Accordingly, we assumed that the Company's Phase III clinical trial cost will amount to $16 million (higher
than the average range mentioned above) and spread evenly over the period between the second quarter of 2015 and the third quarter
of 2018.



It should be emphasized that approval of
clinical trials in Phase I, Phase II and Phase III requires the preliminary approval of the IRB/Helsinki Committee and of the regulatory
health authorities in the countries where the trials are performed.



Only successful results in the advanced
stages will ensure the possibility of moving from one phase to the next one. Following successful completion of the above (including
Phase III), applications for approval of drug registration may be submitted to the relevant health authorities.



Accordingly, the Company's predicted
Phase III clinical trial costs were multiplied by the Company's probability to success in Phase II clinical trial (the
Company's predicted Phase III clinical trial costs are costs,
which the Company must bear as it doesn't have to conduct Phase I clinical trial).



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



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Asset



Estimating IP Value in Use in the DCF
Method





General and Administration Expenses



Apart from the funds required to complete
drug development as discussed above, the Company bear current expenses (excluding clinical trials costs) in connection with the
Patent and the activity relating thereto.



According to the Company's budget for 2012,
the total general and administration expenses in this year will amount to approximately $ 1 million. These expenses include, among
other: development expenses (meaning finding new technologies), management expenses on behalf of the EPO drug development, management
expenses on behalf of a new drug (SAM-101) development in accordance to the exclusive license agreement with MinGuard, as described
in the company overview section.



The Management estimates that the total amount
of general and administration expenses, which are attributed to the EPO drug development, will be approximately $500 thousands
per year. Accordingly, it was assumed that the Company's general and administration expenses will total to approximately $500 thousands
in the projected years. The predicted general and administration expenses were multiplied by the Company's accumulated probability
to success in the development stages and to receive an orphan drug designation in accordance with the relevant reference in each
of the forecasted years.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-134









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Asset



Estimating IP Value in Use in the DCF
Method



Payments and Royalties to Yeda



According to the licence agreement with
Yeda, the Company will pay Yeda a one-time payment of $ 350 thousands six months after the successful completion of Phase II of
the clinical trial, and annual licensing fee of one percent (1%) of net sales of the EPO drug.



Accordingly, it was assumed that at the
completion of Phase II clinical trial in 2015, the Company will pay Yeda a payment of $350 thousands. This amount was multiplied
by the probability to success in this clinical trial.



The Company's predicted royalties in each
of the forecasted years was multiplied by the Company's accumulated probability to success in its clinical trials and the recognition
of its drug as an orphan drug in the rest of the world, in accordance to the relevant reference in each of the forecasted years.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



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Asset





Estimating IP Value in Use in the DCF Method



The following table presents the Company's
expenses expectancy on behalf of the recombinant EPO drug development, the current expenses and the payments to Yeda in the years
2012-2025 (Dollars in thousands):



