UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 20-F


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

OR
 
x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006

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

OR
 
o  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ___________.

Commission file number 000-51310

XTL BIOPHARMACEUTICALS LTD.
(Exact name of registrant as specified in its charter)

Israel
(Jurisdiction of incorporation or organization)

750 Lexington Avenue, 20 th Floor
New York, New York 10022
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
American Depositary Shares,
each representing ten Ordinary Shares, par value NIS 0.02
(Title of Class)
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.

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

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.
 
4,333,047 American Depositary Shares                                            220,124,349 Ordinary Shares
 
 

 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes  o     No ý    
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  
 
Yes  o     No  ý
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  ý     No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (C heck one):
 
Large accelerated filer £
 
Accelerated filer ý
 
Non-accelerated filer £
 
 
Indicate by check mark which financial statement item the registrant has elected to follow.
 
 Item 17   o     Item 18 ý
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  o     No  ý
 
 

 
XTL BIOPHARMACEUTICALS LTD.
ANNUAL REPORT ON FORM 20-F

TABLE OF CONTENTS

   
Page
     
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
1
     
PART I
ITEM 1
Identity of Directors, Senior Management and Advisers
2
ITEM 2
Offer Statistics And Expected Timetable
2
ITEM 3
Key Information
2
ITEM 4
Information on the Company
  18
ITEM 4A
Unresolved Staff Comments
  33
ITEM 5
Operating and Financial Review and Prospects
  33
ITEM 6
Directors, Senior Management and Employees
  46
ITEM 7
Major Shareholders and Related Party Transactions
  55
ITEM 8
Financial Information
  55
ITEM 9
The Offer and Listing
  56
ITEM 10
Additional Information
  58
ITEM 11
Quantitative And Qualitative Disclosures About Market Risk
  75
ITEM 12
Description of Securities other than Equity Securities
  76
 
PART II
ITEM 13
Defaults, Dividend Arrearages and Delinquencies
  77
ITEM 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
  77
ITEM 15
Controls and Procedures
  77
ITEM 16
Reserved
  77
ITEM 16A
Audit Committee Financial Expert
  77
ITEM 16B
Code of Ethics
  77
ITEM 16C
Principal Accountant Fees And Services
  77
ITEM 16D
Exemptions From The Listing Standards For Audit Committees
  78
ITEM 16E
Purchases Of Equity Securities By The Issuer And Affiliated Purchasers
  78
   
 
PART III
ITEM 17
Financial Statements
  79
ITEM 18
Financial Statements
  79
ITEM 19
Exhibits
  79
   
 
SIGNATURES
 
  80
   
 

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

i



SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain matters discussed in this report, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation, those discussed under “Item 3. Key Information-Risk Factors,” “Item 4.- Information on the Company,” “Item 5. Operating and Financial Review and Prospects,” and elsewhere in this report, as well as factors which may be identified from time to time in our other filings with the Securities and Exchange Commission, or the SEC, or in the documents where such forward-looking statements appear. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements.
 
The forward-looking statements contained in this report reflect our views and assumptions only as of the date this report is signed. Except as required by law, we assume no responsibility for updating any forward-looking statements.
 
 
 
 
 

 
1


PART I

Unless the context requires otherwise, references in this report to “XTL,” “we,” “us” and “our” refer to XTL Biopharmaceuticals Ltd. and our wholly-owned subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development, Inc. We have prepared our consolidated financial statements in United States, or US, dollars and in accordance with US generally accepted accounting principles, or US GAAP. All references herein to "dollars" or "$" are to US dollars, and all references to "Shekels" or "NIS" are to New Israeli Shekels.
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable
 
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable
 
 
ITEM 3. KEY INFORMATION
 
Selected Financial Data
 
The table below presents selected statement of operations and balance sheet data for the fiscal years ended and as of December 31, 2006, 2005, 2004, 2003 and 2002. We have derived the selected financial data for the fiscal years ended December 31, 2006, 2005, and 2004, and as of December 31, 2006 and 2005, from our audited consolidated financial statements, included elsewhere in this report and prepared in accordance with US GAAP. We have derived the selected financial data for fiscal years ended December 31, 2003 and 2002 and as of December 31, 2004, 2003 and 2002, from audited financial statements not appearing in this report, which have been prepared in accordance with US GAAP. You should read the selected financial data in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial Statements.”
 

2

 
   
Year Ended December 31,
 
 
 
2006
 
2005
 
2004
 
2003
 
2002
 
 
 
(In thousands, except share and per share amounts)
 
Statements of Operations Data:  
     
Revenues
 
 
 
 
 
 
 
 
 
 
 
Reimbursed out-of-pocket expenses
 
$
--
 
$
2,743
 
$
3,269
 
$
--
 
$
--
 
License
   
454
   
454
   
185
   
--
   
--
 
     
454
   
3,197
   
3,454
   
--
   
--
 
Cost of Revenues
                         
Reimbursed out-of-pocket expenses
   
--
   
2,743
   
3,269
   
--
   
--
 
License (with respect to royalties)
   
54
   
54
   
32
   
--
   
--
 
     
54
   
2,797
   
3,301
         
                                 
Gross Margin
   
400
   
400
   
153
   
--
   
--
 
 
                     
Research and development
                     
Research and development costs
   
10,229
   
7,313
   
11,985
   
14,022
   
13,231
 
Less participations
   
--
   
--
   
--
   
3,229
   
75
 
 
   
10,229
   
7,313
   
11,985
   
10,793
   
13,156
 
                         
In-process research and development
   
--
   
1,783
   
--
   
--
   
--
 
                                 
General and administrative
   
5,576
   
5,457
   
4,134
   
3,105
   
3,638
 
Business development costs
   
641
   
227
   
810
   
664
   
916
 
                         
Operating loss
   
(16,046
)
 
(14,380
)
 
(16,776
)
 
(14,562
)
 
(17,710
)
 
                           
Other income (expense)
                         
Financial and other income, net
   
1,141
   
443
   
352
   
352
   
597
 
Taxes on income
   
(227
)
 
(78
)
 
(49
)
 
(78
)
 
(27
)
 
                         
Loss for the period
 
$
(15,132
)
$
(14,015
)
$
(16,473
)
$
(14,288
)
$
(17,140
)
             
Loss per ordinary share
                           
Basic and diluted
 
$
(0.08
)
$
(0.08
)
$
(0.12
)
$
(0.13
)
$
(0.15
)
Weighted average shares outstanding
   
201,737,295
   
170,123,003
   
134,731,766
   
111,712,916
   
111,149,292
 

   
As of December 31,
 
 
 
2006
 
2005
 
2004
 
2003
 
2002
 
 
 
(In thousands)
 
Balance Sheet Data:  
     
Cash, cash equivalents, bank deposits and trading and marketable securities
 
$
25,347
 
$
13,360
 
$
22,924
 
$
22,262
 
$
35,706
 
Working capital
   
22,694
   
11,385
   
20,240
   
19,967
   
33,396
 
Total assets
   
26,900
   
15,151
   
25,624
   
24,853
   
38,423
 
Long-term obligations
   
738
   
1,493
   
2,489
   
1,244
   
1,017
 
Total shareholders’ equity
   
22,760
   
11,252
   
19,602
   
20,608
   
34,830
 
 
 
3


Risk Factors

Before you invest in our ordinary shares or American Depositary Receipts representing American Depositary Shares, which we refer to in this report as ADRs, you should understand the high degree of risk involved. You should carefully consider the risks described below and other information in this report, including our financial statements and related notes included elsewhere in this report, before you decide to purchase our ordinary shares or ADRs. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our ordinary shares or ADRs could decline and you could lose part or all of your investment.

Risks Related to Our Business
 
We have incurred substantial operating losses since our inception. We expect to continue to incur losses in the future and may never become profitable.
 
You should consider our prospects in light of the risks and difficulties frequently encountered by development stage companies. We have incurred operating losses since our inception and expect to continue to incur operating losses for the foreseeable future. As of December 31, 2006, we had an accumulated deficit of approximately $114.9 million. We have not yet commercialized any of our drug candidates or technologies and cannot be sure we will ever be able to do so. Even if we commercialize one or more of our drug candidates or technologies, we may not become profitable. Our ability to achieve profitability depends on a number of factors, including our ability to complete our development efforts, obtain regulatory approval for our drug candidates and technologies and successfully commercialize them.
 
If we are unable to successfully complete our clinical trial programs for our drug candidates, or if such clinical trials take longer to complete than we project, our ability to execute our current business strategy will be adversely affected.
 
Whether or not and how quickly we complete clinical trials is dependent in part upon the rate at which we are able to engage clinical trial sites and, thereafter, the rate of enrollment of patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study and the existence of competitive clinical trials. If we experience delays in identifying and contracting with sites and/or in patient enrollment in our clinical trial programs, we may incur additional costs and delays in our development programs and may not be able to complete our clinical trials on a cost-effective basis.
 
If third parties on which we rely for clinical trials do not perform as contractually required or as we expect, we may not be able to obtain regulatory approval for or commercialize our products.
 
We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct the clinical trials of our drug candidates and technologies and expect to continue to do so. We rely heavily on these parties for successful execution of our clinical trials, but we do not control many aspects of their activities. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with the general investigational plan and protocol. Our reliance on these third parties that we do not control does not relieve us of our responsibility to comply with the regulations and standards of the US Food and Drug Administration, or the FDA, relating to good clinical practices. Third parties may not complete activities on schedule or may not conduct our clinical trials in accordance with regulatory requirements or the applicable trial’s plans and protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our products or result in enforcement action against us.
 
 
4

 
If the clinical data related to our drug candidates and technologies do not confirm positive early clinical data or preclinical data, our corporate strategy and financial results will be adversely impacted.
 
All of our drug candidates and technologies are in preclinical or clinical stages. Specifically, a clinical trial with Bicifadine for neuropathic pain indications is pending commencement, XTL-2125 and XTL-6865 are currently in a Phase I clinical trial and one of our programs under development, DOS, has not yet been tested in humans. In order for our candidates to proceed to later stage clinical testing, they must show positive preclinical or clinical data. While Bicifadine, XTL-6865 and XTL-2125 have shown promising preclinical data and Bicifadine has shown promising clinical data in the treatment of acute pain prior to it being in-licensed to us, preliminary results of pre-clinical or clinical tests do not necessarily predict the final results, and promising results in pre-clinical or early clinical testing might not be obtained in later clinical trials. Drug candidates in the later stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. Any negative results from future tests may prevent us from proceeding to later stage clinical testing which would materially impact our corporate strategy and our financial results may be adversely impacted.
 
We have limited experience in conducting and managing clinical trials necessary to obtain regulatory approvals. If our drug candidates and technologies do not receive the necessary regulatory approvals, we will be unable to commercialize our products.
 
We have not received, and may never receive, regulatory approval for commercial sale for any of our products. We currently do not have any drug candidates or technologies pending approval with the FDA or with regulatory authorities of other countries. We will need to conduct significant additional research and human testing before we can apply for product approval with the FDA or with regulatory authorities of other countries. Pre-clinical testing and clinical development are long, expensive and uncertain processes. Satisfaction of regulatory requirements typically depends on the nature, complexity and novelty of the product and requires the expenditure of substantial resources. Regulators may not interpret data obtained from pre-clinical and clinical tests of our drug candidates and technologies the same way that we do, which could delay, limit or prevent our receipt of regulatory approval. It may take us many years to complete the testing of our drug candidates and technologies, and failure can occur at any stage of this process. Negative or inconclusive results or medical events during a clinical trial could cause us to delay or terminate our development efforts.
 
Clinical trials also have a high risk of failure. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in clinical trials, even after achieving promising results in earlier trials. If we experience delays in the testing or approval process or if we need to perform more or larger clinical trials than originally planned, our financial results and the commercial prospects for our drug candidates and technologies may be materially impaired. In addition, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval in the US and abroad and, accordingly, may encounter unforeseen problems and delays in the approval process.
 
Even if regulatory approval is obtained, our products and their manufacture will be subject to continual review, and there can be no assurance that such approval will not be subsequently withdrawn or restricted. Changes in applicable legislation or regulatory policies, or discovery of problems with the products or their manufacture, may result in the imposition of regulatory restrictions, including withdrawal of the product from the market, or result in increased costs to us.
 
Because we license some of our proprietary technologies from third-parties, some of these third-parties could prevent us from licensing our drug candidates.

We do not own all of our drug candidates and technologies. We have licensed the patent rights to some of our drug candidates and/or the technologies on which they are based from others. Specifically, we have licensed Bicifadine from Dov Pharmaceutical, Inc., or DOV, who in turn licensed it from Wyeth Pharmaceuticals, Inc., or Wyeth. In addition, we have licensed XTL-2125 from B&C Biopharm Co. Ltd., we have licensed the two human monoclonal antibodies comprising XTL-6865 from Stanford University and DRK-Blutspendedienst Baden-Wurttemberg, and we have licensed certain other Hepatitis C virus, or HCV, compounds from VivoQuest Inc., or VivoQuest. We have also licensed the Trimera technology that was used in the development of XTL-6865, XTL-2125 and HepeX-B from the Yeda Research and Development Company Ltd., which we refer to as Yeda. These license agreements require us to meet development or financing milestones and impose development and commercialization due diligence requirements on us. In addition, under these agreements, we must pay royalties on sales of products resulting from licensed drugs and technologies and pay the patent filing, prosecution and maintenance costs related to the licenses. While we have the right to defend patent rights related to our licensed drug candidates and technologies, we are not obligated to do so. In the event that we decide to defend our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort. If we do not meet our obligations in a timely manner or if we otherwise breach the terms of our agreements, our licensors could terminate the agreements, and we would lose the rights to our drug candidates and technologies. For a further discussion on our license agreements, the patent rights related to those licenses, and the expiration dates of those patent rights, see “Item 4. Information on the Company - Business Overview - Intellectual Property and Patents” and “Item 4. Information on the Company - Business Overview - Licensing Agreements and Collaborations,” below. In addition, see “- Risks Related to Our Intellectual Property,” below regarding potential issues related to the use of patents owned by third-parties.
 
 
5

 
In addition, under the terms of our license agreement with Yeda, we are required to obtain their approval under the license in order to grant sub-licenses to collaborative partners to develop or commercialize XTL-6865, XTL-2125 and HepeX-B. The requirement of obtaining these approvals, and any conditions that Yeda may impose upon such approvals, could have the effect of delaying or impeding our ability to enter into agreements with collaborative partners or result in our having to accept terms and conditions that might not be favorable to us. For a discussion of further required approvals, see “- Risks Relating to Operations in Israel,” below regarding potential restrictions from the Office of the Chief Scientist regarding the manufacture of XTL-6865, XTL-2125 and HepeX-B outside the State of Israel.
 
If we do not establish or maintain drug development and marketing arrangements with third parties, we may be unable to commercialize our drug candidates and technologies into products.
 
We are an emerging company and do not possess all of the capabilities to fully commercialize our drug candidates and technologies on our own. From time to time, we may need to contract with third parties to:
 
·
assist us in developing, testing and obtaining regulatory approval for some of our compounds and technologies;
   
·
manufacture our drug candidates; and
   
·
market and distribute our products.
 
We can provide no assurance that we will be able to successfully enter into agreements with such third-parties on terms that are acceptable to us. If we are unable to successfully contract with third parties for these services when needed, or if existing arrangements for these services are terminated, whether or not through our actions, or if such third parties do not fully perform under these arrangements, we may have to delay, scale back or end one or more of our drug development programs or seek to develop or commercialize our drug candidates and technologies independently, which could result in delays. Further, such failure could result in the termination of license rights to one or more of our drug candidates and technologies. Moreover, if these development or marketing agreements take the form of a partnership or strategic alliance, such arrangements may provide our collaborators with significant discretion in determining the efforts and resources that they will apply to the development and commercialization of our products. Accordingly, to the extent that we rely on third parties to research, develop or commercialize our products, we are unable to control whether such products will be scientifically or commercially successful.
 
For example, in June 2004, we announced the completion of a license agreement with Cubist Pharmaceuticals, Inc., or Cubist, for the worldwide development and commercialization of HepeX-B. Under this agreement, we were responsible for certain clinical and product development activities of HepeX-B through August 2005, at the expense of Cubist. Thereafter, we transferred full responsibility for completing the development of HepeX-B to Cubist. In July 2006, Cubist announced that it has decided not to make any further investment in the HepeX-B program, while it evaluates its strategic options for HepeX-B, including the sub-licensing of the product. Accordingly, at this time there can be no assurance that the drug candidate will be further developed in the future, that any such development would be successful, or that we will receive any proceeds from the sales of HepeX-B.
 
If our products fail to achieve market acceptance, we will never record meaningful revenues.
 
Even if our products are approved for sale, they may not be commercially successful in the marketplace. Market acceptance of our product candidates will depend on a number of factors, including:
 
·
perceptions by members of the health care community, including physicians, of the safety and efficacy of our products;
   
·
the rates of adoption of our products by medical practitioners and the target populations for our products;
   
·
the potential advantages that our products offer over existing treatment methods or other products that may be developed;
   
·
the cost-effectiveness of our products relative to competing products;
   
·
the availability of government or third-party payor reimbursement for our products;
   
·
the side effects or unfavorable publicity concerning our products or similar products; and
   
·
the effectiveness of our sales, marketing and distribution efforts.
 
 
6

 
Because we expect sales of our products to generate substantially all of our revenues in the long-term, the failure of our products to find market acceptance would harm our business and could require us to seek additional financing or other sources of revenue.
 
If the third parties upon whom we rely to manufacture our products do not successfully manufacture our products, our business will be harmed.
 
We do not currently have the ability to manufacture for ourselves the compounds that we need to conduct our clinical trials and, therefore, rely upon a limited number of manufacturers to supply our drug candidates. We have no experience in manufacturing compounds for clinical or commercial purposes and do not have any manufacturing facilities. We rely upon, and intend to continue to rely upon, third parties to manufacture our drug candidates for use in clinical trials and for future sales. In order to commercialize our products, such products will need to be manufactured in commercial quantities while adhering to all regulatory and other requirements, all at an acceptable cost. We may not be able to enter into future third-party contract manufacturing agreements on acceptable terms, if at all.
 
We expect to continue to rely on contract manufacturers and other third parties to produce sufficient quantities of our drug candidates for use in our clinical trials. See “Item 4. Information on the Company - Business Overview - Supply and Manufacturing,” below. We believe that our existing manufacturing arrangements with these parties will be adequate to satisfy our current clinical supply needs for XTL-2125 and XTL-6865, and that our agreement with DOV provides us with access to sufficient inventory to satisfy our current clinical supply needs for Bicifadine. If our contract manufacturers or other third parties, such as DOV, fail to deliver our product candidates for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers, we may be required to delay or suspend clinical trials or otherwise discontinue development and production of our drug candidates.
 
Our contract manufacturers are required to produce our drug candidates in strict compliance with current good manufacturing practices, or cGMP, in order to meet acceptable standards for our clinical trials. If such standards change, the ability of contract manufacturers to produce our drug candidates on the schedule we require for our clinical trials may be affected. In addition, contract manufacturers may not perform their obligations under their agreements with us or may discontinue their business before the time required by us to successfully produce and market our drug candidates. Any difficulties or delays in our contractors’ manufacturing and supply of drug candidates could increase our costs, cause us to lose revenue or make us postpone or cancel clinical trials.
 
In addition, our contract manufacturers will be subject to ongoing periodic, unannounced inspections by the FDA and corresponding foreign governmental agencies to ensure strict compliance with, among other things, current good manufacturing practices, in addition to other governmental regulations and corresponding foreign standards. We will not have control over, other than by contract, third-party manufacturers’ compliance with these regulations and standards. No assurance can be given that our third-party manufacturers will comply with these regulations or other regulatory requirements now or in the future.
 
In the event that we are unable to obtain or retain third-party manufacturers, we will not be able to commercialize our products as planned. If third-party manufacturers fail to deliver the required quantities of our products on a timely basis and at commercially reasonable prices, our ability to develop and deliver products on a timely and competitive basis may be adversely impacted and our business, financial condition or results of operations will be materially harmed.
 
If our competitors develop and market products that are less expensive, more effective or safer than our products, our commercial opportunities may be reduced or eliminated.
 
The pharmaceutical industry is highly competitive. Our commercial opportunities may be reduced or eliminated if our competitors develop and market products that are less expensive, more effective or safer than our products. Other companies have drug candidates in various stages of pre-clinical or clinical development to treat diseases for which we are also seeking to discover and develop drug candidates. For a discussion of these competitors and their drug candidates, see “Item 4. Information on the Company - Business Overview - Competition,” below. Some of these potential competing drugs are further advanced in development than our drug candidates and may be commercialized earlier. Even if we are successful in developing safe, effective drugs, our products may not compete successfully with products produced by our competitors, who may be able to more effectively market their drugs.
 
 
7

 
Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In addition, companies that are active in different but related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. As a result, our competitors may be able to more easily develop products that could render our technologies or our drug candidates obsolete or noncompetitive.
 
If we lose our key personnel or are unable to attract and retain additional personnel, our business could be harmed.
 
As of February 28, 2007, we had 33 full-time employees. To successfully develop our drug candidates and technologies, we must be able to attract and retain highly skilled personnel. The retention of their services cannot be guaranteed. In particular, if we lose the services of Michael S. Weiss, our Chairman, or Ron Bentsur, our Chief Executive Officer, our ability to continue to execute on our business plan could be materially impaired. Our agreement with Mr. Weiss provides that he may terminate his agreement with us upon 30 days’ prior written notice if he is not re-elected as Chairman of our Board, his fees for service as Chairman are reduced by more than 10%, we breach any material term of his agreement, or there is a change of control or reorganization of our company. Our agreement with Mr. Bentsur provides that he may terminate his agreement with us upon 30 days’ prior written notice if he is no longer the highest ranking member of our company’s management team, his annual base salary is reduced by more than 10% (except where we have made similar reductions in the base salary of senior management throughout our company), we breach any material term of his agreement, or there is a change of control or reorganization of our company. We do not maintain a key man life insurance policy covering either Mr. Weiss or Mr. Bentsur.
 
Any acquisitions we make may dilute your equity or require a significant amount of our available cash and may not be scientifically or commercially successful.
 
As part of our business strategy, we may effect acquisitions to obtain additional businesses, products, technologies, capabilities and personnel. If we make one or more significant acquisitions in which the consideration includes our ordinary shares or other securities, your equity in us may be significantly diluted. If we make one or more significant acquisitions in which the consideration includes cash, we may be required to use a substantial portion of our available cash.
 
Acquisitions also involve a number of operational risks, including:
 
·
difficulty and expense of assimilating the operations, technology and personnel of the acquired business;
   
·
our inability to retain the management, key personnel and other employees of the acquired business;
   
·
our inability to maintain the acquired company’s relationship with key third parties, such as alliance partners;
   
·
exposure to legal claims for activities of the acquired business prior to the acquisition;
   
·
the diversion of our management’s attention from our core business; and
   
·
the potential impairment of substantial goodwill and write-off of in-process research and development costs, adversely affecting our reported results of operations.
 
In addition, the basis for completing the acquisition could prove to be unsuccessful as the drugs or processes involved could fail to be scientifically or commercially viable. In addition, we may be required to pay third parties substantial transaction fees, in the form of cash or ordinary shares, in connection with such transactions.
 
If any of these risks occur, it could have an adverse effect on both the business we acquire and our existing operations.
 
 
8

 
We face product liability risks and may not be able to obtain adequate insurance.
 
The use of our drug candidates and technologies in clinical trials, and the sale of any approved products, exposes us to liability claims. Although we are not aware of any historical or anticipated product liability claims against us, if we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to cease clinical trials of our drug candidates and technologies or limit commercialization of any approved products.
 
We believe that we have obtained sufficient product liability insurance coverage for our clinical trials. We intend to expand our insurance coverage to include the commercial sale of any approved products if marketing approval is obtained; however, insurance coverage is becoming increasingly expensive. We may not be able to maintain insurance coverage at a reasonable cost. We may not be able to obtain additional insurance coverage that will be adequate to cover product liability risks that may arise. Regardless of merit or eventual outcome, product liability claims may result in:
 
·
decreased demand for a product;
   
·
injury to our reputation;
   
·
inability to continue to develop a drug candidate or technology;
   
·
withdrawal of clinical trial volunteers; and
   
·
loss of revenues.
 
Consequently, a product liability claim or product recall may result in material losses.
 
Risks Related to Our Financial Condition
 
If we are unable to obtain additional funds on terms favorable to us, or at all, we may not be able to continue our operations.
 
We expect to use, rather than generate, funds from operations for the foreseeable future. We currently have an average projected burn rate of approximately $1.2 million per month in 2007 (excluding a $7.5 million payment made to DOV in January 2007, pursuant to a license agreement). Based on our current business plan, we believe that we have sufficient resources to fund our operations for approximately the next 12 months; however, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control. These factors include:
 
·
the progress of our development activities;
   
·
the progress of our research activities;
   
·
the number and scope of our development programs;
   
·
our ability to establish and maintain current and new licensing or acquisition arrangements;
   
·
our ability to achieve our milestones under our licensing arrangements;
   
·
the costs involved in enforcing patent claims and other intellectual property rights; and
   
·
the costs and timing of regulatory approvals.
 
We may seek additional capital through a combination of public and private equity offerings, debt financings and collaborative, strategic alliance and licensing arrangements. We have made no determination at this time as to the amount, method or timing of any such financing. Such additional financing may not be available when we need it . If we are unable to obtain additional funds on terms favorable to us or at all, we may be required to cease or reduce our operating activities or sell or license to third parties some or all of our technology. If we raise additional funds by selling ordinary shares or other securities, the ownership interests of our shareholders will be diluted. If we need to raise additional funds through the sale or license of our drug candidates or technology, we may be unable to do so on terms favorable to us.
 
 
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We are likely to be subject to taxation in the US, which could significantly increase our tax liability in the US for which we may not be able to apply the net losses accumulated in Israel.
 
The residency of the Chairman of our Board of Directors and our Chief Executive Officer in the US, as well as other less significant contacts we have with the US could likely lead to a determination by the US Internal Revenue Service that we currently have a "permanent establishment" in the US, which began in 2005. As a result, any income attributable to such permanent establishment in the US would be subject to US corporate income tax. If this is the case, we may not be able to utilize any of the accumulated Israeli loss carryforwards reflected on our balance sheet as of December 31, 2006 since these losses were all accumulated under Israeli tax laws. However, we would be able to utilize losses attributable to the US permanent establishment to offset such US taxable income. As of December 31, 2006, we estimate that these U.S. net operating loss carryforwards are approximately $15.2 million. These losses can be carried forward twenty years to offset future US taxable income. US corporate tax rates are higher than those to which we are subject in the State of Israel, and if we are subject to US corporate tax, it would have a material adverse effect on our results of operations.
 
Risks Related to Our Intellectual Property
 
If we are unable to adequately protect our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete in the market.
 
Our commercial success will depend in part on our ability and the ability of our licensors to obtain and maintain patent protection on our drug products and technologies and successfully defend these patents and technologies against third-party challenges. As part of our business strategy, our policy is to actively file patent applications in the US and internationally to cover methods of use, new chemical compounds, pharmaceutical compositions and dosing of the compounds and composition and improvements in each of these. See “Item 4. Information on the Company - Business Overview - Intellectual Property and Patents,” below regarding our patent position with regard to our product candidates. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before we commercialize any of our products, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent.
 
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, the patents we use may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. The patents we use may be challenged or invalidated or may fail to provide us with any competitive advantage. Moreover, in certain parts of the world, such as in China, western companies are adversely affected by poor enforcement of intellectual property rights. See “Item 4. Information on the Company - Business Overview - License Agreements and Collaborations,” below regarding our license of Ab65, a component of XTL-6865.
 
Generally, patent applications in the US are maintained in secrecy for a period of 18 months or more. Since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we are not certain that we were the first to make the inventions covered by each of our pending patent applications or that we were the first to file those patent applications. We cannot predict the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. Third parties or competitors may challenge or circumvent our patents or patent applications, if issued. If our competitors prepare and file patent applications in the US that claim compounds or technology also claimed by us, we may choose to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost, even if the eventual outcome is favorable to us. While we have the right to defend patent rights related to the licensed drug candidates and technologies, we are not obligated to do so. In the event that we decide to defend our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort.
 
We also rely on trade secrets to protect technology where we believe patent protection is not appropriate or obtainable. Trade secrets are difficult to protect. While we require our employees, collaborators and consultants to enter into confidentiality agreements, this may not be sufficient to adequately protect our trade secrets or other proprietary information. In addition, we share ownership and publication rights to data relating to some of our drug candidates and technologies with our research collaborators and scientific advisors. If we cannot maintain the confidentiality of this information, our ability to receive patent protection or protect our proprietary information will be at risk.
 
 
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Specifically, we intend to apply for patent protection for each new monoclonal antibody produced. Such patents may include claims relating to novel human monoclonal antibodies directed at targets for which other human monoclonal antibodies already exist, or at targets which are protected by patents or patent applications filed by third parties. No assurance can be given that any such patent application by a third-party will not have priority over patent applications filed by us.
 
Several groups are attempting to produce and patent a chimeric mouse with human tissue. To the extent any patents issued to other parties claiming, in general, mouse-human chimeras, the risk increases that the potential products and processes of our or our future strategic partners may give rise to claims of patent infringement.
 
We plan to use the recombinant production of antibodies in Chinese Hamster Ovary cells, or CHO cells, in the development and production of some of our products. Patents relating to this method of antibody production are owned by third-parties. We are also aware that third parties have patent protection covering hepatitis C antigens and antibodies, which will be needed in order to commercialize XTL-6865. If we or our collaborative partners are unable to license such patent rights on commercially acceptable terms, the ability to develop, manufacture and sell these products could be impaired. Further, royalties payable to third parties may reduce the payments we will receive from our licensees or development partners.
 
We plan to pursue patent protection in the US and in certain foreign countries relating to our development and commercialization of Bicifadine. Bicifadine and its acid addition salts, including Bicifadine HCl, are disclosed in US Pat. Nos. 4,231,935, issued November 4, 1980, and 4,196,120, issued April 1, 1980, now expired. Currently, we are the exclusive licensee of one issued patent and multiple patent applications filed by DOV relating to Bicifadine. See "Item 4. Informationon the Company Business Overview — Intellectual Property and Patents." However, we cannot guarantee the scope of protection of any issued patents, or that such patents will survive a validity or enforceability challenge, or that any pending patent applications will issue as patents.
 
Under the terms of the license agreements between DOV and Wyeth and between DOV and us relating to Bicifadine, Wyeth has retained limited rights in the Wyeth patent rights, certain DOV patent rights, and know-how to make and develop Bicifadine for the “treatment or amelioration of vasomotor symptoms caused by or occurring in relation to or in connection with menopause or other female hormonal fluctuations” (“the Wyeth Retained Field”). Under the terms of the DOV/Wyeth agreement, Wyeth can only develop Bicifadine for use in the Wyeth Retained Field in collaboration with DOV, and under the license agreement between DOV and XTL, DOV will not conduct research or development with Wyeth for the use of Bicifadine in the Wyeth Retained Field.
 
Certain of the Wyeth patent rights and DOV patent rights may claim overlapping subject matter which may result in the declaration of an interference proceeding before the United States Patent and Trademark Office (USPTO). If an interference is declared, Wyeth and DOV have agreed to meet and attempt to amicably resolve such interference with the goal of having a US patent issue to the assignee of the first inventor of the invention claimed by such conflicting claims. In the event of an interference, we cannot predict whether Wyeth and DOV will be able to reach agreement, or, if not, which party would prevail in such a proceeding.

In addition to patent protection, we may utilize certain regulatory marketing exclusivities for our drug candidates, including New Drug Product Exclusivity as provided by the Federal Food, Drug, and Cosmetic Act under section 505(c)(3)(E) and 505(j)(5)(F). Exclusivity provides the holder of an approved new drug application limited protection from new competition in the marketplace for the innovation represented by its approved drug product. This limited protection precludes approval of certain 505(b)(2) applications or certain abbreviated new drug applications (ANDAs) for prescribed periods of time. Some exclusivity provisions also provide protection from competition by delaying the submission of 505(b)(2) applications and ANDAs for certain periods of time. Exclusivity is available for new chemical entities (NCEs), which by definition are innovative, and for significant changes in already approved drug products, such as a new use.
 
We may also utilize orphan drug regulations to provide market exclusivity for certain of our drug candidates. The orphan drug regulations of the FDA provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the US, or, diseases that affect more than 200,000 individuals in the US but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. We believe that certain of the indications for our drug candidates will be eligible for orphan drug designation. However, we cannot guarantee that any drug candidates will qualify, and, if any do qualify, that we will be the holder of the first FDA approval of such qualifying drug candidates.
 
 
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If DOV declares bankruptcy, they may choose to repudiate their license agreement with Wyeth which could prevent us from pursuing the development of Bicifadine, and would have a material adverse impact on our financial condition.
 
In January 2007, we entered into a license agreement with DOV covering certain patent rights associated with the drug candidate Bicifadine. Some of the patent rights covered by that agreement are in turn under license to DOV by Wyeth. DOV is currently in default under certain of its corporate indebtedness. DOV is negotiating with the holders of that debt to restructure the obligations and payments due, but to date, to our knowledge, they have not reached an agreement. There is a possibility that DOV will be forced to declare bankruptcy whether or not they reach an agreement with the holders of their debt. If they do so, they can under the relevant bankruptcy laws refuse to abide by the terms of their license agreement with Wyeth and they can repudiate the agreement thereby putting their rights, and as a result our rights, to some of the patents covering Bicifadine in question. While we can and will take action in any DOV bankruptcy to protect our rights under our agreement with DOV, we cannot control any action of DOV with regard to their agreements with Wyeth. We have undertaken to enter into a standby license agreement with Wyeth which would become effective if DOV in any way repudiated their agreement with Wyeth. While we believe this will reduce the risk described above, there can be no assurance we will be able to successfully complete an agreement with Wyeth on terms satisfactory to us.
 
Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money defending such claims and adversely affect our ability to develop and commercialize our products.
 
Third parties may assert that we are using their proprietary technology without authorization. In addition, third parties may have or obtain patents in the future and claim that our products infringe their patents. If we are required to defend against patent suits brought by third parties, or if we sue third parties to protect our patent rights, we may be required to pay substantial litigation costs, and our management’s attention may be diverted from operating our business. In addition, any legal action against our licensors or us that seeks damages or an injunction of our commercial activities relating to the affected products could subject us to monetary liability and require our licensors or us to obtain a license to continue to use the affected technologies. We cannot predict whether our licensors or we would prevail in any of these types of actions or that any required license would be made available on commercially acceptable terms, if at all.
 
In addition, there can be no assurance that our patents or patent applications or those licensed to us will not become involved in opposition or revocation proceedings instituted by third parties. If such proceedings were initiated against one or more of our patents, or those licensed to us, the defense of such rights could involve substantial costs and the outcome could not be predicted.
 
Competitors or potential competitors may have filed applications for, may have been granted patents for, or may obtain additional patents and proprietary rights that may relate to compounds or technologies competitive with ours. If patents are granted to other parties that contain claims having a scope that is interpreted to cover any of our products (including the manufacture thereof), there can be no assurance that we will be able to obtain licenses to such patents at reasonable cost, if at all, or be able to develop or obtain alternative technology.
 
In addition, we use or have used certain technology in our DOS program for the development of novel hepatitis C small molecule inhibitors that may or may not be covered by third party patents. In response to a request by a third party, we are currently evaluating certain patents to determine whether or not we may be required to enter into a license under such patents. In the event that we do not license the patent rights, and such third party makes a claim of patent infringement, we may be required to pay substantial litigation costs, and our management’s attention may be diverted from operating our business. In addition, any legal action against us that seeks damages or an injunction relating to the affected activities could subject us to monetary liability and/or require us to discontinue the affected technologies or obtain a license to continue use thereof.
 
Risks Related to Our Ordinary Shares and ADRs
 
Our ADRs are traded in small volumes, limiting your ability to sell your ADRs that represent ordinary shares at a desirable price, if at all.
 
The trading volume of our ADRs has historically been low. Even if the trading volume of our ADRs increases, we can give no assurance that it will be maintained or will result in a desirable stock price. As a result of this low trading volume, it may be difficult to identify buyers to whom you can sell your ADRs and you may be unable to sell your ADRs at an established market price, at a price that is favorable to you, or at all. A low volume market also limits your ability to sell large blocks of our ADRs at a desirable or stable price at any one time. You should be prepared to own our ordinary shares and ADRs indefinitely.
 
12

 
Our stock price can be volatile, which increases the risk of litigation and may result in a significant decline in the value of your investment.
 
The trading price of the ADRs representing our ordinary shares is likely to be highly volatile and subject to wide fluctuations in price in response to various factors, many of which are beyond our control. These factors include:
 
·
developments concerning our drug candidates;
   
·
announcements of technological innovations by us or our competitors;
   
·
introductions or announcements of new products by us or our competitors;
   
·
announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
   
·
changes in financial estimates by securities analysts;
   
·
actual or anticipated variations in interim operating results;
   
·
expiration or termination of licenses, research contracts or other collaboration agreements;
   
·
conditions or trends in the regulatory climate and the biotechnology and pharmaceutical industries;
   
·
changes in the market valuations of similar companies; and
   
·
additions or departures of key personnel.
 
In addition, equity markets in general, and the market for biotechnology and life sciences companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. These broad market and industry factors may materially affect the market price of our ordinary shares or ADRs, regardless of our development and operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs to defend such claims and divert management’s attention and resources even if we prevail in the litigation, all of which could seriously harm our business.
 
Future issuances of our ordinary shares could depress the market for our ordinary shares and ADRs.
 
Future issuances of a substantial number of our ordinary shares, or the perception by the market that those issuances could occur, could cause the market price of our ordinary shares or ADRs to decline or could make it more difficult for us to raise funds through the sale of equity in the future. We believe that we have the cash necessary to fund our operations for the next 12 months; however, prior to the end of that period it will be necessary for us to return to the capital markets through the sale of ADRs or ordinary shares.
 
Also, if we make one or more significant acquisitions in which the consideration includes ordinary shares or other securities, your portion of shareholders' equity in us may be significantly diluted. For example, pursuant to a license agreement with DOV, XTL Development licensed the worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake inhibitor. Under the agreement, XTL Development, upon achievement of certain milestones, will make payments of up to $126.5 million to DOV over the life of the license. We may elect to issue up to an additional $121.5 million in ordinary shares to DOV in lieu of cash for such milestone payments. In addition, XTL Development committed to pay a third party a transaction advisory fee in the form of stock appreciation rights in an amount equivalent to 3% of our fully diluted ordinary shares at the close of the transaction, which are locked up for one year after the close of the transaction, and an additional 7% of our fully diluted ordinary shares at the close of the transaction, which vest following the first to occur of successful Phase III clinical trial results or the acquisition of our company. Payment of the stock appreciation rights by us can be satisfied, at our discretion, in cash and/or by issuance of our ordinary shares. Pursuant to a license agreement with VivoQuest, Inc., or VivoQuest, a privately held biotechnology company based in the US, we licensed (in all fields of use) certain intellectual property and technology related to VivoQuest’s HCV program. Pursuant to the license agreement, we may elect to issue up to an additional $34.6 million in ordinary shares to VivoQuest in lieu of cash upon achievement of certain milestones. In the future, we may enter into additional arrangements with other third-parties permitting us to issue ordinary shares in lieu of certain cash payments.
 
 
13

 
Our ordinary shares and ADRs trade on more than one market, and this may result in price variations.
 
Our ordinary shares are traded on the London Stock Exchange and the Tel Aviv Stock Exchange and ADRs representing our ordinary shares are quoted on the Nasdaq Global Market. Trading in our securities on these markets is made in different currencies and at different times, including as a result of different time zones, different trading days and different public holidays in the US, Israel and the United Kingdom. Consequently, the effective trading prices of our shares on these three markets may differ. Any decrease in the trading price of our shares on one of these markets could cause a decrease in the trading price of our shares on the other market.
 
Holders of our ordinary shares who are US residents may be required to pay additional income taxes.
 
There is a risk that we will be classified as a passive foreign investment company (“PFIC”) for certain tax years. If we are classified as a PFIC, a US holder of our ordinary shares or ADRs representing our ordinary shares will be subject to special federal income tax rules that determine the amount of federal income tax imposed on income derived with respect to the PFIC shares. We will be a PFIC if either 75% or more of our gross income in a tax year is passive income or the average percentage of our assets (by value) that produce or are held for the production of passive income in a tax year is at least 50%. The risk that we will be classified as a PFIC arises because under applicable rules issued by the US Internal Revenue Service, (“IRS”), cash balances, even if held as working capital, are considered to be assets that produce passive income. Therefore, any determination of PFIC status will depend upon the sources of our income and the relative values of passive and non-passive assets, including goodwill. A determination as to a corporation’s status as a PFIC must be made annually. We believe that we were likely not a PFIC for the taxable years ended December 31, 2004 and 2005. However, we believe that we were a PFIC for the taxable year ended December 31, 2006. Although such a determination is fundamentally factual in nature and generally cannot be made until the close of the applicable taxable year, based on our current operations, we believe that there is a significant likelihood that we will be classified as a PFIC in the 2007 taxable year and possibly in subsequent years.
 
In view of the complexity of the issues regarding our treatment as a PFIC, US shareholders are urged to consult their own tax advisors for guidance as to our status as a PFIC. For further discussion of tax consequences of being a PFIC, see US Federal Income Tax Considerations - Tax Consequences If We Are A Passive Foreign Investment Company,” below.
 
Provisions of Israeli corporate law may delay, prevent or affect a potential acquisition of all or a significant portion of our shares or assets and therefore depress the price of our ordinary shares.
 
Israeli corporate law regulates acquisitions of shares through tender offers. It requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. The provisions of Israeli law may delay or prevent an acquisition, or make it less desirable to a potential acquirer and therefore depress the price of our shares. Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders.
 
Israeli corporate law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of such acquisition, the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, Israeli corporate law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser's shareholdings would entitle the purchaser to over 45% of the shares in the company, unless there is a shareholder with 45% or more of the shares in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received the approval of the company’s shareholders; (2) was from a 25% or greater shareholder of the company which resulted in the purchaser becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. These rules do not apply if the acquisition is made by way of a merger. Regulations promulgated under Israeli corporate law provide that these tender offer requirements do not apply to companies whose shares are listed for trading outside of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange or which the shares are traded, either:
 
·
there is a limitation on acquisition of any level of control of the company; or
·
the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public.
 
Finally, in general, Israeli tax law treats specified acquisitions less favorably than does US tax law. See “Item 10. Additional Information - Taxation - Israeli Tax Considerations,” below.
 
 
14

 
Our ADR holders are not shareholders and do not have shareholder rights.
 
The Bank of New York, as depositary, executes and delivers our ADRs on our behalf. Each ADR is a certificate evidencing a specific number of ADSs. Our ADR holders will not be treated as shareholders and do not have the rights of shareholders. The depositary will be the holder of the shares underlying our ADRs. Holders of our ADRs will have ADR holder rights. A deposit agreement among us, the depositary and our ADR holders, and the beneficial owners of ADRs, sets out ADR holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADRs. Our shareholders have shareholder rights. Israeli law and our Articles of Association, or Articles, govern shareholder rights. Our ADR holders do not have the same voting rights as our shareholders. Shareholders are entitled to our notices of general meetings and to attend and vote at our general meetings of shareholders. At a general meeting, every shareholder present (in person or by proxy, attorney or representative) and entitled to vote has one vote on a show of hands. Every shareholder present (in person or by proxy, attorney or representative) and entitled to vote has one vote per fully paid ordinary share on a poll. This is subject to any other rights or restrictions which may be attached to any shares. Our ADR holders may instruct the depositary to vote the ordinary shares underlying their ADRs, but only if we ask the depositary to ask for their instructions. If we do not ask the depositary to ask for the instructions, our ADR holders are not entitled to receive our notices of general meeting or instruct the depositary how to vote. Our ADR holders will not be entitled to attend and vote at a general meeting unless they withdraw the ordinary shares from the depository. However, our ADR holders may not know about the meeting enough in advance to withdraw the ordinary shares. If we ask for our ADR holders’ instructions, the depositary will notify our ADR holders of the upcoming vote and arrange to deliver our voting materials and form of notice to them. The depositary will try, as far as practical, subject to the provisions of the deposit agreement, to vote the shares as our ADR holders instruct. The depositary will not vote or attempt to exercise the right to vote other than in accordance with the instructions of the ADR holders. We cannot assure our ADR holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. In addition, there may be other circumstances in which our ADR holders may not be able to exercise voting rights.
 
Our ADR holders do not have the same rights to receive dividends or other distributions as our shareholders. Subject to any special rights or restrictions attached to a share, the directors may determine that a dividend will be payable on a share and fix the amount, the time for payment and the method for payment (although we have never declared or paid any cash dividends on our ordinary stock and we do not anticipate paying any cash dividends in the foreseeable future). Dividends may be paid on shares of one class but not another and at different rates for different classes. Dividends and other distributions payable to our shareholders with respect to our ordinary shares generally will be payable directly to them. Any dividends or distributions payable with respect to ordinary shares will be paid to the depositary, which has agreed to pay to our ADR holders the cash dividends or other distributions it or the custodian receives on shares or other deposited securities, after deducting its fees and expenses. Our ADR holders will receive these distributions in proportion to the number of shares their ADSs represent. In addition, there may be certain circumstances in which the depositary may not pay to our ADR holders amounts distributed by us as a dividend or distribution. See the risk factor “- There are circumstances where it may be unlawful or impractical to make distributions to the holders of our ADRs,” below.
 
There are circumstances where it may be unlawful or impractical to make distributions to the holders of our ADRs.
 
The deposit agreement with the depositary allows the depositary to distribute foreign currency only to those ADR holders to whom it is possible to do so. If a distribution is payable by us in New Israeli Shekels or Pounds Sterling, the depositary will hold the foreign currency it cannot convert for the account of the ADR holders who have not been paid. It will not invest the foreign currency and it will not be liable for any interest. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, our ADR holders may lose some of the value of the distribution.
 
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADR holders. This means that our ADR holders may not receive the distributions we make on our shares or any value for them if it is illegal or impractical for the depository to make such distributions available to them.
 
 
15

 
Risks Relating to Operations in Israel
 
Conditions in the Middle East and in Israel may harm our operations.
 
Certain of our research and development facilities and some of our suppliers are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest, military conflicts and terrorist actions. There has been a significant increase in violence since September 2000, which has continued with varying levels of severity through to the present. This state of hostility has caused security and economic problems for Israel. To date, we do not believe that the political and security situation has had a material adverse impact on our business, but we cannot give any assurance that this will continue to be the case. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital.
 
Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions and could harm our results of operations.
 
Further, in the past, the State of Israel and Israeli companies have been subjected to an economic boycott. Several countries still restrict business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating results, financial condition or the expansion of our business.
 
Our results of operations may be adversely affected by inflation and foreign currency fluctuations.
 
We generate all of our revenues and hold most of our cash, cash equivalents, bank deposits and marketable securities in US dollars. While a substantial amount of our operating expenses are in US dollars (approximately 90% in 2006), we incur a portion of our expenses in New Israeli Shekels. In addition, we also pay for some of our services and supplies in the local currencies of our suppliers. As a result, we are exposed to the risk that the US dollar will be devalued against the New Israeli Shekel or other currencies, and as result our financial results could be harmed if we are unable to guard against currency fluctuations in Israel or other countries in which services and supplies are obtained in the future. Accordingly, we may in the future enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of currencies. These measures, however, may not adequately protect us from the adverse effects of inflation in Israel. In addition, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the New Israeli Shekel in relation to the dollar or that the timing of any devaluation may lag behind inflation in Israel.
 
The Office of the Chief Scientist may refuse to approve the manufacture of some of our product candidates outside the State of Israel.

We have in the past participated in programs offered by the Office of the Chief Scientist under the Industry, Trade and Labor Ministry of Israel that supports research and development activities. Through December 31, 2006, we have received $7.3 million in grants from the Office of the Chief Scientist for several projects, including XTL-6865, HepeX-B and XTL-2125. Israeli law requires that the manufacture of products developed with government grants be carried out in Israel, unless the Office of the Chief Scientist provides a special approval to the contrary. This approval, if provided, is generally conditioned on an increase in the total amount to be repaid to the Office of the Chief Scientist to between 120% and 300% of the amount of funds granted. While we believe that the Office of the Chief Scientist does not unreasonably withhold approval if the request is based upon commercially justified circumstances and any payment obligations to the Office of the Chief Scientist are sufficiently assured, the matter is solely within its discretion. We cannot be sure that such approval, if requested, would be granted upon terms satisfactory to us or granted at all. Without such approval, we would be unable to manufacture any products developed by this research outside of Israel, which may greatly restrict any potential revenues from such products (see Item 5. “Operating and Financial Review and Prospects - Israeli Government Research and Development Grants” below).
 
 
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We may not continue to be entitled to certain tax benefits from the Israeli government.
 
We are entitled to receive certain tax benefits as a result of the Approved Enterprise status of our existing facilities in Israel. The Law for the Encouragement of Capital Investment, 1959, as amended, provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, permit a company to recognize taxable income attributable to the Approved Enterprise subject to company tax at the maximum rate of 25% rather than the usual rate in 2007 of 29% (2006 -- 31%). This usual rate is currently scheduled to decrease as follows: in 2008 - 27%, 2009 - 26%, 2010 and after - 25%. For further discussion of these tax benefits, see “Item 10. Additional Information - Taxation - Israeli Tax Considerations,” below. To date we have not received any such tax benefits because we have not generated any taxable income to date. To maintain our eligibility for these tax benefits, we must meet certain reporting requirements and certain conditions that we have either obligated ourselves to meet or that are included in the Certificate of Approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel. If we cease to become entitled to tax benefits, we may be required to pay repay corporate tax at the normal rate on all or part of the taxable income that we may generate from the eligible facilities in the future. We may, in the foreseeable future, cease to be entitled to the aforesaid tax benefits, as we may not in the future be in compliance with the Certificate of Approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel due to a reduction in research and development activity in Israel.
 
It may be difficult to enforce a US judgment against us, our officers or our directors or to assert US securities law claims in Israel.
 
Service of process upon us, since we are incorporated in Israel, and upon our directors and officers and our Israeli auditors, some of whom reside outside the US, may be difficult to obtain within the US. In addition, because substantially all of our assets and some of our directors and officers are located outside the US, any judgment obtained in the US against us or any of our directors and officers may not be collectible within the US. There is a doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act pursuant to original actions instituted in Israel. Subject to particular time limitations and provided certain conditions are met, executory judgments of a US court for monetary damages in civil matters may be enforced by an Israeli court. For more information regarding the enforceability of civil liabilities against us, our directors and our executive officers, see “Item 10. Additional Information - Memorandum and Articles of Association - Enforceability of Civil Liabilities,” below.
 
 
 
 

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ITEM 4. INFORMATION ON THE COMPANY
 
History and Development of XTL
 
We are a biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products for the treatment of unmet medical needs, particularly the treatment of neuropathic pain and hepatitis C.

Our lead compound is Bicifadine, a serotonin and norepineprine reuptake inhibitor that we are developing for the treatment of neuropathic pain, a chronic condition resulting from damage to peripheral nerves. We in-licensed Bicifadine from DOV in January 2007, and we expect to initiate a late-stage clinical trial with Bicifadine in the second half of 2007.

We are also developing XTL-2125, a small molecule non-nucleoside, polymerase inhibitor for the treatment of patients with hepatitis C. XTL-2125 is presently in a Phase I clinical trial in patients with chronic hepatitis C, with clinical trial results expected in the second quarter of 2007. A second drug candidate in hepatitis C is XTL-6865, a combination of two monoclonal antibodies against the hepatitis C virus. XTL-6865 is currently in a Phase I clinical trial in patients with chronic hepatitis C, also known as HCV, with results expected shortly. Our third program in the hepatitis C area is the Diversity Oriented Synthesis, or DOS, program. This program is focused on the development of novel hepatitis C small molecule inhibitors. These compounds are presently in advanced stages of optimization. HepeX-B, a combination of two monoclonal antibodies against Hepatitis B, was licensed to Cubist Pharmaceuticals Inc., or Cubist, in June 2004. In July 2006, Cubist announced that it has decided not to make any further investment in the HepeX-B program, while it evaluates its strategic options for HepeX-B, including the possible sub-licensing of the product to a third party.
 
Our legal and commercial name is XTL Biopharmaceuticals Ltd. We were established as a private company limited by shares under the laws of the State of Israel on March 9, 1993, under the name Xenograft Technologies Ltd. We re-registered as a public company on June 7, 1993, in Israel, and changed our name to XTL Biopharmaceuticals Ltd. on July 3, 1995. We commenced operations to use and commercialize technology developed at the Weizmann Institute, in Rehovot, Israel. Until 1999, our therapeutic focus was on the development of human monoclonal antibodies to treat viral, autoimmune and oncological diseases. Our first therapeutic programs focused on antibodies against the hepatiti s B virus, interferon - γ and the hepatitis C virus.
 
Our ordinary shares are traded on the London Stock Exchange under the symbol “XTL,” and on the Tel Aviv Stock Exchange under the symbol “XTL.” Our ADRs are quoted on the Nasdaq Global Market under the symbol “ XTLB. ” We operate under the laws of the State of Israel, under the Israeli Companies Act, the regulations of the United Kingdom Listing Authority, which governs our listing on the London Stock Exchange, and in the US, the Securities Act, the Exchange Act and the regulations of the Nasdaq Global Market.
 
Our principal offices are located at 750 Lexington Avenue, 20th Floor, New York, New York 10022, and our telephone number is 212-531-5960. The principal offices of XTL Biopharmaceuticals, Inc., our wholly-owned US subsidiary and agent for service of process in the US, are located at 750 Lexington Avenue, 20th Floor, New York, NY 10022, and its telephone number is 212-531-5960. Our primary internet address is www.xtlbio.com. None of the information on our website is incorporated by reference into this annual report.
 
On March 22, 2006, we completed a private placement of 46,666,670 ordinary shares (equivalent to 4,666,667 ADRs) at $0.60 per share ($6.00 per ADR), together with warrants for the purchase of an aggregate of 23,333,335 ordinary shares (equivalent to 2,333,333.5 ADRs) at an exercise price of $0.875 ($8.75 per ADR). Total proceeds to us from this private placement were approximately $24.4 million, net of offering expenses of approximately $3.6 million. The private placement closed on May 25, 2006. Since inception, we have raised net proceeds of approximately $128.7 million to fund our activities, including the net proceeds from our recent private placement.
 
For the years ended December 31, 2006, 2005, and 2004 our capital expenditures were $21,000, $38,000 and $180,000, respectively. Our capital expenditures were primarily associated with the purchase of lab equipment for our research and development activities. There were no material divestitures during the years ended December 31, 2006, 2005 and 2004.
 
 
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In January 2007, XTL Development, Inc., or XTL Development, our wholly-owned subsidiary, signed an agreement with DOV to in-license the worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake inhibitor. XTL Development intends to develop Bicifadine for the treatment of neuropathic pain - a chronic condition resulting from damage to peripheral nerves. In accordance with the terms of the license agreement, XTL Development made an initial up-front payment of $7.5 million in cash. In addition, XTL Development will make milestone payments of up to $126.5 million, in cash and/or in our ordinary shares over the life of the license, of which up to $115 million will be due upon or after regulatory approval of the product. XTL Development is also obligated to pay royalties to DOV on net sales of Bicifadine. In connection with the license agreement, XTL Development has committed to pay a transaction advisory fee in the form of our stock appreciation rights in an amount equivalent to 3% of our fully diluted ordinary shares at the close of the transaction, vesting to a third party one year after the close of the transaction, and 7% of our fully diluted ordinary shares at the close of the transaction, vesting following the first to occur of successful Phase III clinical trial results or the acquisition of our company. Payment of the stock appreciation rights can be satisfied, at our discretion, in cash and/or by issuance of our ordinary shares. See “Item 10. Additional Information -Material Contracts.”
 
Business Overview
 
Introduction
 
We are a biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products for the treatment of unmet medical needs, in particular the treatment of neuropathic pain and hepatitis C.
 
Our lead compound is Bicifadine. We are developing Bicifadine for the treatment of neuropathic pain - a chronic condition resulting from damage to peripheral nerves. Bicifadine is a serotonin and norepinephrine reuptake inhibitor, or SNRI. Compared to the currently approved SNRI’s, Bicifadine has a unique ratio of serotonin versus norepinephrine reuptake inhibition, which is weighted toward norepinephrine reuptake inhibition, providing a strong scientific rationale for using Bicifadine for the treatment neuropathic pain indications. Prior to it being in-licensed to us, Bicifadine has been tested extensively in over 15 clinical trials involving over 3,000 patients, and has been shown to be safe and generally well tolerated. Bicifadine was evaluated in various pain indications, including two large, randomized clinical trials (n=750 and n=540) in patients suffering from acute (non-neuropathic) pain, where Bicifadine demonstrated statistically significant efficacy. We intend to initiate a late-stage clinical trial with Bicifadine in neuropathic pain in the second half of 2007.
 

We currently have three products/programs under development with respect to Hepatitis C:
 
·
XTL-2125 is being developed for the treatment of hepatitis C. XTL-2125 is a novel orally-available non-nucleoside HCV RNA polymerase inhibitor. XTL-2125 has demonstrated potent activity against the hepatitis C virus in several pre-clinical systems. Investigational new drug application, or IND, enabling, good laboratory practice, or GLP, studies demonstrated that XTL-2125 has favorable oral pharmacokinetics and a good safety profile in multiple animal species. In May 2006, we announced the initiation of a Phase I, placebo-controlled, dose escalation trial of XTL-2125 in chronic HCV patients. In January 2007, the Phase I clinical trial - as originally designed - was completed. As no dose limiting toxicities have been encountered, we decided to add up to two additional higher dose cohorts to the study. We expect to announce results from this study in the second quarter of 2007. The compound was in-licensed by us from B&C Biopharm Co., Ltd., a Korean drug development company.
   
·
XTL-6865 is also being developed for the treatment of hepatitis C. XTL-6865 (formerly known as the HepeX-C program) is a combination of two fully human monoclonal antibodies (Ab68 and Ab65) against the hepatitis C virus E2 envelope protein. The antibodies comprising XTL-6865 are expected to “trap” the virus in the patient’s serum and prevent the infection of healthy liver cells. A single antibody version of this product was tested in a pilot clinical program that included both Phase I and Phase II clinical trials. In April 2005, we submitted an IND to the FDA in order to commence a Phase Ia/Ib clinical trial for XTL-6865, the dual-antibody product. In September 2005, we announced the initiation of a Phase Ia clinical trial with XTL-6865 in patients with chronic hepatitis C. We expect results from this trial shortly.
   
·
DOS is a pre-clinical program focused on the development of novel hepatitis C small molecule inhibitors.  Compounds developed to date inhibit HCV replication in a pre-clinical cell-based assay with potencies comparable to clinical stage drugs. These compounds are presently in advanced stages of optimization.
   
 
 
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In addition, HepeX-B, a combination of two monoclonal antibodies against hepatitis B, or HBV, was licensed to Cubist in June 2004. In July 2006, Cubist announced that it has decided not to make any further investment in the HepeX-B program, while it evaluates its strategic options for HepeX-B, including the possible sub-licensing of the product to a third party.
 
To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any commercial revenues from the sales of our drug candidates. Moreover, preliminary results of our pre-clinical or clinical tests do not necessarily predict the final results, and acceptable results in early preclinical or clinical testing might not be obtained in later clinical trials. Drug candidates in the later stages of clinical development may fail to show the desired safety and efficacy traits despite having progressed through initial clinical testing. We have received license and reimbursed out of pocket expense revenue pursuant to our agreement with Cubist with respect to HepeX-B, although HepeX-B has not yet been commercialized and may never be commercialized.

Our Strategy

Under our current strategy, we plan to:

·
develop Bicifadine for the treatment of neuropathic pain;
 
 
·
continue the clinical development of XTL-2125 and XTL-6865;
   
·
identify clinical candidates from our DOS program and advance them into clinical development; and
   
·
seek to in-license or acquire additional candidates.

Products Under Development
 
Bicifadine
 
Market Opportunity  

We intend to develop Bicifadine for the treatment of neuropathic pain - a chronic condition resulting from damage to peripheral nerves. According to Datamonitor, there are over 15 million people suffering from neuropathic pain in the United States alone. With limited treatment options available, neuropathic pain represents a significant unmet medical need. According to Datamonitor, the global market for neuropathic pain drugs is expected to grow from $1.7 billion in 2005 to $5.5 billion by 2015.
 
Scientific Background
 
Bicifadine is a serotonin and norepinephrine reuptake inhibitor. Other members of the SNRI class include Cymbalta® (approved for depression and neuropathic pain), and Effexor® (approved only for depression). Both Cymbalta and Effexor have been shown to be efficacious in neuropathic pain. Activity on norepinephrine reuptake is thought to be necessary for anti-depressants to be effective in neuropathic pain. Compared to the currently approved SNRI’s, Bicifadine has a unique ratio of serotonin versus norepinephrine reuptake inhibition, which is weighted toward norepinephrine reuptake inhibition, providing a strong scientific rationale for using Bicifadine for the treatment neuropathic pain indications.
 
 
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Clinical Data
 
Four Phase I clinical trials and 14 Phase II clinical trials involving more than 1,000 patients have been conducted with an immediate release, or IR, formulation of Bicifadine for the treatment of acute pain. In five exploratory double-blind, placebo-controlled Phase II clinical trials of the IR formulation, Bicifadine demonstrated a statistically significant reduction in pain versus placebo, in some cases with an outcome suggesting it might be comparable to or better than positive controls such as codeine. In addition to these trials with the IR formulation, eight Phase I clinical trials using the sustained release, or SR, formulation of Bicifadine have been conducted. SR is a formulation that generally permits less frequent daily dosing and improves tolerability. We intend to use the SR formulation in future clinical development and for commercial use of Bicifadine.
 
In two additional larger (n=750 and n=540) single-dose, double-blind, placebo-controlled clinical trials with Bicifadine in the treatment of moderate to severe post-surgical acute dental pain, Bicifadine produced a highly statistically significant, dose-related reduction in pain compared to placebo, and which was comparable to a positive control arm (codeine or Tramadol). Both trials demonstrated Bicifadine to be safe and generally well-tolerated without producing any serious adverse events.
 
In a Phase III double-blind, placebo-controlled, clinical trial (n=325) with Bicifadine in the treatment of moderate to severe acute pain following bunionectomy surgery, statistically significant increases in analgesia were measured as early as 30 minutes after administration and these effects were sustained for the balance of the eight-hour measurement period. In this study, Bicifadine was safe and generally well-tolerated. The complete assessment of the analgesic action of Bicifadine under repeat dosing conditions could not be fully elucidated due to the high level of “rescue” analgesic medication used in both the placebo and active drug groups.
 
Due to the highly competitive nature of the market for acute pain drugs, and the FDA requirement to complete two repeat-dosing clinical trials in two different acute pain indications, no further studies in acute pain are planned.
 
Bicifadine has been further evaluated in three Phase III trials in chronic lower back pain, or CLBP. The primary efficacy endpoint in these trials was the change in pain severity rating score between baseline and the end of dosing. In these trials, Bicifadine was safe and generally well tolerated, but did not show a statistically significant effect relative to placebo on the primary endpoint of the study at any of the doses tested.
 
We believe that the failure of Bicifadine in the CLBP trials was a result of the inherent heterogeneity of the studied patient population (i.e. the varying causes of CLBP pain), uncontrolled physical activities in what is largely an activity-dependent pain indication, and a high placebo response.
 
Development Status
 
We believe that by re-directing the development of Bicifadine away from the novel indications in acute and chronic pain toward a proven area of efficacy of SNRI’s in the treatment of neuropathic pain, Bicifadine could be successfully developed for neuropathic pain, possibly offering a differentiated efficacy and safety profile based on the drug’s emphasis on norepinephrine reuptake inhibition.
 
We intend to initiate a late-stage clinical trial with Bicifadine in neuropathic pain in the second half of 2007.
 
Products for the treatment of Hepatitis C
 
Market Opportunity  

We are developing several products for the treatment of hepatitis C. Chronic hepatitis C is a serious life-threatening disease which affects around 170 to 200 million people worldwide, according to a Datamonitor report from April 2005. We estimate that between eight to 10 million of these people reside in the US, Europe and Japan. According to the BioSeeker Group, 20% to 30% of chronic hepatitis patients will eventually develop progressive liver disease that may lead to decomposition of the liver or hepatocellular carcinoma (liver cancer). According to the National Digestive Diseases Information Clearing House, each year 10,000 to 12,000 people die from HCV in the US alone. The Centers for Disease Control, or CDC, predicts, that by the end of this decade, the number of deaths due to HCV in the US will surpass the number of deaths due to AIDS.

According to the BioSeeker Group, the worldwide market for the treatment of chronic HCV in 2003 was estimated at $3 billion and consists entirely of Interferon-based treatments. Interferon alpha was first approved for use against chronic hepatitis C in 1991. At present, the optimal regimen appears to be a 24 or 48 week course of the combination of Pegylated-Interferon and Ribavirin. In studies done at the St. Louis University School of Medicine, a 24 week course of this combination therapy yields a sustained response rate of approximately 40% to 45% in patients with genotype 1 (the most prevalent genotype in the western world according to the CDC) and a better sustained response with a 48 week course.
 
 
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XTL-2125

XTL-2125 is a novel non-nucleoside HCV RNA polymerase inhibitor that is being developed for the treatment of chronic hepatitis C. XTL-2125’s ability to inhibit HCV replication was demonstrated in XTL's proprietary cell-based assay for HCV infectivity.  In addition, XTL-2125 was orally active in XTL’s proprietary Trimera mouse model. IND-enabling GLP studies demonstrated that XTL-2125 has a favorable oral pharmacokinetics and a good safety profile in multiple animal species.
 
In the fourth quarter of 2005, we filed an application with the Israel Ministry of Health to conduct Phase I human trials of XTL-2125 in chronic HCV patients.  In May 2006, we announced the initiation of patient dosing in a Phase I clinical trial of XTL-2125 for the treatment of chronic HCV. The Phase I trial is a placebo controlled, randomized, dose escalating study, designed to evaluate the safety, tolerability and antiviral activity of single and multiple doses of XTL-2125. The study - as originally designed - was expected to enroll 48 patients into six cohorts comprised of eight patients each (of which two are placebo patients). Each patient was expected to receive a single dose, followed by a 14-day multi-dosing regimen commencing one week after the single dose administration. In January 2007, the Phase I clinical trial - as originally designed - was completed. As no dose limiting toxicities have been encountered, we have decided to add up to two additional higher dose cohorts to the study. We expect to announce results from this study in the second quarter of 2007.

XTL-6865

XTL-6865 is being developed for the treatment of hepatitis C. XTL-6865 is a combination of two fully human monoclonal antibodies (Ab68 and Ab65) against the hepatitis C virus E2 envelope protein. The antibodies comprising XTL-6865 are expected to “trap” the virus in the patient’s serum and prevent the infection of healthy liver cells. A single antibody version of this product, then referred to as HepeX-C, was tested in a pilot clinical program that included both Phase I and Phase II clinical trials. In April 2005, we submitted an IND to the FDA in order to commence a Phase Ia/Ib clinical trial for XTL-6865, the dual-antibodies product. In September 2005, we announced the initiation of a Phase Ia clinical trial with XTL-6865 in patients with chronic hepatitis C.
 
The two antibodies comprising XTL-6865 were selected by screening a large panel of candidates based on their high level of activity against the virus in our proprietary HCV models. We believe that a combination of two antibodies that bind to different epitopes is essential to provide broad coverage of virus quasispecies, and to minimize the probability for escape from therapy. We have shown that the two antibodies chosen (Ab68 and Ab65) specifically bind and immunoprecipitate viral particles from infected patients’ sera with different HCV genotypes. In addition, both antibodies reduced mean viral load in HCV-Trimera mice. We have also shown that incubation of an infectious human serum with Ab68 or Ab65 prevented the serum’s ability to infect human liver cells and human liver tissue.
 
The original Phase Ia single-dose study was designed to evaluate the safety, tolerability, and virologic activity of escalating single doses of XTL-6865 in patients with chronic hepatitis C virus infection, and to assess the pharmacokinetics of XTL-6865 in the presence of viral infection. The original study was a single-administration, randomized, double blind, placebo-controlled, multi-center design. Doses were administered to groups of four patients each: 5 mg, 20 mg, 75 mg, 250 mg, 600 mg, 1200 mg, 2400 mg, and placebo. Within each group, three subjects received XTL-6865 and one subject will receive placebo. No patient was enrolled in more than one dose level. Concentrations of anti-E2 antibody and HCV RNA in the peripheral blood were periodically evaluated. In December 2006, we completed dosing all patients in the trial - as originally designed. In January 2007, we added one multiple dose cohort to the trial, which includes four patients: three of whom will receive five daily dosings of 1200mg, and one of whom will receive placebo. Results from the trial are expected shortly.
 

DOS
 
DOS is a pre-clinical program focused on the development of three families of novel hepatitis C small molecule inhibitors.  Compounds in each family inhibited HCV replication in a pre-clinical cell-based assay with potencies comparable to clinical stage drugs.  These compounds are presently in advanced stages of optimization.
 
We gained access to the DOS program through a license and asset purchase agreement with VivoQuest that was completed in September 2005. Under this agreement, we licensed lead HCV molecules, a proprietary compound library and medicinal chemistry technologies.  The DOS small molecule chemistry technology developed at VivoQuest was used to create these molecules and is currently being used to produce optimized compounds for advanced pre-clinical and IND-enabling GLP safety studies. See “Item 10. Additional Information -Material Contracts.”
 
 
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HepeX-B
 
HepeX-B, a combination of two monoclonal antibodies against hepatitis B, or HBV, was licensed to Cubist in June 2004. In December 2005, Cubist announced the positive results of a Phase IIb study with HepeX-B, based on which Cubist planned to meet with the FDA to discuss a proposed Phase III trial design. In July 2006, Cubist reported that the FDA direction on the regulatory pathway for approval creates both operational and economic challenges to it. The size of the safety population the FDA is looking for translates to an extremely lengthy development timeline, as there are only about 500 liver transplants due to hepatitis B in the US and Europe each year. In July 2006, Cubist announced that it had decided not to make any further investment in the HepeX-B program while it evaluates its strategic options for HepeX-B, including the potential sub-licensing of the product.
 
Proprietary Technology
 
Our proprietary Trimera technology, which was in-licensed from Yeda, is a method for introducing functional human cells or tissue into a mouse. The Trimera technology is a patented tool whereby murine immune systems are ablated by radiation, and bone marrow is transplanted from genetically immuno-deficient mice to re-enable red blood cell production. The result is the production of “radiation chimeras.” As these chimeras have no immune system, they are able to accept implanted human cells, without rejection, thereby creating a “Trimera.” The resulting mouse can be used to generate humanized monoclonal antibodies, or hMAbs and/or as an animal model of human disease. These models can be used for testing various approaches to treat human disease, including the development of new prophylactic and therapeutic products and were used to discover the HepeX-B product and to screen the activity of XTL-6865 and XTL-2125. We have no plans to use these models and technology in our other current or planned development activities.
 
Intellectual Property and Patents
 
General
 
Patents and other proprietary rights are very important to the development of our business. We will be able to protect our proprietary technologies from unauthorized use by third parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets. It is our intention to seek and maintain patent and trade secret protection for our drug candidates and our proprietary technologies. As part of our business strategy, our policy is to actively file patent applications in the US and internationally to cover methods of use, new chemical compounds, pharmaceutical compositions and dosing of the compounds and compositions and improvements in each of these. We also rely on trade secret information, technical know-how, innovation and agreements with third parties to continuously expand and protect our competitive position. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before we commercialize any of our products, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any commercial advantage or financial value attributable to the patent.
 
Generally, patent applications in the US are maintained in secrecy for a period of 18 months or more. Since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we are not certain that we were the first to make the inventions covered by each of our pending patent applications or that we were the first to file those patent applications. The patent positions of biotechnology and pharmaceutical companies are highly uncertain and involve complex legal and factual questions. Therefore, we cannot predict the breadth of claims allowed in biotechnology and pharmaceutical patents, or their enforceability. To date, there has been no consistent policy regarding the breadth of claims allowed in biotechnology patents. Third parties or competitors may challenge or circumvent our patents or patent applications, if issued. Granted patents can be challenged and ruled invalid at any time, therefore the grant of a patent is not of itself sufficient to demonstrate our entitlement to a proprietary right. The disallowance of a claim or invalidation of a patent in any one territory can have adverse commercial consequences in other territories.
 
If our competitors prepare and file patent applications in the US that claim technology also claimed by us, we may choose to participate in interference proceedings declared by the US Patent and Trademark Office to determine priority of invention, which could result in substantial cost, even if the eventual outcome is favorable to us. While we have the right to defend patent rights related to our licensed drug candidates and technologies, we are not obligated to do so. In the event that we decide to defend our licensed patent rights, we will be obligated to cover all of the expenses associated with that effort.
 
 
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If a patent is issued to a third party containing one or more preclusive or conflicting claims, and those claims are ultimately determined to be valid and enforceable, we may be required to obtain a license under such patent or to develop or obtain alternative technology. In the event of a litigation involving a third party claim, an adverse outcome in the litigation could subject us to significant liabilities to such third party, require us to seek a license for the disputed rights from such third party, and/or require us to cease use of the technology. Further, our breach of an existing license or failure to obtain a license to technology required to commercialize our products may seriously harm our business. We also may need to commence litigation to enforce any patents issued to us or to determine the scope, validity and/or enforceability of third-party proprietary rights. Litigation would involve substantial costs.
 
Bicifadine  
 
There are currently eight patent families filed by DOV relating to Bicifadine: (i) methods and compositions containing Bicifadine for the treatment and prevention of hyperthermia; (ii) solid compositions containing the polymorph Form B of Bicifadine as characterized by certain infrared peaks and a distinct x-ray powder diffraction (XPRD) profile, and methods of treating pain in mammals using the same; (iii) methods and compositions employing a therapeutically effective amount of Bicifadine for preventing and treating a condition or symptom of acute pain, chronic pain, and/or a neuropathic disorder in mammalian subjects; (iv) methods and compositions containing Bicifadine HCl to prevent or treat neuropathic disorders in mammals, including, but not limited to, diabetic neuropathy; (v) methods and compositions containing Bicifadine for the prevention and treatment of lower urinary tract disorders; (vi) methods of making Bicifadine; (vii) methods and compositions for preventing or treating chronic pain comprising Bicifadine in combination with a non-steroidal anti-inflammatory drug (NSAID).

Of these eight patent families, there is one issued patent, U.S. Patent No. 7,094,799, generally directed to solid compositions containing the polymorph Form B of Bicifadine and “substantially free” of polymorph Form A. Pending patent applications filed by DOV in 2006 include:

·
A patent application directed to sustained release formulations of Bicifadine.
   
·
A patent application directed to the use of Bicifadine for treating a disability or reducing a functional impairment associated with acute pain, chronic pain, and/or neuropathic disorders.
   
·
A patent application directed to the use of Bicifadine for preventing and treating neuropathic disorders, including, but not limited to, diabetic neuropathy, diabetic peripheral neuropathy, and neuropathy associated with alcoholism, sciatica, multiple sclerosis, spinal cord injury, chronic low back pain, HIV, cancer, etc.

In addition, there is one issued patent to Wyeth directed to a method of treating an addictive, compulsive disorder caused by alcohol or cocaine abuse using Bicifadine HCl. There are also three pending US applications filed by Wyeth in 2005 directed to methods for treating neuropathic disorders or conditions. At least one of these patent applications covers the use of Bicifadine in the treatment of neuropathic pain.

Under the license agreement with DOV, we have exclusive worldwide rights to the above patents and patent applications for all therapeutic uses, with the exception of the Wyeth Retained Field. Under the terms of the DOV/Wyeth agreement, Wyeth can only develop Bicifadine for use in the Wyeth Retained Field in collaboration with DOV, and under the license agreement between DOV and XTL Development, DOV will not conduct research or development with Wyeth for the use of Bicifadine in the Wyeth Retained Field. See “Item 3. Key Information-Risk Factors-Risks Related to Our Intellectual Property.”
 
XTL-2125

One patent family presently covers XTL-2125. It covers the structure of the compound, and its use for the treatment of chronic HCV patients. The patent application covers the unique structure of the molecules and their use as a pharmaceutical composition for the treatment of HCV. This patent family, if issued, will expire in 2023. Based on the provisions of the Patent Term Extension Act, we currently believe that we would qualify for certain patent term extensions. The patent application covering XTL-2125 is exclusively licensed to us by B&C Biopharm Co., Ltd.
 
 
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XTL-6865
 
XTL-6865 is a combination of two human monoclonal antibodies against HCV, Ab68 and Ab65. Three patent families presently cover XTL-6865, including the two human monoclonal antibodies comprising XTL-6865 and its use to treat HCV infection. The patents cover both the treatment of chronic HCV patients with the antibodies and the prevention of liver re-infection in liver transplant recipients. One family concerns one antibody comprising XTL-6865, Ab68. Two families concern the second antibody comprising XTL-6865, Ab65.
 
The patent and patent applications covering Ab68 are exclusively licensed to us from the DRK-Blutspendedienst Baden-Wurttemberg (Ulm University, Ulm, Germany).
 
The patent and patent applications covering Ab65 are exclusively licensed to us from Stanford University, California in all territories outside China, and in China, it is co-exclusively licensed to us and Applied Immunogenetics.
 
Currently, XTL-6865 and its use to treat hepatitis C infection is covered by one issued US patent that will expire in 2019. Additional patent applications, if issued, will expire between 2018 and 2021. Based on the provisions of the Patent Term Extension Act, we currently believe that we would qualify for certain patent term extensions. We believe that we will have sufficient time to commercially utilize the inventions directed to the treatment and prevention of hepatitis C infection.

DOS
 
The lead molecules that are included in the VivoQuest license are covered by two issued patents and four patent applications. The patent applications describe both the structure of the compounds and their use for treating HCV infection. The two issued VivoQuest patents will expire in 2023. Additional patent applications, if issued, will expire in 2023, 2024 and 2025. Based on the provisions of the Patent Term Extension Act, we currently believe that we would qualify for certain patent term extensions.
 
We believe that we will have sufficient time to commercially utilize the inventions from our small molecule development program directed to the treatment and prevention of hepatitis C infection.
 
Other Intellectual Property Rights
 
We depend upon trademarks, trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.
 
In addition to patent protection, we may utilize orphan drug regulations to provide market exclusivity for certain of our drug candidates. The orphan drug regulations of the FDA provide incentives to pharmaceutical and biotechnology companies to develop and manufacture drugs for the treatment of rare diseases, currently defined as diseases that exist in fewer than 200,000 individuals in the US, or, diseases that affect more than 200,000 individuals in the US but that the sponsor does not realistically anticipate will generate a net profit. Under these provisions, a manufacturer of a designated orphan drug can seek tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for such FDA-approved orphan product. While we believe that certain of the indications for our drug candidates will be eligible for orphan drug designation, we cannot assure you that our drugs will obtain such orphan drug designation or that we will be the first to receive FDA approval for such drugs so as to be eligible for market exclusivity protection.
 
 
25

 
Licensing Agreements and Collaborations
 
We have formed strategic alliances with a number of companies for the manufacture and commercialization of our products. Our current key strategic alliances are discussed below. See “Item 5. Operating and Financial Review and Prospects - Obligations and Commitments” which describes contingent milestone payments we have undertaken to make to certain licensors over the life of the licenses described below.
 
Bicifadine License
 
In January 2007, XTL Development signed an agreement with DOV to in-license the worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake inhibitor. XTL Development intends to develop Bicifadine for the treatment of neuropathic pain - a chronic condition resulting from damage to peripheral nerves. In accordance with the terms of the license agreement, XTL Development made an initial up-front payment of $7.5 million in cash. In addition, XTL Development will make milestone payments of up to $126.5 million, in cash and/or in our ordinary shares over the life of the license, of which up to $115 million will be due upon or after regulatory approval of the product and the remaining $11.5 million will be due prior to regulatory approval of the product. XTL Development is also obligated to pay DOV royalties on net sales of the product.
 
XTL-2125 License
 
XTL-2125 has been licensed from B&C since February 2003. Under the terms of the agreement, we have exclusive worldwide rights to XTL-2125, with the exception of Asia, which is shared between the two companies, and Korea, for which B&C retains exclusive rights. Under the terms of the agreement, we are obligated to make certain milestone payments in addition to royalties on product sales. To date we have made $1.5 million in license and milestone payments to B&C, and we have agreed to make additional contingent milestone payments of up to approximately $13.0 million over the life of the license, of which $8.0 million will be due upon or following regulatory approval of the drug. The license terminates upon the expiration of the last of the licensed patents. Notwithstanding the above, we may terminate this agreement upon specified notice to B&C.
 
XTL-6865 License
 
XTL-6865 is a combination of two human monoclonal antibodies against HCV, Ab68 and Ab65.
 
In April 2000, we licensed Ab68 under an exclusive worldwide license from the DRK-Blutspendedienst Baden-Wurttemberg (Ulm University, Germany, or Ulm). Under the terms of this agreement, we are obligated to pay Ulm a specified royalty rate on sales of product incorporating Ab68. We can deduct certain payments that are made to third parties from these royalties, subject to a minimum royalty rate. We are also obligated to pay Ulm a specified percentage of any milestone payments we may receive from any sublicensee to whom we may grant a license or sublicense of Ab68 or technology related to the production of Ab68. We can deduct certain of these payments that are made to third parties from the percentage of milestone payments owed to Ulm, subject to a minimum milestone payment amount. Either party may terminate the agreement, by written notice, upon or after the winding up or insolvency of the other party, or upon or after commitment of a material breach by the other party that cannot be cured, or if curable, has not been cured, within 60 days after receipt of notice. In the absence of such termination, the agreement shall expire upon the expiration of the patent family granted under the agreement. To date we have made $150,000 in license and milestone payments to Ulm.
 
In September 2003, we licensed Ab65 from Stanford University under an exclusive worldwide license agreement, excluding China. In China, we have co-exclusive rights with Applied Immunogenetics LLC. Under the terms of this agreement, we must use commercially reasonable efforts to commercialize and market Ab65. We are obligated to make royalty payments to Stanford University on sales of product incorporating Ab65, and we are also obligated to make milestone payments upon the occurrence of certain specified events. To date we have made $202,000 in license and milestone payments to Stanford University, and we have undertaken to make contingent milestone payments of up to approximately $200,000 over the life of the license, all of which will be due upon or following regulatory approval of the drug. The license terminates upon the later of the expiration of last of the licensed patents or at the time of our last royalty payment. Notwithstanding the above, we may terminate this agreement upon specified notice to Stanford University. In addition, should we fail to meet certain developmental milestones for Ab65, our rights to the use of Ab65 become non-exclusive upon notice to that effect to us by Stanford University.
 
In addition, under an agreement entered into in September 2003, we are obligated to make royalty payments on sales of product incorporating Ab65 to Applied Immunogenetics LLC, a company that previously held non-exclusive rights to Ab65 and returned them to Stanford University, enabling us to gain exclusive rights to Ab65 from Stanford University. Our agreement with Applied Immunogenetics LLC expires on the expiration or termination of our exclusive agreement with Stanford University, as described above. To date we have made $183,000 in license and milestone payments to Applied Immunogenetics LLC. There are no additional contingent milestone payments.
 
 
26

 
Cubist License
 
We have entered into a licensing agreement with Cubist dated June 2, 2004, as amended, under which we granted to Cubist an exclusive, worldwide license (with the right to sub-license) to commercialize HepeX-B and any other product containing a hMAb or humanized monoclonal antibody or fragment directed at the hepatitis B virus owned or controlled by us. In August 2005, we transferred full responsibility for completing the development of HepeX-B to Cubist. Cubist will be responsible for completing the development and for registration and commercialization of the product worldwide. Nevertheless, during the term of this agreement, we have an ongoing obligation to transfer to Cubist all information Cubist may reasonably require and to provide Cubist with reasonable access to pertinent employees of ours that have experience with or information related to HepeX-B. We are also required to file, prosecute and maintain the relevant patents at our sole expense.
 
Cubist has the right to sub-license HepeX-B. The sub-licensee fees we will receive in such cases will vary according to the territory, the subject of the sub-license, the patent protection of HepeX-B in that territory, total costs of HepeX-B development, third party license payments, indemnification obligations and local competition.
 
In December 2005, Cubist announced the positive results of a Phase IIb study with HepeX-B, based on which Cubist planned to meet with the FDA to discuss a proposed Phase III trial design. In July 2006, Cubist reported that the FDA direction on the regulatory pathway for approval creates both operational and economic challenges to it. The size of the safety population the FDA is looking for translates to an extremely lengthy development timeline, as there are only about 500 liver transplants due to hepatitis B in the US and Europe each year. As of the date hereof, Cubist has decided not to make any further investment in the HepeX-B program while Cubist evaluates strategic options for HepeX-B.
 
The agreement expires on the later of the last valid patent claim covering HepeX-B to expire or 10 years after the first commercial sale of HepeX-B on a country-by-country basis.
 
VivoQuest License
 
In August 2005, we entered into a license agreement with VivoQuest covering a proprietary compound library, including certain HCV compounds. Under the terms of the license agreement, we have exclusive worldwide rights to VivoQuest’s intellectual property and technology in all fields of use. To date we have made approximately $0.9 million in license payments to VivoQuest under the license agreement. The license agreement also provides for additional milestone payments triggered by certain regulatory and sales targets. These additional milestone payments total $34.6 million, $25.0 million of which will be due upon or following regulatory approval or actual product sales, and are payable in cash or ordinary shares at our election. In addition, the license agreement requires that we make royalty payments to VivoQuest on product sales.
 
Yeda License
 
In April of 1993, we entered into a research and license agreement with Yeda, which we refer to as the Yeda Agreement, under which Yeda granted us an exclusive worldwide license to use the Trimera patent portfolio and to exclusively use the information derived from the performance of certain research for the purposes specified in the agreement. Subject to earlier termination in accordance with the Yeda Agreement, the term of the license with respect to any licensed product made and/or sold or to any other licensed activity conducted in any country where a licensed patent covers such product or other licensed activity is until the date on which the last licensed patent in that country expires or until 12 years from the first commercial sale of the product (or first receipts to us from such other licensed activity) in such country, whichever is the longer period and in any other country until 12 years from the first commercial sale of such product (or first receipts to us from such other licensed activity) in that country. Similar provisions fix the term of the license with respect to licensed activities not attributable to any particular country. Under the agreement, any assignment or sublicense of the license granted by Yeda requires Yeda's prior written consent.
 
The Yeda Agreement has undergone a number of amendments, one of the end results of which is that we shall pay to Yeda the following royalties in connection with the license: a royalty of 3% of all net sales received by us; 25% of amounts received by us on net sales of third parties (less certain royalties payable by us to third parties), but no more than 3% and no less than 1.5% of such net sales; and a royalty ranging between 20% to 40% on any receipts to us other than our net sales or receipts on net sales made by third parties. Furthermore, such amendments have also changed the termination provisions relating to Yeda’s entitlement to terminate the agreement if we do not pay Yeda a certain minimum amount of annual royalties of $100,000 or $200,000, depending on the year. We may terminate the agreement with Yeda with six months advance notice in which event our rights in any technology licensed by Yeda to us shall terminate and all rights in any technology derived from research and development activities performed by us in connection with the technology licensed by Yeda to us shall vest in Yeda.
 
 
27

 
In the agreement between Yeda, us and Cubist, whereby Yeda gave its consent relating to the grant of the license by us to Cubist under the terms of the HepeX-B collaboration, Yeda received the right to receive at least 1.5% of net sales of HepeX-B by Cubist sub-licensees, regardless of the amount received by us from Cubist in respect of such sales.
 