|Dollars in thousands                                                   |  | 2012 |     |   | 2013 |  |       | 2014 |  |  | 2015  |   |  | 2016 |       |   | 2017 |  |       | 2018 |  |  | 2019  |   |  | 2020 |       |   | 2021 |  |     | 2022 |  |  | 2023 |   |  | 2024 |     |   | 2025 | 
|---------------------------------------------------------------------- |  | ---- | --- | - | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | - |  | ---- | ----- | - | ---- |  | --- | ---- |  |  | ---- | - |  | ---- | --- | - | ---- | 
|Expenses Expectancy                                                    |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy Cost Phase II                                               |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Phase II Cost                                                          |  |      | 150 |   |      |  | 600   |      |  |  | 600   |   |  |      | 150   |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Probability                                                            |  |      | 100 | % |      |  | 100   | %    |  |  | 100   | % |  |      | 100   | % |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy Cost Phase II                                               |  |      | 150 |   |      |  | 600   |      |  |  | 600   |   |  |      | 150   |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy Cost Phase III                                              |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Phase III Cost                                                         |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 3,429 |   |      |  | 4,571 |      |  |  | 4,571 |   |  |      | 3,429 |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Accumulated Probability                                                |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 38    | % |      |  | 38    | %    |  |  | 38    | % |  |      | 38    | % |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy Cost Phase III                                              |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 1,303 |   |      |  | 1,737 |      |  |  | 1,737 |   |  |      | 1,303 |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy R&D (excluding clinical trails’
    costs) and G&A Expenses |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|R&D (excluding clinical trails’ costs) and G&A Expenses                |  |      | 500 |   |      |  | 500   |      |  |  | 500   |   |  |      | 500   |   |      |  | 500   |      |  |  | 500   |   |  |      | 500   |   |      |  | 500 |      |  |  | 500  |   |  |      | 500 |   |      | 
|Accumulated Probability                                                |  |      | 100 | % |      |  | 100   | %    |  |  | 100   | % |  |      | 38    | % |      |  | 38    | %    |  |  | 38    | % |  |      | 23    | % |      |  | 18  | %    |  |  | 18   | % |  |      | 18  | % |      | 
|Expectancy R&D (excluding clinical trails’
    costs) and G&A Expenses |  |      | 500 |   |      |  | 500   |      |  |  | 500   |   |  |      | 190   |   |      |  | 190   |      |  |  | 190   |   |  |      | 116   |   |      |  | 91  |      |  |  | 91   |   |  |      | 91  |   |      | 
|Expectancy Payment to YEDA if Phase II is successfully
    completed   |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Payment                                                                |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 350   |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Probability                                                            |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 38    | % |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Expectancy Payment to YEDA if Phase II is successfully
    completed   |  |      |     |   |      |  |       |      |  |  |       |   |  |      | 133   |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Royalties Expectancy to Yeda                                           |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |     |      |  |  |      |   |  |      |     |   |      | 
|Royalties                                                              |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      | 250   |   |      |  | 63  |      |  |  | 190  |   |  |      | 412 |   |      | 
|Accumulated Probability                                                |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      | 23    | % |      |  | 18  | %    |  |  | 18   | % |  |      | 18  | % |      | 
|Royalties Expectancy to Yeda                                           |  |      |     |   |      |  |       |      |  |  |       |   |  |      |       |   |      |  |       |      |  |  |       |   |  |      | 58    |   |      |  | 12  |      |  |  | 35   |   |  |      | 75  |   |      | 
|Total Expenses Expectancy                                              |  |      | 650 |   |      |  | 1,100 |      |  |  | 1,100 |   |  |      | 1,776 |   |      |  | 1,927 |      |  |  | 1,927 |   |  |      | 1,477 |   |      |  | 102 |      |  |  | 125  |   |  |      | 166 |   |      | 





|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 





F-136













Estimating an Impairment Loss of Intangible
Asset



Estimating IP Value in Use in the DCF
Method



Taxes



In the calculation of the after tax cash
flaws a 25% tax rate was taken into account, similar to the tax rate in Israel. It is important to indicate that in accordance
with with international standards (IAS 36) the cash flaws are presented before income taxes.



Investment Forecast



Fixed Assets Investment



In conformity with international standards,
future negative cash flows that improve or increase the asset’s performance level, must not be taken into account when estimating
the asset’s value in use, and positive cash flows deriving from such investments must be neutralized. While it is necessary,
in the context of cash flows, to take cash outflows necessary for maintaining the level of future projected economic benefits likely
to derive from the asset in its present situation, however, in this case, we do not anticipate a need for investment in structures
and/or office equipment and/or computers etc.



Working Capital Investment



There is no need for the Company to invest
in working capital.