Competition
 
Competition in the pharmaceutical and biotechnology industries is intense. Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. In addition, companies that are active in different but related fields represent substantial competition for us. Many of our competitors have significantly greater capital resources, larger research and development staffs and facilities and greater experience in drug development, regulation, manufacturing and marketing than we do. These organizations also compete with us to recruit qualified personnel, attract partners for joint ventures or other collaborations, and license technologies that are competitive with ours. To compete successfully in this industry we must identify novel and unique drugs or methods of treatment and then complete the development of those drugs as treatments in advance of our competitors.
 
The drugs that we are attempting to develop will have to compete with existing therapies. In addition, a large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. Other companies have products or drug candidates in various stages of pre-clinical or clinical development to treat diseases for which we are also seeking to discover and develop drug candidates. Some of these potential competing drugs are further advanced in development than our drug candidates and may be commercialized earlier.
 
Competing Products for Treatment of Neuropathic Pain
 
Three oral drugs have been approved by the FDA for the treatment of neuropathic pain: Gabapentin (developed by Pfizer Inc.) which is approved for the treatment of post herpetic neuralgia; Pregabalin (developed by Pfizer Inc.) which is approved for post herpetic neuralgia and diabetic neuropathic pain; and Cymbalta (developed by Eli Lilly and Company) which is approved for diabetic neuropathic pain.
 
Several other drugs are in late-stage clinical trials for the treatment of neuropathic pain: milnacipran (developed by Cypress Bioscience Inc.) is presently is Phase III clinical trials for the treatment of fibromyalgia, and desvenlafaxin (developed by Wyeth Pharmaceuticals Inc.) is presently in Phase III clinical trials for the treatment of neuropathic pain. Wyeth has also filed a new drug application, or NDA, with the FDA, seeking approval of desvenlafaxin in depression.
 
Several additional companies are developing drugs for neuropathic pain including: Vernalis plc, Endo Pharmaceuticals Inc., GlaxoSmithKline plc, Avanir Pharmaceuticals, and UCB.
 
Competing Products for Treatment of Chronic Hepatitis C
 
We believe that a certain number of the drugs that are currently under development will become available in the future for the treatment of hepatitis C.
 
At present, the only approved therapies for treatment of chronic HCV are Interferon-based. There are multiple drugs presently under development for the treatment of HCV, most of which are in the pre-clinical or early stage of clinical development. These compounds are being developed by both established pharmaceutical companies, as well as by biotech companies. Examples of such companies are: Anadys Pharmaceuticals, Inc., F. Hoffman-LaRoche & Co., Intercell AG, Schering-Plough Corporation, Gilead Sciences, Inc., Idenix Pharmaceuticals, Inc., InterMune, Inc., Vertex Pharmaceuticals Incorporated and Viropharma Incorporated. Many of these companies and organizations, either alone or with their collaborative partners, have substantially greater financial, technical and human resources than we do. In addition, our competitors also include smaller private companies such as Pharmasset, Ltd.
 
 
28

 
Supply and Manufacturing
 
We currently have no manufacturing capabilities and do not intend to establish any such capabilities.
 
Bicifadine
 
As part of our license agreement with DOV, we have the right to purchase certain inventories of Bicifadine that have been produced for DOV. We believe that the present Bicifadine inventories owned by DOV will be adequate to satisfy our current clinical supply needs. For further late stage trials, we intend to utilize DOV’s existing Bicifadine inventory so long as it meets the relevant specifications and quality control requirements. In the event that the inventory does not meet the proper specifications, or if DOV should fail to provide us with adequate supplies of the inventory, then we will contract with a manufacturer to supply us with our additional clinical needs. For commercial supply of Bicifadine, we intend to contract with the drug’s existing manufacturers or other drug manufacturers to produce drug supply in sufficient quantity for launch and commercialization. See “Item 3. Key Information-Risk Factors-Risks Related to Our Intellectual Property.”
 
XTL-2125
 
In 2003, we entered into a contract manufacturing agreement with an Israeli-based manufacturer for the supply of XTL-2125. We believe that this contract manufacturer will be adequate to satisfy our current clinical supply needs.
 
XTL-6865
 
In 2000, we entered into a contract manufacturing agreement with a US-based manufacturer for the supply of the HepeX-C drug product, the single antibody version of XTL-6865, and subsequently under a master agreement for the supply of XTL-6865, the dual-MAb product. We believe that this contract manufacturer will be adequate to satisfy our current clinical supply needs.
 
HepeX-B
 
In July 2006, Cubist announced that it has decided not to make any further investment in the HepeX-B program, while it evaluates its strategic options for HepeX-B, including the sub-licensing of the product.
 
Future supply of the HepeX-B clinical material will be manufactured by a contract manufacturer to be selected by our partner Cubist or its sub-licensor, should it sub-license HepeX-B to a third-party.
 
DOS
 
For planned pre-clinical and clinical supply of the HCV compounds licensed from VivoQuest, we intend to enter into a contract with a manufacturer to produce our pre-clinical and clinical supply needs.
 
General
 
At the time of commercial sale, to the extent possible and commercially practicable, we plan to engage a back-up supplier for each of our product candidates. Until such time, we expect that we will rely on a single contract manufacturer to produce each of our product candidates under cGMP regulations. Our third-party manufacturers have a limited numbers of facilities in which our product candidates can be produced and will have limited experience in manufacturing our product candidates in quantities sufficient for conducting clinical trials or for commercialization. Our third-party manufacturers will have other clients and may have other priorities that could affect our contractor’s ability to perform the work satisfactorily and/or on a timely basis. Both of these occurrences would be beyond our control.  We anticipate that we will similarly rely on contract manufacturers for our future proprietary product candidates.
 
We expect to similarly rely on contract manufacturing relationships for any products that we may in-license or acquire in the future. However, there can be no assurance that we will be able to successfully contract with such manufacturers on terms acceptable to us, or at all.
 
Contract manufacturers are subject to ongoing periodic inspections by the FDA, the US Drug Enforcement Agency and corresponding state agencies to ensure strict compliance with cGMP and other state and federal regulations. Our contractor in Israel faces similar inspections from Israeli regulatory agencies and from the FDA. We do not have control over third-party manufacturers’ compliance with these regulations and standards, other than through contractual obligations.
 
 
29

 
If we need to change manufacturers, the FDA and corresponding foreign regulatory agencies must approve these new manufacturers in advance, which will involve testing and additional inspections to ensure compliance with FDA regulations and standards and may require significant lead times and delay. Furthermore, switching manufacturers may be difficult because the number of potential manufacturers is limited. It may be difficult or impossible for us to find a replacement manufacturer quickly or on terms acceptable to us, or at all.
 
Government and Industry Regulation
 
Numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies, impose substantial regulations upon the clinical development, manufacture and marketing of our drug candidates and technologies, as well as our ongoing research and development activities. None of our drug candidates have been approved for sale in any market in which we have marketing rights. Before marketing in the US, any drug that we develop must undergo rigorous pre-clinical testing and clinical trials and an extensive regulatory approval process implemented by the FDA, under the Federal Food, Drug and Cosmetic Act of 1938, as amended . The FDA regulates, among other things, the pre-clinical and clinical testing, safety, efficacy, approval, manufacturing, record keeping, adverse event reporting, packaging, labeling, storage, advertising, promotion, export, sale and distribution of biopharmaceutical products.
 
The regulatory review and approval process is lengthy, expensive and uncertain. We are required to submit extensive pre-clinical and clinical data and supporting information to the FDA for each indication or use to establish a drug candidate’s safety and efficacy before we can secure FDA approval. The approval process takes many years, requires the expenditure of substantial resources and may involve ongoing requirements for post-marketing studies or surveillance. Before commencing clinical trials in humans, we must submit an IND to the FDA containing, among other things, pre-clinical data, chemistry, manufacturing and control information, and an investigative plan. Our submission of an IND may not result in FDA authorization to commence a clinical trial.
 
The FDA may permit expedited development, evaluation, and marketing of new therapies intended to treat persons with serious or life-threatening conditions for which there is an unmet medical need under its fast track drug development programs. A sponsor can apply for fast track designation at the time of submission of an IND, or at any time prior to receiving marketing approval of the NDA. To receive fast track designation, an applicant must demonstrate that the drug:
 
·
is intended to treat a serious or life-threatening condition;
   
·
is intended to treat a serious aspect of the condition; and
   
·
has the potential to address unmet medical needs, and this potential is being evaluated in the planned drug development program.
Clinical testing must meet requirements for institutional review board oversight, informed consent and good clinical practices, and must be conducted pursuant to an IND, unless exempted.
 
For purposes of NDA approval, clinical trials are typically conducted in the following sequential phases:
 
·
Phase I : The drug is administered to a small group of humans, either healthy volunteers or patients, to test for safety, dosage tolerance, absorption, metabolism, excretion, and clinical pharmacology.
   
·
Phase II : Studies are conducted on a larger number of patients to assess the efficacy of the product, to ascertain dose tolerance and the optimal dose range, and to gather additional data relating to safety and potential adverse events.
   
·
Phase III : Studies establish safety and efficacy in an expanded patient population.
   
·
Phase IV : The FDA may require Phase IV post-marketing studies to find out more about the drug’s long-term risks, benefits, and optimal use, or to test the drug in different populations, such as children.
 
 
30

 
The length of time necessary to complete clinical trials varies significantly and may be difficult to predict. Clinical results are frequently susceptible to varying interpretations that may delay, limit or prevent regulatory approvals. Additional factors that can cause delay or termination of our clinical trials, or that may increase the costs of these trials, include:
 
·
slow patient enrollment due to the nature of the clinical trial plan, the proximity of patients to clinical sites, the eligibility criteria for participation in the study or other factors;
   
·
inadequately trained or insufficient personnel at the study site to assist in overseeing and monitoring clinical trials or delays in approvals from a study site’s review board;
   
·
longer treatment time required to demonstrate efficacy or determine the appropriate product dose;
   
·
insufficient supply of the drug candidates;
   
·
adverse medical events or side effects in treated patients; and
   
·
ineffectiveness of the drug candidates.
 
In addition, the FDA may place a clinical trial on hold or terminate it if it concludes that subjects are being exposed to an unacceptable health risk. Any drug is likely to produce some toxicity or undesirable side effects when administered at sufficiently high doses and/or for a sufficiently long period of time. Unacceptable toxicity or side effects may occur at any dose level at any time in the course of studies designed to identify unacceptable effects of a drug candidate, known as toxicological studies, or clinical trials of drug candidates. The appearance of any unacceptable toxicity or side effect could cause us or regulatory authorities to interrupt, limit, delay or abort the development of any of our drug candidates and could ultimately prevent approval by the FDA or foreign regulatory authorities for any or all targeted indications.
 
Before receiving FDA approval to market a product, we must demonstrate that the product is safe and effective for its intended use by submitting to the FDA an NDA containing the pre-clinical and clinical data that have been accumulated, together with chemistry and manufacturing and controls specifications and information, and proposed labeling, among other things. The FDA may refuse to accept an NDA for filing if certain content criteria are not met and, even after accepting an NDA, the FDA may often require additional information, including clinical data, before approval of marketing a product.

As part of the approval process, the FDA must inspect and approve each manufacturing facility. Among the conditions of approval is the requirement that a manufacturer’s quality control and manufacturing procedures conform to cGMP. Manufacturers must expend time, money and effort to ensure compliance with cGMP, and the FDA conducts periodic inspections to certify compliance. It may be difficult for our manufacturers or us to comply with the applicable cGMP and other FDA regulatory requirements. If we or our contract manufacturers fail to comply, then the FDA will not allow us to market products that have been affected by the failure.

If the FDA grants approval, the approval will be limited to those disease states, conditions and patient populations for which the product is safe and effective, as demonstrated through clinical studies. Further, a product may be marketed only in those dosage forms and for those indications approved in the NDA. Certain changes to an approved NDA, including, with certain exceptions, any changes to labeling, require approval of a supplemental application before the drug may be marketed as changed. Any products that we manufacture or distribute pursuant to FDA approvals are subject to continuing regulation by the FDA, including compliance with cGMP and the reporting of adverse experiences with the drugs. The nature of marketing claims that the FDA will permit us to make in the labeling and advertising of our products will be limited to those specified in an FDA approval, and the advertising of our products will be subject to comprehensive regulation by the FDA. Claims exceeding those that are approved will constitute a violation of the Federal Food, Drug, and Cosmetic Act. Violations of the Federal Food, Drug, and Cosmetic Act or regulatory requirements at any time during the product development process, approval process, or after approval may result in agency enforcement actions, including withdrawal of approval, recall, seizure of products, injunctions, fines and/or civil or criminal penalties. Any agency enforcement action could have a material adverse effect on our business.

Should we wish to market our products outside the US, we must receive marketing authorization from the appropriate foreign regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. At present, companies are typically required to apply for foreign marketing authorizations at a national level. However, within the EU, registration procedures are available to companies wishing to market a product in more than one EU member state. Typically, if the regulatory authority is satisfied that a company has presented adequate evidence of safety, quality and efficacy, then the regulatory authority will grant a marketing authorization. This foreign regulatory approval process, however, involves risks similar or identical to the risks associated with FDA approval discussed above, and therefore we cannot guarantee that we will be able to obtain the appropriate marketing authorization for any product in any particular country. Our current development strategy calls for us to seek marketing authorization for our drug candidates outside the United States.
 
 
31


Failure to comply with applicable federal, state and foreign laws and regulations would likely have a material adverse effect on our business. In addition, federal, state and foreign laws and regulations regarding the manufacture and sale of new drugs are subject to future changes. We cannot predict the likelihood, nature, effect or extent of adverse governmental regulation that might arise from future legislative or administrative action, either in the US or abroad.

Organizational structure
 
Our wholly-owned subsidiaries, XTL Biopharmaceuticals, Inc. and XTL Development, Inc., are each incorporated in Delaware and each has its principal place of business in New York, New York.
 
Property, Plants and Equipment
 
We lease an aggregate of approximately 1,776 square meters of office and laboratory facilities in Rehovot, Israel, expiring in April 2007. On February 28, 2007, we exercised an option to renew the lease and to downsize the facilities to approximately 400 square meters of office space; the lease expires in April 2008, with an option to extend for an additional year through April 2009. We lease approximately 3,000 square meters of laboratory facilities in Valley Cottage, New York, and 39 square meters in Raleigh, North Carolina. The leases in Valley Cottage and Raleigh expire in November 2009, and in October 2007, respectively. We also lease an approximate 100 square meter area in New York, New York, which is subject to a rent sharing agreement with the lessee of the facility. We have an option to renew our lease agreements, as needed.
 
We anticipate that these facilities will be sufficient for our needs for the foreseeable future. To our knowledge, there are no environmental issues that affect our use of the properties that we lease.
 
There are no encumbrances on our rights in these leased properties or on any of the equipment that we own. However, to secure the lease agreements in Israel, we provided a bank guarantee in the amount of approximately $236,000. As of December 31, 2006, the guarantee is secured by pledge on a restricted deposit amounting to $172,000 linked to the Israeli Consumer Price Index, which is included in the balance sheet as a restricted deposit .
 

32

 
ITEM 4A. UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following discussion and analysis contains forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in “Item 3. Key Information-Risk Factors” and “Item 4. Information on the Company.” See also the “Special Cautionary Notice Regarding Forward-Looking Statements” set forth above.
 
You should read the following discussion and analysis in conjunction with our audited consolidated financial statements, including the related notes, prepared in accordance with US GAAP for the years ended December 31, 2006, 2005 and 2004, and as of December 31, 2006 and 2005, contained in “Item 18. Financial Statements” and with any other selected financial data included elsewhere in this annual report.
 
Selected Financial Data
 
The table below presents selected statement of operations and balance sheet data for the fiscal years ended and as of December 31, 2006, 2005, 2004, 2003 and 2002. We have derived the selected financial data for the fiscal years ended December 31, 2006, 2005, and 2004, and as of December 31, 2006 and 2005, from our audited consolidated financial statements, included elsewhere in this annual report and prepared in accordance with US GAAP. We have derived the selected financial data for fiscal years ended December 31, 2003 and 2002 and as of December 31, 2004, 2003 and 2002, from audited financial statements not appearing in this annual report, which have been prepared in accordance with US GAAP. You should read the selected financial data in conjunction with “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information” and “Item 18. Financial Statements,” including the related notes.
 
33

 
   
Year Ended December 31,
 
 
 
2006
 
2005
 
2004
 
2003
 
2002
 
 
 
(In thousands, except share and per share amounts)
 
Statements of Operations Data:  
     
Revenues
     
 
 
 
 
 
 
 
 
Reimbursed out of-pocket-expenses
 
$
--
 
$
2,743
 
$
3,269
 
$
--
 
$
--
 
License
   
454
   
454
   
185
   
--
   
--
 
     
454
   
3,197
   
3,454
   
--
   
--
 
Cost of Revenues
                               
Reimbursed out-of-pocket expenses
   
--
   
2,743
   
3,269
   
--
   
--
 
License
   
54
   
54
   
32
   
--
   
--
 
     
54
   
2,797
   
3,301
         
                                 
Gross Margin
   
400
   
400
   
153
   
--
   
--
 
 
                     
Research and development
                     
Research and development costs
   
10,229
   
7,313
   
11,985
   
14,022
   
13,231
 
Less participations
   
--
   
--
   
--
   
3,229
   
75
 
 
   
10,229
   
7,313
   
11,985
   
10,793
   
13,156
 
                                 
In-process research and development
   
--
   
1,783
   
--
   
--
   
--
 
                                 
General and administrative
   
5,576
   
5,457
   
4,134
   
3,105
   
3,638
 
Business development costs
   
641
   
227
   
810
   
664
   
916
 
                         
Operating loss
   
(16,046
)
 
(14,380
)
 
(16,776
)
 
(14,562
)
 
(17,710
)
 
                           
Other income (expense)
                         
Financial and other income, net
   
1,141
   
443
   
352
   
352
   
597
 
Taxes on income
   
(227
)
 
(78
)
 
(49
)
 
(78
)
 
(27
)
 
                         
Loss for the period
 
$
(15,132
)
$
(14,015
)
$
(16,473
)
$
(14,288
)
$
(17,140
)
 
                           
Loss per ordinary share
                           
Basic and diluted
 
$
(0.08
)
$
(0.08
)
$
(0.12
)
$
(0.13
)
$
(0.15
)
Weighted average shares outstanding
   
201,737,295
   
170,123,003
   
134,731,766
   
111,712,916
   
111,149,292
 
 
   
As of December 31,
 
 
 
2006
 
2005
 
2004
 
2003
 
2002
 
 
 
(In thousands)
 
Balance Sheet Data:  
     
Cash, cash equivalents, bank deposits and trading and marketable securities
 
$
25,347
 
$
13,360
 
$
22,924
 
$
22,262
 
$
35,706
 
Working capital
   
22,694
   
11,385
   
20,240
   
19,967
   
33,396
 
Total assets
   
26,900
   
15,151
   
25,624
   
24,853
   
38,423
 
Long-term obligations
   
738
   
1,493
   
2,489
   
1,244
   
1,017
 
Total shareholders’ equity
   
22,760
   
11,252
   
19,602
   
20,608
   
34,830
 
 

 
34

 
Overview
 
We are a biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products for the treatment of unmet medical needs, particularly the treatment of neuropathic pain and hepatitis C. To date, we have not received approval for the sale of any of our drug candidates in any market and, therefore, have not generated any commercial revenues from the sales of our drug candidates.

We were established as a corporation under the laws of the State of Israel in 1993, and commenced operations to use and commercialize technology developed at the Weizmann Institute, in Rehovot, Israel. Since commencing operations, our activities have been primarily devoted to developing our technologies and drug candidates, acquiring pre-clinical and clinical-stage compounds, raising capital, purchasing assets for our facilities, and recruiting personnel. We are a development stage company and have no product sales to date. Our major sources of working capital have been proceeds from various private placements of equity securities, option and warrant exercises, from our initial public offering and from our placing and open offer transaction.
 
We have incurred negative cash flow from operations each year since our inception and we anticipate incurring negative cash flows from operating activities for the foreseeable future. We have spent, and expect to continue to spend, substantial amounts in connection with implementing our business strategy, including our planned product development efforts, our clinical trials and potential in-licensing and acquisition opportunities.
 
Our revenues currently consist of license fees and reimbursed out of pocket expenses from Cubist. We recognize the license fee revenues from our agreement with Cubist ratably over the expected life of the arrangement or until regulatory approval is obtained, with un-amortized amounts recorded as deferred revenues. We also recognize revenue related to reimbursed out of pocket expenses at the time that that we provide development services to Cubist. In July 2006, Cubist announced that it had decided not to make any further investment in the HepeX-B program while it evaluates its strategic options for HepeX-B, including the sub-licensing of the product. See “Item 4. Information on the Company - Business Overview - Products Under Development - HepeX-B.”
 
Our cost of revenues consist of costs associated with the Cubist program for HepeX-B which consist primarily of salaries and related personnel costs, fees paid to consultants and other third-parties for clinical and laboratory development, facilities-related and other expenses relating to the design, development, testing, and enhancement of our product candidate out-licensed to Cubist. In addition, we recognize license fee expenses associated with our agreement with Yeda proportional to our license fee agreement with Cubist, with un-amortized amounts recorded as deferred expenses.
 
Our research and development costs consist primarily of salaries and related personnel costs, fees paid to consultants and other third-parties for clinical and laboratory development, license and milestone fees, facilities-related and other expenses relating to the design, development, testing, and enhancement of our product candidates. We expense our research and development costs as they are incurred.
 
Our participations consist primarily of grants received from the Israeli government in support of our research and development activities. These grants are recognized as a reduction of expense as the related costs are incurred. See “- Research and Development, Patents and Licenses - Israeli Government Research and Development Grants,” below.
 
Our general and administrative expenses consist primarily of salaries and related expenses for executive, finance and other administrative personnel, professional fees, director fees and other corporate expenses, including investor relations, and facilities related expenses. We expense our general and administrative expenses as they are incurred.
 
Our business development costs consist primarily of salaries and related expenses for business development personnel, travel and professional fees. Our business development activities are related to partnering activities for our drug programs, seeking new development collaborations and in-licensing opportunities. We expense our business development expenses as they are incurred.
 
Our results of operations include non-cash compensation expense as a result of the grants of stock options. Compensation expense for awards of options granted to employees and directors represents the fair value of the award recorded over the respective vesting periods of the individual stock options. The expense is included in the respective categories of expense in the statement of operations. We experienced a significant increase in non-cash compensation in the fiscal year ended December 31, 2005, and continue to expect to incur significant non-cash compensation as a result of adopting Statement of Financial Accounting Standards No. 123, “Share Based Payment,” or SFAS 123R, on January 1, 2005.
 
 
35

 
For awards of options and warrants to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period for the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. These awards are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.
 
Our ongoing clinical trials will be lengthy and expensive. Even if these trials show that our drug candidates are effective in treating certain indications, there is no guarantee that we will be able to record commercial sales of any of our product candidates in the near future. In addition, we expect losses to continue as we continue to fund development of our drug candidates. As we continue our development efforts, we may enter into additional third-party collaborative agreements and may incur additional expenses, such as licensing fees and milestone payments. As a result, our periodical results may fluctuate and a period-by-period comparison of our operating results may not be a meaningful indication of our future performance.
 
Results of Operations
 
Years Ended December 31, 2006 and 2005
 
Revenues. Revenues for the year ended December 31, 2006, decreased by $2,743,000 to $454,000, as compared to revenues of $3,197,000 for the year ended December 31, 2005. The decrease in revenues for the year ended December 31, 2006, was due to the absence of reimbursed out of pocket expenses from Cubist, pursuant to our agreement with Cubist, under which we transferred full responsibility for completing the development of HepeX-B to Cubist. We do not expect our revenues to have a material impact on our operating results during the next fiscal year.
 
Cost of Revenues . Cost of revenues for the year ended December 31, 2006, decreased by $2,743,000 to $54,000, as compared to cost of revenues of $2,797,000, for the year ended December 31, 2005. The decrease in cost of revenues was due to the absence of development expenses for HepeX-B that were incurred pursuant to our licensing agreement with Cubist, as described above. We do not expect our cost of revenues to have a material impact on our operating results during the next fiscal year.
 
Research and Development Costs . Research and development costs increased by $2,916,000 to $10,229,000 for the year ended December 31, 2006, as compared to $7,313,000 for the year ended December 31, 2005. The increase in research and development costs was due primarily to an increase of $3,413,000 in expenses related to the inclusion of a full year of DOS which was acquired from VivoQuest in September 2005 (see “Item 10. Additional Information -Material Contracts” and “Item 4. Information on the Company”), offset by a decrease of approximately $66,000 and $431,000 in expenses related to the XTL-6865 and XTL-2125 development and clinical programs, respectively. The decreased expenses associated with our clinical programs were due to the benefit in 2006 of cost reductions associated with our 2005 restructuring (see “2005 Restructuring,” below).
 
We expect our research and development costs to increase in 2007 due to the recent in-licensing and planned clinical development of Bicifadine (see “Item 10. Additional Information -Material Contracts” and “Item 4. Information on the Company”), and also due to the continued development of our existing programs.
 
In-Process Research and Development . We did not record a charge for the year ended December 31, 2006. For the year ended December 31, 2005, we incurred a charge of $1,783,000 for the estimate of the portion of the VivoQuest transaction purchase price allocated to in-process research and development.
 
General and Administrative Expenses . General and administrative expenses increased by $119,000 to $5,576,000 for the year ended December 31, 2006, as compared to expenses of $5,457,000 for the year ended December 31, 2005. The increase in general and administrative expenses was due primarily to increased expenses associated with the hiring of our Chief Executive Officer in 2006 and with being a US public company, offset by a decrease of $649,000 in non-cash compensation costs, related to option grants. In 2005 a market capitalization-based milestone, associated with certain grants made to our Chairman and to one of our non-executive directors in 2005 (see “Item 6. Directors, Senior Management and Employees - Employment Agreements”) was achieved; in 2006, no such milestone was achieved, resulting in a decrease in non-cash compensation expense in 2006 as compared to 2005.
 
Excluding non-cash compensation costs, we do not expect any change in the level of our general and administrative costs during 2007.
 
 
36

 
Business Development Costs . Business development costs increased by approximately $414,000 to $641,000 for the year ended December 31, 2006, as compared to expenses of $227,000 for the year ended December 31, 2005. The increase in business developments costs was due primarily to increased expenses associated with our acquisition and in-licensing program, which included legal and due diligence expenses associated with the recent in-licensing of Bicifadine.
 
We expect our expenses to increase significantly during 2007 as a result of the expense associated with issuance the stock appreciation rights that were issued as a transaction advisory fee in connection with the recent in-licensing of Bicifadine (see “Item 10. Additional Information -Material Contracts” and “Item 4. Information on the Company”).
 
Financial and Other Income . Financial and other income for the year ended December 31, 2006, increased by $698,000 to $1,141,000, as compared to financial income of $443,000 for the year ended December 31, 2005. The increase in financial and other income was due primarily to a higher level of invested funds due to the completion of the private placement that closed in May 2006, as well as due to the general increase in short-term market interest rates when compared to the comparable period last year.
 
Income Taxes . Income tax expense increased by $149,000 to $227,000 for the year ended December 31, 2006, as compared to expenses of $78,000 for year ended December 31, 2005. Our income tax expense is attributable to taxable income from the continuing operations of our subsidiary in the US. This income is eliminated upon consolidation of our financial statements.
 
Years Ended December 31, 2005 and 2004
 
Revenues. Revenues for the year ended December 31, 2005, decreased by $257,000 to $3,197,000, as compared to revenues of $3,454,000 for the year ended December 31, 2004. The decrease in revenues for the year ended December 31, 2005, was due to a $526,000 decrease associated with the reimbursement for development expenses for HepeX-B that were incurred pursuant to our licensing agreement with Cubist, partially offset by an increase of $269,000 in licensing revenues pursuant to our agreement with Cubist.
 
Cost of Revenues . Cost of revenues for the year ended December 31, 2005, decreased by $504,000 to $2,797,000, as compared to cost of revenues of $3,301,000, for the year ended December 31, 2004. The decrease in cost of revenues was due to a $526,000 decrease in development expenses for HepeX-B that were incurred pursuant to our licensing agreement with Cubist, partially offset by a $22,000 increase in licensing expense pursuant to our agreement with Yeda.
 
Research and Development Costs . Research and development costs decreased by $4,672,000 to $7,313,000 for the year ended December 31, 2005, as compared to $11,985,000 for the year ended December 31, 2004. The decrease in research and development costs was due primarily to the absence of approximately $3,301,000 in expenses related to the development and clinical program of HepeX-B, due to the agreement with Cubist and the subsequent inclusion of development costs related to HepeX-B in Cost of Revenues above and a decrease of approximately $2,746,000 in expenses related to the XTL-6865 development and clinical program. This decrease was partially offset by an approximate $135,000 increase in expenses associated with XTL-2125 and an increase of $1,240,000 in expenses related to the inclusion of DOS from September 2005 following the completion of the VivoQuest transaction (see “Item 10. Additional Information - Material Contracts”).
 
In-Process Research and Development. For the year ended December 31, 2005, we incurred a charge of $1,783,000 for the estimate of the portion of the VivoQuest transaction purchase price allocated to in-process research and development.
 
General and Administrative Expenses . General and administrative expenses increased by $1,323,000 to $5,457,000 for the year ended December 31, 2005, as compared to expenses of $4,134,000 for the year ended December 31, 2004. The increase in general and administrative expenses was due primarily to an increase in non-cash compensation costs of $2,639,000, primarily related to the grant of options to certain of our directors and the application of SFAS 123R, offset by a decrease in expenses following our 2005 restructuring.
 
Business Development Costs . Business development costs decreased by approximately $583,000 to $227,000 for the year ended December 31, 2005, as compared to expenses of $810,000 for the year ended December 31, 2004. The decrease in business developments costs was due primarily to reduced compensation costs and reduced professional fees.
 
 
37

 
Financial and Other Income . Financial and other income for the year ended December 31, 2005, increased by $91,000 to $443,000, as compared to financial and other income of $352,000 for the year ended December 31, 2004. The increase in financial and other income was due primarily to increased interest income due to the general increase in short-term market interest rates when compared to the comparable period last year.
 
Income Taxes . Income tax expense increased by $29,000 to $78,000 for the year ended December 31, 2005, as compared to expenses of $49,000 for year ended December 31, 2004. Our income tax expense is attributable to taxable income from the continuing operations of our subsidiary in the US. This income is eliminated upon consolidation of our financial statements.
 
2005 Restructuring
 
In 2005, we implemented a restructuring plan designed to focus our resources on the development of our lead programs, with the goal of moving these programs through to clinical proof of concept. The 2005 restructuring included a 32 person reduction in our workforce, 31 of whom were in research and development and one of whom was in general and administrative. As part of the 2005 restructuring, we took a charge in 2005 of $168,000, relating to employee dismissal costs, $163,000 of which was included in research and development costs and $5,000 of which was included in general and administrative expenses. The 2005 Restructuring was completed in early 2006.

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

In December 2005, as a result of our restructuring, and in accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144, we reviewed the carrying value of certain lab equipment assets, and recorded an impairment charge in research and development costs in an amount of $26,000 in 2005.
 
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities and related disclosure of contingent assets and liabilities at the date of our financial statements and the reported amounts of revenues and expenses during the applicable period. Actual results may differ from these estimates under different assumptions or conditions.
 
We define critical accounting policies as those that are reflective of significant judgments and uncertainties and which may potentially result in materially different results under different assumptions and conditions. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include the following:
 
Revenue Recognition. We recognize the revenue from our licensing agreement with Cubist under the provisions of EITF 00-21 entitled “Revenue Arrangements with Multiple Deliverables” and SAB 104 entitled “Revenue Recognition.” Under those pronouncements, companies are required to allocate revenues from multiple-element arrangements to the different elements based on sufficient objective and reliable evidence of fair value. Since we have not been able to determine the fair value of each unit of accounting, the Cubist agreement was accounted for as one unit of accounting, after failing the separation criteria. We, therefore, recognize revenue on the Cubist agreement ratably over the life of the arrangement. If actual future results vary, we may need to adjust our estimates, which could have an impact on the timing and amount of revenue to be recognized.
 
Stock Compensation . We have granted options to employees, directors and consultants, as well as warrants to other third parties. Statement of Financial Accounting Standards, or SFAS, No. 123R “Share - Based Payment” (“SFAS 123R”) addresses the accounting for share-based payment transactions in which a company obtains employee services in exchange for (a) equity instruments of a company or (b) liabilities that are based on the fair value of a company’s equity instruments or that may be settled by the issuance of such equity instruments.
 
 
38

 
SFAS 123R eliminates the ability to account for employee share-based payment transactions using Accounting Principles Board Opinion No. 25 - “Accounting for Stock Issued to Employees,” or APB 25, and requires instead that such transactions be accounted for using the grant-date fair value based method. SFAS 123R applies to all awards granted or modified after the effective date of the standard. In addition, compensation costs for the unvested portion of previously granted awards that remain outstanding on the effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the pro-forma disclosure under SFAS No. 123 “Accounting for Stock-Based Compensation,” or SFAS 123.
 
Prior to January 1, 2005, we accounted for employee stock-based compensation under the intrinsic value model in accordance with APB 25 and related interpretations. We implemented early adoption of SFAS 123R, as of January 1, 2005, using the modified prospective application transition method, as permitted by SFAS 123R. Under such transition method, our financial statements for periods prior to the effective date of SFAS 123R (January 1, 2005) have not been restated. As a result of the early adoption, we reduced the deferred share-based compensation against the additional paid in capital.
 
The fair value of stock options granted with service conditions was determined using the Black-Scholes valuation model. Such value is recognized as an expense over the service period, net of estimated forfeitures, using the straight-line method under SFAS 123R. The fair value of stock options granted with market conditions was determined using a lattice model that incorporated a Monte Carlo Simulation method. Such value is recognized as an expense using the graded method under SFAS123R.
 
We account for equity instruments issued to third party service providers (non-employees) in accordance with the fair value method prescribed by SFAS123, and as of January 1, 2005, by SFAS 123R, and the provisions Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,” or EITF 96-18.
 
The estimation of stock awards that will ultimately vest requires significant judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period those estimates are revised. We consider many factors when estimating expected forfeitures, including types of awards, employee class, and historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.
 
Accounting For Income Taxes . In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires management to estimate our actual current tax exposure and assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred tax balances are computed using the tax rates expected to be in effect when these differences reversed. Valuation allowances are provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As a result of our “approved enterprise” status, our current tax rate in Israel is 0%, and therefore no deferred tax assets have been included in these financial statements in respect of carryforward losses. Our current income tax expense results from taxes imposed on our US-based subsidiary, and t he deferred tax assets included in these financial statements result from changes in respect of temporary differences between the financial reporting basis and the tax basis in our US-based subsidiary.
 
Paragraph 9(f) of SFAS No. 109, “Accounting for Income Taxes,” or SFAS 109, prohibits the recognition of deferred tax liabilities or assets that arise from differences between the financial reporting and tax bases of assets and liabilities that are measured from the local currency into dollars using historical exchange rates and that result from changes in exchange rates or indexing for tax purposes. Consequently, the above-mentioned differences were not reflected in the computation of deferred tax assets and liabilities.
 
Impairment . Pursuant to SFAS 144, long-lived assets, including certain intangible assets, to be held and used by an entity are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under SFAS 144, if the sum of the estimated future cash flows (undiscounted and without interest charges) of the long-lived assets held and used is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values. Assets “held for sale” are reported at the lower of their carrying amount or fair value less estimated costs to sell.
 
Accounting Related to the Valuation of In-Process Research and Development. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS 142, we recorded a charge of $1,783,000 in 2005 for the amount allocated to in-process research and development in the VivoQuest transaction. In-process research and development costs represent the relative fair value of purchased in-process research and development costs that, as of the transaction date, have not reached technological feasibility and have no proven alternative future use. As VivoQuest is a development stage enterprise that had not yet commenced its planned principal operations, we accounted for the transaction as an acquisition of assets pursuant to the provisions of SFAS 142. Accordingly, the purchase price was allocated to the individual assets acquired, based on their relative fair values, and no goodwill was recorded.
 
 
39


The fair value of the in-process research and development acquired was estimated by management with the assistance of an independent third-party appraiser, using the “income approach.” In the income approach, fair value is dependent on the present value of future economic benefits to be derived from ownership of an asset. Central to this approach is an analysis of the earnings potential represented by an asset and of the underlying risks associated with obtaining those earnings. Fair value is calculated by discounting future net cash flows available for distribution to their present value at a rate of return, which reflects the time value of money and business risk. In order to apply this approach, the expected cash flow approach was used. Expected cash flow is measured as the sum of the average, or mean, probability-weighted amounts in a range of estimated cash flows. The expected cash flow approach focuses on the amount and timing of estimated cash flows and their relative probability of occurrence under different scenarios. The probability weighted expected cash flow estimates are discounted to their present value using the risk free rate of return, since the business risk is incorporated in adjusting the projected cash flows to the probabilities for each scenario. The valuation was based on information that was available to us as of the transaction date and the expectations and assumptions deemed reasonable by our management. No assurance can be given, however, that the underlying assumptions or events associated with such assets will occur as projected.
 
Recently Issued Accounting Standards
 
EITF 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation).” In June 2006, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 06-03, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation)”. EITF 06-03 relates to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction. EITF 06-03 states that the presentation of the taxes, either on a gross or net basis, is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, “Disclosure of Accounting Policies,” if those amounts are significant. EITF 06-03 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006 (January 1, 2007 for us). We are currently evaluating the impact of this standard on our consolidated financial statements and disclosures.
 
FIN 48, “Accounting for Uncertainty in Income Taxes.” In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS 109. FIN 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination. If the tax position is deemed “more-likely-than-not” to be sustained, the tax position is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006 (January 1, 2007 for us). We are currently evaluating the impact of this standard on our consolidated financial statements and disclosures.

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

SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 expresses the SEC’s view regarding the process of quantifying financial statement misstatements. The bulletin was effective as of the year beginning January 1, 2006. The implementation of this bulletin had no impact on our consolidated financial statements and disclosures.
 
 
40


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

Impact of Inflation and Currency Fluctuations
 
We generate all of our revenues and hold most of our cash, cash equivalents and bank deposits in US dollars. While a substantial amount of our operating expenses are in US dollars, we incur a portion of our expenses in New Israeli Shekels. In addition, we also pay for some of our services and supplies in the local currencies of our suppliers. As a result, we are exposed to the risk that the US dollar will be devalued against the New Israeli Shekel or other currencies, and as result our financial results could be harmed if we are unable to guard against currency fluctuations in Israel or other countries in which services and supplies are obtained in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of currencies. These measures, however, may not adequately protect us from the adverse effects of inflation in Israel. In addition, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the New Israeli Shekel in relation to the dollar or that the timing of any devaluation may lag behind inflation in Israel. To date, our business has not been materially adversely affected by changes in the US dollar exchange rate or by effects of inflation in Israel.
 
Governmental Economic, Fiscal, Monetary or Political Policies that Materially Affected or Could Materially Affect Our Operations
 
Israeli companies are generally subject to income tax at the corporate tax rate of 29% in 2007 (31% in 2006), which will be reduced as follows: 2008 - 27%, 2009-26%, 2010 and after - 25%. However, we have been granted approved enterprise status, and we are, therefore, eligible for a reduced corporate tax under the Law for the Encouragement of Capital Investments, 1959. Subject to compliance with applicable requirements, the portion of our undistributed profits derived from the approved enterprise program will be tax-exempt for a period of two years commencing in the first year in which we generate taxable income and will be subject, for a period of five to eight years, to a reduced corporate tax of between 10% and 25%, depending on the percentage of non-Israeli investors holding our ordinary shares. The period of tax benefits with respect to our approved enterprise program has not yet commenced because we have yet to realize taxable income. However, this benefit period cannot extend beyond 12 years from the year of commencement of operations or 14 years from the year in which approval was granted, whichever is earlier. Since we are currently over 25% foreign owned, we are entitled to a reduced tax rate of 25%. If we subsequently pay a dividend out of income derived from the “approved enterprise” during the tax exemption period, it will be subject to withholding tax on the amount distributed, including any company tax on these amounts from which it was exempt , at the rate which would have been applicable had such income not been exempt (25%). These benefits may not be applied to reduce the US federal tax rate for any income derived by our US subsidiary. To maintain our eligibility for these tax benefits, we must meet certain reporting requirements and certain conditions that we have either obligated ourselves to meet or that are included in the Certificate of Approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel. We may, in the foreseeable future, cease to be entitled to the aforesaid tax benefits, as we may not in the future be in compliance with the Certificate of Approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel due to a reduction in research and development activity in Israel. There can be no assurance that such tax benefits will continue in the future at their current levels or otherwise.
 
As of December 31, 2006, XTL Biopharmaceuticals Ltd. did not have any taxable income. As of December 31, 2006, our net operating loss carryforwards for Israeli tax purposes amounted to approximately $110.6 million. Under Israeli law, these net-operating losses may be carried forward indefinitely and offset against future taxable income, including capital gains from the sale of assets used in the business, with no expiration date.
 
For a description of Israeli government policies that affect our research and development expenses, and the financing of our research and development, see “-Research and Development, Patents and Licenses - Israeli Government Research and Development Programs,” below.
 
 
41

 
Liquidity and Capital Resources
 
We have financed our operations from inception primarily through our initial public offering, various private placement transactions, our August 2004 placing and open offer transaction and option and warrant exercises. As of December 31, 2006, we had received net proceeds of $45.7 million from our initial public offering, net proceeds of $15.4 million from the 2004 placing and open offer transaction, net proceeds of approximately $67.6 million from various private placement transactions, including the March 2006 private placement that closed in May 2006, and proceeds of $2.1 million from the exercise of options and warrants.
 
As of December 31, 2006, we had $25.2 million in cash, cash equivalents, and short-term bank deposits, an increase of $11.8 million from December 31, 2005. Cash used in operating activities for the year ended December 31, 2006, was $12.6 million, as compared to $10.5 million for the year ended December 31, 2005. This increase in cash used in operating activities was due primarily to increased expenditures associated with the execution of our business plan. For the year ended December 31, 2006, net cash used in investing activities of $20.8 million, as compared to $9.5 million in net cash provided from investing activities, was primarily the result of investment of a portion of the proceeds of our private placement that closed in May 2006 in short-term bank deposits. For the year ended December 31, 2006, net cash provided by financing activities of $24.5 million, as compared to $1.5 million for the year ended December 31, 2005, was the result of our $24.4 million private placement that closed in May 2006, and $0.1 million of proceeds from the exercise of stock options in 2006.
 
Our cash and cash equivalents, as of December 31, 2006, were invested in highly liquid investments such as cash and short-term bank deposits. As of December 31, 2006, we are unaware of any known trends or any known demands, commitments, events, or uncertainties that will, or that are reasonably likely to, result in a material increase or decrease in our required liquidity. We expect that our liquidity needs during 2007 will continue to be funded from existing cash, cash equivalents, and short-term bank deposits.
 
Based on our current business plan, we believe that we have sufficient resources to fund our operations for approximately the next 12 months. We do believe, however, that we will seek additional capital during the next 12 months through public or private equity offerings, debt financings and/or collaborative, strategic alliance and licensing arrangements. We have made no determination at this time as to the amount, method or timing of any such financing. Such additional financing may not be available when we need it .
 
Our forecast of the period of time through which our cash, cash equivalents and short-term investments will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties. The actual amount of funds we will need to operate is subject to many factors, some of which are beyond our control. These factors include the following:
 
·
the timing of expenses associated with manufacturing and product development of the proprietary drug candidates within our portfolio and those that may be in-licensed, partnered or acquired;
   
·
our ability to achieve our milestones under licensing arrangements;
   
·
the timing of the in-licensing, partnering and acquisition of new product opportunities; and
   
·
the costs involved in prosecuting and enforcing patent claims and other intellectual property rights.
 
We have based our estimate on assumptions that may prove to be inaccurate. We may need to obtain additional funds sooner or in greater amounts than we currently anticipate. Potential sources of financing may be obtained through strategic relationships, public or private sales of our equity or debt securities, and other sources. We may seek to access the public or private equity markets when conditions are favorable due to our long-term capital requirements. We do not have any committed sources of financing at this time, and it is uncertain whether additional funding will be available when we need it on terms that will be acceptable to us, or at all. If we raise funds by selling additional shares of our ordinary shares or other securities convertible into shares of our ordinary shares, the ownership interest of our existing shareholders will be diluted. If we are not able to obtain financing when needed, we may be unable to carry out our business plan. As a result, we may have to significantly limit our operations, and our business, financial condition and results of operations would be materially harmed. See “Item 3. Key Information - Risk Factors - Risks Related to Our Financial Condition.”
 
Off-Balance Sheet Arrangements
 
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
 
 
42

 
Obligations and Commitments
 
As of December 31, 2006, we had known contractual obligations, commitments and contingencies of $1,919,000. Of this amount, $469,000 relates to research and development agreements, of which $441,000 is due within the next year, with the remaining balance due as per the schedule below. The additional $1,450,000 relates to our operating lease obligations, of which $584,000 is due within the next year, with the remaining balance due as per the schedule below.

   
Payment due by period
 
Contractual obligations
 
Total
 
Less than
1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Research & development agreements
 
$
469,000
 
$
441,000
 
$
28,000
 
$
--
 
$
--
 
Operating leases
   
1,450,000
   
584,000
   
866,000
   
--
   
--
 
Total
 
$
1,919,000
 
$
1,025,000
 
$
894,000
 
$
--
 
$
--
 

Additionally, we have undertaken to make contingent milestone payments to certain licensors of up to approximately $48.5 million over the life of the licenses, of which approximately $34.0 million will be due upon or following regulatory approval of the drugs. In some cases, these contingent payments will only be triggered upon receipt of royalties on sales of related products and in certain cases will partially offset royalties we would otherwise owe those licensors. See “Item 4. Information on the Company - Business Overview - Licensing Agreements and Collaborations” above.

We also have a commitment to make contingent payments to the Office of the Chief Scientist of up to approximately $17.0 million, all of which is due from royalties of approximately 3%-5% from proceeds from net sales of products in the research and development of which the Israeli government participated in by way of grants, as discussed in the immediately following section.

In addition, in January 2007, we signed an agreement with DOV to in-license the worldwide rights for Bicifadine. In accordance with the terms of the license agreement, we made an up-front payment of $7.5 million in cash. In addition, we will make milestone payments of up to $126.5 million, in cash and/or ordinary shares over the life of the license, of which up to $115 million will be due upon approval of the product. We are also obligated to pay royalties to DOV on net sales of the product. In addition, we have committed to pay a third party a transaction advisory fee in the form of stock appreciation rights in an amount equivalent to 3% of our fully diluted ordinary shares at the close of the transaction, vesting after one year of the close of the transaction, and 7% of our fully diluted ordinary shares at the close of the transaction, vesting following the first to occur of successful Phase III clinical trial results or our acquisition. Payment of the stock appreciation rights by XTL Development can be satisfied, at our discretion, in cash and/or by issuance of our ordinary shares. See “Item 10. Additional Information - Material Contracts”.


Research and Development, Patents and Licenses

Research and development costs consist primarily of salaries and related personnel costs, fees paid to consultants and outside service providers for clinical and laboratory development, facilities-related and other expenses relating to the design, development, testing, and enhancement of our product candidates and technologies.

The following table sets forth the research and development costs for each of our clinical-stage projects, our pre-clinical activities, and for all other research and development programs for the periods presented. Whether or not and how quickly we complete development of our clinical stage projects is dependent on a variety of factors, including the rate at which we are able to engage clinical trial sites and the rate of enrollment of patients. As such, the costs associated with the development of our drug candidates may change significantly. For a further discussion of factors that may affect our research and development, see “Item 3. Risk Factors - Risks Related to Our Business,” and “Item 4.Information on the Company - Business Overview - Products Under Development” above.
 
 
43


   
Years ended December 31,
 
   
 
2006
 
 
2005
 
 
2004
 
Cumulative, as of
December 31, 2006
 
XTL-2125
                 
Research and development costs
 
$
2,936,000
 
$
3,367,000
 
$
3,232,000
 
$
12,301,000
 
Less participations
   
--
   
--
   
--
   
(168,000
)
     
2,936,000
   
3,367,000
   
3,232,000
   
12,133,000
 
                           
XTL-6865
                         
Research and development costs
   
2,640,000
   
2,706,000
   
5,452,000
   
24,259,000
 
Less participations
   
--
   
--
   
--
   
(2,540,000
)
     
2,640,000
   
2,706,000
   
5,452,000
   
21,719,000
 
                           
HepeX-B 1
                         
Research and development costs
   
--
   
2,743,000
   
6,570,000
   
26,985,000
 
Less participations
   
--
   
(2,743,000
)
 
(3,269,000
)
 
(10,173,000
)
 
   
--
   
--
   
3,301,000
   
16,812,000
 
                           
Other research and development programs 2
                         
Research and development costs
   
4,653,000
   
1,240,000
   
--
   
35,586,000
 
Less participations
   
--
   
--
   
--
   
(4,081,000
)
     
4,653,000
   
1,240,000
   
--
   
31,505,000
 
                           
Total Research and development
                         
Research and development costs
   
10,229,000
   
10,056,000
   
15,254,000
   
99,131,000
 
Less participations
   
--
   
(2,743,000
)
 
(3,269,000
)
 
(16,962,000
)
     
10,229,000
   
7,313,000
   
11,985,000
   
82,169,000
 
____________________
1 Includes $6,012,000 in development costs for HepeX-B incurred from June 2004, the date we out-licensed HepeX-B to Cubist, for which we were subsequently reimbursed by Cubist pursuant to our license agreement. The amount was classified in revenues and cost of revenues in our statement of operations.
2 Other research and development programs includes DOS from September 2005 pursuant to the completion of the VivoQuest transaction and also includes early stage discovery research activities that ceased in 2003.

Israeli Government Research and Development Grants

In the past, we participated in programs offered by the Office of the Chief Scientist under the Industry, Trade and Labor Ministry of Israel that support research and development activities. We did not apply for, or receive, grants from the Office of the Chief Scientist for the years ended December 31, 2006, 2005 and 2004.

In the past, we received grants from the Office of the Chief Scientist for several projects. Under the terms of these grants, we will be required to pay a royalty ranging between 3% to 5% of the net sales of products developed from an Office of the Chief Scientist-funded project, beginning with the commencement of sales of such products and ending when 100% of the dollar value of the grant is repaid (100% plus LIBOR interest applicable to grants received on or after January 1, 1999). The royalty rate (between 3% and 5%) varies depending on the amount of years that lapse between receipt of the grant and its repayment by us. At the time grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed, as above, we are not obligated to pay any such royalties. At December 31, 2006, the maximum amount of the contingent liability in respect of royalties related to ongoing projects including interest and LIBOR rate was equal to $3,442,000.
 
Israeli law requires that the manufacture of products developed with government grants be carried out in Israel, unless the Office of the Chief Scientist provides a special approval to the contrary. This approval, if provided, is generally conditioned on an increase in the total amount to be repaid to the Office of the Chief Scientist to between 120% and 300% of the amount of funds granted. The specific increase within this range would depend on the extent of the manufacturing to be conducted outside of Israel. Alternatively, the restriction on manufacturing outside of Israel will not apply to the extent that plans to manufacture were disclosed when filing the application for funding (and provided the application was approved based on the information disclosed in the application). In such circumstances, the Office of the Chief Scientist will take into account the proposal that Office of the Chief Scientist-funded projects will have an overseas manufacturing component. Under applicable Israeli law, Israeli government consent is required to transfer to Israeli third parties technologies developed under projects which the government funded. Transfer of Office of the Chief Scientist funded technologies outside of Israel is prohibited. Israeli law further specifies that both the transfer of know-how as well as the transfer of intellectual property rights in such know-how are subject to the same restrictions. These restrictions do not apply to exports from Israel or the sale of products developed with these technologies.
 
 
44

 
We have received the approval of the Office of the Chief Scientist for the transfer of manufacturing rights of our HepeX-B product under the terms of the agreement with Cubist. As a consequence, we are obligated to repay the grants received from the Office of the Chief Scientist for the financing of the HepeX-B product from any amounts received by us from Cubist due to the sales of HepeX-B product, at a percentage rate per annum calculated based on the aggregate amount of grants received from the Office of the Chief Scientist divided by all amounts invested by us in the research and development activities of HepeX-B, and up to an aggregate amount of 300% of the original amounts received for such project, including interest at the LIBOR rate. As of December 31, 2006, the aggregate amount received from the Office of the Chief Scientist for the financing of the HepeX-B project including interest and LIBOR rate was equal to $4,533,000. At December 31, 2006, the maximum amount of the contingent liability in respect of royalties related to HepeX-B product was $13,599,000.
 
Trend Information
 
Please see “Item 5. Operating and Financial Review and Prospects” and “Item 4. Information on the Company” for trend information.
 
 
 
 
 

45

 
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
Directors and Senior Management
 
The following sets forth information with respect to our directors and executive officers as of February 28, 2007. Except as noted, the business address for each of the following is 750 Lexington Avenue, 20 th Floor, New York, NY 10022.

Name
  Age
Position
Michael S. Weiss
41
Chairman of the Board of Directors
William J. Kennedy, Ph.D
62
Non Executive Director
Ido Seltenreich (1)
35
Non Executive and External Director
Vered Shany, D.M.D (1)
42
Non Executive and External Director
Ben Zion Weiner, Ph.D (1)
62
Non Executive Director
Ron Bentsur
41
Chief Executive Officer
Bill Kessler (1)
41
Director of Finance

(1) Business address is Kiryat Weizmann Science Park, Building 3, POB 370, Rehovot 76100, Israel.
 
Michael S. Weiss has served as a director of our company since November 2004, and was appointed interim Chairman of the Board in March 2005 and Chairman of the Board in August 2005. Mr. Weiss is currently the Chairman and CEO of Keryx Biopharmaceuticals, Inc. (Nasdaq: KERX). Prior to that, from 1999-2002, Mr. Weiss was the founder, chairman and CEO of ACCESS Oncology, Inc., a private cancer company subsequently acquired by Keryx. Prior to that, Mr. Weiss was Senior Managing Director at Paramount Capital, Inc. From 1991-1993, Mr. Weiss was an attorney at Cravath, Swaine & Moore. Mr. Weiss received his B.A., magna cum laude from State University of New York at Albany and was awarded a Juris Doctorate degree from Columbia University Law School.
 
William J. Kennedy has served as a director of our company since February 2005. Dr. Kennedy retired as Vice President, Drug Regulatory Affairs, for Zeneca Pharmaceuticals Group in October 1999, and since that time has served as a regulatory consultant to the pharmaceutical industry. Prior to joining Zeneca Pharmaceuticals in 1986, Dr. Kennedy worked in regulatory affairs at G.D. Searle & Co., Kalipharma Inc., Berlex Laboratories, Inc. and Pfizer Pharmaceuticals, Inc. Dr. Kennedy earned a B.S. from Siena College, a M.A. from Clark University and a Ph.D in Pharmacology from SUNY, Buffalo. Prior to joining the industry in 1977, he was an Associate Research Professor at Yale University conducting research in Molecular Biology and Recombinant DNA.
 
Ido Seltenreich has served as a director of our company since August 2005. Mr. Seltenreich was the representative of Cinema City International N.V., or CCI, in the Czech Republic, for which he had served as the Managing and Financing Director from October 1999 to September 2006.  From July 2003 to August 2005, Mr. Seltenreich also served as a member of the Board of Directors of an intragroup company of CCI, a development company that operated in the Bulgarian market. Prior to that, from 1996-1999, Mr. Seltenreich worked at Luboshits Kasirer, a member of Ernst & Young. Mr. Seltenreich received his B.A. in economics and accounting from Haifa University and has an Israeli CPA license.
 
Vered Shany has served as a director of our company since August 2005. Since September 2006, Dr. Shany has served as the founder, Chairman and CEO of Lotus Bio Inc., a private medical diagnostics company. Since March 2002, Dr. Shany has managed Tashik Consultants, providing strategic consulting and corporate analysis for Israeli and international corporations and investment management in life sciences companies. Previously, Dr. Shany served as managing director of Up-Tech Ventures Ltd, a subsidiary of the Africa-Israel Investments Group from May 2000 to March 2002, as a member of the Board of Directors of the Weizmann Science Park Incubator from May 2000 to March 2002, and as vice president of marketing for Arad Technological Incubator from 1995 to 1999. Dr. Shany is currently an external director of Capital Point Ltd., since August 2006, and in Simigon Ltd., since September 2006. Dr. Shany served as an external director in Lahak Mutual Funds of Bank Hapoalim, from October 2000 to September 2006, and in SFKT - Shrem Fudim Kellner Technologies, from September 2000 to September 2006. Dr. Shany holds an M.A. in business administration from Heriot - Watt University, Edinburgh Business School, and she completed her D.M.D., Doctor of Medical Dentistry, and her B.Med.Sc, from Hebrew University of Jerusalem.
 
46


Ben Zion Weiner has served as a director of our company since February 2005. Dr. Weiner has been with Teva Pharmaceutical Industries Ltd. since 1975, after a Post Doctorate fellowship at Schering-Plough in the U.S. He received his Ph.D in Chemistry from the Hebrew University of Jerusalem. In January 2006, Dr. Weiner joined the Office of the CEO and assumed the role of Chief R&D Officer at Teva. Dr. Weiner served as Group Vice President—Global Products from April 2002 until January 2006, responsible for Global Generic Research and Development, Global Innovative Research and Development and innovative products marketing. Dr. Weiner is a member of Teva's Core Management Committee. He was granted twice the Rothschild Prize for Innovation/Export, in 1989 for the development of alpha D3 for Dialysis and Osteoporosis and in 1999 for the development of Copaxone® for Multiple Sclerosis.
 
Ron Bentsur has served as our Chief Executive Officer since January 2006. From June 2003 until January 2006, Mr. Bentsur served as Vice President, Finance and Investor Relations of Keryx Biopharmaceuticals, Inc. From October 2000 to June 2003, Mr. Bentsur served as Director of Investor Relations at Keryx. From July 1998 to October 2000, he served as Director of Technology Investment Banking at Leumi Underwriters, where he was responsible for all technology/biotechnology private placement and advisory transactions. From June 1994 to July 1998, Mr. Bentsur worked as an investment banker at ING Barings Furman Selz. Mr. Bentsur holds a B.A. in Economics and Business Administration with distinction from the Hebrew University of Jerusalem, Israel and an M.B.A., Magna Cum Laude, from New York University’s Stern Graduate School of Business.  
 
Bill Kessler has served as our Director of Finance since January 2006 and as our principal finance and accounting officer since July 2006. Mr. Kessler has over 15 years of corporate and Wall Street experience, working with publicly-traded and private companies in Israel and the United States. During 2005, Mr. Kessler served as a consultant to our company, where he spearheaded the process of listing XTL for trading on Nasdaq. From October 2003 until December 2005, Mr. Kessler served as a financial consultant to Keryx, and from April 2001 until September 2003, Mr. Kessler served as the controller of Keryx. From 1996-2000, Mr. Kessler served as Chief Financial Officer for TICI Software Systems Ltd., an Israeli based software development and consulting company. From 1990-1993, Mr. Kessler worked as a research analyst at Wertheim Schroder & Co., covering media and entertainment companies. Mr. Kessler holds a B.A., Magna Cum Laude, from Yeshiva University, and an M.B.A., from Columbia University.
 
Employment Agreements
 
We have an employment agreement dated as of January 3, 2006, with Ron Bentsur, Chief Executive Officer. Mr. Bentsur is entitled to an annual base salary of $225,000. He was entitled to receive a one time bonus of $25,000 in the event we are successful in securing an equity financing in excess of $10 million, and he received this bonus in 2006 as a result of our private placement completed in May 2006. He is entitled to receive discretionary bonus payments of up to 100% of his annual base salary on achievement of certain milestones recommended by the Remuneration Committee and set by our Board of Directors. In March 2006, Mr. Bentsur was also granted options to purchase a total of 7,000,000 ordinary shares at an exercise price equal to $0.774 per share (the closing price of our ADRs on the Nasdaq Global Market on January 2, 2006, divided by ten). These options are exercisable for a period of ten years from the date of issuance, and granted under the same terms and conditions as the 2001 Share Option Plan (see “- Share Ownership - Share Option Plans” below) and the specific terms of any option agreement entered into with Mr. Bentsur. Of these, 2,333,334 options shall vest as follows: 777,782 options on the one-year anniversary of the issuance of the options and 194,444 options at the end of each quarter thereafter for the following two years. The balance of options shall vest upon achievement of certain milestones (2,333,333 upon the achievement of $350 million market capitalization or $75 million in working capital, as set out in the agreement and 2,333,333 upon the achievement of $550 million market capitalization or $125 million in working capital, as set out in the agreement). We may terminate the agreement without cause (as defined in the agreement) on 30 days’ prior notice to Mr. Bentsur, and immediately and without prior notice for cause. Mr. Bentsur may terminate the agreement with good reason (as defined in the agreement) on 30 days’ prior notice to us. In addition, in the event of a merger, acquisition or other change of control or in the event that we terminate Mr. Bentsur, either without cause or as a result of his death or disability, or Mr. Bentsur terminates his agreement for good reason, any outstanding but unvested options granted to Mr. Bentsur under the agreement will immediately vest and the period during which he may exercise such options shall be the earlier of two years from the effective date of his termination or ten years from the date he commenced employment. Additionally, our Board of Directors shall have the discretion to accelerate all or a portion of Mr. Bentsur’s options at any time. If we choose to terminate the agreement for cause, Mr. Bentsur will not be owed any benefits, with the exception of any unpaid remuneration that would have accrued up to his date of termination.
 
 
47

 
We have an employment agreement dated February 10, 2006, and effective as of January 1, 2006, with Bill Kessler, our Director of Finance. Mr. Kessler is entitled to an annual base salary of $90,000. He is entitled to receive bonus payments at the discretion of the Chief Executive Officer and as set by our Board of Directors. Mr. Kessler shall also be entitled to receive one or more grants of options to purchase our ordinary shares, on terms and conditions set by our Board of Directors. Mr. Kessler is also entitled to receive benefits comprised of managers' insurance (pension and disability insurance), a continuing education plan, and the use of a company car. There is a non-compete clause surviving one year after termination of employment, preventing Mr. Kessler from competing directly with us. The employment agreement may be terminated by either party on three months prior written notice. In June 2006, our Board of Directors granted options to Mr. Kessler to purchase a total of 500,000 ordinary shares at an exercise price equal to $0.60 per share (the price of our ADRs in the private placement that we completed on March 22, 2006 and which closed on May 25, 2006, divided by ten, which was above the market price of our ADRs on the Nasdaq Global Market on such date divided by ten). These options vest over a four-year period and are exercisable for a period of ten years from the date of issuance, and were granted under the Share Option Plan 2001.
 
We have an agreement dated August 1, 2005, with Michael S. Weiss, our non-Executive Chairman of the Board of Directors. Mr. Weiss is entitled to annual remuneration of $150,000. He was granted options to purchase a total of 9,250,000 ordinary shares at an exercise price equal to $0.354 per share (which was below the market price of our ordinary shares on the date of grant). These options are exercisable for a period of five years from the date of issuance, and granted under the same terms and conditions as our 2001 Share Option Plan. The options shall vest upon achievement of certain market capitalization based milestones. As of December 31, 2006, 3,083,333 options that were granted to Mr. Weiss are vested. We may terminate the agreement without cause (as defined in the agreement) on 30 days’ prior notice to Mr. Weiss, and immediately and without prior notice for cause. Mr. Weiss may terminate the agreement with good reason (as defined in the agreement) on 30 days prior notice to us. In the event that the agreement is terminated without cause (in our case) or with good reason (in the case of Mr. Weiss), any outstanding but unvested options granted to Mr. Weiss under the agreement will immediately vest and the period during which he may exercise such options will be extended. If we choose to terminate the agreement for cause, Mr. Weiss will not be owed any benefits, with the exception of any unpaid remuneration that would have accrued through his date of termination.
 
We have three types of service agreements with our non-executive directors, other than our agreement with our non-Executive Chairman. The first type, entered into with Ben Zion Weiner on August 1, 2005, provides for a grant of 2,000,000 options having an exercise price equal to $0.354 per share (which was below the market price of our ordinary shares on the date of grant), exercisable for a period of five years and vesting upon achievement of certain market capitalization based milestones. As of December 31, 2006, 666,667 options that were granted to Mr. Weiner are vested. The second type of director service agreement, entered into with William Kennedy on August 1, 2005, provides for a grant of 60,000 options having an exercise price equal $0.853 (equal to the average price per share, as derived from the Daily Official List of the London Stock Exchange, in the three days preceding the date of such grant), vesting over the three years from the date of grant. In addition, the second type of director service agreement provides for three annual grants of 20,000 options each, at an exercise price equivalent to the then current closing price of our ADRs on the Nasdaq Global Market (subject to the ordinary share-ADR ratio). The third type, entered into with Ido Seltenreich and Vered Shany, on August 1, 2005, , respectively, does not provide for option grants, and has a term of 36 months, unless terminated by the director upon two months’ written notice to us. Each of the three types of director service agreements provides for an annual salary of $20,000, payments of $2,000 for attendance at each board meeting, $500 for attendance at each committee meeting, $500 for attendance at a board meeting held by teleconference, reimbursement of reasonable out-of-pocket expenses, and termination by the director on two months’ written notice to us.
 
Compensation
 
The aggregate compensation paid by us and by our wholly-owned subsidiary to all persons who served as directors or officers for the year 2006 (nine persons) was approximately $1.1 million. This amount includes payments made for social security, pension, disability insurance and health insurance premiums of approximately $0.1 million, as well as bonus accruals, payments made in lieu of statutory severance, payments for continuing education plans, payments made for the redemption of accrued vacation, and amounts expended by us for automobiles made available to our officers.
 
During 2006, we granted a total of 40,000 options to two of our non-executive directors: 20,000 options granted to William Kennedy, are exercisable at $0.325 per ordinary share (the closing price of our ADRs on the Nasdaq Global Market on the date of grant divided by ten), and expire ten years after date of grant; and 20,000 options granted to the estate of Jonathan Spicehandler are exercisable at $0.325 per ordinary share (which was below the closing price of our ADRs on the Nasdaq Global Market on the date of grant divided by ten, $0.328), and expire on December 31, 2007. Subsequent to the passing of Jonathan Spicehandler, our Board of Directors accelerated the vesting of any unvested options and extended the exercise period through to December 31, 2007.
 
 
48

 
In March 2006, the Board of Directors approved grants of a total of 9,898,719 options to our non-executive Chairman and 750,000 options to one of our non-executive directors, Ben Zion Weiner. These options are exercisable at an exercise price of $0.713 per share (the volume weighted average price per share of the ADRs on the Nasdaq Global Market during the thirty trading days prior to the Board of Directors’ approval divided by ten). The options vest as follows: (i) 1/3 of such options vest over three years, of which amounts, 1/3 vest and become exercisable upon the first anniversary of the issuance of the options and the remainder vest and become exercisable on a quarterly basis; (ii) 1/3 of such options vest and become exercisable upon our achieving a total market capitalization on a fully diluted basis of more than $350 million; and (iii) 1/3 of such options vest upon our achieving a total market capitalization on a fully diluted basis of more than $550 million. The options can be exercised for a period of ten years. The grant of such options is conditional upon approval of the shareholders at a duly convened shareholder meeting. During 2006, we did not seek shareholder approval, so the options had not been granted as of the date hereof.
 
All members of our Board of Directors who are not our employees are reimbursed for their expenses for each meeting attended. Our directors who are not external directors as defined by the Israeli Companies Act are eligible to receive share options under our share option plans. Non-executive directors do not receive any remuneration from us other than their fees for services as members of the board, additional fees if they serve on committees of the board and expense reimbursement.
 
In accordance with the requirements of Israeli Law, we determine our directors’ compensation in the following manner:
 
·
first, our audit committee reviews the proposal for compensation;
   
·
second, provided that the audit committee approves the proposed compensation, the proposal is then submitted to our Board of Directors for review, except that a director who is the beneficiary of the proposed compensation does not participate in any discussion or voting with respect to such proposal; and
   
·
finally, if our Board of Directors approves the proposal, it must then submit its recommendation to our shareholders, which is usually done in connection with our shareholders’ general meeting.
 
The approval of a majority of the shareholders voting at a duly convened shareholders meeting is required to implement any such compensation proposal.
 
Board practices
 
Election of Directors and Terms of Office
 
Our Board of Directors currently consists of five members, including our non-executive Chairman. Other than our two external directors, our new directors are elected by an ordinary resolution at the annual general meeting of our shareholders. The nomination of our directors is proposed by a nomination committee of our Board of Directors, whose proposal is then approved by the board. The current members of the nomination committee are William Kennedy, (chairman of the nomination committee), Ido Seltenreich and Vered Shany. Our board, following receipt of a proposal of the nomination committee, has the authority to add additional directors up to the maximum number of 12 directors allowed under our Articles. Such directors appointed by the board serve until the next annual general meeting of the shareholders. Unless they resign before the end of their term or are removed in accordance with our Articles, all of our directors, other than our external directors, will serve as directors until our next annual general meeting of shareholders. In November 2006, at the annual general meeting of our shareholders, Michael Weiss, Ben Zion Weiner and William Kennedy were re-elected to serve as directors of our company. Ido Seltenreich and Vered Shany were elected to serve as external directors of our company at the annual general meeting that took place in August 2005. Ido Seltenreich and Vered Shany are serving as external directors pursuant to the provisions of the Israeli Companies Law for a three-year term ending in August 2008, as more fully described below. After this date, their term of service may be renewed for an additional three-year term.
 
None of our directors or officers have any family relationship with any other director or officer.
 
None of our directors are entitled to receive any severance or similar benefits upon termination of his or her service, except for our chairman, as more fully described above in “ - Employment Agreements” above.
 
Our Articles permit us to maintain directors and officers’ liability insurance and to indemnify our directors and officers for actions performed on behalf of us, subject to specified limitations. We maintain a directors and officers insurance policy which covers the liability of our directors and officers as allowed under Israeli Companies Law.
 
 
49

 
External and Independent Directors
 
The Israeli Companies Law requires Israeli companies with shares that have been offered to the public either in or outside of Israel to appoint two external directors. No person may be appointed as an external director if that person or that person’s relative, partner, employer or any entity under the person’s control, has or had, on or within the two years preceding the date of that person's appointment to serve as an external director, any affiliation with the company or any entity controlling, controlled by or under common control with the company. The term affiliation includes:
 
·
an employment relationship;
   
·
a business or professional relationship maintained on a regular basis;
   
·
control; and
   
·
service as an office holder, other than service as an officer for a period of not more than three months, during which the company first offered shares to the public.
 
No person may serve as an external director if that person’s position or business activities create, or may create, a conflict of interest with that person's responsibilities as an external director or may otherwise interfere with his/her ability to serve as an external director. If, at the time external directors are to be appointed, all current members of the Board of Directors are of the same gender, then at least one external director must be of the other gender. A director in one company shall not be appointed as an external director in another company if at that time a director of the other company serves as an external director in the first company. In addition, no person may be appointed as an external director if he/she is a member or employee of the Israeli Security Authority, and also not if he/she is a member of the Board of Directors or an employee of a stock exchange in Israel.
 
External directors are to be elected by a majority vote at a shareholders' meeting, provided that either:
 
·
the majority of shares voted at the meeting, including at least one-third of the shares held by non-controlling shareholders voted at the meeting, vote in favor of election of the director, with abstaining votes not being counted in this vote; or
   
·
the total number of shares held by non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company.
 
The initial term of an external director is three years and may be extended for an additional three-year term. An external director may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if such external director ceases to meet the statutory qualifications for their appointment or violates his or her duty of loyalty to the company. At least one external director must serve on every committee that is empowered to exercise one of the functions of the Board of Directors.
 
An external director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with service provided as an external director.
 
Ido Seltenreich and Vered Shany serve as external directors pursuant to the provisions of the Israeli Companies Law and as our independent directors under the corporate governance codes of practice requirements of the London Stock Exchange. They both serve on our audit committee, our nomination committee and our compensation committee.
 
Subject to certain exceptions, issuers that list on Nasdaq must have boards of directors including a majority of independent directors, as such term is defined by Nasdaq. We are in compliance with the independence requirements of both the SEC and Nasdaq.
 
 
50

 
Audit Committee
 
The Israeli Companies Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the company’s business and approving related party transactions as required by law. An audit committee must consist of at least three directors, including all of its external directors. The chairman of the Board of Directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted.
 
Our audit committee is currently comprised of three independent non-executive directors. The audit committee is chaired by Ido Seltenreich, who serves as the audit committee financial expert, with William Kennedy and Vered Shany as members. The audit committee meets at least twice a year and monitors the adequacy of our internal controls, accounting policies and financial reporting. It regularly reviews the results of the ongoing risk self-assessment process, which we undertake, and our interim and annual reports prior to their submission for approval by the full Board of Directors. The audit committee oversees the activities of the internal auditor, sets its annual tasks and goals and reviews its reports. The audit committee reviews the objectivity and independence of the external auditors and also considers the scope of their work and fees. In accordance with the Nasdaq requirements, our audit committee is directly responsible for the appointment, compensation and oversight of our independent auditors.
 
We have adopted a written charter for our audit committee, setting forth its responsibilities as outlined by Nasdaq rules and the regulations of the SEC. In addition, our audit committee has adopted procedures for the receipt, retention and treatment of complaints we may receive regarding accounting, internal accounting controls, or auditing matters and the submission by our employees of concerns regarding questionable accounting or auditing matters. In addition, both SEC and Nasdaq rules mandate that the audit committee of a listed issuer consist of at least three members, all of whom must be independent, as such term is defined by rules and regulations promulgated by the SEC. We are in compliance with the independence requirements of both the SEC and Nasdaq.
 
Approval of Compensation to Our Officers
 
The Israeli Companies Law prescribes that compensation to officers must be approved by a company's Board of Directors. Nasdaq corporate governance rules require that compensation of the chief executive officer and other executive officers be determined, or recommended to the Board of Directors, by a majority of the independent directors or by a compensation committee comprised solely of independent directors. We have established a compensation committee in compliance with the Israeli Companies Law and Nasdaq rules.
 
Our compensation committee consists of three independent directors: Vered Shany (chairman of the compensation committee), William Kennedy and Ido Seltenreich. The responsibilities of the compensation committee are to set our overall policy on executive remuneration and to decide the specific remuneration, benefits and terms of employment for each senior manager, including the Chief Executive Officer.
 
The objectives of the compensation committee’s policies are that senior managers should receive compensation which is appropriate given their performance, level of responsibility and experience. Compensation packages should also allow us to attract and retain executives of the necessary caliber while, at the same time, motivating them to achieve the highest level of corporate performance in line with the best interests of shareholders. In order to determine the elements and level of remuneration appropriate to each executive director, the compensation committee reviews surveys on executive pay, obtains external professional advice and considers individual performance.
 
Research and Development Committee
 
Our research and development committee is currently comprised of three external directors, Ben-Zion Weiner, William Kennedy and Michael Weiss. The research and development committee oversees our current and proposed research and development activities in an advisory role and is only authorized to make recommendations to our Board of Directors.
 
 
51

 
Internal Auditor
 
Under the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company's actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor cannot be an office holder, an interested party or a relative of an office holder or interested party, and he or she may not be the company's independent accountant or its representative. We comply with the requirement of the Israeli Companies Law relating to internal auditors. Our internal auditors examine whether our various activities comply with the law and orderly business procedure.
 
Compliance with Nasdaq Corporate Governance Requirements
 
Under the Nasdaq corporate governance rules, foreign private issuers are exempt from many of the requirements if they instead elect to comply with home country practices and disclose where they have elected to do so. As noted above, we are currently in compliance with Nasdaq rules relating to the independence of our Board of Directors and its committees, however, as discussed below, we may in the future elect to comply with the practice required under Israeli law.
 
Pursuant to Nasdaq Marketplace Rule 4350(a)(i), foreign private issuers may elect to follow home country practices in lieu of certain Nasdaq corporate governance requirements by submitting to Nasdaq a written statement from an independent counsel in the company's home country, certifying that the company's practices are not prohibited by the home country's laws. This letter is only required once, at the time of listing. We previously submitted to Nasdaq such a letter from our legal counsel in Israel in connection with the September 1, 2005, application for our ADRs to trade on the Nasdaq Global Market under the symbol “XTLB.”
 
On March 22, 2006, we completed a private placement of ordinary shares together with warrants for an aggregate consideration of approximately $28 million in gross proceeds. The transaction closed on May 25, 2006. In connection with the private placement, we relied on the exemption afforded by Nasdaq Marketplace Rule 4350(a)(i) from the requirements of Nasdaq Marketplace Rule 4350(i)(D), which requires that an issuer receive shareholder approval prior to an issuance of shares (or securities convertible into or exercisable for shares) which together with any sales by officers, directors or substantial shareholders of the company equals 20% or more of the shares or the voting power outstanding before the issuance.
 
Employees
 
As of February 28, 2007, we had 33 full-time equivalent employees. We and our Israeli employees are subject, by an extension order of the Israeli Ministry of Welfare, to a few provisions of collective bargaining agreements between the Histadrut, the General Federation of Labor Unions in Israel and the Coordination Bureau of Economic Organizations, including the Industrialists Associations. These provisions principally address cost of living increases, recreation pay, travel expenses, vacation pay and other conditions of employment. We provide our employees with benefits and working conditions equal to or above the required minimum. Other than those provisions, our employees are not represented by a labor union. We have written employment contracts with our employees, and we believe that our relations with our employees are good.
 
For the years ended December 31, 2006, 2005 and 2004, the number of our employees engaged in the specified activities, by geographic location, are presented in the table below.
 
 
52

 
   
Year ended December 31,
 
   
2006
 
2005
 
2004
 
Research and Development
             
Israel
   
8
   
22
   
44
 
U.S
   
18
   
19
   
8
 
     
26
   
41
   
52
 
Financial and general management
                   
Israel
   
4
   
4
   
7
 
U.S
   
2
   
--
   
--
 
     
6
   
4
   
7
 
Business development
                   
Israel
   
--
   
--
   
--
 
U.S
   
1
   
1
   
1
 
     
1
   
1
   
1
 
Total
   
33
   
46
   
60
 
Average number of full-time employees
   
40
   
54
   
58
 

Share Ownership
 
The following table sets forth certain information as of February 28, 2007, regarding the beneficial ownership by our directors and executive officers. All numbers quoted in the table are inclusive of options to purchase shares that are exercisable within 60 days of February 28, 2007.
 
   
Amount and nature of beneficial ownership
 
 
 
 
Ordinary shares beneficially owned excluding options
 
Options 1 exercisable within 60 days of  February 28, 2007
 
Total ordinary shares beneficially owned
 
Percent of
ordinary shares beneficially owned
 
Michael S. Weiss
Chairman of the Board
   
--
   
3,083,333 2
   
3,083,333
   
1.38
%
William Kennedy
Director
   
--
   
25,000 3
   
25,000
   
*
 
Ben Zion Weiner
Director
   
--
   
666,667 2
   
666,667
   
*
 
Ido Seltenreich
Director
   
250,000 4
   
--
   
250,000
   
*
 
Vered Shany
Director
   
--
   
--
   
--
   
--
 
Ron Bentsur
Chief Executive Officer
   
48,220
   
777,782 5
   
826,002
   
*
 
Bill Kessler
Director of Finance
   
--
   
--
   
--
   
--
 
                           
All directors and executive officers as a group (7 persons)
   
298,220
   
4,552,782
   
4,851,002
   
2.16
%
-------------------------------------
                       
 
(1)
Options to purchase ordinary shares
 
(2)
At an exercise price of $0.354 per ordinary share, expiring July 31, 2010.
 
(3)
20,000 options at an exercise price of $0.354 per ordinary share, expiring July 31, 2015 and 5,000 options at an exercise price of $0.325 per ordinary share, expiring July 31, 2016.
 
(4)
Held under a blind trusteeship arrangement with a third-party.
 
(5)
At an exercise price of $0.774 per ordinary share, expiring March 15, 2016.
* Represents Less than 1% of ordinary shares outstanding.


Share Option Plans

We maintain the following share option plans for our and our subsidiary’s employees, directors and consultants. In addition to the discussion below, see Note 6 of our consolidated financial statements, included at “Item 18. Financial Statements.”
 
Our Board of Directors administers our share option plans and has the authority to designate all terms of the options granted under our plans including the grantees, exercise prices, grant dates, vesting schedules and expiration dates, which may be no more than ten years after the grant date. Options may not be granted with an exercise price of less than the fair market value of our ordinary shares on the date of grant, unless otherwise determined by our Board of Directors.
 
As of December 31, 2006, we have granted to employees, directors and consultants options that are outstanding to purchase up to 33,235,238 ordinary shares, under the five share option plans and pursuant to certain grants apart from these plans also discussed below under Non-Plan Share Options.
 
 
53

 
1998 Share Option Plan
 
Under a share option plan established in 1998, we granted options to our employees which are held by a trustee under section 3(i) of the Israeli tax ordinance, or the Tax Ordinance, of which 3,884,810 are outstanding and exercisable at an exercise price of $0.497 per ordinary share. The options are non-transferable.
 
The options granted thereunder are outstanding and exercisable until January 2008. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration. There are no options available for grant under this plan.
 
1999 Share Option Plan
 
Under a share option plan established in 1999, we granted options to our employees which are held by a trustee under section 3(i) of the Tax Ordinance, of which 790,790 are outstanding and exercisable, at an exercise price of $0.497 per ordinary share. The options are non-transferable.
 
The option term is for a period of ten years from the grant date. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration. There are no options available for grant under this plan.
 
1999 International Share Option Plan
 
Under an international share option plan established in 1999, we granted options to our employees during 1999 and 2000 of which 1,380,000 are outstanding and exercisable at an exercise price between $0.497 and $1.10 per ordinary share. The options are non-transferable.
 
The options granted thereunder are outstanding until October 2007. If the options are not exercised and the shares are not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration. There are no options available for grant under this plan.
 
2000 Share Option Plan
 
Under a share option plan established in 2000, we granted options to our employees which are held by a trustee under section 3(i) of the Tax Ordinance, of which 669,800 are outstanding and exercisable, at an exercise price of $1.10 per ordinary share. The options are non-transferable.
 
The option term is for a period of ten years from grant date. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration. There are no options available for grant under this plan.
 
2001 Share Option Plan
 
Under a share option plan established in 2001, referred to as the 2001 Plan, we granted options during 2001-2006, at an exercise price between $0.106 and $0.931 per ordinary share. Up to 11,000,000 options were available to be granted under the 2001 Plan, of which 5,714,838 are outstanding. Options granted to Israeli employees were in accordance with section 102 of the Tax Ordinance, under the capital gains option set out in section 102(b)(2) of the ordinance. The options are non-transferable.
 
The option term is for a period of ten years from the grant date. The options were granted for no consideration. The options vest over a four year period. As of December 31, 2006, 1,801,637 options are fully vested. As of December 31, 2006, the remaining number of options available for future grants under the 2001 Plan is 4,799,569.
 
 
54

 
Non-Plan Share Options
 
In addition to the options granted under our share option plans, there are 20,795,000 outstanding options, and 6,066,667 exercisable options, as of December 31, 2006, which were granted to employees, directors and consultants not under an option plan during 1997-2006. The options were granted at an exercise price between $0.20 and $2.11 per ordinary share. The options expire between 2008 and 2016.
 
This figure includes 9,250,000 and 2,000,000 options that were granted to our Chairman and Ben Zion Weiner, a non-executive director, respectively, at an exercise price equal to $0.354 per ordinary share, in August 2005, and are exercisable for a period of five years from the date of issuance, and vest upon achievement of certain market capitalization based milestones (see “-Employment Agreements,” above).
 
This figure also includes 7,000,000 options that were granted to our CEO, and are exercisable for a period of ten years from the date of issuance at an exercise price equal to $0.774 per ordinary share. Of these, 2,333,334 options vest over a three year period and the balance of options vest upon achievement of certain market capitalization based or working capital based milestones (see “-Employment Agreements above”).
 
In addition, this figure also includes options granted to consultants as in conjunction with a licensing agreement with Stanford University to purchase a total of up to 320,000 of our ordinary shares at an exercise price per share of $0.200.
 
 
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
Major Shareholders
 
As of February 28, 2007, we are not aware of any beneficial owner holding more than 5% of our outstanding ordinary shares. As of February 28, 2007, there were 5,110,019 ADRs outstanding, held by approximately 5 record holders, whose holdings represented approximately 23% of the total outstanding ordinary shares, substantially all of which record holders were in the US.
 
Related Party Transactions
 
We did not have any transactions or loans with related parties during the fiscal year ended December 31, 2005. For the fiscal year ended December 31, 2006 and during the two months ended February 28, 2007, we leased approximately 100 meters of office space from Keryx subject to a rent sharing agreement for $15,000 and $3,000, respectively. In addition, our Chief Executive Officer and our Director of Finance provide consulting services to Keryx; however, the amount of their time devoted to this endeavor and the compensation they receive, if any, is immaterial.
 
 
ITEM 8. FINANCIAL INFORMATION
 
Consolidated Statements and Other Financial Information
 
Our audited consolidated financial statements are included on pages F-1 through F-39 of this annual report.
 
Legal Proceedings
 
Neither we nor our subsidiaries are a party to, and our property is not the subject of, any material pending legal proceedings.
 
Dividend Distributions
 
We have never declared or paid any cash dividends on our ordinary shares and do not anticipate paying any such cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors.

In the event that we decide to pay a cash dividend from income that is tax exempt under our approved enterprise status, we would be liable for corporate tax on the amount distributed at the rate of up to 25%. See Note 8 of our Consolidated Financial Statements, included at “Item 18. Financial Statements,” and “Item 10. Additional Information - Taxation.” Cash dividends may be paid by an Israeli company only out of retained earnings as calculated under Israeli law. We currently have no retained earnings and do not expect to have any retained earnings in the foreseeable future.
 
 
55


Significant Changes
 
In-Licensing of Bicifadine

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

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


ITEM 9. THE OFFER AND LISTING
 
Markets and Share Price History
 
The primary trading market for our ordinary shares, having a nominal value of NIS 0.02, is the London Stock Exchange, where our shares have been listed and traded under the symbol “XTL” since our initial public offering in September of 2000. As of July 12, 2005, our ordinary shares are also listed on the Tel Aviv Stock Exchange under the symbol “XTL.” Since September 1, 2005, our ADRs have been traded on the Nasdaq Global Market under the symbol “XTLB,” with each ADR representing ten ordinary shares.

The following table sets forth, for the periods indicated, the high and low reported sales prices of the ordinary shares on the London Stock Exchange. For comparative purposes only, we have also provided such figures translated into US Dollars at an exchange rate of 1.958 US Dollars per British Pound, as reported by the Bank of Israel on February 28, 2007.
 
 
British Pence (p)
 
US Dollar
Last Six Calendar Months
High
 
Low
 
High
 
Low
February 2007
21.75
 
19.50
 
0.43
 
0.38
January 2007
24.25
 
14.25
 
0.47
 
0.28
December 2006
16.00
 
14.25
 
0.31
 
0.28
November 2006
19.00
 
14.75
 
0.37
 
0.29
October 2006
18.00
 
11.75
 
0.35
 
0.23
September 2006
16.00
 
12.00
 
0.31
 
0.23
               
Financial Quarters During the Past Two Full Fiscal Years
             
Fourth Quarter of 2006
19.00
 
11.75
 
0.37
 
0.23
Third Quarter of 2006
24.00
 
12.00
 
0.47
 
0.23
Second Quarter of 2006
40.75
 
23.50
 
0.80
 
0.46
First Quarter of 2006
45.00
 
34.25
 
0.88
 
0.67
Fourth Quarter of 2005
53.00
 
42.00
 
1.04
 
0.82
Third Quarter of 2005
61.75
 
38.00
 
1.21
 
0.74
Second Quarter of 2005
40.50
 
36.00
 
0.79
 
0.70
First Quarter of 2005
43.50
 
26.00
 
0.85
 
0.51
               
Last Five Full Financial Years
             
2006
45.00
 
11.75
 
0.88
 
0.23
2005
61.75
 
26.00
 
1.21
 
0.51
2004
32.25
 
13.00
 
0.63
 
0.25
2003
18.75
 
5.75
 
0.37
 
0.11
2002
64.00
 
11.50
 
1.25
 
0.23
 
 
56

 
The following table sets forth, for the periods indicated, the high and low sales prices of the ordinary shares on the Tel Aviv Stock Exchange. For comparative purposes only, we have also provided such figures translated into US Dollars at an exchange rate of 4.211 New Israeli Shekel per US Dollar, as reported by the Bank of Israel on February 28, 2007.
 