WACC



When applying the Income Approach, the cash
flows expected to be generated by a business are discounted to their present value equivalent using a rate of return that reflects
the relative risk of the investment, as well as the time value of money. According to IAS 36, while measuring the recoverable amount,
no income tax receipts or payments should be included. Therefore,
we should measure a Pre-tax discount rate. According to our estimation the pre-tax discount rate totals to approximately 25%..



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-137









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Asset





Estimating IP Value in Use in the DCF Method



This return, known as the weighted average
cost of capital (“WACC”) is calculated by weighting the required returns on interest-bearing debt and common
equity capital in proportion to their estimated percentages in an expected industry capital structure.



The general formula for calculating the
WACC is:



WACC	= Kd (D%) + Ke (E%)



Where:



| | WACC= | Weighted average rate of return on invested capital;
| | ----- | ----------------------------------------------------



| | Kd= | After-tax rate of return on debt capital;
| | --- | -----------------------------------------



| | D%= | Debt capital as a percentage of the sum of the debt, preferred and common equity capital (“Total
Invested Capital”);
| | --- | --------------------------------------------------------------------------------------------------------------------



| | Ke= | Rate of return on common equity capital; and
| | --- | --------------------------------------------



| | E%= | Common equity capital as a percentage of the Total Invested Capital.
| | --- | --------------------------------------------------------------------



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-138









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Asset





Estimating IP Value in Use in the
DCF Method



CAPM has been empirically tested and
is widely accepted for the purpose of estimating a company’s required return on capital. In applying the CAPM, the rate
of return on capital is estimated as the current risk-free rate of return on Israeli Governmental bonds, plus a market risk
premium expected over the risk-free rate of return, multiplied by the “beta” for the valued company. Beta
is defined as a risk measure that reflects the sensitivity of a company’s stock (or capital) price to the
movements of the stock market as a whole.



The CAPM rate of return on capital is calculated
using the following formula:



Ke=Rf + β(Rm * Rf)+ SCP+ Sp
Where;



| | Ke= | Rate of return on capital (in this case, Total Invested Capital);
| | --- | -----------------------------------------------------------------



| | Rf= | Risk free rate of return;
| | --- | -------------------------



| | Β= | Beta or systematic risk for this type of capital investment (in this case, asset beta);
| | -- | ---------------------------------------------------------------------------------------



In order to calculate the beta we
based on Damodaran's data on company's operating in the drug market and on comparable companies operating in the drug market (Celgene,
ONYX Pharmaceuticals Inc., AstraZeneca PLC, Bristol-Myers Squibb Company and Novartis AG).





| | Rm –
Rf= | Market
risk premium; the expected return on a broad portfolio of stocks in the market (Rm) less the risk free rate (Rf);
| | -------- | ------------------------------------------------------------------------------------------------------------------------







|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 





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Asset





Estimating IP Value in Use in the DCF
Method



| | SCP | Small cap premium - Ibbotson valuation edition 2011 yearbook
| | --- | ------------------------------------------------------------



| | Sp | Specific Premium
| | -- | ----------------



Since most of biotechnology companies are
unleveraged the debt weight was determined to be 0%.



Following are the parameters that served
for the calculation of the Company's WACC as of December 31, 2011:



|Parameters                    |  | Symbolization |  | Value |       |   | Source
|----------------------------- |  | ------------- |  | ----- | ----- | - | ------
|Beta                          |  | β             |  |       | 1.08  |   |       
|Rf                            |  | Rf            |  |       | 2.25  | % |       
|Risk Premium                  |  | Rm-RF         |  |       | 7.28  | % |       
|Additional Risk Small Company |  | SRP           |  |       | 10.06 | % |       
|Additional Specific risk      |  | SRP           |  |       | 2.00  | % |       
|Cost of Capital               |  | Ke            |  |       | 22.2  | % |       
|WACC                          |  | WACC          |  |       | 22.2  | % |       