 
New Israeli Shekel
 
US Dollar
Last Six Calendar Months
High
 
Low
 
High
 
Low
February 2007
1.86
 
1.59
 
0.44
 
0.38
January 2007
2.02
 
1.12
 
0.48
 
0.27
December 2006
1.34
 
1.03
 
0.32
 
0.24
November 2006
1.57
 
1.24
 
0.37
 
0.29
October 2006
1.40
 
0.96
 
0.33
 
0.23
September 2006
1.31
 
1.04
 
0.31
 
0.25
Financial Quarters Since Listing
             
Fourth Quarter of 2006
1.57
 
0.96
 
0.37
 
0.23
Third Quarter of 2006
2.03
 
1.04
 
0.48
 
0.25
Second Quarter of 2006
3.37
 
2.03
 
0.80
 
0.48
First Quarter of 2006
3.66
 
2.86
 
0.87
 
0.68
Fourth Quarter of 2005
4.38
 
3.44
 
1.04
 
0.82
Full Financial Years Since Listing
             
2006
3.66
 
0.96
 
0.87
 
0.23
 
American Depositary Shares
 
The following table presents, for the periods indicated, the high and low market prices for our ADRs as reported on the Nasdaq Global Market since September 1, 2005, the date on which our ADRs were initially quoted. Prior to the initial quotation of our ADRs on the Nasdaq Global Market on September 1, 2005, our ADRs were not traded in any organized market and were not liquid.

 
US Dollar
Last Six Calendar Months
High
Low
February 2007
4.35
3.90
January 2007
4.99
2.69
December 2006
3.30
2.70
November 2006
3.69
2.85
October 2006
3.40
2.22
September 2006
3.02
2.08
Financial Quarters Since Listing
   
Fourth Quarter of 2006
3.69
2.22
Third Quarter of 2006
4.43
2.08
Second Quarter of 2006
7.50
4.40
First Quarter of 2006
8.12
6.13
Fourth Quarter of 2005
9.50
7.10
Full Financial Years Since Listing
   
2006
8.12
2.08
 
 
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ITEM 10. ADDITIONAL INFORMATION
 
Memorandum and Articles of Association
 
Objects and Purposes of the Company
 
Pursuant to Part B, Section 3 of our Articles of Association, we may undertake any lawful activity.
 
Powers and Obligations of the Directors
 
Pursuant to the Israeli Companies Law and our Articles of Association, a director is not permitted to vote on a proposal, arrangement or contract in which he or she has a personal interest. Also, the directors may not vote compensation to themselves or any members of their body, as that term is defined under Israeli law, without the approval of our audit committee and our shareholders at a general meeting. The requirements for approval of certain transactions are set forth below in “Item 10. Additional Information - Memorandum and Articles of Association-Approval of Certain Transactions.” The power of our directors to enter into borrowing arrangements on our behalf is limited to the same extent as any other transaction by us.
 
The Israeli Companies Law codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care generally requires an office holder to act with the same level of care as a reasonable office holder in the same position would employ under the same circumstances. The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and such person’s personal affairs, avoiding any competition with the company, avoiding exploiting any corporate opportunity of the company in order to receive personal advantage for such person or others, and revealing to the company any information or documents relating to the company’s affairs which the office holder has received due to his or her position as an office holder.
 
Indemnification of Directors and Officers; Limitations on Liability

Israeli law permits a company to insure an office holder in respect of liabilities incurred by him or her as a result of an act or omission in the capacity of an office holder for:

·
a breach of the office holder’s duty of care to the company or to another person;
   
·
a breach of the office holder’s fiduciary duty to the company, provided that he or she acted in good faith and had reasonable cause to believe that the act would not prejudice the company; and
   
·
a financial liability imposed upon the office holder in favor of another person.
   
   Moreover, a company can indemnify an office holder for any of the following obligations or expenses incurred in connection with the acts or omissions of such person in his or her capacity as an office holder:

·
monetary liability imposed upon him or her in favor of a third party by a judgment, including a settlement or an arbitral award confirmed by the court; and
   
·
reasonable litigation expenses, including attorneys’ fees, actually incurred by the office holder or imposed upon him or her by a court, in a proceeding brought against him or her by or on behalf of the company or by a third party, or in a criminal action in which he or she was acquitted, or in a criminal action which does not require criminal intent in which he or she was convicted; furthermore, a company can, with a limited exception, exculpate an office holder in advance, in whole or in part, from liability for damages sustained by a breach of duty of care to the company.

Our Articles of Association allow for insurance, exculpation and indemnification of office holders to the fullest extent permitted by law. We have entered into indemnification, insurance and exculpation agreements with our directors and executive officers, following shareholder approval of these agreements. We have directors’ and officers’ liability insurance covering our officers and directors for a claim imposed upon them as a result of an action carried out while serving as an officer or director, for (a) the breach of duty of care towards us or towards another person, (b) the breach of fiduciary duty towards us, provided that the officer or director acted in good faith and had reasonable grounds to assume that the action would not harm our interests, and (c) a monetary liability imposed upon him in favor of a third party.
 
 
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Approval of Certain Transactions
 
The Israeli Companies Law codifies the fiduciary duties that office holders, including directors and executive officers, owe to a company. An office holder, as defined in the Israeli Companies Law, is a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, other manager directly subordinate to the managing director or any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title. An office holder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest between the office holder's position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing to the company any information or documents relating to the company's affairs which the office holder has received due to his position as an office holder. Each person listed in the table under “Directors and Senior Management,” which is displayed under “Item 6. Directors, Senior Management and Employees - Directors and Senior Management,” holds such office in our Company. Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the Board of Directors, or a committee thereof. Arrangements regarding the compensation of directors also require audit committee and shareholders approval, with the exception of compensation to external directors in the amounts specified in the regulations discussed in “Item 6. Directors, Senior Management and Employees - Directors and Senior Management - Compensation.”
 
The Israeli Companies Law requires that an office holder promptly discloses any personal interest that he or she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. The disclosure must be made to our Board of Directors or shareholders without delay and prior to the meeting at which the transaction is to be discussed. In addition, if the transaction is an extraordinary transaction, as defined under the Israeli Companies Law, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of the foregoing, or by any corporation in which the office holder is a 5% or greater shareholder, or holder of 5% or more of the voting power, director or general manager or in which he or she has the right to appoint at least one director or the general manager. An extraordinary transaction is defined as a transaction not in the ordinary course of business, not on market terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.
 
In the case of a transaction which is not an extraordinary transaction (other than transactions relating to a director’s conditions of service), after the office holder complies with the above disclosure requirement, only board approval is required unless the Articles of Association of the company provides otherwise. The transaction must not be adverse to the company's interest. If the transaction is an extraordinary transaction, then, in addition to any approval required by the Articles of Association, the transaction must also be approved by the audit committee and by the Board of Directors, and under specified circumstances, by a meeting of the shareholders. An office holder who has a personal interest in a matter that is considered at a meeting of the Board of Directors or the audit committee may not be present at this meeting or vote on this matter.
 
The Israeli Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which is defined as a shareholder who has the ability to direct the activities of a company, other than in circumstances where this power derives solely from the shareholder’s position on the Board or any other position with the company, and includes a shareholder that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation of a controlling shareholder who is an office holder, require the approval of the audit committee, the Board of Directors and the shareholders of the company. The shareholders’ approval must either include at least one-third of the disinterested shareholders who are present, in person or by proxy, at the meeting, or, alternatively, the total shareholdings of the disinterested shareholders who vote against the transaction must not represent more than one percent of the voting rights in the company.
 
In addition, a private placement of securities that will increase the relative holdings of a shareholder that holds 5% or more of the company’s outstanding share capital, assuming the exercise by such person of all of the convertible securities into shares held by that person, or that will cause any person to become a holder of more than 5% of the company’s outstanding share capital, requires approval by the Board of Directors and the shareholders of the company. However, subject to certain exceptions under regulations adopted under the Israeli Companies Law, shareholder approval will not be required if the aggregate number of shares issued pursuant to such private placement, assuming the exercise of all of the convertible securities into shares being sold in such a private placement, comprises less than 20% of the voting rights in a company prior to the consummation of the private placement.
 
 
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Under the Israeli Companies Law, a shareholder has a duty to act in good faith towards the company and other shareholders and refrain from abusing his power in the company, including, among other things, voting in the general meeting of shareholders on the following matters:
 
·
any amendment to the Articles of Association;
   
·
an increase of the company's authorized share capital;
   
·
a merger; and
   
·
approval of interested party transactions that require shareholders approval.
 
In addition, any controlling shareholder, any shareholder who knows it can determine the outcome of a shareholders vote and any shareholder who, under a company’s Articles of Association, can appoint or prevent the appointment of an office holder, is under a duty to act with fairness towards the company. The Israeli Companies Law does not describe the substance of this duty. The Israeli Companies Law requires that specified types of transactions, actions and arrangements be approved as provided for in a company’s articles of association and in some circumstances by the audit committee, by the Board of Directors and by the shareholders. In general, the vote required by the audit committee and the Board of Directors for approval of these matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting.
 
Rights Attached to Ordinary Shares
 
Our authorized share capital consists of 300,000,000 ordinary shares, par value NIS 0.02 per share.
 
Holders of ordinary shares have one vote per share, and are entitled to participate equally in the payment of dividends and share distributions and, in the event of our liquidation, in the distribution of assets after satisfaction of liabilities to creditors. No preferred shares are currently authorized. All outstanding ordinary shares are validly issued and fully paid.
 
Transfer of Shares
 
Fully paid ordinary shares are issued in registered form and may be freely transferred under our Articles of Association unless the transfer is restricted or prohibited by another instrument or applicable securities laws.
 
Dividend and Liquidation Rights
 
We may declare a dividend to be paid to the holders of ordinary shares according to their rights and interests in our profits. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings.
 
This right may be affected by the grant of preferential dividend or distribution rights, to the holders of a class of shares with preferential rights that may be authorized in the future. Under the Israeli Companies Law, the declaration of a dividend does not require the approval of the shareholders of the company, unless the company's articles of association require otherwise. Our Articles provide that the Board of Directors may declare and distribute dividends without the approval of the shareholders.
 
Annual and Extraordinary General Meetings
 
We must hold our annual general meeting of shareholders each year no later than 15 months from the last annual meeting, at a time and place determined by the Board of Directors, upon at least 21 days’ prior notice to our shareholders to which we need to add additional three days for notices sent outside of Israel. A special meeting may be convened by request of two directors, 25% of the directors then in office, one or more shareholders holding at least 5% of our issued share capital and at least 1% of our issued voting rights, or one or more shareholders holding at least 5% of our issued voting rights. Notice of a general meeting must set forth the date, time and place of the meeting. Such notice must be given at least 21 days but not more than 45 days prior to the general meeting. The quorum required for a meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent between them at least one-third of the voting rights in the company. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place (with no need for any notice to the shareholders) or until such other later time if such time is specified in the original notice convening the general meeting, or if we serve notice to the shareholders no less than seven days before the date fixed for the adjourned meeting. If at an adjourned meeting there is no quorum present half an hour after the time set for the meeting, any number participating in the meeting shall represent a quorum and shall be entitled to discuss the matters set down on the agenda for the original meeting. All shareholders who are registered in our registrar on the record date, or who will provide us with proof of ownership on that date as applicable to the relevant registered shareholder, are entitled to participate in a general meeting and may vote as described in “Voting Rights” and “Voting by Proxy and in Other Manners,” below.
 
 
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Voting Rights
 
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares that represent more than 50% of the voting power represented at a shareholders meeting in which a quorum is present have the power to elect all of our directors, except the external directors whose election requires a special majority as described under the section entitled “Item 6. Directors, Senior Management and Employees - Board Practices - External and Independent Directors.”
 
Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Shareholders may vote in person or by proxy. These voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.
 
Under the Israeli Companies Law, unless otherwise provided in the Articles of Association or by applicable law, all resolutions of the shareholders require a simple majority. Our Articles of Association provide that all decisions may be made by a simple majority. See “-Approval of Certain Transactions” above for certain duties of shareholders towards the company.
 
Voting by Proxy and in Other Manners
 
Our Articles of Association enable a shareholder to appoint a proxy, who need not be a shareholder, to vote at any shareholders meeting. We require that the appointment of a proxy be in writing signed by the person making the appointment or by an attorney authorized for this purpose, and if the person making the appointment is a corporation, by a person or persons authorized to bind the corporation. In the document appointing a proxy, each shareholder may specify how the proxy should vote on any matter presented at a shareholders meeting. The document appointing the proxy shall be deposited in our offices or at such other address as shall be specified in the notice of the meeting not less than 48 hours before the time of the meeting at which the person specified in the appointment is due to vote.
 
The Israeli Companies Law and our Articles of Association do not permit resolutions of the shareholders to be adopted by way of written consent, for as long as our ordinary shares are publicly traded.
 
Limitations on the Rights to Own Securities
 
The ownership or voting of ordinary shares by non-residents of Israel is not restricted in any way by our Articles of Association or the laws of the State of Israel, except that nationals of countries which are, or have been, in a state of war with Israel may not be recognized as owners of ordinary shares.
 
Anti-Takeover Provisions under Israeli Law
 
The Israeli Companies Law permits merger transactions with the approval of each party’s board of directors and shareholders. In accordance with the Israeli Companies Law, a merger may be approved at a shareholders meeting by a majority of the voting power represented at the meeting, in person or by proxy, and voting on that resolution. In determining whether the required majority has approved the merger, shares held by the other party to the merger, any person holding at least 25% of the outstanding voting shares or means of appointing the board of directors of the other party to the merger, or the relatives or companies controlled by these persons, are excluded from the vote.
 
Under the Israeli Companies Law, a merging company must inform its creditors of the proposed merger. Any creditor of a party to the merger may seek a court order blocking the merger, if there is a reasonable concern that the surviving company will not be able to satisfy all of the obligations of the parties to the merger. Moreover, a merger may not be completed until at least 30 days have passed from the time the merger was approved in a general meeting of each of the merging companies, and at least 50 days have passed from the time that a merger proposal was filed with the Israeli Registrar of Companies.
 
 
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Israeli corporate law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of such acquisition, the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another shareholder with 25% or greater shares in the company. Similarly, Israeli corporate law provides that an acquisition of shares in a public company must be made by means of a tender offer if, as a result of the acquisition, the purchaser's shareholdings would entitle the purchaser to over 45% of the shares in the company, unless there is a shareholder with 45% or more of the shares in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received the approval of the company’s shareholders; (2) was from a 25% or greater shareholder of the company which resulted in the purchaser becoming a 25% or greater shareholder of the company, or (3) was from a 45% or greater shareholder of the company which resulted in the acquirer becoming a 45% or greater shareholder of the company. These rules do not apply if the acquisition is made by way of a merger. Regulations promulgated under the Israeli Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading external of Israel if, according to the law in the country in which the shares are traded, including the rules and regulations of the stock exchange or which the shares are traded, either:
 
·
there is a limitation on acquisition of any level of control of the company; or
   
·
the acquisition of any level of control requires the purchaser to do so by means of a tender offer to the public.

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

Rights of Shareholders
 
Under the Israeli Companies Law, our shareholders have the right to inspect certain documents and registers including the minutes of general meetings, the register of shareholders and the register of substantial shareholders, any document held by us that relates to an act or transaction requiring the consent of the general meeting as stated above under “-Approval of Certain Transactions,” our Articles of Association and our financial statements, and any other document which we are required to file under the Israeli Companies Law or under any law with the Registrar of Companies or the Israeli Securities Authority, and is available for public inspection at the Registrar of Companies or the Securities Authority, as the case may be.
 
If the document required for inspection by one of our shareholders relates to an act or transaction requiring the consent of the general meeting as stated above, we may refuse the request of the shareholder if in our opinion the request was not made in good faith, the documents requested contain a commercial secret or a patent, or disclosure of the documents could prejudice our good in some other way.
 
The Israeli Companies Law provides that with the approval of the court any of our shareholders or directors may file a derivative action on our behalf if the court finds the action is a priori, to our benefit, and the person demanding the action is acting in good faith. The demand to take action can be filed with the court only after it is serviced to us, and we decline or omit to act in accordance to this demand.
 
Enforceability of Civil Liabilities
 
We are incorporated in Israel and some of our directors and officers and the Israeli experts named in this report reside outside the US. Service of process upon them may be difficult to effect within the US. Furthermore, because substantially all of our assets, and those of our non-US directors and officers and the Israeli experts named herein, are located outside the US, any judgment obtained in the US against us or any of these persons may not be collectible within the US.
 
 
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We have been informed by our legal counsel in Israel, Kantor & Co., that there is doubt as to the enforceability of civil liabilities under the Securities Act or the Exchange Act, pursuant to original actions instituted in Israel. However, subject to particular time limitations, executory judgments of a US court for monetary damages in civil matters may be enforced by an Israeli court, provided that:
 
·
the judgment was obtained after due process before a court of competent jurisdiction, that recognizes and enforces similar judgments of Israeli courts, and the court had authority according to the rules of private international law currently prevailing in Israel;
   
·
adequate service of process was effected and the defendant had a reasonable opportunity to be heard;
   
·
the judgment is not contrary to the law, public policy, security or sovereignty of the State of Israel and its enforcement is not contrary to the laws governing enforcement of judgments;
   
·
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties;
   
·
the judgment is no longer appealable; and
   
·
an action between the same parties in the same matter is not pending in any Israeli court at the time the lawsuit is instituted in the foreign court.
   
We have irrevocably appointed XTL Biopharmaceuticals, Inc., our US subsidiary, as our agent to receive service of process in any action against us in any US federal court or the courts of the State of New York.
 
Foreign judgments enforced by Israeli courts generally will be payable in Israeli currency. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to render judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of the judgment. Under existing Israeli law, a foreign judgment payable in foreign currency may be paid in Israeli currency at the rate of exchange for the foreign currency published on the day before date of payment. Current Israeli exchange control regulations also permit a judgment debtor to make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily may be linked to Israel’s consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at that time. Judgment creditors must bear the risk of unfavorable exchange rates.
 
 
Material Contracts
 
Bicifadine License
 
In January 2007, XTL Development, our wholly owned subsidiary, signed an agreement with DOV to in-license the worldwide rights for Bicifadine, a serotonin and norepinephrine reuptake inhibitor. XTL Development intends to develop Bicifadine for the treatment of neuropathic pain - a chronic condition resulting from damage to peripheral nerves. In accordance with the terms of the license agreement, XTL Development made an initial up-front payment of $7.5 million in cash. In addition, XTL Development will make milestone payments of up to $126.5 million, in cash and/or in our ordinary shares over the life of the license, of which up to $115 million will be due upon or after regulatory approval of the product and the remaining $11.5 million will be due prior to regulatory approval of the product. XTL Development is also obligated to pay royalties to DOV on net sales of the product to DOV.
 
In addition, XTL Development has committed to pay a transaction advisory fee to a third party in the form of stock appreciation rights in the amount equivalent to 3% of our fully diluted ordinary shares at the close of the transaction, vesting one year after the close of the transaction, and 7% of our fully diluted ordinary shares at the close of the transaction, vesting following the first to occur of successful Phase III clinical trial results or the acquisition of XTL. Payment of the stock appreciation rights by XTL Development can be satisfied, at our discretion, in cash and/or by issuance of our ordinary shares.
 
Yeda License Agreement
 
In April of 1993, we entered into a research and license agreement with Yeda, which we refer to as the Yeda Agreement, under which Yeda granted us an exclusive worldwide license to use the Trimera patent portfolio and to exclusively use the information derived from the performance of certain research for the purposes specified in the agreement. Subject to earlier termination in accordance with the Yeda Agreement, the term of the license with respect to any licensed product made and/or sold or to any other licensed activity conducted in any country where a licensed patent covers such product or other licensed activity is until the date on which the last licensed patent in that country expires or until 12 years from the first commercial sale of the product (or first receipts to us from such other licensed activity) in such country, whichever is the longer period and in any other country until 12 years from the first commercial sale of such product (or first receipts to us from such other licensed activity) in that country. Similar provisions fix the term of the license with respect to licensed activities not attributable to any particular country. Under the agreement, any assignment or sublicense of the license granted by Yeda requires Yeda's prior written consent.
 
 
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The Yeda Agreement has undergone a number of amendments, one of the end results of which is that we shall pay to Yeda the following royalties in connection with the license: a royalty of 3% of all net sales received by us; 25% of amounts received by us on net sales of third parties (less certain royalties payable by us to third parties), but no more than 3% and no less than 1.5% of such net sales; and a royalty ranging between 20% to 40% on any receipts to us other than our net sales or receipts on net sales made by third parties. Furthermore, such amendments have also changed the termination provisions relating to Yeda’s entitlement to terminate the agreement if we do not pay Yeda a certain minimum amount of annual royalties of $100,000 or $200,000, depending on the year. We may terminate the agreement with Yeda with six months advance notice in which event our rights in any technology licensed by Yeda to us shall terminate and all rights in any technology derived from research and development activities performed by us in connection with the technology licensed by Yeda to us shall vest in Yeda.
 
In the agreement between Yeda, us and Cubist, whereby Yeda gave its consent relating to the grant of the license by us to Cubist under the terms of the HepeX-B collaboration, Yeda received the right to receive at least 1.5% of net sales of HepeX-B by Cubist sub-licensees, regardless of the amount received by us from Cubist in respect of such sales.
 
Cubist Collaboration
 
We have entered into a licensing agreement with Cubist dated June 2, 2004, as amended, under which we granted to Cubist an exclusive, worldwide license (with the right to sub-license) to commercialize HepeX-B and any other product containing a hMAb or humanized monoclonal antibody or fragment directed at the hepatitis B virus owned or controlled by us. In August 2005, we transferred full responsibility for completing the development of HepeX-B to Cubist. Cubist will be responsible for completing the development and for registration and commercialization of the product worldwide. Nevertheless, during the term of this agreement, we have an ongoing obligation to transfer to Cubist all information Cubist may reasonably require and to provide Cubist with reasonable access to pertinent employees of ours that have experience with or information related to HepeX-B. We are also required to file, prosecute and maintain the relevant patents at our sole expense.
 
In the event that the actual costs incurred in conducting activities that Cubist determines are necessary or advisable to obtain regulatory approval for HepeX-B for the prevention of recurrent hepatitis B infections in liver transplant patients exceed $33.9 million, any costs in excess shall be borne in equal share by us and Cubist.
 
Under the terms of the agreement, Cubist paid us an initial up-front payment of $1 million upon the signing of the agreement, a further aggregate amount of $1 million was paid in 2004, and an additional amount of up to $3 million will be paid upon achievement of certain regulatory milestones. We are entitled to receive royalties from net sales by Cubist, generally ranging from 10% to 17%, depending on levels of net sales achieved by Cubist, subject to certain deductions based on patent protection of HepeX-B in that territory, total costs of HepeX-B development, third party license payments and indemnification obligations.
 
Cubist has the right to sub-license HepeX-B. The sub-licensee fees we will receive in such cases will vary according to the territory, the subject of the sub-license, the patent protection of HepeX-B in that territory, total costs of HepeX-B development, third party license payments, indemnification obligations and local competition. For example, where HepeX-B is not patent protected and a competing product obtains more than an agreed percentage of the local market, we would receive no royalties on sales of HepeX-B.
 
Cubist has granted us the non-exclusive right of negotiation during the term of the agreement to obtain all or any portion of the rights to manufacture and supply HepeX-B or any other product containing an hMAb or humanized monoclonal antibody or fragment directed at the hepatitis B virus owned or controlled by us. Furthermore, in certain circumstances, we have the exclusive right to negotiate with Cubist to obtain from Cubist a sub-license to market and sell the HepeX-B or such other product in certain territories.
 
 
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We agreed that during the term of the agreement and for one year thereafter, we will not research, develop or commercialize any competitive product containing a human or humanized monoclonal antibody or fragment that is directed to and binds with the hepatitis B virus.
 
The agreement expires on the later of the last valid patent claim covering HepeX-B to expire or ten years after the first commercial sale of HepeX-B on a country-by-country basis.
 
In December 2005, Cubist announced the positive results of a Phase IIb study with HepeX-B, based on which Cubist planned to meet with the FDA to discuss a proposed Phase III trial design. In July 2006, Cubist reported that the FDA direction on the regulatory pathway for approval creates both operational and economic challenges to it. The size of the safety population the FDA is looking for translates to an extremely lengthy development timeline, as there are only about 500 liver transplants due to hepatitis B in the US and Europe each year. As of the date hereof, Cubist has decided not to make any further investment in the HepeX-B program while Cubist evaluates strategic options for HepeX-B.
 
VivoQuest Inc.

In August 2005, we entered into an asset purchase agreement with VivoQuest, a privately held biotechnology company based in the US, pursuant to which we agreed to purchase from VivoQuest certain assets, including VivoQuest’s laboratory equipment, and to assume VivoQuest’s lease of its laboratory space. In consideration, we paid $450,000 to VivoQuest, which payment was satisfied by the issuance of ordinary shares having a fair market value in the same amount as of the closing date. In addition, we entered into a license agreement with VivoQuest pursuant to which we acquired exclusive worldwide rights to VivoQuest’s intellectual property and technology. The license covers a proprietary compound library, including VivoQuest’s lead HCV compounds, that was developed through the use of Diversity Oriented Synthesis, or DOS, technology. The terms of the license agreement include an initial upfront license fee of approximately $941,000 that was paid in our ordinary shares. The license agreement also provides for additional milestone payments triggered by certain regulatory and sales targets. These milestone payments total $34.6 million, $25.0 million of which will be due upon or following regulatory approval or actual product sales, and are payable in cash or ordinary shares at our election. In addition, the license agreement requires that we make royalty payments on product sales. The asset purchase agreement and the license agreement with VivoQuest were completed in September 2005.
 
Exchange Controls
 
Under Israeli Law, Israeli non-residents who purchase ordinary shares with certain non-Israeli currencies (including dollars) may freely repatriate in such non-Israeli currencies all amounts received in Israeli currency in respect of the ordinary shares, whether as a dividend, as a liquidating distribution, or as proceeds from any sale in Israel of the ordinary shares, provided in each case that any applicable Israeli income tax is paid or withheld on such amounts. The conversion into the non-Israeli currency must be made at the rate of exchange prevailing at the time of conversion.
 
Taxation
 
The following discussion of Israeli and US tax consequences material to our shareholders is not intended and should not be construed as legal or professional tax advice and does not exhaust all possible tax considerations. To the extent that the discussion is based on new tax legislation, which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question. This summary does not purport to be a complete analysis of all potential tax consequences of owning ordinary shares or ADRs. In particular, this discussion does not take into account the specific circumstances of any particular shareholder (such as tax-exempt entities, certain financial companies, broker-dealers, shareholders subject to Alternative Minimum Tax, shareholders that actually or constructively own 10% or more of our voting securities, shareholders that hold ordinary shares or ADRs as part of straddle or hedging or conversion transaction, traders in securities that elect mark to market, banks and other financial institutions or shareholders whose functional currency is not the US dollar), some of which may be subject to special rules.
 
We urge shareholders to consult their own tax advisors as to the US, Israeli, or other tax consequences of the purchase, ownership and disposition of ordinary shares and ADRs, including, in particular, the effect of any foreign, state or local taxes. For purposes of the entire Taxation discussion, we refer to ordinary shares and ADRs collectively as ordinary shares.
 
 
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Israeli Tax Considerations
 
The following discussion refers to the current tax law applicable to companies in Israel, with special reference to its effect on us. This discussion also includes specified Israeli tax consequences to holders of our ordinary shares and Israeli Government programs benefiting us.
 
Tax Reforms
 
On January 1, 2003 a comprehensive tax reform took effect in Israel (the Law for Amendment of the Income Tax Ordinance (Amendment No. 132), 5762-2002, as amended) (which we refer to as “the 2003 Reform”). Pursuant to the 2003 Reform, resident companies are subject to Israeli tax on income on a worldwide basis. In addition, the concept of controlled foreign corporation was introduced according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income or certain capital gains). An Israeli company that is subject to Israeli taxes on the income of its non-Israeli subsidiaries will receive a credit for income tax paid by the subsidiary in its country of resident subject to certain limitations. The 2003 Reform also substantially changed the system of taxation of capital gains.
 
On July 25, 2005 an additional tax reform took effect in Israel (the Law for Amendment of the Income Tax Ordinance (Amendment No. 147) (which we refer to as “the 2005 Reform”). In general terms, pursuant to the 2005 Reform, and generally effective from January 1, 2006, the Israeli corporate tax rates were and will be further reduced, the capital gains tax rate that applies to Israeli individuals on the disposition of traded securities was increased and the tax rates that apply to dividends distributed by an Israeli company was partly reduced.
 
Corporate Tax Rate
 
The regular tax rate in Israel in 2007 is 29% (2006-31%). This rate is currently scheduled to decrease as follows: in 2008 - 27%, 2009 - 26%, 2010 and after - 25%. However, the effective tax rate of a company which derives income from an approved enterprise may be considerably less, as further discussed below.
 
Tax Benefits Under the Law for the Encouragement of Capital Investments, 1959
 
The Law for the Encouragement of Capital Investment, 1959, as amended, commonly referred to as the Investment Law, provides that a proposed capital investment in eligible facilities may, upon application to the Investment Center of the Ministry of Industry and Trade of the State of Israel, be designated as an Approved Enterprise. Each certificate of approval for an Approved Enterprise relates to a specific investment program delineated both by its financial scope, including its capital sources, and by its physical characteristics, for example, the equipment to be purchased and utilized under the program. The tax benefits derived from any certificate of approval relate only to taxable income attributable to the specific Approved Enterprise. If a company has more than one approval or only a portion of its capital investments is approved, its effective tax rate is the result of a weighted average of the applicable rates.
 
Taxable income of a company derived from an Approved Enterprise is subject to company tax at the maximum rate of 25% rather than the usual rate in 2007 of 29% (as mentioned above, gradually scheduled to be reduced to 25% in 2010), for the benefit period. This period is ordinarily seven years, or ten years if the company qualifies as a foreign investors’ company as described below, commencing with the year in which the Approved Enterprise first generates taxable income. However, this period is limited to 12 years from commencement of production of the Approved Enterprise or 14 years from the date of approval, whichever is earlier.
 
A company that has been granted the status of an Approved Enterprise may elect to forego entitlement to grants otherwise available for an Approved Enterprise, in return for an alternative package of benefits. Under the alternative package of benefits, a company’s undistributed income derived from an Approved Enterprise will be exempt from company tax for a period of between two and ten years from the first year of taxable income, depending on the geographic location of the Approved Enterprise within Israel, and the company will be eligible for a reduced tax rate for the remainder of the benefits period.
 
A company that has elected the alternative package of benefits and that subsequently pays a dividend out of income derived from the approved enterprise during the tax exemption period will be subject to tax on the amount distributed, including any company tax on these amounts, at the rate which would have been applicable had it not elected the alternative package of benefits, generally 10%-25%, depending on the percentage of the company’s shares held by foreign shareholders. The dividend recipient is taxed at the reduced rate applicable to dividends from approved enterprises, which is 15%, if the dividend is distributed during the tax exemption period or within 12 years after this period, or in the case of a foreign investors’ company, without time limitation. The company must withhold this tax at source, regardless of whether the dividend is converted into or paid in foreign currency.
 
 
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A company that has an Approved Enterprise program is eligible for enhanced tax benefits if it qualifies as a foreign investors’ company. A foreign investors' company is a company more than 25% of whose share capital and combined share and loan capital is owned by non-Israeli residents. A company which qualifies as a foreign investors' company and has an Approved Enterprise program is eligible for tax benefits for a ten-year benefit period. The company tax rate applicable to income earned from approved enterprise programs in the benefit period by a company meeting these qualifications is as follows:
 
For a company with foreign investment of
 
Company tax rate
 
More than 25% and less than 49%
   
25 %
 
49% or more and less than 74%
   
20 %
 
74% or more and less than 90%
   
15 %
 
90% or more
   
10 %
 
 
The determination of foreign ownership is made on the basis of the lowest level of foreign ownership during the tax year.
 
Subject to applicable provisions concerning income under the alternative package of benefits, all dividends are considered to be attributable to the entire enterprise and their effective tax rate is the result of a weighted average of the various applicable tax rates. Under the Investment Law, a company that has elected the alternative package of benefits is not obliged to attribute part of the dividend to exempt profits, and may generally decide from which year's profits to declare dividends. We currently intend to reinvest any income derived from our Approved Enterprise programs and not to distribute the income as a dividend.
 
The Investment Center bases its decision whether or not to approve an application on the criteria set forth in the Investment Law and regulations and the then prevailing policy of the Investment Center. In addition, the benefits available to an Approved Enterprise are conditioned upon the fulfillment of conditions stipulated in the Investment Law and its regulations and in the criteria in the specific certificate of approval, as described above. If a company does not meet these conditions, it would be required to refund the amount of tax benefits, together with consumer price index linkage adjustment and interest.
 
Additionally after receiving the certificate of approval from the Investment Center, a company must meet certain reporting requirements. The company must file periodic audited reports on the progress in implementing the program. Additionally, where a company has completed the implementation of investing in fixed assets, a final implementation report must be filed with, and reviewed by, the Investment Center. Should the Investment Center determine that the investments in assets were made in accordance with the certificate of approval and that the required minimum capital has been invested, it will issue a final approval of implementation, which will also indicate the year that will be the first year of potential benefits under the Approved Enterprise.
 
On March 29, 2005, the Israeli Parliament enacted an amendment to the Investment Law, which is intended to provide expanded tax benefits to local and foreign investors and to simplify the bureaucratic process relating to approval of investments qualifying under the Investment Law.
 
The amendment to the Investment Law does not retroactively apply for investment programs having an Approved Enterprise approval certificate from the Investment Center issued up to December 31, 2004 (even when investments under these programs are conducted after January 1, 2005). Consequently, the amendment to the Investment Law should not impact an existing Approved Enterprise that received an approval certificate prior to December 2004. The new tax regime will only apply for a new Approved Enterprise and to an Approved Enterprise expansion for which the first year of benefits was 2004 or later.
 
Under the amended Investment Law, if an investment project meets all of the eligibility criteria under the alternative benefits route as set forth in the amended Investment Law and in regulations to be issued thereunder, such project will automatically qualify for the Approved Enterprise taxation benefits under the alternative package of benefits with no need for prior approval from the Israeli Tax Authorities. In addition, the amended Investment Law provides that the criteria for conferral of tax benefits in the alternative package of benefits of the Investment Law be handled by the Israeli Tax Authorities rather than the Investment Center. In this respect a mechanism will be available which will enable a company to apply for a pre-ruling from the Israeli Tax Authorities to obtain certainty as to the investment taxation status of its investment under the amended Investment Law.
 
 
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The Investment Center has granted us Approved Enterprise status, which approval was granted prior to December 31, 2004, and is therefore entitled to the benefits afforded by the Investment Law prior to its amendment. Accordingly, our undistributed taxable income derived from this program will be tax exempt for a period of two years beginning with the year in which we first generate taxable income, and thereafter will be subject to a reduced tax rate of 25% or less, if we qualify as a foreign investors' company, for a period of between five and eight years, depending on the percentage of our capital held by non-Israeli shareholders. However, this benefit period cannot extend beyond 12 years from the year of commencement of operations or 14 years from the year in which approval was granted, whichever is earlier. To date, we have not generated taxable income. We may, in the forseeable future, cease to be entitled to the aforesaid tax benefits, as we may not in the future be in compliance with the Certificate of Approval from the Investment Center of the Ministry of Industry and Trade of the State of Israel due to a reduction in research and development activity in Israel.
 
Additionally, given our significant amount of net operating losses, and the limitation mentioned above to the benefit period, there is no certainty if and when we would be able to enjoy the tax benefits described above.
 
Tax Benefits for Research and Development
 
Israeli tax law allows, under specific conditions, a tax deduction in the year incurred for expenditures, including capital expenditures, relating to scientific research and development projects, if the expenditures are approved by the relevant Israeli government ministry, determined by the field of research, and the research and development is for the promotion of the company and is carried out by or on behalf of the company seeking the deduction. Expenditures not so approved are deductible over a three-year period. In the past, expenditures that were made out of proceeds made available to us through government grants were automatically deducted during a one year period.
 
Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969
 
The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. An industrial company is defined as a company resident in Israel, at least 90% of the income of which in a given tax year exclusive of income from specified government loans, capital gains, interest and dividends, is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity.
 
Under the Industry Encouragement Law, industrial companies are entitled to a number of corporate tax benefits, including:
 
·
deduction of purchase of know-how and patents over an eight-year period; and
   
·
the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli industrial companies and an industrial holding company.
 
Under some tax laws and regulations, an industrial enterprise may be eligible for special depreciation rates for machinery, equipment and buildings. These rates differ based on various factors, including the date the operations begin and the number of work shifts. An industrial company owning an approved enterprise may choose between these special depreciation rates and the depreciation rates available to the approved enterprise.
 
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
 
We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. We cannot assure you that the Israeli tax authorities will agree that we qualify, or, if we qualify, that we will continue to qualify as an industrial company or that the benefits described above will be available to us in the future. We may, in the forseeable future, cease to be entitled to the aforesaid tax benefits, due to a reduction in research and development activity in Israel.
 
 
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Special Provisions Relating to Taxation under Inflationary Conditions
 
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary Adjustments Law, represents an attempt to overcome the problems presented to a traditional tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is highly complex. Its features, which are material to us, can be described as follows:
 
·
where a company's equity, as defined in the law, exceeds the cost of fixed assets as defined in the Inflationary Adjustments Law, a deduction from taxable income that takes into account the effect of the applicable annual rate of inflation on the excess is allowed up to a ceiling of 70% of taxable income in any single tax year, with the unused portion permitted to be carried forward on a linked basis. If the cost of fixed assets, as defined in the Inflationary Adjustments Law, exceeds a company's equity, then the excess multiplied by the applicable annual rate of inflation is added to taxable income; and
   
·
subject to specified limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the consumer price index.

 
Israeli Estate and Gift Taxes
 
Generally, Israel does not currently impose taxes on inheritance or bona fide gifts. For transfer of assets by inheritance or gift that would normally be subject to capital gains tax or land appreciation tax, the recipient’s tax cost basis and date of purchase are generally deemed to be the same as those for the transferor of the property.
 
Capital Gains Tax on Sale of our Ordinary Shares by Both Residents and Non-Residents of Israel
 
Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. The law distinguishes between the inflationary surplus and the real gain. The inflationary surplus is the portion of the total capital gain, which is equivalent to the increase of the relevant asset’s purchase price attributable to the increase in the Israeli consumer price index from the date of purchase to the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus. A non resident that invests in taxable assets with foreign currency may elect to calculate the inflationary amount by using such foreign currency.
 
Non-Israeli residents will be exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a stock exchange recognized by the Israeli Ministry of Finance (including the Tel-Aviv Stock Exchange and Nasdaq), provided such shareholders did not acquire their shares prior to an initial public offering and that such capital gains are not derived by a permanent establishment of the foreign resident in Israel. Notwithstanding the foregoing, dealers in securities in Israel are taxed at the regular tax rates applicable to business income. However, Non-Israeli corporations will not be entitled to such exemption if an Israeli resident (1) has a controlling interest of 25% or more in such non-Israeli corporation, or (2) is the beneficiary of, or is entitled to, 25% or more of the revenue or profits of such non-Israeli corporation, whether directly or indirectly. In any event, the provisions of the tax reform shall not affect the exemption from capital gains tax for gains accrued before January 1, 2003, as described in the previous paragraph.
 
On July 25, 2005, the 2005 Reform came into effect. Pursuant to the 2005 Reform, effective January 1, 2006, the capital gains tax imposed on Israeli tax resident individuals on the sale of securities is 20%. With respect to an Israeli tax resident individual who is a “substantial shareholder” on the date of sale of the securities or at any time during the 12 months preceding such sale, the capital gains tax rate was increased to 25%. A “substantial shareholder” is defined as someone who alone, or together with another person, holds, directly or indirectly, at least 10 % in one or all of any of the means of control in the corporation. With respect to Israeli tax resident corporate investors, effective January 1, 2006 capital gains tax at the regular corporate rate will be imposed on such taxpayers on the sale of traded shares.
 
Other provisions may apply to shareholders that acquired their ordinary shares in XTL prior to our 2006 private placement and / or prior to January 1, 2003.
 
In addition, pursuant to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the “United States- Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the US within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States- Israel Tax Treaty (a “Treaty United States Resident”) generally will not be subject to the Israeli capital gains tax unless such “Treaty United States Resident” holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the twelve- month period preceding such sale, exchange or disposition, subject to certain conditions or if the capital gains from such sale are considered as business income attributable to a permanent establishment of the US resident in Israel. However, under the United States-Israel Tax Treaty, such “Treaty United States Resident” would be permitted to claim a credit for such taxes against the US federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in US laws applicable to foreign tax credits.
 
 
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Taxation of Dividends
 
Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel
 
Pursuant to the 2005 Reform, effective January 1, 2006, the tax rate imposed on dividends distributed by an Israeli company to Israeli tax resident individuals or to non-Israeli residents was reduced to a tax at a rate of 20%. With respect to “substantial shareholders,” as defined above, the applicable tax rate remains 25%. The taxation of dividends distributed by an Israeli company to another Israeli corporate tax resident remains unchanged.
 
Notwithstanding, dividends distributed by an Israeli company to Israeli tax resident individuals or to non-Israeli residents are subject to a 20% withholding tax (15% in the case of dividends distributed from the taxable income attributable to an Approved Enterprise), unless a lower rate is provided in a treaty between Israel and the shareholder’s country of residence. Dividends distributed by an Israeli company to another Israeli tax resident company are generally exempt, unless such dividends are distributed from taxable income attributable to an Approved Enterprise, in which case such dividends are taxed at a rate of 15%, or unless such dividends are distributed from income that was not taxed in Israel, in which case such dividends are taxed at a rate of 25%.
 
In any case, dividends distributed from the taxable income attributable to an Approved Enterprise, to both Israeli tax residents and non-Israeli residents remains subject to a 15% tax rate.
 
Under the US-Israel Tax Treaty, the maximum Israeli tax and withholding tax on dividends paid to a holder of ordinary shares who is a resident of the US is generally 25%, but is reduced to 12.5% if the dividends are paid to a corporation that holds in excess of 10% of the voting rights of company during the company’s taxable year preceding the distribution of the Dividend and the portion of the company’s taxable year in which the dividend was distributed. Dividends of an Israeli company derived from the income of an Approved Enterprise will still be subject to a 15% dividend withholding tax; if the dividend is attributable partly to income derived from an Approved Enterprise, and partly to other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income. A non-resident of Israel who has dividend income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel in respect of such income, provided such income was not derived from a business conducted in Israel by the taxpayer.
 
US Federal Income Tax Considerations
 
The following discusses the material US federal income tax consequences to a holder of our ordinary shares who qualifies as a US holder, which is defined as:
 
·
a citizen or resident of the US;
   
·
a corporation created or organized under the laws of the US, the District of Columbia, or any state; or
   
·
a trust or estate, treated, for US federal income tax purposes, as a domestic trust or estate.
 
This discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, which we refer to as the Code, current and proposed Treasury regulations promulgated under the Code, and administrative and judicial decisions as of the date of this report, all of which are subject to change, possibly on a retroactive basis. This discussion does not address any aspect of state, local or non-US tax laws. Except where noted, this discussion addresses only those holders who hold our shares as capital assets. This discussion does not purport to be a comprehensive description of all of the tax considerations that may be relevant to US holders entitled to special treatment under US federal income tax laws, for example, financial institutions, insurance companies, tax-exempt organizations and broker/dealers, and it does not address all aspects of US federal income taxation that may be relevant to any particular shareholder based on the shareholder's individual circumstances. In particular, this discussion does not address the potential application of the alternative minimum tax, or the special US federal income tax rules applicable in special circumstances, including to US holders who:
 
·
have elected mark-to-market accounting;
   
·
hold our ordinary shares as part of a straddle, hedge or conversion transaction with other investments;
   
·
own directly, indirectly or by attribution at least 10% of our voting power;
   
·
are tax exempt entities;
   
·
are persons who acquire shares in connection with employment or other performance of services; and
   
·
have a functional currency that is not the US dollar.
 
 
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Additionally, this discussion does not consider the tax treatment of partnerships or persons who hold ordinary shares through a partnership or other pass-through entity or the possible application of US federal gift or estate taxes. Material aspects of US federal income tax relevant to a holder other than a US holder are also described below.
 
Each shareholder should consult its tax advisor regarding the particular tax consequences to such holder of ownership and disposition of our shares, as well as any tax consequences that may arise under the laws of any other relevant foreign, state, local, or other taxing jurisdiction.
 
Taxation of Dividends Paid on Ordinary Shares
 
Subject to the description of the passive foreign investment company rules below, a US holder will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares, including any Israeli taxes withheld from the amount paid, to the extent the distribution is paid out of our current or accumulated earnings and profits as determined for US federal income tax purposes. Distributions in excess of these earnings and profits will be applied against and will reduce the US holder’s basis in the ordinary shares and, to the extent in excess of this basis, will be treated as gain from the sale or exchange of ordinary shares.
 
Certain dividend income may be eligible for a reduced rate of taxation. Dividend income will be taxed to a non-corporate holder at the applicable long-term capital gains rate if the dividend is received from a “qualified foreign corporation,” and the shareholder of such foreign corporation holds such stock for more than 60 days during the 121 day period that begins on the date that is 60 days before the ex-dividend date for the stock. The holding period is tolled for any days on which the shareholder has reduced his risk of loss. A “qualified foreign corporation” is either a corporation that is eligible for the benefits of a comprehensive income tax treaty with the US or a corporation whose stock, the shares of which are with respect to any dividend paid by such corporation, is readily tradable on an established securities market in the United States. However, a foreign corporation will not be treated as qualified if it is a passive foreign investment company (as discussed below) for the year in which the dividend was paid or the preceding year. Distributions of current or accumulated earnings and profits paid in foreign currency to a US holder will be includible in the income of a US holder in a US dollar amount calculated by reference to the exchange rate on the day the distribution is received. A US holder that receives a foreign currency distribution and converts the foreign currency into US dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the US dollar, which will generally be US source ordinary income or loss.
 
As described above, we will generally be required to withhold Israeli income tax from any dividends paid to holders who are not resident in Israel. See “ - Israeli Tax Considerations—Taxation of Dividends” above. If a US holder receives a dividend from us that is subject to Israeli withholding, the following would apply:
 
·
You must include the gross amount of the dividend, not reduced by the amount of Israeli tax withheld, in your US taxable income.
   
·
You may be able to claim the Israeli tax withheld as a foreign tax credit against your US income tax liability. However, to the extent that 25% or more of our gross income from all sources was effectively connected with the conduct of a trade or business in the US (or treated as effectively connected, with limited exceptions) for a three-year period ending with the close of the taxable year preceding the year in which the dividends are declared, a portion of this dividend will be treated as US source income, possibly reducing the allowable foreign tax.
   
·
The foreign tax credit is subject to significant and complex limitations. Generally, the credit can offset only the part of your US tax attributable to your net foreign source passive income. Additionally, if we pay dividends at a time when 50% or more of our stock is owned by US persons, you may be required to treat the part of the dividend attributable to US source earnings and profits as US source income, possibly reducing the allowable credit.
   
·
A US holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent the US holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or, alternatively, to the extent the US holder is under an obligation to make related payments with respect to substantially similar or related property. Any days during which a US holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute.
   
·
If you do not elect to claim foreign taxes as a credit, you will be entitled to deduct the Israeli income tax withheld from your XTL dividends in determining your taxable income.
   
·
Individuals who do not claim itemized deductions, but instead utilize the standard deduction, may not claim a deduction for the amount of the Israeli income taxes withheld.
   
·
If you are a US corporation holding our stock, the general rule is that you cannot claim the dividends-received deduction with respect to our dividends. There is an exception to this rule if you own at least 10% of our ordinary shares (by vote and value) and certain conditions are met, including that we were not a PFIC during the period you have held our ordinary shares.
 
Special rules, described below, apply if we are a passive foreign investment company.
 
 
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Taxation of the Disposition of Ordinary Shares
 
Subject to the description of the passive foreign investment company rules below, upon the sale, exchange or other disposition of our ordinary shares, a US holder will recognize capital gain or loss in an amount equal to the difference between the US holder's basis in the ordinary shares, which is usually the cost of these shares, and the amount realized on the disposition. Capital gain from the sale, exchange or other disposition of ordinary shares held more than one year is long-term capital gain and is eligible for a reduced rate of taxation for non-corporate holders. In general, gain realized by a US holder on a sale, exchange or other disposition of ordinary shares generally will be treated as US source income for US foreign tax credit purposes. A loss realized by a US holder on the sale, exchange or other disposition of ordinary shares is generally allocated to US source income. However, regulations require the loss to be allocated to foreign source income to the extent certain dividends were received by the taxpayer within the 24-month period preceding the date on which the taxpayer recognized the loss. The deductibility of a loss realized on the sale, exchange or other disposition of ordinary shares is subject to limitations for both corporate and individual shareholders.
 
A US holder that uses the cash method of accounting calculates the US dollar value of the proceeds received from a sale of ordinary shares as of the date that the sale settles, and will generally have no additional foreign currency gain or loss on the sale, while a US holder that uses the accrual method of accounting is required to calculate the value of the proceeds of the sale as of the trade date and may therefore realize foreign currency gain or loss, unless the US holder has elected to use the settlement date to determine its proceeds of sale for purposes of calculating this foreign currency gain or loss. In addition, a US holder that receives foreign currency upon disposition of our ordinary shares and converts the foreign currency into US dollars subsequent to receipt will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the US dollar, which will generally be US source ordinary income or loss.
 
Tax Consequences If We Are A Passive Foreign Investment Company
 
Special tax rules apply to the timing and character of income received by a US holder of a PFIC. We will be a PFIC if either 75% or more of our gross income in a tax year is passive income or the average percentage of our assets (by value) that produce or are held for the production of passive income in a tax year is at least 50%. The IRS, has indicated that cash balances, even if held as working capital, are considered to be assets that produce passive income. Therefore, any determination of PFIC status will depend upon the sources of our income, and the relative values of passive and non- passive assets, including goodwill. Furthermore, because the goodwill of a publicly-traded corporation such as us is largely a function of the trading price of its shares, the valuation of that goodwill is subject to significant change throughout each year. A determination as to a corporation’s status as a PFIC must be made annually. We believe that we were likely not a PFIC for the taxable years ended December 31, 2005 and 2004. However, we believe that we were a PFIC for the taxable year ended December 31, 2006. Although such a determination is fundamentally factual in nature and generally cannot be made until the close of the applicable taxable year, based on our current operations, we believe that there is a significant likelihood that we will be classified as a PFIC in the 2007 taxable year and possibly in subsequent years.
 
 
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If we are classified as a PFIC, a special tax regime would apply to both (a) any “excess distribution” by us (generally, the US holder's ratable share of distributions in any year that are greater than 125% of the average annual distributions received by such US holder in the three preceding years or its holding period, if shorter) and (b) any gain recognized on the sale or other disposition of your ordinary shares. Under this special regime, any excess distribution and recognized gain would be treated as ordinary income and the federal income tax on such ordinary income is determined under the following steps: (i) the amount of the excess distribution or gain is allocated ratably over the US holder's holding period for our ordinary shares; (ii) tax is determined for amounts allocated to the first year in the holding period in which we were classified as a PFIC and all subsequent years (except the year in which the excess distribution was received or the sale occurred) by applying the highest applicable tax rate in effect in the year to which the income was allocated; (iii) an interest charge is added to this tax calculated by applying the underpayment interest rate to the tax for each year determined under the preceding sentence from the due date of the income tax return for such year to the due date of the return for the year in which the excess distribution or sale occurs; and (iv) amounts allocated to a year prior to the first year in the US holder’s holding period in which we were classified as a PFIC or to the year in which the excess distribution or the disposition occurred are taxed as ordinary income and no interest charge applies.
 
A US holder may generally avoid the PFIC regime by electing to treat his PFIC shares as a “qualified electing fund.” If a US holder elects to treat PFIC shares as a qualified electing fund, also known as a “QEF Election,” the US holder must include annually in gross income (for each year in which PFIC status is met) his pro rata share of the PFIC’s ordinary earnings and net capital gains, whether or not such amounts are actually distributed to the US holder. A US holder may make a QEF Election with respect to a PFIC for any taxable year in which he was a shareholder. A QEF Election is effective for the year in which the election is made and all subsequent taxable years of the US holder. Procedures exist for both retroactive elections and the filing of protective statements. A US holder making the QEF Election must make the election on or before the due date, as extended, for the filing of the US holder's income tax return for the first taxable year to which the election will apply.
 
A QEF Election is made on a shareholder-by-shareholder basis. A US holder must make a QEF Election by completing Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to the holder’s timely filed US federal income tax return. We have complied with the record-keeping and reporting requirements that are a prerequisite for US holders to make a QEF Election for the 2006 tax year. For this purpose, we have made our 2006 PFIC annual information statement available under a link entitled “PFIC Annual Information Statement” under the “Investor Information” section on our corporate website, which you may access at www.xtlbio.com . While we plan to continue to comply with such requirements, if, in the future, meeting those record-keeping and reporting requirements becomes onerous, we may decide, in our sole discretion, that such compliance is impractical and will so notify US holders.
 
Alternatively, a US holder may also generally avoid the PFIC regime by making a so-called "mark-to-market" election. Such an election may be made by a US holder with respect to ordinary shares owned at the close of such holder's taxable year, provided that we are a PFIC and the ordinary shares are considered “marketable stock.” The ordinary shares will be marketable stock if they are regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, or the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or an equivalent regulated and supervised foreign securities exchange.
 
If a US holder were to make a mark-to-market election with respect to ordinary shares, such holder generally will be required to include in its annual gross income the excess of the fair market value of the PFIC shares at year-end over such shareholder’s adjusted tax basis in the ordinary shares. Such amounts will be taxable to the US holder as ordinary income, and will increase the holder’s tax basis in the ordinary shares. Alternatively, if in any year, a United States holder’s tax basis exceeds the fair market value of the ordinary shares at year-end, then the US holder generally may take an ordinary loss deduction to the extent of the aggregate amount of ordinary income inclusions for prior years not previously recovered through loss deductions and any loss deductions taken will reduce the shareholder’s tax basis in the ordinary shares. Gains from an actual sale or other disposition of the ordinary shares with a “mark-to-market” election will be treated as ordinary income, and any losses incurred on an actual sale or other disposition of the ordinary shares will be treated as an ordinary loss to the extent of any prior “unreversed inclusions” as defined in Section 1296(d) of the Code.
 
The mark-to-market election is made on a shareholder-by-shareholder basis. The mark-to-market election is made by completing Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and attaching it to the holder’s timely filed US federal income tax return for the year of election. Such election is effective for the taxable year for which made and all subsequent years until either (a) the ordinary shares cease to be marketable stock or (b) the election is revoked with the consent of the IRS.
 
 
73

 
A US holder who did not make an election either to (i) treat us as a “qualified electing fund,” or (ii) mark our ordinary shares to market, will be subject to the following:
 
·
gain recognized by the US holder upon the disposition of, as well as income recognized upon receiving certain excess distributions on the ordinary shares would be taxable as ordinary income;
   
·
the US holder would be required to allocate the excess distribution and/or disposition gain ratably over such US holder's entire holding period for such ordinary shares;
   
·
the amount allocated to each year other than the year of the excess distribution or disposition and pre-PFIC years would be subject to tax at the highest applicable tax rate, and an interest charge would be imposed with respect to the resulting tax liability;
   
·
the US holder would be required to file an annual return on IRS Form 8621 for the years in which distributions were received on and gain was recognized on dispositions of, our ordinary shares; and
   
·
any US holder who acquired the ordinary shares upon the death of the shareholder would not receive a step-up to market value of his income tax basis for such ordinary shares. Instead such US holder beneficiary would have a tax basis equal to the decedent's basis, if lower.

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

US Federal Income Tax Consequences for Non-US holders of Ordinary Shares
 
Except as described in "Information Reporting and Back-up Withholding" below, a Non-US holder of ordinary shares will not be subject to US federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, ordinary shares, unless:
 
·
the item is effectively connected with the conduct by the Non-US holder of a trade or business in the US and, in the case of a resident of a country which has a tax treaty with the US, the item is attributable to a permanent establishment in the US;
   
·
the Non-US holder is subject to tax under the provisions of US tax law applicable to US expatriates; or
   
·
the individual non-US holder is present in the US for 183 days or more in the taxable year of the disposition and certain other conditions are met.
 
Information Reporting and Back-Up Withholding
 
US holders generally are subject to information reporting requirements with respect to dividends paid in the US on ordinary shares. Existing regulations impose back-up withholding on dividends paid in the US on ordinary shares unless the US holder provides IRS Form W-9 or otherwise establishes an exemption. US holders are subject to information reporting and back-up withholding on proceeds paid from the disposition of ordinary shares unless the US holder provides IRS Form W-9 or otherwise establishes an exemption.

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

Prospective investors should consult their tax advisors concerning the effect, if any, of these Treasury regulations on an investment in ordinary shares. Back-up withholding is not an additional tax. The amount of any back-up withholding will be allowed as a credit against a holder's US federal income tax liability and may entitle the holder to a refund, provided that specified required information is furnished to the IRS on a timely basis.
 
 
74


US Federal Income Tax Consequences for XTL

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

At present, the parent company, XTL Biopharmaceuticals Ltd., does not earn any taxable income for US tax purposes. If we do eventually earn taxable income attributable to our US permanent establishment, w e may not be able to utilize any of the accumulated Israeli loss carryforwards reflected on our balance sheet as of December 31, 2006 since these losses were all accumulated under Israeli tax laws. However, we would be able to utilize accumulated loss carryforwards to offset such U.S. taxable income only to the extent these carryforwards were attributable to our US permanent establishment . As of December 31, 2006, we estimate these U.S. net operating loss carryforwards are approximately $ 15.2 million.   These losses can be carried forward twenty years to offset future US taxable income. US corporate tax rates are higher than those to which we are subject in the State of Israel, and if we are subject to US corporate tax, it would have a material adverse effect on our results of operations .

The above comments are intended as a general guide to the current position. Any person who is in any doubt as to his or her taxation position, and who requires more detailed information than the general outline above or who is subject to tax in a jurisdiction other than the United States should consult professional advisers.
 
Documents on Display
 
We are required to file reports and other information with the SEC under the Exchange Act and the regulations thereunder applicable to foreign private issuers. You may inspect and copy reports and other information filed by us with the SEC at the SEC’s public reference facilities described below. Although as a foreign private issuer we are not required to file periodic information as frequently or as promptly as US companies, we generally announce publicly our interim and year-end results promptly and will file that periodic information with the SEC under cover of Form 6-K. As a foreign private issuer, we are also exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and other provisions in Section 16 of the Exchange Act.
 
You may review and obtain copies of our filings with the SEC, including any exhibits and schedules, at the SEC’s public reference facilities in Room 1580, 100 F. Street, N.E., Washington, D.C. 20549. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our periodic filings will also be available on the SEC’s website at www.sec.gov. These SEC filings are also available to the public from commercial document retrieval services. Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to this annual report, the contract or document is deemed to modify the description contained in this annual report. We urge you to review the exhibits themselves for a complete description of the contract or document.
 
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Interest Rate Risk. The primary objective of our investment activities is to preserve principal while maximizing our income from investments and minimizing our market risk. We invest in government, investment-grade corporate debt securities, and bank deposits in accordance with our investment policy. Some of these instruments in which we invest may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. As of December 31, 2006, our portfolio of financial instruments consists of cash equivalents and short-term bank deposits with multiple institutions. The average duration of all of our investments held as of December 31, 2006, was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments.
 
 
75

 
Foreign Currency and Inflation Risk. We generate all of our revenues and hold most of our cash, cash equivalents and bank deposits in US dollars. While a substantial amount of our operating expenses are in US dollars, we incur a portion of our expenses in New Israeli Shekels. In addition, we also pay for some of our services and supplies in the local currencies of our suppliers. As a result, we are exposed to the risk that the US dollar will be devalued against the New Israeli Shekel or other currencies, and as result our financial results could be harmed if we are unable to guard against currency fluctuations in Israel or other countries in which services and supplies are obtained in the future. Accordingly, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of currencies. These measures, however, may not adequately protect us from the adverse effects of inflation in Israel. In addition, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the New Israeli Shekel in relation to the dollar or that the timing of any devaluation may lag behind inflation in Israel.
 
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
 
Not applicable.
 
 

 
76

 
PART II
 
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
 
Not applicable.
 
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
 
Not applicable.
 
ITEM 15. CONTROLS AND PROCEDURES  
 
(a) Disclosure controls and procedures.   Our management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. As of December 31, 2006, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management concluded that our disclosure controls and procedures as of December 31, 2006, were effective.

 (b) Internal controls. There have been no changes in our internal control over financial reporting that occurred during the fiscal year ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 16. RESERVED
 
Not applicable.
 
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
 
Our Board of Directors has determined that Ido Seltenreich, chairman of our audit committee, is an audit committee financial expert, as defined by applicable SEC regulations, and is independent in accordance with applicable SEC and Nasdaq regulations.
 
  ITEM 16B. CODE OF ETHICS
 
We have adopted a Code of Conduct applicable that applies to all employees, directors and officers of our company, including our principal executive officer, principal financial officer, principal accounting officer or controller and other individuals performing similar functions. A copy of our Code of Conduct can be found on our website ( www.xtlbio.com ) and may also may be obtained, without charge, upon a written request addressed to our investor relations department, XTL Biopharmaceuticals Ltd., 750 Lexington Avenue, 20 th Floor, New York, NY 10022.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors  
 
Our audit committee is responsible for the oversight of the independent auditors’ work. The audit committee’s policy is to pre-approve all audit and non-audit services provided by our independent auditors, Kesselman & Kesselman, a member of PricewaterhouseCoopers International Ltd., or PWC. These services may include audit services, audit-related services and tax services, as further described below.
 
Principal Accountant Fees and Services
 
We were billed the following fees for professional services rendered by PwC, for the years ended December 31, 2006 and 2005.
 
 
77


 
 
2006
 
 
2005
 
 
 
(in thousands)
 
Audit fees
 
$
166
 
$
161
 
Audit-related fees
   
150
   
74
 
Tax fees
   
63
   
46
 
Total
 
$
379
 
$
281
 

The audit fees for the years ended December 31, 2006 and 2005, respectively, were for professional services rendered for the audit of our annual consolidated financial statements, review of interim consolidated financial statements, and statutory audits.
 
The audit-related fees as of the years ended December 31, 2006 and 2005, respectively, were for assurance and related due diligence services related to accounting consultations in connection with our fundraising activity in 2006 and our listing on the Nasdaq Global Market in 2005, including issuance of comfort letters, and consents and assistance with review of documents filed with the SEC and the United Kingdom Listing Authority.
 
Tax fees as of the years ended December 31, 2006 and 2005, respectively, were for services related to tax compliance, including the preparation of tax returns, tax planning and tax advice, including assistance with tax audits and appeals, and tax advice related to our in-licensing activities.
 
For the fiscal year ended December 31, 2006, all of our audit-related fees were pre-approved by our audit committee.  For the fiscal year ended   December 31,   2005, $29,000 of the tax fees were pre-approved   by our audit committee.  The balance of $17,000 in tax fees were related to professional services initiated prior to our becoming subject to the pre-approval requirements of the Exchange Act and the rules and regulations promulgated thereunder in connection with our listing on Nasdaq in September 2005.
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 
Not applicable.
 
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
Not applicable.
 
 
 
 
 
78


PART III

ITEM 17. FINANCIAL STATEMENTS
 
We have elected to furnish financial statements and related information specified in Item 18.
 
ITEM 18. FINANCIAL STATEMENTS
 
See pages F-1 to F-39 of this Annual Report.
 
ITEM 19. EXHIBITS
 
The following exhibits are filed as part of this annual report:

Exhibit
Number
 
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^
10.12
1998 Share Option Plan dated October 19, 1998†
10.13
1999 Share Option Plan dated June 1, 1999†
10.14
1999 International Share Option Plan Dated June 1, 1999†
10.15
2000 Share Option Plan dated April 12, 2000†
10.16
2001 Share Option Plan dated February 28, 2001†
10.17
Letter of Understanding, dated August 5, 2005, relating to the License Agreement dated June 2, 2004 between Cubist Pharmaceuticals, Inc. and XTL Biopharmaceuticals Ltd.†
10.19
Employment Agreement, dated August 1, 1999, between XTL Biopharmaceuticals Ltd. and Jonathan Burgin†
10.20
Employment Agreement, dated as of January 3, 2006, between XTL Biopharmaceuticals Ltd. and Ron Bentsur^
10.21
Agreement, dated August 1, 2005, between XTL Biopharmaceuticals Ltd. and Michael S. Weiss†
10.22
Form No. 1 of Director Service Agreement†
10.23
Form No. 2 of Director Service Agreement†
10.24
Form No. 3 of Director Service Agreement†
10.25
Form No. 4 of Director Indemnification Agreement†
10.26
License Agreement Between XTL Biopharmaceuticals Ltd. and VivoQuest, Inc., dated August 17, 2005†
10.27
Asset Purchase Agreement Between XTL Biopharmaceuticals Ltd. and VivoQuest, Inc., dated August 17, 2005†
10.28
Form of Securities Purchase Agreement, dated March 17, 2006, by and among XTL Biopharmaceuticals Ltd., and the purchasers named therein^
10.29
Form of Registration Rights Agreement, dated March 22, 2006, by and among XTL Biopharmaceuticals Ltd. and the purchasers named therein^
10.30
Form of Ordinary Share Purchase Warrants, dated March 22, 2006, issued to the purchasers under the Securities Purchase Agreement^
10.31
Escrow Agreement, dated March 22, 2006, by and among XTL Biopharmaceuticals Ltd., the Placement Agents named therein, and JPMorgan Chase Bank, N.A., as escrow agent^
10.32
License Agreement between XTL Development, Inc. and DOV Pharmaceutical, Inc., dated January 15, 2007.
10.33
Employment Agreement, dated as of January 1, 2006, between XTL Biopharmaceuticals Ltd. and Bill Kessler.
21.1
List of Subsidiaries†
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 22, 2007.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated March 22, 2007.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated March 22, 2007.
 
† Incorporated by reference from the registration statement on Form 20-F filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on July 14, 2005, as it may be amended or restated.

^ Incorporated by reference from the registration statement on Form F-1 filed by XTL Biopharmaceuticals Ltd. with the Securities and Exchange Commission on April 20, 2006, as it may be amended or restated.

79


SIGNATURES
 
The registrant hereby certifies that it meets all the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration statement on its behalf.
     
 
XTL BIOPHARMACEUTICALS LTD.
( Registrant )
 
 
 
 
 
 
Date: March 22, 2007 Signature:    /s/ Ron Bentsur  
 
Ron Bentsur
  Chief Executive Officer
 
 
 
 
 
 
 
 

 

80


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
2006 ANNUAL REPORT

TABLE OF CONTENTS

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


 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  
 
To the Shareholders of
XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)

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

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

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

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

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


Kesselman & Kesselman
Certified Public Accountants (Israel)
A Member of PricewaterhouseCoopers International Limited
Tel-Aviv, Israel
March 14, 2007
 
F-2

 
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of XTL Biopharmaceuticals Ltd.
(A Development Stage Company):


We have audited the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows of XTL Biopharmaceuticals Ltd. (A Development Stage Company) (the "Company") and its subsidiary for the period from March 9, 1993 to December 31, 2000. These consolidated financial statements are the responsibility of the Company's management and of the Company's Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

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




Somekh Chaikin
Certified Public Accountants (Isr.)
A member firm of KPMG International

Tel Aviv, Israel
May 3, 2005





 
F-3

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars, except share amounts)

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

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

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

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

 
F-4

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of US dollars, except share and per share amounts)

   
Year ended December 31
 
Period from
March 9, 1993*
to December 31,
 
   
2006
 
2005
 
2004
 
2006
 
REVENUES :
                 
Reimbursed out-of-pocket expenses
   
   
2,743
   
3,269
   
6,012
 
License
   
454
   
454
   
185
   
1,093
 
     
454
   
3,197
   
3,454
   
7,105
 
COST OF REVENUES :
                     
Reimbursed out-of-pocket expenses
   
   
2,743
   
3,269
   
6,012
 
License (with respect to royalties)
   
54
   
54
   
32
   
140
 
     
54
   
2,797
   
3,301
   
6,152
 
GROSS MARGIN
   
400
   
400
   
153
   
953
 
RESEARCH AND DEVELOPMENT COSTS
                     
(includes non-cash stock option compensation of $173, $112 and $30, in 2006, 2005 and 2004, respectively)
   
10,229
   
7,313
   
11,985
   
93,119
 
LESS - PARTICIPATIONS
   
   
   
   
10,950
 
     
10,229
   
7,313
   
11,985
   
82,169
 
IN - PROCESS RESEARCH AND
                       
DEVELOPMENT COSTS
   
   
1,783
   
   
1,783
 
GENERAL AND ADMINISTRATIVE
                     
EXPENSES (includes non-cash stock option
                     
compensation of $1,992, $2,641 and $2, in 2006, 2005 and 2004, respectively)
   
5,576
   
5,457
   
4,134
   
34,588
 
BUSINESS DEVELOPMENT COSTS
                     
(includes non-cash stock option compensation of $15, $10 and $0, in 2006, 2005 and 2004, respectively)
   
641
   
227
   
810
   
5,154
 
OPERATING LOSS
   
16,046
   
14,380
   
16,776
   
122,741
 
FINANCIAL AND OTHER INCOME - net
   
1,141
   
443
   
352
   
8,284
 
LOSS BEFORE INCOME TAXES
   
14,905
   
13,937
   
16,424
   
114,457
 
INCOME TAXES
   
227
   
78
   
49
   
466
 
LOSS FOR THE PERIOD
   
15,132
   
14,015
   
16,473
   
114,923
 
BASIC AND DILUTED LOSS PER
                     
ORDINARY SHARE
 
$
0.08
 
$
0.08
 
$
0.12
     
WEIGHTED AVERAGE NUMBER OF
                       
SHARES USED IN COMPUTING
                       
BASIC AND DILUTED LOSS PER
                       
ORDINARY SHARE
   
201,737,295
   
170,123,003
   
134,731,766
     

* Incorporation date, see Note 1a.

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

 
F-5

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands of US dollars, except share amounts)

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

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

 
F-6

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (continued)
(in thousands of US dollars, except share amounts)
 
   
Accumulated other comprehensive income (loss)
 
Deficit accumulated during the development stage
 
Total
 
CHANGES DURING THE PERIOD
             
FROM MARCH 9, 1993 (DATE OF
             
INCORPORATION) TO DECEMBER 31, 2003 :
             
Comprehensive loss:
                   
Loss for the period
   
   
(69,303
)
 
(69,303
)
Net unrealized loss
   
14
   
   
14
 
Comprehensive loss
   
14
   
(69,303
)
 
(69,289
)
Employee stock options expenses
   
   
   
377
 
Non-employee stock option expenses
   
   
   
106
 
Exercise of share warrants in 2000
   
   
   
347
 
Exercise of share warrants in 2001
   
   
   
75
 
Exercise of employee stock options in 1999
   
   
   
**
 
Exercise of employee stock options in 2000
   
   
   
1
 
Exercise of employee stock options in 2001
   
   
   
26
 
Exercise of employee stock options in 2002
   
   
   
20
 
Exercise of employee stock options in 2003
   
   
   
4
 
Issuance of share capital in 1993 (net of $912 - issuance expenses)
   
   
   
5,590
 
Issuance of share capital in 1994 (net of $22 - issuance expenses)
   
   
   
2,108
 
Issuance of share capital in 1996 (net of $646 - issuance expenses)
   
   
   
5,363
 
Issuance of share capital in 1998 (net of $1,650 - issuance expenses)
   
   
   
12,175
 
Issuance of share capital in 1999 (net of $49 - issuance expenses)
   
   
   
1,201
 
Issuance of share capital in 2000
   
   
   
16,702
 
Bonus shares
   
   
   
 
Conversion of preferred shares into ordinary shares
   
   
   
 
Receipts in respect of share warrants
                   
(expired in 1999)
   
   
   
89
 
Initial public offering (“IPO”) of the Company’s shares under
a prospectus dated September 20, 2000
(net of $ 5,199 issuance expenses)
              45,713  
                     
BALANCE AT DECEMBER 31, 2003
   
14
   
(69,303
)
 
20,608
 
 
** Represents an amount less than $1,000.

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

 
F-7

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(in thousands of US dollars, except share amounts)
 
   
Ordinary shares
 
Additional
 
   
Number of
     
paid in
 
   
shares
 
Amount
 
capital
 
BALANCE AT DECEMBER 31, 2003 -
             
brought forward
   
112,019,464
   
594
   
89,303
 
CHANGES DURING 2004:
                   
Comprehensive loss:
                   
Loss for the period
   
   
   
 
Net unrealized gain
   
   
   
 
Comprehensive loss
   
   
   
 
Non-employee stock option compensation expenses
   
   
   
32
 
Exercise of stock options
   
50,000
   
**
   
19
 
Issuance of shares, net of $2,426
                   
share issuance expenses
   
56,009,732
   
247
   
15,183
 
BALANCE AT DECEMBER 31, 2004
   
168,079,196
   
841
   
104,537
 
CHANGES DURING 2005:
                   
Comprehensive loss - loss for the period
                   
Non-employee stock option compensation expenses
   
   
   
45
 
Employee stock option compensation expenses
   
   
   
2,718
 
Exercise of stock options
   
3,786,825
   
17
   
1,494
 
Issuance of ordinary shares in respect of license
                   
and purchases of assets (Note 3)
   
1,314,420
   
6
   
1,385
 
BALANCE AT DECEMBER 31, 2005
   
173,180,441
   
864
   
110,179
 
CHANGES DURING 2006:
                   
Comprehensive loss - loss for the period
   
   
   
 
Non-employee stock option compensation expenses
   
   
   
7
 
Employee stock option compensation expenses
   
   
   
2,173
 
Exercise of stock options
   
277,238
   
1
   
96
 
Issuance of share warrants, net of $681 share issuance expenses
   
   
   
4,565
 
Issuance of shares, net of $2,956 share issuance expenses
   
46,666,670
   
207
   
19,591
 
BALANCE AT DECEMBER 31, 2006
   
220,124,349
   
1,072
   
136,611
 
 
**   Represents an amount less than $ 1,000.
 
The accompanying notes are an integral part of the financial statements.
 
 
F-8

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(in thousands of US dollars, except share amounts)

   
Accumulated other comprehensive income (loss)
 
Deficit accumulated during the development stage
 
Total
 
               
BALANCE AT DECEMBER 31, 2003 -
             
brought forward
   
14
   
(69,303
)
 
20,608
 
CHANGES DURING 2004:
                   
Comprehensive loss:
                   
Loss for the period
   
   
(16,473
)
 
(16,473
)
Net unrealized gain
   
(14
)
 
   
(14
)
Comprehensive loss
   
(14
)
 
(16,473
)
 
(16,487
)
Non-employee stock option compensation expenses
   
   
   
32
 
Exercise of stock options
   
   
   
19
 
Issuance of shares, net of $2,426
                   
share issuance expenses
   
   
   
15,430
 
BALANCE AT DECEMBER 31, 2004
   
   
(85,776
)
 
19,602
 
CHANGES DURING 2005:
                   
Comprehensive loss - loss for the period
   
   
(14,015
)
 
(14,015
)
Non-employee stock option compensation expenses
   
   
   
45
 
Employee stock option compensation expenses
   
   
   
2,718
 
Exercise of stock options
   
   
   
1,511
 
Issuance of ordinary shares in respect of license
                   
and purchases of assets (Note 3)
   
   
   
1,391
 
BALANCE AT DECEMBER 31, 2005
   
   
(99,791
)
 
11,252
 
CHANGES DURING 2006:
                   
Comprehensive loss - loss for the period
   
   
(15,132
)
 
(15,132
)
Non-employee stock option compensation expenses
   
   
   
7
 
Employee stock option compensation expenses
   
   
   
2,173
 
Exercise of stock options
   
   
   
97
 
Issuance of share warrants, net of $681 share issuance expenses
   
   
   
4,565
 
Issuance of shares, net of $2,956 share issuance expenses
   
   
   
19,798
 
BALANCE AT DECEMBER 31, 2006
   
   
(114,923
)
 
22,760
 
 
**   Represents an amount less than $ 1,000.
 
The accompanying notes are an integral part of the financial statements.

 
F-9

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)

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

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands of US dollars)
 
   
Year ended December 31
 
Period from
March 9, 1993 (a)
to December 31,
 
   
2006
 
2005
 
2004
 
2006
 
CASH FLOWS FROM FINANCING ACTIVITIES:
     
 
 
 
     
Issuance of share capital and warrants - net of
share issuance expenses
   
24,363
   
   
15,430
   
128,734
 
Exercise of share warrants and stock options
   
97
   
1,511
   
19
   
2,100
 
Proceeds from long-term debt
   
   
   
   
399
 
Proceeds from short-term debt
   
   
   
   
50
 
Repayment of long-term debt
   
   
   
   
(399
)
Repayment of short-term debt
   
   
   
   
(50
)
Net cash provided by financing activities
   
24,460
   
1,511
   
15,449
   
130,834
 
NET INCREASE (DECREASE) IN CASH AND
                     
CASH EQUIVALENTS
   
(8,960
)
 
572
   
8,604
   
4,400
 
BALANCE OF CASH AND CASH EQUIVALENTS
                     
AT BEGINNING OF PERIOD
   
13,360
   
12,788
   
4,184
   
 
BALANCE OF CASH AND CASH EQUIVALENTS
                     
AT END OF PERIOD
   
4,400
   
13,360
   
12,788
   
4,400
 
Supplementary information on investing and
                     
financing activities not involving cash flows:
                     
Issuance of ordinary shares in respect of
                     
license and purchase of assets
   
   
1,391
   
   
1,391
 
Conversion of convertible subordinated debenture
                         
into shares
   
   
   
   
1,700
 
Supplemental disclosures of cash flow information:
                     
Income taxes paid
   
136
   
49
   
107
   
457
 
Interest paid
   
   
   
   
350
 
 
(a)   Incorporation date, see Note 1a.
 
The accompanying notes are an integral part of the financial statements.
 
 
F-11


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

a.
General:

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

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

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

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

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

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

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

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

b.
Functional currency

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

 
F-12

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

c.
Principles of consolidation

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

d.
Impairment of long-lived and intangible assets

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

e.
Cash equivalents

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

f.
Marketable securities

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

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

 
F-13

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

g.
Property and equipment

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

Annual rates of depreciation are as follows:

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

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

h.
Intangible assets

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

i.
Deferred income taxes

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

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

j.
Research and development costs and participations

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

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

In connection with the purchase of assets, amounts assigned to intangible assets to be used in a particular research and development project that have not reached technological feasibility and have no alternative future use are charged to in-process research and development costs at the purchase date.
 
 
F-14

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

k.
Revenue recognition

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

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

l.
Business development costs

Costs associated with business development are comprised of costs related to partnering activities for the Company’s drug programs, seeking new development collaborations and in-licensing opportunities. Business development costs are expensed as incurred.
 
m.
Loss per share (“LPS”)

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

n.
Comprehensive loss

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

o.
Stock- based compensation

SFAS No. 123R “Share - Based Payment” (“SFAS 123R”) addresses the accounting for share-based payment transactions in which a company obtains employee services in exchange for (a) equity instruments of a company or (b) liabilities that are based on the fair value of a company’s equity instruments or that may be settled by the issuance of such equity instruments.
 
 
F-15

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

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

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

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

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

 
F-16

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

   
 
Year ended
December 31
 
Period from
March 9, 1993*
to December 31,
 
   
2004
 
2004
 
   
($ in thousands except per share amounts)
 
       
Loss for the period, as reported
   
16,473
   
85,776
 
Deduct: stock- based employee compensation
             
expense, included in reported loss
   
   
(483
)
Add: stock-based employee compensation
             
expense determined under fair value
             
method for all awards
   
239
   
6,355
 
Loss - pro-forma
   
16,712
   
91,648
 
 
Basic and diluted loss per share:
           
As reported
   
0.12
       
Pro-forma
   
0.12
       
               
* Incorporation date, see Note 1a.
             
 
p.
Recently issued accounting pronouncements in the United States:

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

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

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 expresses the SEC’s view regarding the process of quantifying financial statement misstatements. The bulletin was effective as of the year beginning January 1, 2006. The implementation of this bulletin had no impact on the Company’s consolidated financial statements and disclosures.
 
 
F-17

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

q.
Reclassifications

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

NOTE 2 - LICENSE AGREEMENT WITH CUBIST

The Company entered into a licensing agreement with Cubist in June 2004, under which the Company granted to Cubist an exclusive, worldwide license (with the right to sub-license) to commercialize HepeX-B and any other product containing an hMAb, or humanized monoclonal antibody, or fragment directed at the hepatitis B virus owned or controlled by the Company. See Note 1k for the revenue recognition treatment.
 
In August 2005, the Company amended its licensing agreement with Cubist. Under the terms of the agreement, as amended, Cubist paid the Company an initial up-front nonrefundable payment of $1 million upon the signing of the agreement, and a payment of $1 million (out of which $454,000, $454,000 and $185,000 was recorded as revenue in the years ended December 31, 2006, 2005 and 2004, respectively) as collaboration support paid in 2004 (instead of a total of $2 million to be paid in installments through 2005, as per the original agreement). Furthermore, under the terms of the agreement, as amended, Cubist shall make a payment in the amount of $3 million upon achievement of certain regulatory milestones until the end of 2007 or an amount of $2 million upon achievement of the same certain regulatory milestones until the end of 2008. Under this agreement, as amended, the Company was responsible for certain clinical and product development activities of HepeX-B through August 2005, at the expense of Cubist. The Company has transferred full responsibility for completing the development of HepeX-B to Cubist. Cubist will be responsible for completing the development and for registration and commercialization of the product worldwide.

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

 
F-18

 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 2 - LICENSE AGREEMENT WITH CUBIST (continued)
 
Under the agreement, the Company is entitled to receive royalties from net sales by Cubist, if any, generally ranging from 10% to 17%, depending on the levels of net sales achieved by Cubist and subject to certain deductions based on the patent protection of HepeX-B in such territory, the total cost of HepeX-B development, third party license payments and indemnification obligations. As of the date hereof, Cubist has decided not to make any further investment in the HepeX-B program while Cubist evaluates strategic options for HepeX-B.

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

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

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

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

For a discussion of the Company's commitment to the Government of Israel related to the transfer of manufacturing rights of the Company’s HepeX-B product candidate under the terms of the agreement with Cubist, see Note 7a(2).
 
NOTE 3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST

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

In connection with the VivoQuest transaction (the “Transaction”):
 
(1)
the Company issued the fair value equivalent of $1,391,000 of its ordinary shares (1,314,420 ordinary shares, calculated based upon the average of the closing prices per share for the period commencing two days before, and ending two days after the closing of the transaction), made cash payments of approximately $400,000 to cover VivoQuest’s operating expenses prior to the closing of the Transaction, and incurred $148,000 in direct expenses associated with the Transaction;
 
 
F-19

 
 

XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST (continued)

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

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

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

The purchase price consisted of:

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

The tangible and intangible assets acquired consisted of the following:

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

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

F-20


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 3 - LICENSE AND ASSET PURCHASE AGREEMENT WITH VIVOQUEST (continued)

The fair value of the assembled workforce acquired was estimated by management with the assistance of an independent third-party appraiser, using the “cost approach.” The cost approach measures the fair- value based on the cost of reproducing or replacing an asset, less depreciation and amortization from physical deterioration and functional or economic obsolescence, if present and measurable. According to this approach, the estimated fair value of the assembled workforce is based on the cost of replacing VivoQuest’s key employees, which were hired by the Company as a part of Transaction.
 
The amount allocated to in-process research and development represents the relative fair value of purchased in-process research and development that, as of the transaction date, have not reached technological feasibility and have no proven alternative future use. Accordingly, they were charged in the consolidated statement of operations as “in- process research and development costs.”
 
The assembled workforce that was acquired is being amortized using the straight-line method over its estimated useful life of three years, and is classified as “intangible assets” on the Company’s balance sheet.

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

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

   
December 31
 
   
2006
 
2005
 
   
($ in thousands)
 
Property and equipment
         
Cost:
         
Laboratory equipment
   
1,281
   
1,960
 
Computers
   
227
   
232
 
Leasehold improvements
   
572
   
698
 
Furniture and office equipment
   
156
   
238
 
     
2,236
   
3,128
 
Accumulated depreciation and amortization:
             
Laboratory equipment
   
895
   
1,333
 
Computers
   
202
   
217
 
Leasehold improvements
   
572
   
697
 
Furniture and office equipment
   
77
   
119
 
     
1,746
   
2,366
 
     
490
   
762
 

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

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

c.
Depreciation totaled $229,000, $238,000 and $319,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
 
F-21

 
XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - EMPLOYEE SEVERANCE OBLIGATIONS

a.
The Company

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

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

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

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

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

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

b.
The Subsidiary

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

c.
Severance expenses

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

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

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

1)
For the years ended December 31, 2006, 2005 and 2004, the Company contributed to insurance companies, in respect of its severance obligations to its Israeli employees, $82,000, $166,000 and $276,000, respectively, and expects to contribute, in 2007, $48,000 to insurance companies in respect of its severance obligations to its Israeli employees.
 
F-22

 
XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5 - EMPLOYEE SEVERANCE OBLIGATIONS (continued)

2)
The Company expects to pay future benefits to certain employees who will reach retirement, as follows:
 
   
($ in thousands)
2010
 
12  
2011
 
2012-2016
 
55  
   
67*

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

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

NOTE 6 - SHAREHOLDERS’ EQUITY

a.
Share Capital and Warrants

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

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

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

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

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

F-23

 
XTL BIOPHARMACEUTICALS LTD.
 
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

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

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

b.
Stock Option Plans:

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

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

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

(a)
1998 Share Option Plan

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

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

(b)
1999 Share Option Plan

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

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

F-24

 
XTL BIOPHARMACEUTICALS LTD.
 
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

(c)
1999 International Share Option Plan

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

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

(d)
2000 Share Option Plan
 
Under a share option plan established in 2000 (“the 2000 Plan”), the Company granted options to employees during 2000, which are held by a trustee under section 3(i) of the Tax Ordinance, of which 669,800 are outstanding and exercisable as of December 31, 2006, at an exercise price of $1.10 per ordinary share.
 
The option term is for a period of 10 years from grant date. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. These options were granted for no consideration. There are no options available for grant under this plan.
 
(e)
2001 Share Option Plan
 
Under a share option plan established in 2001 (“the 2001 Plan”), the Company has granted options during 2001-2006 , at an exercise price between $0.106 and $0.931 per ordinary share. Up to 11,000,000 options were available to be granted under the 2001 Plan, of which 5,714,838 are outstanding as of December 31, 2006. Options granted to Israeli employees were in accordance with section 102 of the Tax Ordinance, under the capital gains option set out in section 102(b)(2) of the ordinance.
 
The option term is for a period of 10 years from the grant date. The options were granted for no consideration. The options vest over a four year period. As of December 31, 2006, 1,801,637 options are fully vested. As of December 31, 2006, the remaining number of options available for future grants under the 2001 Plan is 4,799,569.
 