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-140









Estimating an Impairment Loss of Intangible
Asset







Estimating IP Value in Use in the DCF
Method



The following table presents the IP's free
cash flaws forecast in the years 2012-2025 based on the assumptions detailed above (Dollars in thousands):



|Dollars in Thousands       |  | 2012 |       |   | 2013 |  |        | 2014 |  |  | 2015   |   |  | 2016 |        |   | 2017 |  |        | 2018 |  |  | 2019   |   |  | 2020 |       |  | 2021 |  |       | 2022 |  |  | 2023  |  |  | 2024 |       |  | 2025 | 
|-------------------------- |  | ---- | ----- | - | ---- |  | ------ | ---- |  |  | ------ | - |  | ---- | ------ | - | ---- |  | ------ | ---- |  |  | ------ | - |  | ---- | ----- |  | ---- |  | ----- | ---- |  |  | ----- |  |  | ---- | ----- |  | ---- | 
|Profit (Loss) Before Taxes |  |      | (650  | ) |      |  | (1,100 | )    |  |  | (1,100 | ) |  |      | (1,776 | ) |      |  | (1,927 | )    |  |  | (1,927 | ) |  |      | 4,318 |  |      |  | 1,049 |      |  |  | 3,328 |  |  |      | 7,316 |  |      | 
|Changes in Working Capital |  |      | —     |   |      |  | —      |      |  |  | —      |   |  |      | —      |   |      |  | —      |      |  |  | —      |   |  |      | —     |  |      |  | —     |      |  |  | —     |  |  |      | —     |  |      | 
|Free Cash Flaws            |  |      | (650  | ) |      |  | (1,100 | )    |  |  | (1,100 | ) |  |      | (1,776 | ) |      |  | (1,927 | )    |  |  | (1,927 | ) |  |      | 4,318 |  |      |  | 1,049 |      |  |  | 3,328 |  |  |      | 7,316 |  |      | 
|Capitalized Cash Flaws     |  |      | (581  | ) |      |  | (786   | )    |  |  | (629   | ) |  |      | (812   | ) |      |  | (704   | )    |  |  | (563   | ) |  |      | 1,009 |  |      |  | 196   |      |  |  | 497   |  |  |      | 874   |  |      | 
|Recoverable Amount         |  |      | 3,510 |   |      |  |        |      |  |  |        |   |  |      |        |   |      |  |        |      |  |  |        |   |  |      |       |  |      |  |       |      |  |  |       |  |  |      |       |  |      | 



As presented in the table above, the IP's
recoverable amount is $ 3,510 thousands.



*Due to the fact that the date of the asset's
amortization is unknown, we didn't take under consideration tax asset, which reflects the Company's future tax benefit.



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-141









Estimating an Impairment Loss of Intangible
Asset





Estimating IP Value in Use in
the DCF Method



Sensitivity Analysis



The following table presents the sensitivity
analysis for the IP's recoverable amount , according to growth and discount rates (Dollars in thousands):



|               |  |    |   |  | Pre-Tax WACC
|-------------- |  | -- | - |  | ------------
|Royalties Rate |  |    |   |  |             
|               |  | 10 | % |  |             
|               |  | 11 | % |  |             
|               |  | 12 | % |  |             
|               |  | 13 | % |  |             
|               |  | 14 | % |  |             
|               |  | 15 | % |  |             
|               |  | 16 | % |  |             



|Section 5: Estimating an Impairment Loss of Intangible Asset |XTL Biopharmaceuticals Ltd. | |  | 
|------------------------------------------------------------------------------------------- |  | 



F-142







Section 6

Determining an Impairment Loss



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Determining an Impairment Loss



Carrying Amount



In order to determine whether there is
an impairment loss we compared the IP's recoverable amount to its carrying amount.



If, and only if, the recoverable amount
of an asset is less than its carrying amount, the asset shall be reduced to its recoverable amount.



Determining an Impairment Loss



Based on our study the IP's recoverable amount
is higher than its carrying amount, and therefore we have concluded that the Company's IP isn't deemed to be impaired



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