(f)
Non-Plan Share Options
 
In addition to the options granted under the Company’s share option plans, there are 20,795,000 outstanding options, and 6,066,667 exercisable options, as of December 31, 2006, which were granted by the Company to employees, directors and consultants not under an option plan during 1997-2006 . The options were granted at an exercise price between $0.20 and $2.11 per ordinary share. The options expire between 2008 and 2016.
 
F-25


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

2)
The following table summarizes options granted to employees and directors under the Company's stock option plans, as discussed above:
 
   
Year ended December 31
 
   
2006
 
2005
 
2004
 
       
Weighted
     
Weighted
     
Weighted
 
       
Average
     
average
     
average
 
   
Number
 
exercise price
 
Number
 
exercise price
 
Number
 
exercise price
 
       
$
     
$
     
$
 
 
                         
Balance outstanding at   beginning of year
   
24,268,975
   
0.59
   
17,805,661
   
0.69
   
17,552,661
   
0.69
 
Changes during the year:
                                     
Granted *
   
11,740,000
   
0.70
   
11,370,000
   
0.36
   
432,000
   
0.33
 
Exercised **
   
(277,238
)
 
0.35
   
(3,786,825
)
 
0.40
   
(50,000
)
 
0.37
 
Reclassified***
   
(125,000
)
 
0.25
   
   
   
   
 
Expired
   
(2,074,505
)
 
0.60
   
(153,285
)
 
0.95
   
(44,133
)
 
0.91
 
Forfeited
   
(1,056,994
)
 
0.57
   
(966,576
)
 
0.39
   
(84,867
)
 
0.56
 
Balance outstanding at   end of year****
   
32,475,238
   
0.63
   
24,268,975
   
0.59
   
17,805,661
   
0.69
 
Balance exercisable at end of year****
   
14,145,370
   
0.72
   
16,262,310
   
0.70
   
16,051,324
   
0.72
 

*
In 2006, the exercise price of the options granted to employees was greater than, equal to, or less than the share price on the grant date (see (a) below). In 2005, the exercise price of options granted to the Company's directors was equal to or less than the share price on the grant date (see (b) and (c) below). In 2004, the exercise price of options granted to employees and directors was equal to the share price on the grant date (see (d) below).
**
The total intrinsic value of options exercised during 2006, 2005 and 2004 was $167,000, $1,521,000 and $6,000, respectively.
***
In 2006, a former employee was engaged by the Company as a consultant. The options that were granted to that former employee have been reclassified from options to an employee to options to a consultant.
****
The aggregate intrinsic value as of December 31, 2006 is $33,000 for outstanding options, and $21,000 for exercisable options.

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

   
Options outstanding                     
 
        Options exercisable        
 
 
 
 
Range of
exercise prices
 
 
 
 
Number
outstanding
 
Weighted-
average
remaining
contractual
life (years)
 
 
Weighed-
average
exercise
price
 
 
 
 
Number
exercisable
 
Weighted-
average
remaining
contractual
life (years)
 
 
Weighed-average
exercise
price
 
$0.100-$0.299
   
272,772
   
5.9
 
$
0.16
   
126,237
   
3.9
 
$
0.11
 
$0.300-$0.399
   
11,290,000
   
3.6
 
$
0.35
   
3,771,667
   
3.6
 
$
0.35
 
$0.400-$0.499
   
5,802,600
   
1.1
 
$
0.49
   
5,802,600
   
1.1
 
$
0.49
 
$0.500-$0.699
   
3,625,000
   
9.5
 
$
0.60
   
   
 
$
 
$0.700-$0.899
   
7,273,800
   
9.0
 
$
0.78
   
233,800
   
4.1
 
$
0.85
 
$0.900-$1.100
   
2,936,066
   
1.5
 
$
1.02
   
2,936,066
   
1.5
 
$
1.02
 
$2.110
   
1,275,000
   
3.7
 
$
2.11
   
1,275,000
   
3.7
 
$
2.11
 
     
32,475,238
   
4.9
 
$
0.63
   
14,145,370
   
2.1
 
$
0.72
 

F-26


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

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

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

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

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

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

F-27


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

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

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

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

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

F-28

 
XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

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

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

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

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

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

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

F-29


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

   
Year ended December 31
 
   
2006
 
2005
 
2004
 
       
Weighted
     
Weighted
     
Weighted
 
       
average
     
average
     
average
 
   
Number
 
exercise price
 
Number
 
exercise price
 
Number
 
exercise price
 
       
$
     
$
     
$
 
Balance outstanding at
                         
beginning of year
   
525,000
   
0.33
   
525,000
   
0.33
   
205,000
   
0.54
 
Changes during the year:
                                     
Granted*
   
120,000
   
0.29
   
   
   
320,000
   
0.20
 
Reclassified**
   
125,000
   
0.25
   
   
   
   
 
Expired
   
(10,000
)
 
0.50
   
   
   
   
 
Balance outstanding at
         
 
                         
end of year***
   
760,000
   
0.31
   
525,000
   
0.33
   
525,000
   
0.33
 
Balance exercisable at
                     
 
             
end of year***
   
448,334
   
0.36
   
355,000
   
0.39
   
280,901
   
0.45
 
 
*
The options exercise price was equal to the share price on the grant date.
**
In 2006, a former employee was engaged by the Company as a consultant. The options that were granted to that former employee have been reclassified from options to an employee to options to a consultant.
***
The aggregate intrinsic value as of December 31, 2006 is $27,000 for outstanding options, and $13,000 for exercisable options.
 
The following table summarizes information about stock options outstanding and exercisable at December 31, 2006:

   
Options outstanding
 
        Options exercisable        
 
 
 
 
Range of
exercise prices
 
 
 
 
Number
outstanding
 
Weighted-
average
remaining
contractual
life (years)
 
 
Weighed-
average
exercise
price
 
 
 
 
Number
exercisable
 
Weighted-
average
remaining
contractual
life (years)
 
 
Weighed-average
exercise
price
 
0.100-0.299
   
375,000
   
5.5
 
$
0.24
   
233,334
   
3.5
 
$
0.22
 
0.100-0.299
   
170,000
   
*
 
$
0.20
   
   
 
$
 
0.300-0.399
   
20,000
   
5.0
 
$
0.31
   
20,000
   
5.0
 
$
0.31
 
0.500-0.699
   
195,000
   
5.0
 
$
0.54
   
195,000
   
5.0
 
$
0.54
 
     
760,000
               
448,334
             

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

F-30


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6 - SHAREHOLDERS’ EQUITY (continued)

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

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

a.
Royalty Bearing Agreements:

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

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

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

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

F-31


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)
 
2)
The Company is committed to pay royalties to the Government of Israel on proceeds from sales of products in the research and development of which the Government participates by way of grants. At the time grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties. Under the terms of the Company's funding from the Israeli Government, royalties of 3% - 5% are payable on sales of products developed from projects so funded, up to 100% of the amount of the grant received by the Company (dollar linked), and as from January 1, 1999, with the addition of an annual interest based on Libor.

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

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

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

b.
Operating lease commitments:

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

Future minimum rental payments under these agreements are as follows:
 
   
December 31, 2006
 
   
($ in thousands)
 
         
In 2007
   
569
 
In 2008
   
447
 
In 2009
   
419
 
     
1,435
 

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

F-32


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - COMMITMENTS AND CONTINGENCIES (continued)  

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

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

c.
Research and development agreement commitments

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

d.
Tax Assessment

In 2005, the Company received an assessment from the Israeli tax authorities of approximately $730,000 (including fines and interest expenses) related to withholding taxes for the periods of 2001-2004. In 2006, the Company settled this assessment with the Israeli tax authorities and paid $48,000.
 
NOTE 8 - INCOME TAXES

a.
The Company

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

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

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

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

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

The period of tax benefits with respect to the Company's approved enterprise program has not yet commenced because the Company has yet to realize taxable income. However, this benefit period cannot extend beyond 12 years from the year of commencement of operations or 14 years from the year in which approval was granted, whichever is earlier. The Company has an “approved enterprise” plan from 2001. The expiration of this plan is in 2015.
 
F-33


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 8 - INCOME TAXES (continued)

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

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

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

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

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

   
Tax rates in Israel applicable to income from other sources

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

   
US Federal Income Tax Consequences

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

F-34


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - INCOME TAXES (continued)

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

b.
The Subsidiary

The Subsidiary is taxed according to US tax laws.

c.
Current tax losses for tax purposes

1)
Company

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

2)
Subsidiary

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

The following table summarizes the taxes on income for the Company and the Subsidiary for 2006, 2005 and 2004:
 
   
2006
 
2005
 
2004
 
   
($ in thousands)
 
($ in thousands)
 
($ in thousands)
 
   
Company
 
Subsidiary
 
Company
 
Subsidiary
 
Company
 
Subsidiary
 
                           
Net income (loss) before income taxes
   
(15,363
)
 
458
   
(14,187
)
 
250
   
(16,582
)
 
158
 
Income taxes
   
   
227
   
   
78
   
   
49
 
Net income (loss) for the year
   
(15,363
)
 
231
   
(14,187
)
 
172
   
(16,582
)
 
109
 
 
d.
Deferred income taxes
 
As a result of the “approved enterprise” status of the Company, the Company’s current Israeli tax rate is 0%, and therefore no deferred tax assets have been included in these financial statements in respect of carryforward losses.
 
The deferred tax assets included in these financial statements result from changes in respect of temporary differences between the financial reporting basis and the tax basis in the Subsidiary in respect of property and equipment in the amount of $19,000 and certain employee related provisions in the amount of $29,000.

F-35


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 8 - INCOME TAXES (continued)

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

1)
Income taxes

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

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

2)
Withholding taxes - see Note 7d.
 
NOTE 9 - RESTRUCTURING:

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

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

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

F-36


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION

a.
Short-term bank deposits

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

b.
Other receivables and prepaid expenses:
 
   
December 31
 
   
2006
 
2005
 
   
($ in thousands)
 
Prepaid expenses
   
258
   
285
 
Employees
   
118
   
75
 
Value added tax authorities
   
8
   
17
 
Interest receivable
   
318
   
54
 
     
702
   
431
 
 
c.
Accounts payable and accrued expenses:

Suppliers
   
941
   
657
 
Accrued expenses
   
1,190
   
940
 
Income taxes
   
143
   
 
Accrued compensation and related liabilities
   
729
   
410
 
     
3,003
   
2,007
 

d.
Financial and other income - net:
 
           
March 9, 1993
 
   
Year ended December 31
 
to December 31,
 
   
2006
 
2005
 
2004
 
2006
 
   
($ in thousands)
 
Interest income
   
1,058
   
503
   
297
   
10,286
 
Interest expense
   
   
   
   
(374
)
Foreign exchange differences-gain (loss)
   
2
   
(39
)
 
67
   
(1,755
)
Gain from trading securities*
   
2
   
   
13
   
1
 
Other income*
   
100
           
100
 
Other expense
   
(21
)
 
(21
)
 
(25
)
 
26
 
     
1,141
   
443
   
352
   
8,284
 

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

F-37


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

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

1)
As follows:
   
December 31, 2006
 
   
Israeli currency
 
Other
 
   
Unlinked
     
   
($ in thousands)
 
Assets
   
548
   
4
 
Liabilities
   
747
   
108
 
 
The above balances do not include Israeli currency balances linked to the dollar.

2)
Data regarding the changes in the exchange rate of the dollar and the Israeli CPI:

   
Year ended December 31
 
   
2006
 
2005
 
2004
 
             
Devaluation (evaluation) of the Israeli currency against the dollar
   
(8.21
)%
 
6.85
%
 
(1.6
)%
Changes in the Israeli CPI
   
(0.1
)%
 
2.4
%
 
1.2
%
Exchange rate of one dollar (at end of year)
   
NIS 4.225
   
NIS 4.603
   
NIS 4.308
 
 
b.
Fair value of financial instruments

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

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

c.
Concentration of credit risks

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

F-38


XTL BIOPHARMACEUTICALS LTD.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)
 
NOTE 12 - SUBSEQUENT EVENT

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

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

F-39

 
 
 
V069141_EX4-1 LOGO
 
 
 

 
 

Exhibit 10.32

CONFIDENTIAL TREATMENT REQUESTED .
Confidential portions of this document have been redacted and separately filed with the
U.S. Securities and Exchange Commission.

L ICENSE AGREEMENT
 
This License Agreement (this “ Agreement ”), dated January 15, 2007 (the “ Effective Date ”), is made by and between DOV Pharmaceutical, Inc., a Delaware corporation (“ DOV ”), and XTL Development, Inc., a Delaware corporation (“ XTL ”). DOV and XTL are sometimes hereinafter referred to each as a “Party” and collectively as the “Parties.”
 
WHEREAS, the Parties desire to enter into an agreement pursuant to which DOV will grant a sole and exclusive license to XTL under the DOV Patent Rights and DOV Know-How for XTL to develop and commercialize the Licensed Compound and Licensed Product as defined below, and
 
WHEREAS, DOV and Wyeth Holdings Corporation (“Wyeth”) entered into that certain Amended and Restated License Agreement dated December 7, 2006 (the “ Wyeth Agreement ”), relating, among other things, to Bicifadine (as defined below).
 
NOW, THEREFORE, the Parties hereby agree as follows:
 
Section 1.    Definitions .
 
For the purpose of this Agreement, the following words and phrases shall have the meanings set forth below:
 
1.1    “Affiliate” means with respect to a party, any other business entity that directly controls, is controlled by, or is under common control with, such party. A business entity or party shall be regarded as in control of another business entity if it owns, or controls, more than fifty percent (50%) of the voting stock or other voting ownership interest of the other business entity, or if it directly or indirectly possesses the power to direct or cause the direction of the management and policies of the other business entity by any means whatsoever.
 
1.2    “Annual” means from January 1 to December 31 of any given calendar year.
 
1.3    “Approval” means, with respect to any Licensed Product in any regulatory jurisdiction, approval from the applicable Regulatory Authority sufficient for the manufacture, offer for sale, sale, distribution, importation or use of the Licensed Product in such jurisdiction in accordance with applicable Laws.
 
1.4    “Bicifadine” means the compound CL 220,075 as listed in Schedule 1 to the Wyeth Agreement.
 
1.5    “Clinical Data” means the information with respect to the Licensed Product or the Licensed Compound made, collected or otherwise generated under or in connection with pre-clinical, clinical, or the post-Approval studies for the Licensed Compound or Licensed Product, including any data, reports and results with respect to any of the foregoing.
 
1.6    “Commercially Reasonable Efforts” means, with respect to Licensed Products, the carrying out of development and commercialization activities in a manner comparable to that which a company within the pharmaceutical industry that is similarly situated to XTL and its Affiliates, taken collectively, would reasonably devote to a product of similar market potential based on conditions then prevailing and taking into account, without limitation, issues of safety and efficacy, product profile, the proprietary position, the then current competitive environment for such product and the timing of such product’s entry into the market, the regulatory environment and status of such product, and other relevant scientific, technical and commercial factors.
 

 
1.7    “Confidential Information” means all data or information received by a Party or its Affiliates (“Receiving Party”) that is of value to the Party or its Affiliates disclosing or providing such data or information (“Disclosing Party”) including, but not limited to, Technology; marketing plans or strategies; formulas; methods; techniques; drawings; processes; financial data; financial plans; product plans; lists of actual or potential customers, vendors and/or employees; potential packaging; advertising materials; trademarks, service marks and trade dress; price lists; pricing policies; and competitive strategies. Confidential Information also includes any compilation or organization of information which, divided into individually segregated segments, may not be deemed confidential but in its organized completed format is unique, proprietary and confidential to the Disclosing Party. Additionally, Confidential Information includes any information described in this provision which the Disclosing Party obtains from another party and which the Disclosing Party treats as proprietary or designates as confidential information, whether or not owned or developed by the Disclosing Party. Confidential Information shall be treated as such regardless of whether it is marked “confidential” or “proprietary” or communicated by the Disclosing Party or its Affiliates in oral, written, graphic, or electronic form.
 
1.8    “Confidentiality Agreement” means that certain Confidentiality and Nondisclosure Agreement, dated October 17, 2006, by and between the Parties.
 
1.9    “Controlled” or “Controls”, means, when used in reference to intellectual property (including, but not limited to, patents, trademarks, know-how or Technology), the legal authority or right of a person or entity to license or sublicense such intellectual property to another person or entity, or to provide or disclose such intellectual property to such other person or entity, in each case, without breaching any contractual or fiduciary obligations.
 
1.10    “DOV Bicifadine Patent Rights” means the DOV Patent Rights that relate only to the Licensed Compound and not to any other compounds.
 
1.11    “DOV Commingled Patent Rights” means all DOV Patent Rights other than the DOV Bicifadine Patent Rights.
 
1.12    “DOV Know-How” means all Technology owned, licensed or otherwise Controlled by DOV or any of its Affiliates as of the Effective Date, that is related to the Licensed Compound or Licensed Product, or that is essential, necessary or useful for the manufacture, use, sale, offer for sale, importation, research, development, commercialization or other exploitation of the Licensed Compound or Licensed Product.
 
1.13    “DOV Patent Rights” means the patents and patent applications listed in Exhibit B attached hereto, as amended from time to time during the term of this Agreement by mutual agreement of the Parties, and (a) any foreign counterparts thereof, (b) all divisionals, continuations, continuations-in-part thereof or any other patent application claiming priority directly or indirectly to (i) any of the patents or patent applications identified in Exhibit B or (ii) any patent or patent application from which the patents or patent applications identified in Exhibit B claim direct or indirect priority, and (c) all patents issuing on any of the foregoing, and any foreign counterparts thereof, together with all registrations, reissues, re-examinations, renewals, supplemental protection certificates, or extensions of any of the foregoing, and any foreign counterparts thereof. The parties shall update Exhibit B from time to time during the term of this Agreement as may be required.
 
2

 
1.14    “EMEA” means the European Agency for the Evaluation of Medicinal Products, or any successor agency thereto.
 
1.15    “EU” means the European Union, as its membership may be altered from time to time, and any successor thereto, and which, as of the Effective Date, consists of Austria, Belgium, Bulgaria, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom, and that certain portion of Cyprus included in such organization.
 
1.16    “Europe” means the countries comprising the EU as it may be constituted from time to time, together with those additional countries included in the European Economic Area as it may be constituted from time to time.
 
1.17    “FDA” means the United States Food and Drug Administration or any successor agency thereto.
 
1.18    “Field” means the treatment of any diseases, disorders and conditions in humans, other than the treatment or amelioration of vasomotor symptoms caused by or occurring in relation to or connection with menopause or other female hormonal fluctuations in a patient undergoing treatment.
 
1.19    “First Commercial Sale” means, with respect to any Licensed Product on a country-by-country basis, the first sale for use by the general public of such Licensed Product in such country after Approval of such Licensed Product has been granted, or marketing and sale of such Licensed Product is otherwise permitted, by the applicable Regulatory Authority of such country.
 
1.20    “FTE” means full-time equivalent.
 
1.21    “Governmental Authority” means any supranational, national, federal, state or local judicial, legislative, executive or regulatory authority or any arbitrator or arbitration tribunal.
 
1.22    “IND” means an investigational new drug application filed with the FDA for authorization to commence clinical studies or post-Approval studies and its equivalent in other countries or regulatory jurisdictions.
 
1.23    “JNDA” means a New Drug Application filed with the Koseisho required for marketing approval for the applicable Licensed Product in Japan.
 
1.24    “Koseisho” means the Japanese Ministry of Health and Welfare, or any successor agency thereto.
 
1.25    “Laws” means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, domestic or foreign.
 
1.26    “Licensed Compound” means (a) Bicifadine and (b) any prodrugs, optical isomers, hydrates, solvates, salt forms and polymorphs of Bicifadine.
 
1.27    “Licensed Product” means any pharmaceutical product in all forms, presentations, formulations and dosage forms containing a Licensed Compound, either alone or in combination with one or more other active ingredients (“Combination Product”).

3


1.28    “NDA” means a New Drug Application filed with the FDA seeking approval to market a Licensed Product in the United States.
 
1.29    “NDA Filing” means an NDA for a Licensed Product that has been accepted for filing by the FDA.
 
1.30    “Net Sales” means the gross amount invoiced for Licensed Product sold, distributed or otherwise disposed of by XTL, its Affiliates and/or Sublicensees (collectively, the “ Selling Party ”), in an arm’s length transaction to an end user (“ Gross Sales ”), less:
 
(i)    trade, quantity or cash discounts (other than early payment discounts);
 
(ii)    credits or allowances, if any, given or made on account of price adjustments, returns, bad debts, rebates, and any all Federal, state or local government rebates whether in existence now or enacted at any time during the term of this Agreement ( e.g ., HCFA or Medicaid rebates), rejections, recalls or destruction requested or made by an appropriate government agency; and
 
(iii)    any tax, excise or governmental charge upon or measured by the sale, transportation, delivery or use of the Licensed Product;
 
provided that Net Sales shall in no event be less than eighty percent (80%) of Gross Sales.
 
In   the case of discounts on “bundles” of products which include the Licensed Product, XTL and its Affiliates may, subject to notice to DOV, calculate Net Sales as set forth above discounting the bona fide list price of the Licensed Product by the average percentage discount of all products of the Selling Party in a particular “bundle”, calculated as follows:
 
Average percentage
discount on a   =       (1-A/B) x 100
particular “bundle”
 
where A equals the total discounted price of a bundle, and B equals the sum of the undiscounted bona fide list prices of each unit of every product in such bundle. XTL shall, and shall cause its Affiliates and Sublicensees (directly or through XTL) to, provide DOV documentation, reasonably acceptable to DOV, establishing such average discount with respect to each bundle. Where the Licensed Product is also sold other than in a bundle, the average discount as calculated above shall be applied to the undiscounted list price of the Licensed Product in the bundle. If the Licensed Product is not sold separately and no bona fide list price exists for the Licensed Product, the Parties shall negotiate in good faith an imputed list price for the Licensed Product, and the average discount as calculated above with respect thereto shall be applied to such imputed list price.
 
For the sake of clarity, sales of Licensed Product among XTL, its Affiliates or permitted Sublicensees, where such Licensed Product is being transferred to such Affiliate or permitted Sublicensee for purposes of resale or further distribution, shall not be included in the calculation of Net Sales, it being understood that Net Sales shall be calculated based on the gross amount invoiced in connection with such resale or further distribution. Notwithstanding, the foregoing, if Licensed Product is sold or otherwise transferred among XTL, its Affiliates or permitted Sublicensees and XTL, such Affiliate or such permitted Sublicensee is the end user of such Licensed Product, then the Net Sales for such units of Licensed Product shall be calculated based on the gross amount invoiced in connection with such sale or transfer.
 

4

 
*****Confidential material redacted and filed separately with the Commission.

1.31    “Phase IIB Trial” means a double-blind, placebo-controlled, dose finding study in a specific chronic pain indication designed so as to achieve the first Milestone Event set forth in Section 6.3 .
 
1.32    “Publicly Traded Stock” means:
 
A.   ordinary shares of XTL Biopharmaceuticals Ltd. (“XTL Ltd.”), a public company limited by shares organized under the laws of the State of Israel which have been duly authorized for issuance by all appropriate corporate action, and which are:
 
(i)   freely tradable without restriction on the London Stock Exchange as of the date of issuance; or
 
(ii)   issued off of a shelf registration statement filed by XTL Ltd. under the Securities Act of 1933, as amended (the “ Securities Act ”), such that following such issuance they are freely tradable without restriction on the Nasdaq Global Market; and which carry a value equal to:
 
a.   in the case of (i) above, the lesser of (x) the closing sales price of an ordinary share as reported by the London Stock Exchange (or another authoritative source) as of the close of business on the day prior to the date of issuance, and (y) the average of the closing sales price of an ordinary share as reported by the London Stock Exchange (or another authoritative source) for the ***** trading days beginning on the trading day ***** prior to the day the milestone giving rise to the payment is publicly announced and ending with the close of business on the ***** day following public announcement of such milestone; or
 
b.   in the case of (ii) above, the lesser of (A) the quotient of (w) the average of the closing sales price of an American Depositary Shares of XTL Ltd. as reported by the Nasdaq Global Market (or another authoritative source), as of the close of business on the day prior to the date of issuance, and (x) the number of ordinary shares of XTL Ltd. represented by each American Depositary Share of XTL Ltd., and (B) the quotient of (y) the average of the closing sales price of an American Depositary Shares of XTL Ltd. as reported by the Nasdaq Global Market (or another authoritative source) for the ***** trading days beginning on the trading day ***** prior to the day the milestone giving rise to the payment is publicly announced and ending with the close of business on the ***** day following public announcement of such milestone, and (z) the number of ordinary shares of XTL Ltd. represented by each American Depositary Share of XTL Ltd.; or
 
B.   shares of capital stock of XTL or XTL Biopharmaceuticals, Inc., a Delaware corporation and the parent corporation for XTL (“Parent”), in each case that have been registered under the Securities Act and are freely tradable without restriction on a stock exchange in the United States; and which carry a value equal to the lesser of (i) the closing sales price of such shares as reported by the stock exchange on which such shares are listed (or another authoritative source), on the day prior to the date of issuance, and (ii) the average of the closing sales price of such shares as reported by the stock exchange on which such shares are listed (or another authoritative source), for the ***** trading days beginning on the trading day ***** prior to the day the milestone giving rise to the payment is publicly announced and ending with the close of business on the ***** day following public announcement of the milestone giving rise to the payment.
 
5

 
*****Confidential material redacted and filed separately with the Commission.
 
1.33    “Regulatory Authority” means any national or supranational governmental authority, including, without limitation, the FDA, EMEA or Koseisho, that has responsibility in countries in the Territory over the development and/or commercialization of the Licensed Compound and Licensed Product.
 
1.34    “Regulatory Documentation” means all applications, registrations, licenses, authorizations and approvals (including all Approvals), all correspondence submitted to or received from Regulatory Authorities (including minutes and official contact reports relating to any communications with any Regulatory Authority) and all supporting documents and all preclinical and clinical studies and tests, relating to the Licensed Compound or the Licensed Product and all data contained in any of the foregoing, including all NDAs, regulatory drug lists, advertising and promotion documents, manufacturing data, Clinical Data, adverse event files and complaint files.
 
1.35    “Technology” means know-how, trade secrets, chemical and biological materials, formulations, information, documents, studies, results, data and regulatory approvals, filings and correspondence (including drug master files), including biological, chemical, pharmacological, toxicological, pre-clinical, clinical and assay data, manufacturing processes and data, specifications, sourcing information, assays, and quality control and testing procedures, whether or not patented or patentable, in each case, to the extent related to the Licensed Compound or Licensed Product.
 
1.36    “Territory” means all countries of the world.
 
1.37    “Third Party” means any person or entity other than XTL or DOV or any of their Affiliates.
 
1.38    “Trademark” means any word, name, symbol, color, designation or device or any combination thereof, including any trademark, trade dress, brand mark, service mark, trade name, brand name, logo or business symbol, whether or not registered.
 
Section 2.    License and Assignment Grants by DOV .
 
2.1    Exclusive License . DOV, for itself and on behalf of its Affiliates, hereby grants to XTL and its Affiliates a non-transferable (except in accordance with Section  12.2 ), sole and exclusive (even as to DOV and its Affiliates), worldwide license, with the right to sublicense in accordance with Section 2.1 (a) , under the DOV Patent Rights and DOV Know-How, to make, have made, use, sell, offer to sell, import, research, develop, commercialize and otherwise exploit the Licensed Compound and Licensed Product in the Field in the Territory. The foregoing license grant includes the right to make reference to all regulatory approvals, filings and correspondence (including drug master files) contained within the DOV Know-How. Each Affiliate of XTL performing any obligations or exercising any rights hereunder shall be bound by the terms and conditions of this Agreement as and to the same extent as XTL, and XTL shall remain fully responsible for the performance of its Affiliates hereunder.
 
(a)    Right to Sublicense . The licenses granted in Section  2.1 include the right to grant sublicenses (through multiple tiers) to Third Parties (each such Third Party sublicensee, a “ Sublicensee ”), provided that: (1) each such sublicense shall be subordinate to this Agreement, (2) no such sublicense shall impair XTL (directly or with and through its Sublicensees) to perform its obligations hereunder, (3) no such sublicense shall limit or impair DOV’s rights hereunder and (4) XTL shall remain responsible for its, its Affiliates and its Sublicensees conformity to the terms and conditions set forth herein, including without limitation, the obligation to use Commercially Reasonable Efforts to develop and commercialize the Licensed Compound and Licensed Product throughout the Territory, the obligation to make payments as and when due hereunder, and the obligation to keep records and make reports hereunder . XTL shall provide DOV with a true, accurate and complete copy of each sublicense agreement with its Sublicensees promptly after execution.
 
 
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(i)    Each sublicense granted to a Sublicensee by XTL to any rights licensed to it hereunder shall terminate immediately upon the termination of the license from DOV to XTL with respect to such rights as of the effective date of such termination by DOV pursuant to Section  11.2(b) , provided however, that if a Sublicensee is not in material default of its obligations to XTL under its sublicense agreement, and within sixty (60) days of such termination   the Sublicensee agrees in writing to be bound directly to DOV under a license agreement substantially similar to this Agreement with respect to the rights sublicensed hereunder, substituting such Sublicensee for XTL, then such sublicense shall not so terminate.
 
(b)    Restrictions on DOV . DOV and its Affiliates shall not grant or provide to any Third Party any Technology, patent or other intellectual property rights or Confidential Information inconsistent with the terms of this Agreement. For as long as the license grant set forth in Section  2.1 is in effect, DOV Know-How shall be treated as Confidential Information of both XTL and DOV, and DOV and its Affiliates shall neither use DOV Know-How, nor shall DOV or its Affiliates disclose DOV Know-How, except as permitted by Section  8.1(b) or  8.2 .
 
2.2    Assignment of INDs. DOV, for itself and its Affiliates, hereby assigns and transfers to XTL all of DOV’s right, title, and interest in and to any and all INDs relating to the Licensed Compound in the Field in the Territory .
 
2.3    Use of Trademarks . As between the Parties, XTL shall have the sole right to determine and own the Trademarks to be used with respect to the commercialization of the Licensed Product in the Field in the Territory. XTL and its Affiliates shall make reasonable efforts to avoid using in their Development and Commercialization activities any Trademark that is confusingly similar to, misleading or deceptive with respect to any trademark owned by DOV.
 
2.4    License Limitations . All licenses and other rights are or shall be granted only as expressly provided in this Agreement, and no other licenses or other rights are or shall be created or granted hereunder by implication, estoppel or otherwise.
 
Section 3.    Regulatory Matters in the Territory .
 
3.1    Regulatory Responsibilities . As between the Parties, XTL shall have sole responsibility for preparing and maintaining all Regulatory Documentation with respect to (i) Approvals for the Licensed Product in the Field in the Territory and (ii) Development and Commercialization activities, as set forth in Section 5 , for the Licensed Product in the Field in the Territory. To the extent possible, DOV shall provide, at XTL’s expense, reasonable assistance to XTL with respect to this Section 3.1 .  
 
3.2    [Reserved]
 
3.3    Ownership . All Approvals and related Regulatory Documentation for the Licensed Product in the Field in the Territory shall be the sole and exclusive property of XTL and held in the name of XTL (or in each such case XTL’s Affiliate or Sublicensee). DOV shall not be entitled to receive copies of XTL’s Clinical Data, provided, however, that upon written request by DOV, XTL shall, at its sole discretion, provide such copies to DOV subject to the confidentiality provisions of Section 8 .
 

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3.4    Communications with Regulatory Authorities . As between the Parties, XTL shall be responsible for all communications with any Regulatory Authority relating to the Licensed Product or Licensed Compound in the Territory during the term of this Agreement. Subject to Section 3.3, as relating to the Licensed Product or Licensed Compound, XTL (or its Affiliates or Sublicensees) shall promptly provide DOV with copies of all (i) material written communications to or from any Regulatory Authority, and (ii) written meeting minutes or summaries of material meetings, conferences and discussions with Regulatory Authorities. Except as necessary to comply with the Laws, DOV shall not initiate any communications with any Regulatory Authority concerning the Licensed Compound or the Licensed Product without first obtaining XTL’s approval.
 
(a)    XTL shall promptly inform DOV of any action, correspondence or reports to or from Governmental Authorities (other than Regulatory Authorities) that would reasonably be expected to materially affect the current or anticipated development or commercialization of the Licensed Product or Licensed Compound, and shall furnish DOV with copies of any relevant documents relating thereto.
 
3.5    Regulatory Records . XTL shall maintain, or cause to be maintained, records of the development and commercialization activities performed by XTL, its Affiliates and Sublicensees with respect to the Licensed Product in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes, which shall be reasonably complete and accurate and shall properly reflect all work done and results achieved in the performance of such development activities, and which shall be retained by or for XTL for at least five (5) years after the termination of this Agreement, or for such longer period as may be required by Law.
 
Section 4.    Performance of Duties .
 
4.1    Transition . Within thirty (30) days following the Effective Date, DOV shall transfer or cause to have transferred to XTL, or shall perform or cause to have performed, each item scheduled in Exhibit D hereto; provided that any copies of documents, data and other information shall be made available to XTL and may be copied at XTL’s expense. DOV shall cause its Affiliates to provide XTL with access to their facilities, during normal business hours for the purpose of reviewing such data or other information in DOV’s or its Affiliates’ possession as of the Effective Date. Such access shall be granted on two (2) days written notice from XTL to DOV specifying the date and time of access.
 
4.2    Studies Completion .
 
(a)    DOV shall use reasonable efforts to complete, or to cause to have completed, each of the deliverables specified in Exhibit E within the one hundred eighty (180) days immediately following the Effective Date. XTL shall reimburse DOV for direct FTE costs and vendor costs incurred in connection with DOV’s efforts to complete such deliverables, upon completion of each such deliverable, within thirty (30) days following receipt of an invoice from DOV.  The estimated cost for the deliverables indicated on Exhibit E are not binding; provided that unless the Parties agree otherwise in writing, XTL shall not be required to reimburse DOV for costs incurred in connection with a specific deliverable that are in excess of ***** percent (*****%) of the estimated cost associated with such deliverable. In the event that DOV does not complete one or more such deliverables within one hundred eighty (180) days following the Effective Date, then for each business day above and beyond the one hundred eighty (180) day period and until DOV completes each such deliverable, XTL shall reduce the reimbursement for each such outstanding deliverable at a rate of ***** percent (*****%) per month, calculated on the total number of days; provided that no such reduction shall apply to delays that are beyond DOV’s reasonable control, including, without limitation, delays caused by Regulatory Authorities or by XTL.
 

 
*****Confidential material redacted and filed separately with the Commission.
 
(b)    XTL shall close out the 021 and 022 clinical studies using Good Clinical Practices required by Regulatory Authorities, including, but not limited to, drug accountability procedures.
 
4.3    Database Support . For a period of two (2) months after the Effective Date, DOV shall provide XTL access to DOV’s Vice President of Clinical Research and Development, or an employee with similar knowledge, to provide support and training to XTL as may be reasonably necessary to complete the close-out of the 021 and 022 clinical studies, in any case not to exceed twenty percent (20%) of such person’s time. XTL shall reimburse DOV at cost for the time provided by the Vice President of Clinical Research and Development or other employee pursuant to this Section 4.3 .
 
4.4    Sales of Licensed Compound .
 
(a)    To the extent that such purchase is necessary for the Commercialization and Development of the Licensed Product, during the term of this Agreement XTL shall purchase the Licensed Compound (whether in the form of the active pharmaceutical ingredient, intermediate, or finished product) from DOV’s existing inventory (the “ Inventory ”), at a price equal to *****, as set forth in Exhibit C , prior to offering to purchase or purchasing any such material from any other source; provided however, that such requirement shall be waived with respect to any such material that is expired or otherwise not in compliance with XTL’s applicable specifications at the time XTL requests such supply. Within seven (7) days notice from XTL of XTL’s request to purchase a quantity of the Inventory (each such request, a “ Purchase Request ”), DOV shall take all actions that may be reasonably necessary or desirable to fulfill the Purchase Request. For each such Purchase Request, XTL shall remit payment to DOV for the purchased quantity of Inventory within thirty (30) days of receipt of an invoice from DOV.   XTL will reimburse DOV for any direct storage and necessary stability testing costs associated with the Inventory actually purchased pursuant to this Section 4.4 (a), such costs calculated for the period beginning on the Effective Date and until the date of fulfillment of the Purchase Request.
 
(b)    For a period of ***** years following the Effective Date, DOV shall be responsible for and shall perform or cause to have performed the storage and any necessary stability testing of the Inventory. In the event that XTL purchases Inventory in accordance with the provisions of Section 4.4(a) , at the time of each such purchase XTL shall reimburse DOV for the costs incurred to store and conduct stability testing of such Inventory from the Effective Date to the time of purchase. Further, if at the end of the ***** year period following the Effective Date Inventory remains on-hand, XTL shall reimburse DOV for ***** percent (*****%) of the sum of the costs incurred by DOV (i) to store and conduct stability testing of such Inventory for such ***** year period and (ii) to dispose of such Inventory (should DOV decide to dispose of same at such time). To the extent that the purchase of all of the Inventory (as described in Section 4.4(a)) is not necessary for the Commercialization and Development of the Licensed Product, XTL may provide notice to DOV that XTL shall not purchase such Inventory and XTL shall then reimburse DOV for ***** percent (*****%) of the sum of the costs incurred by DOV (i) to store and conduct stability testing of such remaining Inventory from the Effective Date until the date of such notice and (ii) to dispose of such remaining Inventory (should DOV decide to dispose of same at such time). In the event that XTL purchases all the Inventory during the ***** years following the Effective Date, XTL shall have the option, upon thirty (30) days notice to DOV, to assume all contracts for the storage and testing of the Inventory (the “ Inventory Contracts ”), and DOV shall take all actions that may be reasonably necessary or desirable in connection with such option, including, but not limited to, assignment of the Inventory Contracts to XTL pursuant to an assignment agreement in form and substance reasonably acceptable to the Parties.
 
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Section 5.    Development and Commercialization .
 
5.1    Clinical Trial . XTL shall use Commercially Reasonable Efforts to initiate (i.e., dosing of the first patient) a Phase IIB Trial of the Licensed Compound no later than ***** the date of DOV’s compliance with Section 4.1 . If XTL fails to initiate a Phase IIB Trial of the Licensed Compound by such *****, and provided that such failure is not due to a delay that is beyond XTL’s reasonable control, including, without limitation, delays caused by Regulatory Authorities or by DOV, then XTL may obtain a *****, provided that if XTL fails to initiate a Phase IIB Trial of the Licensed Compound by the end of such *****, and provided that such failure is not due to a delay that is beyond XTL’s reasonable control, including, without limitation, delays caused by Regulatory Authorities or by DOV, then XTL may obtain a *****. The ***** described in the previous sentence are *****. Notwithstanding the foregoing, if during the ***** immediately following the Effective Date, XTL enters into a sublicense in accordance with Section 2.1(a) or XTL assigns this Agreement in connection with a change of control in accordance with Section 12.2 , then the fee for each of the ***** permitted in accordance with this Section 5.1 shall be ***** U.S. dollars (US$*****). Failure to initiate a Phase IIB Trial of the Licensed Compound within ***** the date of DOV’s compliance with Section 4.1 shall constitute a material breach of this Agreement, unless such failure is due to a delay that is beyond XTL’s reasonable control, including, without limitation, delays caused by Regulatory Authorities or by DOV.  
 
5.2    Responsibilities and Costs .   XTL shall use Commercially Reasonable Efforts to develop and commercialize the Licensed Compound and Licensed Product throughout the Territory. Without limiting the foregoing requirement, XTL shall have sole responsibility for, and shall bear all costs associated with, such commercialization and development activities.
 
5.3    [Reserved]
 
5.4    Markings . All promotional materials, packaging and product labeling for the Licensed Product used by XTL, its Affiliates, Sublicensees or distributors in connection with the Licensed Product shall contain (i) the applicable Trademark selected by XTL for use in commercialization of the Licensed Product, (ii) if required by Law, the logo and corporate name of the manufacturer, and (iii) if appropriate, the applicable patent numbers.
 
Section 6.    XTL Payments .
 
6.1    Initial License Fee . Within seven (7) days after the Effective Date, XTL shall pay to (a) Wyeth five million U.S. dollars (US$5,000,000) in cash and (b) DOV one million five hundred thousand U.S. dollars (US$1,500,000) in cash; in each case, in accordance with wire instructions provided by DOV to XTL. Notwithstanding anything else contained herein, in the event that XTL does not pay Wyeth in strict accordance with the terms of this Section 6.1 , this Agreement shall be void ab initio.
 
6.2    Transition Fee . Within seven (7) days after the Effective Date, XTL shall place one million U.S. dollars (US$1,000,000) in an interest-bearing escrow account. XTL shall pay to DOV the balance of such account, including interest, in cash and in accordance with wire instructions provided by DOV to XTL, within thirty (30) days of the Effective Date, subject only to DOV’s compliance with Section 4.1 , and provided that for each day above and beyond the thirty (30) day period specified in Section 4.1 that DOV takes to complete the Transition, XTL shall reduce such payment at a rate of ***** percent (*****%) per month, calculated on the total number of days, provided further that no such reduction shall apply to delays that are beyond DOV’s reasonable control, including, without limitation, delays caused by Regulatory Authorities or by XTL.
 
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*****Confidential material redacted and filed separately with the Commission.
 
6.3    Milestone Payments . As set forth in the following table, XTL shall owe Milestone Payments to DOV upon achievement of each of the Milestones Events by XTL or an Affiliate or Sublicensee of XTL. Each Milestone Payment shall be due and payable by XTL to DOV within twenty (20) days after the achievement of the corresponding Milestone Event with respect to a Licensed Product. Only one set of Milestone Payments are payable hereunder no matter how many times any of the Milestone Events are achieved.  
 
“Milestone Event”
 
“Milestone Payment”
1.   Receipt of favorable results *****
 
US$***** (in cash or Publicly Traded Stock)
2.   NDA ***** for a Licensed Product containing a Licensed Compound in a ***** indication
 
US$***** (in cash or Publicly Traded Stock)
3.   NDA ***** for a Licensed Product containing a Licensed Compound in a ***** indication
 
US$***** (in cash or Publicly Traded Stock)
4.   First FDA Approval of NDA for a Licensed Product containing a Licensed Compound
 
US$***** (at least US$***** in cash and up to US$***** in Publicly Traded Stock)
5.   EMEA Approval of a Licensed Product containing a Licensed Compound in a ***** indication
 
US$***** (in cash or Publicly Traded Stock)
6.   JNDA Approval of a Licensed Product containing a Licensed Compound in a ***** indication
 
US$***** (in cash or Publicly Traded Stock)
7.   Commercial Launch of a Licensed Compound for a ***** indication
 
US$***** (in cash or Publicly Traded Stock)
8.   NDA ***** for a Combination Product
 
US$***** (in cash or Publicly Traded Stock)
9.   FDA Approval of NDA for a Combination Product
 
US$***** (in cash or Publicly Traded Stock)
10.   Annual worldwide sales of Licensed Compounds and Licensed Products equal US$*****
 
US$***** (in cash or Publicly Traded Stock)
11.   Annual worldwide sales of Licensed Compounds and Licensed Products equal US$*****
 
US$***** (in cash or Publicly Traded Stock)
12.   Annual worldwide sales of Licensed Compounds and Licensed Products equal US$*****
 
US$***** (in cash or Publicly Traded Stock)
 
6.4    Royalties .
 
(a)    Royalties . Subject to the terms and conditions of this Agreement (including the remainder of this Section 6 ), XTL shall pay to DOV royalties, on a country-by-country and product-by-product basis for the period of time specified in Section  6.4(b) , at the graduated royalty rates specified in the following table with respect to Net Sales of Licensed Products :
 
Aggregate Net Sales
of All Licensed Products in a Calendar Year
 
 
Royalty Rate
On such Net Sales up to ***** U.S. dollars (US$*****)
 
***** percent (*****%)
On such Net Sales above ***** U.S. dollars (US$*****) and up ***** U.S. dollars (US$*****)
 
***** percent (*****%)
On such Net Sales above ***** U.S. dollars (US$*****)
 
***** percent (*****%)

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The applicable royalty rate shall be determined by reference to all Net Sales on which royalties are paid in a given calendar year. By way of example, in a given calendar year, if the aggregate annual worldwide Net Sales for all Licensed Products for which royalties are due under this Section  6.4(a) were US$*****, the following royalty payment would be payable under this Section  6.4(a) (subject to all reductions set forth in this Agreement): *****.
 
(b)    Royalty Term . The royalties due under Section  6.4(a) shall be payable on Net Sales from the First Commercial Sale of a particular Licensed Product until the later of, on a country-by-country basis, (i) the expiration of the last to expire patent in such country covering such Licensed Product or its use for which regulatory approval has been obtained in such country, or (ii) ten (10) years from such First Commercial Sale in each such country . Such period during which royalties are payable with respect to a Licensed Product in a country is referred to herein as the “Royalty Term” in such country with respect to such Licensed Product.
 
(c)    Only One Royalty . Only one royalty shall be due with respect to the sale of the same unit of Licensed Product. Only one royalty shall be due hereunder on the sale of a Licensed Product even if the manufacture, use, sale, offer for sale or importation of such Licensed Product infringes more than one claim of the DOV Patent Rights.
 
6.5    Payment Terms .
 
(a)    Manner of Payment . All payments to be made by XTL hereunder shall be made in U.S. dollars by wire transfer to such bank account as DOV may designate or in Publicly Traded Stock. DOV may designate that some or all of the amounts due hereunder be paid to third part(ies), for example, in the event that DOV sells or assigns its right to receive some or all of the amounts due hereunder to one or more third parties and XTL agrees that such third parties shall be entitled to receive reports under Section 6.5(b) and to perform audits under Section 6.5(c) as and to the same extent as DOV and without limiting DOV’s rights hereunder. In the event that XTL elects to pay any Milestone Payment due under Section 6.3 (in part or in whole) in Publicly Traded Stock, the amount of such Milestone Payment paid in Publicly Traded Stock will not exceed ***** percent (*****%) of the average aggregate market value of the equity securities of XTL Ltd. over the ***** trading days before such Milestone Payment was due, provided, however, that in the case of the Milestone Payment due to DOV upon FDA Approval of NDA for a Licensed Product containing a Licensed Compound, XTL may pay such Milestone Payment in Publicly Traded Stock in an amount up to ***** percent (*****%) of the average aggregate market value of the equity securities of XTL Ltd. over the ***** trading days before such Milestone Payment was due. In addition, XTL will reimburse DOV for any *****, provided, that such reimbursement shall not exceed ***** percent (*****%) of the aggregate market value of Publicly Traded Stock sold in such transaction.
 
(b)    Reports and Royalty Payments . For as long as royalties are due under Section  6.4(a) , XTL shall furnish to DOV a written report, within forty-five (45) days after the end of each calendar quarter, showing the amount of Net Sales of Licensed Products and   royalty due for such calendar quarter. Royalty payments for each calendar quarter shall be due at the same time as such written report for the calendar quarter. The report shall include, at a minimum, the following information for the applicable calendar quarter, each listed by product and by country of sale: (i) the number of units of Licensed Products sold by XTL and its Affiliates and Sublicensees on which royalties are owed DOV hereunder; (ii) the gross amount received for such sales; (iii) deductions taken from Net Sales as specified in the definition thereof; (iv) Net Sales; and (v)  the royalties and Milestone Payments owed to DOV, listed by category. In addition to the foregoing, XTL shall furnish to DOV a written report within ten (10) business days after the end of each calendar quarter estimating the total Net Sales for such calendar quarter by XTL, its Affiliates and Sublicensees.
 
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(c)    Records and Audits . XTL shall keep, and shall cause each of its Affiliates and Sublicensees, as applicable, to keep adequate books and records of accounting for the purpose of calculating all royalties payable to DOV hereunder. For the five (5) years next following the end of the calendar year to which each shall pertain, such books and records of accounting (including those of XTL’s Affiliates and Sublicensees, as applicable) shall be kept at each of their principal place of business and shall be open for inspection at reasonable times and upon reasonable notice by an independent certified accountant selected by DOV or Wyeth and reasonably acceptable to XTL, for the sole purpose of inspecting the royalties due to DOV under this Agreement. In no event shall such inspections be conducted more frequently than once every twelve (12) months. For the sake of clarity, DOV or Wyeth may conduct an annual inspection of the books and records of XTL and XTL’s Affiliates and Sublicensees, and each such inspection shall be limited to the records and accounts pertaining to the year in which the inspection is conducted and the immediately preceding five (5) calendar years. Results of each such audit shall be shared by DOV and Wyeth. The accountant conducting the inspection must have executed and delivered to XTL and its Affiliates and Sublicensees, as applicable, a confidentiality agreement as reasonably requested by XTL, which shall include provisions limiting such accountant’s disclosure to DOV or Wyeth, as applicable, to only the results and basis for such results of such inspection. The results of such inspection, if any, shall be binding on both Parties. Any underpayments shall be paid by XTL within thirty (30) days of notification of the results of such inspection. Any overpayments shall be fully creditable against amounts payable in subsequent payment periods. DOV shall pay for such inspections, except that in the event there is any upward adjustment in aggregate royalties payable for any calendar year shown by such inspection of more than ***** percent (*****%) of the amount paid, XTL shall reimburse DOV for any reasonable out-of-pocket costs of such accountant.
 
(d)    Currency Exchange . Royalties shall accrue in the currency of the country in which the sale of the Licensed Product or Licensed Compound is made, and if different from U.S. dollars, shall be converted into U.S. dollars using the exchange rate of such domestic currency as quoted by the Wall Street Journal, for the last business day of the calendar quarter during which the royalties accrued.
 
(e)    Tax Withholding . The withholding tax, duties, and other levies (if any) applied by any government authority on payments made by XTL to DOV hereunder shall be borne by DOV. DOV shall provide to XTL a signed Form W-9 with its certified tax identification number within 30 days from the date hereof. XTL and its Affiliates shall use commercially reasonable efforts to provide to DOV proper evidence of payments of withholding tax (if any) and assist DOV by obtaining or providing in as far as possible the required documentation for the purpose of DOV’s tax returns.
 
(f)    Blocked Payments . In the event that, by reason of applicable law in any country, it becomes impossible or illegal for XTL (or any of its Affiliates or Sublicensees) to transfer, or have transferred on its behalf, payments owed DOV hereunder, XTL shall promptly notify DOV of the conditions preventing such transfer and such payments shall be deposited in local currency in the relevant country to the credit of DOV in a recognized banking institution designated by DOV or, if none is designated by DOV within a period of thirty (30) days, in a recognized banking institution selected by XTL or its Affiliate or Sublicensee, as the case may be, and identified in a written notice given to DOV.
 
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*****Confidential material redacted and filed separately with the Commission.
 
(g)    Interest Due . XTL shall pay DOV interest on any payments that are not paid on or before the date such payments are due under this Agreement at a rate of ***** percent (*****%) per month or the maximum applicable legal rate, if less, calculated on the total number of days payment is delinquent.
 
Section 7.    Patent Prosecution, Infringement and Extensions .  
 
7.1    Generally . Anything herein to the contrary notwithstanding, the Wyeth Patents (as such term is defined under the Wyeth Agreement) shall not be subject to this Section 7 and all rights and obligations set forth in this Section 7 are subject to the rights held by Wyeth pursuant to Article 12.0 of the Wyeth Agreement, provided, however, that in the event Wyeth gives notice to DOV of any desire to cease preparation, filing, prosecution or maintenance of any Wyeth Primary Patent (as such term is defined under the Wyeth Agreement), then DOV shall promptly notify XTL of such event and shall elect to continue preparation, filing, prosecution, or maintenance of any Wyeth Primary Patent at XTL’s request and expense.
 
7.2    Prosecution and Maintenance of DOV Patent Rights .  
 
(a)    XTL shall be responsible for the preparation, prosecution (including any interferences, oppositions, reissue proceedings and reexaminations) and maintenance of the DOV Bicifadine Patent Rights. XTL shall use Commercially Reasonable Efforts to obtain appropriate patent protection for the Licensed Compound and Licensed Product (including related compositions, formulations, methods of use, and processes). XTL shall reasonably consult with DOV with respect to the preparation, filing, prosecution and maintenance of the DOV Bicifadine Patent Rights and DOV agrees to reasonably cooperate with XTL in such activities. XTL shall keep DOV advised of the status of such activities and shall also inform DOV in a timely manner of any material communications XTL receives from the relevant patent office with respect to such activities, including providing DOV with copies of any papers relating to the filing, prosecution or maintenance of DOV Bicifadine Patent Rights in sufficient time to allow DOV to review and submit comments to XTL regarding responsive submissions to such papers. In the event DOV submits comments to XTL, XTL will reasonably consider DOV’s substantive and/or strategic comments in preparing such responsive submissions. DOV shall forward to XTL copies of any papers relating to the filing, prosecution or maintenance of DOV Bicifadine Patent Rights promptly upon receipt. As of the Effective Date, XTL shall be responsible for all its costs incurred for such preparation, filing, prosecution and maintenance.  
 
(b)    Without limiting the foregoing, XTL shall not knowingly permit any of the DOV Bicifadine Patent Rights to be abandoned in any country without DOV first being given an opportunity to assume full responsibility and costs for the continued prosecution and maintenance of same.
 
(c)    DOV shall be responsible for the preparation, prosecution (including any interferences, oppositions, reissue proceedings and reexaminations) and maintenance of all DOV Commingled Patent Rights, and all preparation, filing, prosecution, and maintenance decisions with respect to the DOV Commingled Patent Rights shall be made by DOV with the goal and intention of obtaining appropriate patent protection for the Licensed Compound and Licensed Product in the Territory. DOV shall reasonably consult with XTL with respect to the preparation, filing, prosecution and maintenance of the DOV Commingled Patent Rights as they pertain to the Licensed Product and Licensed  Compound and XTL agrees to reasonably cooperate with DOV in such activities. DOV shall keep XTL advised of the status of such activities and shall also inform XTL in a timely manner of any material communications DOV receives from the relevant patent office with respect to such activities, including providing XTL with copies of any papers relating to the filing, prosecution or maintenance of DOV Commingled Patent Rights as they pertain to the Licensed Product and Licensed Compound in sufficient time to allow XTL to review and submit comments to DOV regarding responsive submissions to such papers. In the event XTL submits comments to DOV, DOV will reasonably consider XTL’s substantive and/or strategic comments in preparing such responsive submissions. XTL shall forward to DOV copies of any papers relating to the filing, prosecution or maintenance of DOV Commingled Patent Rights promptly upon receipt. DOV shall be responsible for all its costs incurred for such preparation, filing, prosecution and maintenance.
 
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(d)    DOV’s obligations and XTL’s rights relating to the DOV Commingled Patent Rights pertain only to the Licensed Compound and Licensed Product.
 
(e)    Upon either DOV’s or XTL’s reasonable request, the Parties shall cooperate in good faith to prepare and file separate patent application(s) designed to sever the DOV Commingled Patent Rights. All “divisional” patent applications that pertain specifically and exclusively to the Licensed Compound and Licensed Product shall be considered DOV Bicifadine Patent Rights and XTL shall be responsible for the preparation, prosecution (including any interferences, oppositions, reissue proceedings and reexaminations) and maintenance of such “divisional ” patent applications in accordance with the terms of Section 7.2(a) . All “divisional” patent applications that do not pertain specifically and exclusively to the Licensed Compound and Licensed Product shall not be subject to the terms of this License Agreement and DOV shall not have any obligations under this Agreement with respect to such “divisional” patent applications. Upon the filing of any “divisional” patent applications pursuant to the terms of this Section 7.2(e) , the Parties shall amend Exhibit B so as to list the “divisional” patent application(s) that are DOV Patent Rights and delete the parent or other patent application(s) claiming the residual DOV Commingled Patent Rights. The Parties shall cooperate to ensure that any “divisional” patent applications filed pursuant to the terms of this Section 7.2(e) shall not adversely affect the patentability, validity or enforceability of any of the other DOV Patent Rights or any other patent rights owned or controlled by DOV, any of DOV’s Affiliates, Wyeth or any of Wyeth’s Affiliates. XTL shall be responsible for any incremental out-of-pocket costs incurred by DOV for preparing and filing such “divisional” patent application(s) and maintaining any patent that issues therefrom.  
 
7.3    Enforcement and Defense of DOV Patent Rights .
 
(a)    Enforcement by XTL . In the event that DOV or XTL becomes aware of a suspected infringement of any DOV Patent Right exclusively licensed to XTL under this Agreement, or any such DOV Patent Right is challenged in any action or proceeding (other than any interferences, oppositions, reissue proceedings or reexaminations, which are addressed above), in each case, in the Field in the Territory, such Party shall notify the other Party promptly, and following such notification, the Parties shall confer. XTL shall have the right, but shall not be obligated, to bring an infringement action or defend any such action or proceeding at its own expense, in its own name and entirely under its own direction and control, or to settle any such action or proceeding by sublicense, subject to the following. DOV shall reasonably assist XTL (at XTL’s expense) in any action or proceeding being defended or prosecuted if so requested, and shall lend its name to and join as a nominal party in such actions or proceedings if reasonably requested by XTL or required by applicable Laws. DOV shall have the right to participate and be represented in any such suit by its own counsel at its own expense.   No settlement of any such action or proceeding which restricts the scope, or adversely affects the enforceability, of a DOV Patent Right may be entered into by XTL without the prior written consent of DOV, which consent shall not be unreasonably withheld, delayed or conditioned.
 
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(b)    Enforcement by DOV . If XTL elects not to bring any action for infringement described in Section 7.3(a) and so notifies DOV, then DOV may bring such action at its own expense, in its own name and entirely under its own direction and control, subject to the following. XTL shall reasonably assist DOV (at DOV’s expense) in any action or proceeding being prosecuted if so requested, and shall lend its name to such actions or proceedings if requested by DOV or required by applicable Laws. XTL shall have the right to participate and be represented in any such suit by its own counsel and at its own expense. No settlement of any such action or proceeding which restricts the scope, or adversely affects the enforceability, of a DOV Patent Right may be entered into by DOV without the prior written consent of XTL, which consent shall not be unreasonably withheld, delayed or conditioned.
 
(c)    Damages . In the event that either Party exercises its rights under this Section  7.3 (the “ Exercising Party ”) and recovers any damages or other sums in such action or proceeding or in settlement thereof (“ Recovery ”), then after deducting the costs and expenses borne by such Exercising Party in prosecuting or defending such action, proceeding or settlement, and, in the event the other Party participated in the action, proceeding or settlement, after deducting the costs and expenses borne by such other Party in prosecuting or defending such action, proceeding or settlement, the Exercising Party shall be entitled to ***** percent (*****%) of the remainder of such Recovery and the other Party, regardless of whether such other Party participated in the action, proceeding or settlement, shall be entitled to ***** percent (*****%) of the remainder of such Recovery.
 
(d)    Withdrawal . If either Party brings an action or proceeding under this Section 7.3 and subsequently ceases to pursue or withdraws from such action or proceeding, it shall promptly notify the other Party and the other Party may substitute itself for the withdrawing Party under the terms of this Section 7.3 .
 
7.4    Patent Extensions; Orange Book Listings; Patent Certifications .
 
(a)    Patent Term Extension . XTL shall have the sole right to make any elections with respect to obtaining patent term extension or supplemental protection certificates or their equivalents in any country with respect to DOV Patent Rights. XTL shall notify DOV in the event XTL determines it will not make such elections or their equivalent. Upon such notice from XTL, DOV may make elections with respect to obtaining patent term extension or supplemental protection certificates or their equivalents in any country with respect to DOV Patent Rights
 
(b)    Data Exclusivity . With respect to any data exclusivity periods, such as those periods listed in the FDA’s Orange Book (including any available pediatric exclusivities) or other exclusivity periods under national implementations of Article 10.1(a)(iii) of Directive 2001/EC/83 (and all equivalents in any country), XTL shall have the sole right to seek and maintain all such data exclusivity periods available for the Licensed Compound or Licensed Product.
 
(c)    Notification of Patent Certification . Each Party shall notify and provide the other Party with copies of any allegations of alleged patent invalidity, unenforceability or non-infringement of a DOV Patent Right pursuant to a Paragraph IV Patent Certification by a Third Party filing an Abbreviated New Drug Application, an application under §505(b)(2) or any other similar patent certification by a Third Party, and any foreign equivalent thereof. Such notification and copies shall be provided to the other Party within five (5) business days after a Party receives such certification, and shall be sent to the address set forth in Section  12.6 .
 
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SECTION 8.    Confidential Information and Publicity .
 
8.1    Confidentiality .
 
(a)    Confidential Information . Except as expressly provided herein, each of the Parties agrees that, for itself and its Affiliates, and for as long as this Agreement is in effect and for a period of ***** years thereafter, a Receiving Party shall (i) not disclose such Confidential Information to any Third Party without the prior written consent of the Disclosing Party, except for disclosures expressly permitted below, and (ii) not use such Confidential Information for any purpose except those licensed or otherwise authorized or permitted by this Agreement. For clarity, all Confidential Information of XTL received by or disclosed to DOV hereunder shall be used by DOV only for ensuring that XTL complies with its obligations hereunder and that DOV complies with its obligations under the Wyeth Agreement and for no other purposes.
 
(b)    Exceptions . The obligations in Section  8.1(a) shall not apply with respect to any portion of the Confidential Information that the Receiving Party can show by competent proof:
 
(i)    is publicly disclosed by the Disclosing Party, either before or after it is disclosed to the Receiving Party hereunder;
 
(ii)    was known to the Receiving Party or any of its Affiliates, without any obligation to keep it confidential or any restriction on its use, prior to disclosure by the Disclosing Party;
 
(iii)    is subsequently disclosed to the Receiving Party or any of its Affiliates by a Third Party lawfully in possession thereof and without any obligation to keep it confidential or any restriction on its use;
 
(iv)    is published by a Third Party or otherwise becomes publicly available or enters the public domain, either before or after it is disclosed to the Receiving Party; or
 
(v)    has been independently developed by employees or contractors of the Receiving Party or any of its Affiliates without the aid, application or use of Confidential Information of the Disclosing Party.
 
8.2    Authorized Disclosures . The Parties may disclose Confidential Information belonging to either Party to the extent such disclosure is reasonably necessary , in order to comply with applicable Laws, in connection with prosecuting or defending litigation, making regulatory filings, and filing, prosecuting and enforcing patent applications and patents . Other than making a regulatory filing, prior to publishing any Clinical Data regarding the Licensed Compound, XTL shall provide DOV with a reasonable opportunity to review and comment on the proposed publication (which notice shall be no less than one business day under any circumstances). Prior to the Effective Date, DOV submitted certain articles for publication by various journals. The Parties agree that the publication of such articles after the Effective Date shall not be a breach by DOV of its obligations under this Agreement. XTL shall, in connection with all publications regarding the Licensed Compound, indicate that the Licensed Compound is licensed by XTL from DOV.
 
8.3    Terms of this Agreement; Publicity . The Parties agree that the terms of this Agreement shall be treated as Confidential Information of both Parties. Each Party agrees not to issue any press release or other public statement disclosing information relating to this Agreement or the transactions contemplated hereby or the terms hereof without the prior written consent of the other Party, except that:
 
(a)    DOV shall be permitted to disclose the terms hereof to Wyeth; and
 
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(b)    The Parties shall each be permitted to disclose the terms of this Agreement (i) in communication with investors, consultants, advisors or others on a need-to-know basis, in each case under appropriate confidentiality provisions substantially equivalent to those of this Agreement; (ii) as necessary to comply with applicable governmental Laws and regulations (including, without limitation, the rules and regulations of the Securities and Exchange Commission or any national securities exchange) and with judicial process; or (iii) to other parties under a written confidentiality agreement.
 
8.4    Relationship to the Confidentiality Agreement . This Agreement supersedes the Confidentiality Agreement, provided that all “Confidential Information” disclosed or received by the Parties thereunder shall be deemed “Confidential Information” hereunder and shall be subject to the terms and conditions of this Agreement.
 
Section 9.    ***** .
 
9.1    As stated in Sections 9.2 and 9.3 , XTL shall keep (and XTL shall cause its Sublicensees to keep under terms and conditions equal to those set forth in this Section 9 ) DOV, during the term of this Agreement, promptly and fully informed of all pharmaceutical, toxicological and clinical findings relating to ***** of the Licensed Product or Licensed Compound. DOV shall be permitted to share with Wyeth all data and information provided under this Section 9 by XTL.
 
9.2    XTL undertakes to notify DOV promptly with written confirmation by immediate telecopy of any information concerning *****, reasonably associated with clinical studies or attributed to the use or application of the Licensed Product or Licensed Compound. In any event the above notification shall be made within two (2) working days after Licensee first learns or is advised of relevant information with respect to such *****.
 
9.3    XTL shall also forward regularly (and usually every six (6) months unless the Parties agree on another period) to DOV any information on *****.
 
9.4    XTL shall provide upon request the information on *****.
 
9.5    XTL shall inform DOV, without delay, of any governmental action, correspondence or reports to or from Governmental Authorities that may affect the situation of the Licensed Product or Licensed Compound and furnish DOV with copies of any relevant documents relating thereto.
 
Section 10.    Warranties; Limitations of Liability; Indemnification ; Covenants.
 
10.1    Representations and Warranties of Both Parties . Each Party represents and warrants to the other Party, as of the Effective Date, that:
 
(a)    Such Party is a corporation duly organized, validly existing and in good standing under the Laws of the state in which it is incorporated, and it has full right and authority to enter into this Agreement and to accept the rights and licenses granted as herein described.
 
(b)    This Agreement has been duly authorized by all requisite corporate action, and when executed and delivered will become a valid and binding contract of such Party enforceable against it in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and other Laws affecting creditors’ rights generally from time to time if effect, and to general principles of equity.
 
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(c)    The execution, delivery and performance of this Agreement does not conflict with any other agreement, contract, instrument or understanding, oral or written, to which such Party is bound, nor will it violate any law applicable to such Party.
 
(d)    All necessary consents, approvals and authorizations of all regulatory and Governmental Authorities and other persons or entities required to be obtained by such Party in connection with the execution and delivery of this Agreement and the performance of its obligations hereunder have been obtained.
 
10.2    DOV Representations and Warranties . DOV covenants, represents and warrants to XTL that as of the Effective Date:
 
(a)    DOV Controls the patents and patent applications that are included within the DOV Patent Rights as of the Effective Date and DOV Controls the DOV Know-How, in both cases, for use with the Licensed Compound within the Field;
 
(b)    To the best of its knowledge and belief, all of the issued patents within the DOV Patent Rights are in good standing;
 
(c)    To the best of its knowledge and belief, DOV is not aware of any notice from any Third Party asserting any ownership rights to any DOV Know-How for use with the Licensed Compound within the Field;
 
(d)    To the best of its knowledge and belief, DOV is not aware of any pending or threatened action, suit, proceeding or claim by a Third Party asserting that DOV is infringing or has misappropriated or otherwise is violating any patent, trade secret or other proprietary right of any Third Party as would reasonably be expected to result in DOV being unable to grant the rights and licenses to XTL under this Agreement;
 
(e)    DOV has not granted any right or license or other encumbrance of any kind to any Third Party relating to the DOV Patent Rights and DOV Know-How that conflicts with any of the rights granted to XTL hereunder;
 
(f)    Except as set forth on Schedule 10.2(f), there are no claims, actions, or proceedings pending or, to DOV’s knowledge, threatened; nor are there any formal inquiries or notices that may lead to the institution of such legal proceedings, against DOV or its Affiliates or Wyeth or its Affiliates, which if adversely decided, would, individually or in the aggregate, have a material adverse effect on, or prevent DOV’s ability to grant the licenses and assignments to XTL contemplated hereunder; and
 
(g)    Except as otherwise noted on Exhibit C , all inventory of the Licensed Compound set forth on Exhibit C , whether in the form of the active pharmaceutical ingredient, intermediate, or finished product, has been manufactured in compliance with current Good Manufacturing Practices as provided by the FDA (“ cGMP ”).
 
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10.3      Disclaimer . EXCEPT AS EXPRESSLY SET FORTH HEREIN, NEITHER DOV NOR XTL MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
 
10.4    Limitation of Liability . NOTWITHSTANDING ANYTHING IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY SHALL BE LIABLE TO THE OTHER OR ANY THIRD PARTY WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES; PROVIDED, HOWEVER, THAT THIS SECTION  10.4 SHALL NOT APPLY TO THE PARTIES’ INDEMNIFICATION RIGHTS AND OBLIGATIONS UNDER SECTIONS  10.6(a) AND 10.6(b) .
 
10.5    Performance by Affiliates . The Parties recognize that each Party may perform some or all of its obligations under this Agreement through Affiliates and Third Party contractors provided, however, that each Party shall remain responsible and liable for the performance by its Affiliates and Third Party contractors and shall cause its Affiliates and Third Party contractors to comply with the provisions of this Agreement in connection therewith.
 
10.6    Indemnification .
 
(a)    XTL Indemnity . XTL hereby agrees to indemnify and hold DOV and its Affiliates, and their respective employees, directors, agents and contractors, and their respective successors, heirs and assigns   and representatives (“ DOV Indemnitees ”) harmless from and against all claims, liability, threatened claims, damages, expenses (including reasonable attorneys’ fees), suits, proceedings, losses or judgments, whether for money or equitable relief, of any kind, including death, personal injury, illness, product liability or property damage or the failure to comply with applicable law (collectively, “ Losses ”), arising from any Third Party claim due to the use, manufacture, sale, development or commercialization of any Licensed Compounds or Licensed Products by or for XTL or any of its Affiliates, Sublicensees, agents and contractors, except to the extent that such Losses arise from (a) the negligence, recklessness or willful misconduct of any DOV Indemnitees or (b) any breach of this Agreement by DOV.
 
(b)    DOV Indemnity . DOV hereby agrees to indemnify and hold XTL, its Affiliates and Sublicensees, and their respective employees, directors, agents and contractors, and their respective successors, heirs and assigns   and representatives (“ XTL Indemnitees ”) harmless from and against all Losses arising from any Third Party claim due to the use, manufacture, sale, development or commercialization of any Licensed Compounds or Licensed Products by or for DOV or any of its Affiliates, licensees (other than XTL and its Affiliates and Sublicensees), agents and contractors, except to the extent that such Losses arise from (a) the negligence, recklessness or willful misconduct of any XTL Indemnitees or (b) any breach of this Agreement by XTL.
 
(c)    Indemnification Procedure . A claim to which indemnification applies under Section  10.6(a) or Section  10.6(b) shall be referred to herein as a “Claim.” If any person or entity (each, an “ Indemnitee ”) intends to claim indemnification under this Section  10.6 , the Indemnitee shall notify the other Party (the “ Indemnitor ”) in writing promptly upon becoming aware of any claim that may be a Claim (it being understood and agreed, however, that the failure by an Indemnitee to give such notice shall not relieve the Indemnitor of its indemnification obligation under this Agreement except and only to the extent that the Indemnitor is actually prejudiced as a result of such failure to give notice). The Indemnitor shall have the right to assume and control the defense of such Claim at its own expense with counsel selected by the Indemnitor and reasonably acceptable to the Indemnitee; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitee, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. If the Indemnitor does not assume the defense of such Claim as aforesaid, the Indemnitee may defend such Claim but shall have no obligation to do so. The Indemnitee shall not settle or compromise any Claim without the prior written consent of the Indemnitor, and the Indemnitor shall not settle or compromise any Claim in any manner which would have an adverse effect on the Indemnitee’s interests, without the prior written consent of the Indemnitee, which consent, in each case, shall not be unreasonably withheld. The Indemnitee shall reasonably cooperate with the Indemnitor at the Indemnitor’s expense and shall make available to the Indemnitor all pertinent information under the control of the Indemnitee, which information shall be subject to Section  8.1 .
 
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10.7    Insurance . XTL and its Sublicensees shall, beginning with the initiation of the first clinical trial for a Licensed Product, maintain at all times during the development and commercialization of the Licensed Compound a comprehensive general liability insurance from a recognized, creditworthy insurance company, on a claims-made basis, with endorsements for contractual liability, product liability and clinical trials, and with coverage limits at least equal to those that are customary in the industry. DOV and Wyeth shall be named as additional insureds on all such insurance policies. Within ten (10) days following written request by DOV, XTL shall furnish to DOV a certificate of insurance evidencing such coverage, and undertakes to communicate to DOV during the term of this Agreement any modifications to such coverage.
 
10.8    Covenants .
 
(a)    DOV shall not knowingly take any action, or omit to take any action, that it reasonably expects would (i) encumber any of its right, title and interest in and to the Licensed Compounds or the Licensed Products in any way that would have a material adverse effect on the rights and licenses granted to XTL hereunder, or (ii) cause DOV to be in breach under the Wyeth Agreement.
 
(b)    Neither DOV, nor any of its Affiliates, will conduct research or development activities with Wyeth, or any of its Affiliates, relating to the use of Bicifadine in the Retained Rights Field (as defined in the Wyeth Agreement).
 
(c)    XTL shall only pay amounts due under this Agreement in shares of Publicly Traded Stock if, at the time of such payment, all material information regarding XTL Ltd. has been disclosed to the public.
 
Section 11.    Term and Termination .
 
11.1    Term . This Agreement shall commence as of the Effective Date and, unless sooner terminated in accordance with the terms hereof or by mutual written consent, shall continue on a Licensed Product-by-Licensed Product and country-by-country basis until the end of the Royalty Term with respect to such Licensed Product in such country. Upon the end of the Royalty Term for each country and each Licensed Product, the license grants contained in Section  2.1 shall become non-exclusive, perpetual, irrevocable and fully paid up with respect to such Licensed Product in such country.
 
11.2    Termination By DOV . DOV shall have the right to terminate this Agreement, in DOV’s sole discretion, as follows :
 
(a)    Insolvency . DOV shall have the right to terminate this Agreement upon delivery of written notice to XTL in the event that: (i) XTL fails to or is unable to make payments to DOV or to any third parties as and when they become due and payable in the ordinary course of business, (ii) a liquidation proceeding under any state or United States bankruptcy Law, receivership Law, or the like, as they now exist, or as they may be amended, is commenced by XTL, (iii) if XTL is served with an involuntary petition against it in any insolvency proceeding, upon the ninety-first (91st) day after such service if such involuntary petition has not previously been stayed or dismissed, or (iv) upon the making by XTL of an assignment of substantially all of its assets for the benefit of its creditors.
 
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(b)    Breach . Subject to Section  11.2(c) below, DOV shall have the right to terminate this Agreement, at DOV’s sole discretion, upon delivery of written notice to XTL in the event of any material   breach by XTL of any terms and conditions of this Agreement, provided that such breach has not been cured within sixty (60) days after written notice thereof is given by DOV to XTL specifying the nature of the alleged breach, provided, however , that to the extent such material breach involves the failure to make a payment when due, such breach must be cured within thirty (30) days after written notice thereof is given by DOV to XTL.
 
(c)    Disputed Breach . If XTL disputes in good faith the existence or materiality of a breach specified in a notice provided by DOV pursuant to Section  11.2(b) and XTL provides notice to DOV of such dispute within the applicable thirty (30) day, sixty (60) day or three (3) month period, DOV shall not have the right to terminate this Agreement unless and until the existence of such material breach or failure by XTL has been determined in accordance with Section  12.7 and XTL fails to cure such breach within sixty (60) days following such determination (except to the extent such breach involves the failure to make a payment when due, which breach must be cured within ten (10) business days following such determination). It is understood and acknowledged that during the pendency of such a dispute, all of the terms and conditions of this Agreement shall remain in effect and the Parties shall continue to perform all of their respective obligations hereunder; provided, however, that any payments that are made by one Party to the other Party pursuant to this Agreement pending resolution of the dispute shall be paid into escrow (such payments, the “ Escrow Funds ”) with an escrow agent mutually selected by the Parties according to an escrow agreement in form and substance reasonably satisfactory to the Parties. The Parties further agree that any Escrow Funds shall be promptly refunded from the escrow if an arbitrator or court determines pursuant to Section  12.7 that such Escrow Funds are to be refunded by one Party to the other Party.
 
(d)    Scope of Termination . Except as otherwise expressly provided herein, termination of this Agreement shall be as to all countries in the Territory and all Licensed Products.
 
11.3    Termination by XTL .
 
(a)    At XTL’s discretion, effective upon ***** prior written notice in the case where NDA Approval or other Approval has not been obtained for the applicable Licensed Product or upon ***** prior written notice in the case where NDA Approval or other Approval has been obtained for the applicable Licensed Product, XTL may terminate this Agreement for any reason.
 
(b)    In addition, XTL may terminate this Agreement in the event of material breach by DOV, provided that such breach has not been cured within sixty (60) days after written notice thereof is given by XTL to DOV.   I f DOV disputes in good faith the existence or materiality of such breach and provides notice to XTL of such dispute within such sixty (60) day period, XTL shall not have the right to terminate this Agreement in accordance with this Section  11.3 (b) unless and until it has been determined in accordance with Section  12.7 that this Agreement was materially breached by DOV and DOV fails to cure such breach within sixty (60) days following such determination. It is understood and acknowledged that during the pendency of such a dispute, all of the terms and conditions of this Agreement shall remain in effect and the Parties shall continue to perform all of their respective obligations hereunder. The Parties further agree that any payments that are made by one Party to the other Party pursuant to this Agreement pending resolution of the dispute shall be promptly refunded if an arbitrator or court determines pursuant to Section  12.7 that such payments are to be refunded by one Party to the other Party.
 
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11.4    Effect of Termination . Upon termination (or, in the case of clauses (c) below, expiration) of this Agreement under Section 11.3(a) or Section 11.2 , either in its entirety or with respect to one or more applicable country (each a “ Terminated Country ”; the rights and obligations of the Parties as to the remaining countries of the Territory in which termination under Section  11.2 has not occurred, being unaffected by such termination):
 
(a)    All rights and licenses granted to XTL in Section 2 shall terminate with respect to each Terminated Country, all rights of XTL under the DOV Patent Rights and DOV Know-How shall revert to DOV, and XTL shall cease all use of the DOV Patent Rights, DOV Know-How and Trademarks and Corporate Names of DOV and its Affiliates with respect to each Terminated Country.
 
(b)    With respect to each Terminated Country, XTL shall assign to DOV XTL’s right, title and interest in all regulatory filings (including, without limitation, all NDAs) and Approvals and other documents relating to or necessary to further develop and commercialize Licensed Compounds and Licensed Products, as they exist as of the date of such termination, and XTL shall provide to DOV one (1) copy of the foregoing documents and filings and all documents and filings contained in or referenced in any such filings, together with the raw and summarized data for any preclinical and clinical studies of the Licensed Compounds and such Licensed Product (and where reasonably available, electronic copies thereof) at DOV’s cost. In addition, upon request by DOV, XTL shall grant to DOV the right to access and reference any other documents (including but not limited to regulatory filings) that are available to XTL and reasonably necessary for DOV to further develop, manufacture and commercialize the Licensed Compounds and Licensed Product for the Terminated Country. Without limiting the foregoing in this paragraph, to the extent applicable, XTL’s obligations under Section  7.4 shall continue with respect to the Terminated Country.
 
(c)    All amounts due or payable to DOV that were accrued, or that arise out of acts or events occurring, prior to the effective date of termination or expiration shall remain due and payable; but (except as otherwise expressly provided herein) no additional amounts shall be payable based on events occurring after the effective date of termination or expiration.
 
(d)    Should XTL have any inventory of the Licensed Compound suitable for use in clinical trials in each Terminated Country, XTL shall offer to sell such Licensed Compound to DOV at ***** (but DOV shall be under no obligation to purchase same unless it agrees to do so in writing at such time).
 
(e)    XTL shall assign (or, if applicable, cause its Affiliate to assign) to DOV all of XTL’s (and such Affiliates’) right, title and interest in and to any registered or unregistered trademark, trademark application, trade name or internet domain name that is specific to a Licensed Product (it being understood that the foregoing shall not include any trademarks or trade names that contain XTL’s name) in each Terminated Country.
 
(f)    XTL shall grant to DOV a license, which license shall be exclusive with respect to each Terminated Country, with the right to grant sublicenses, under all patent rights owned or Controlled by Licensee as of the Termination Date to make, use, import, sell and offer for sale and otherwise develop and commercialize the Licensed Product and Licensed Compound in the Terminated Country. In consideration of the license granted by XTL to DOV in accordance with this Section   11.4(f) , DOV shall pay XTL a royalty on a product-by-product basis at a rate equal to ***** percent (***** %) of Net Sales (with the roles of DOV and XTL reversed for purposes of the definition of Net Sales and for Section 6.5 ) of the Licensed Product in the Terminated Country. The maximum cumulative royalty payments under this Section 11.4(f) shall not exceed ***** percent (*****%) of the payments due and payable by XTL to DOV under this Agreement prior to the time XTL grants DOV a license in accordance with this Section 11.4(f) .
 
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(g)    Neither Party shall be relieved of any obligation that accrued prior to the effective date of such termination or expiration.
 
(h)    DOV shall have the right to retain all amounts previously paid to DOV by XTL, subject to any applicable determination of an arbitrator or court pursuant to Section  11.6 .
 
11.5    Survival . The following provisions shall survive termination or expiration of this Agreement, as well as any other provision which by its terms or by the context thereof, is intended to survive such termination: Section 1 (as applicable), Section  2.1(a)(i) , Section 5 (with respect to obligations arising prior to expiration or termination of this Agreement), Section 6 (with respect to obligations arising prior to expiration or termination of this Agreement). Section  7.3(c) (with respect to an action, suit or proceeding commenced prior to termination), Section  7.4(c) , Section 8 , Section 10.3 , Section 10.4 , Section  10.6 , Section  11.4 , Section  11.5 , Section  11.6 and Section 12 . Termination or expiration of this Agreement shall not relieve the Parties of any liability or obligation which accrued hereunder prior to the effective date of such termination or expiration nor preclude either Party from pursuing all rights and remedies it may have hereunder or at law or in equity, subject to Section  12.7 , with respect to any breach of this Agreement nor prejudice either Party’s right to obtain performance of any obligation. All other obligations shall terminate upon expiration of this Agreement.
 
11.6    Bankruptcy . The Parties agree that in the event a Party becomes a debtor under Title 11 of the U.S. Code (“ Title 11 ”), this Agreement shall be deemed to be, for purposes of Section 365(n) of Title 11, a license to rights to “intellectual property” as defined therein. Each Party hereunder shall have the rights and elections as specified in Title 11. Any agreements supplemental hereto shall be deemed to be “agreements supplementary to” this Agreement for purposes of Section 365(n) of Title 11.

Section 12.    General Provisions .
 
12.1    Efforts to Consummate; Certain Governmental Matters . Upon the terms and subject to the conditions herein provided, each of the Parties agrees to use its reasonable best efforts to provide or cause to be provided promptly to each Governmental Authority with regulatory jurisdiction over enforcement of any applicable Competition Laws (“ Governmental Antitrust Authority ”) information and documents requested by such Governmental Antitrust Authority or necessary, proper or advisable to permit consummation of the license of the Licensed Compounds and Licensed Products and the other transactions contemplated by this Agreement. Subject to appropriate confidentiality protections, each of the Parties hereto will furnish to the other Party’s counsel such necessary information and reasonable assistance as such other Party may reasonably request in connection with the foregoing and will keep the other Party reasonably informed with respect to any consent, authorization, order or approval of, or exemption by, sought from any Governmental Authority in connection with this Agreement and the transactions contemplated hereby. For purposes of this Section 12.1 , “Competition Laws” shall mean statutes, rules, regulations, orders, decrees, administrative and judicial doctrines and other Laws of any jurisdiction that are designed or intended to prohibit, restrict or regulate actions that may have the purpose or effect of creating a monopoly, lessening competition or restraining trade.
 
12.2    Assignment . Except as provided by Section  2.1 , 6.5 or  10.5 , neither Party may assign this Agreement, delegate its obligations or otherwise transfer licenses or other rights created by this Agreement, without the prior written consent of the other Party, which consent shall not be unreasonably withheld; provided that each Party may assign this Agreement as a whole without such consent to an Affiliate of such Party; provided, further, that DOV may assign this Agreement as a whole without such consent in connection with the acquisition (whether by merger, consolidation, sale or otherwise) of DOV or of that part of DOV’s business to which this Agreement relates. Any assignment or transfer in violation of this Section  12.2 shall be void. This Agreement shall inure to the benefit of, and be binding upon, the legal representatives, successors and permitted assigns of the Parties.  
 
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12.3    Force Majeure . Neither Party shall be responsible for failure or delay in the performance of any of its obligations hereunder due to Force Majeure. Force Majeure shall mean any circumstance that, due to an event or a legal position beyond the Party’s reasonable control, renders impossible the fulfillment of any of the Party’s obligations hereunder, such as, but not limited to, acts of God, acts, regulations, or Laws of any government, war, civil commotion, destruction of facilities or materials by fires, earthquakes, or storms, labor disturbances, shortages of public utilities, common carriers, or raw materials, or any other cause, or causes of similar effects, except, however, any economic occurrence. During any such case of Force Majeure, this Agreement shall not be terminated, but only suspended and the Party so affected shall continue to perform its obligations as soon as such case of Force Majeure is removed or alleviated.
 
12.4    Severability . If any one or more of the provisions contained in this Agreement is held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby, unless the absence of the invalidated provision(s) adversely affects the substantive rights of the Parties. The Parties shall in such an instance use their reasonable best efforts to replace the invalid, illegal or unenforceable provision(s) with valid, legal and enforceable provision(s) which, insofar as practical, implement the purposes of this Agreement.
 
12.5    Amendment; Waiver . This Agreement may not be modified, amended or rescinded, in whole or part, except by a written instrument signed by the Parties; provided that any unilateral undertaking or waiver made by one Party in favor of the other shall be enforceable if undertaken in a writing signed by the Party to be charged with the undertaking or waiver. No delay or omission by either Party hereto in exercising any right or power occurring upon any noncompliance or default by the other Party with respect to any of the terms of this Agreement shall impair any such right or power or be construed to be a waiver thereof. A waiver by either of the Parties of any of the covenants, conditions or agreements to be performed by the other shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant, condition or agreement herein contained.
 
12.6    Notices . Except as otherwise provided herein, all notices under this Agreement shall be sent by certified mail or by overnight courier service, postage prepaid, to the following addresses of the respective Parties:
 
If to XTL, to:  
  XTL Biopharmaceuticals, Inc.
750 Lexington Avenue, 20 th Floor
New York, New York 10022
Attention: Ron Bentsur
Facsimile: (212) 531-5961
     
With a required copy to:
  Alston & Bird LLP
90 Park Avenue
New York, New York 10016
Attention: Mark F. McElreath
Facsimile: (212) 210-9444
                                
25

 
If to DOV, to:  
    DOV Pharmaceutical, Inc.
150 Pierce Street
Somerset, New Jersey 08873
Attention: President
Facsimile: (732) 907-3799
     
With a required copy to: 
 
  Goodwin Procter LLP
53 State Street
Boston, MA 02109
Attention: Kingsley L. Taft, Esq.
Facsimile: (617) 523-1231
                                   
or to such address as each Party may hereafter designate by notice to the other Party. A notice shall be deemed to have been given on the date it is received by all required recipients for the noticed Party.
 
12.7    Dispute Resolution . Disputes arising under or in connection with this Agreement shall be resolved pursuant to this Section  12.7 ; provided, however, that in the event a dispute cannot be resolved without an adjudication of the rights or obligations of a Third Party (other than a DOV Indemnitee or XTL Indemnitee identified in Sections  10.6(a) or 10.6(b) , as applicable), the dispute procedures set forth in this Section  12.7 shall be inapplicable as to such dispute.
 
(a)    In the event of a dispute between the Parties, the Parties shall first attempt in good faith to resolve such dispute by negotiation and consultation between themselves. In the event that such dispute is not resolved on an informal basis within forty-five (45) days, any Party may, by written notice to the other, have such dispute referred to each of the Parties’ respective CEOs or his or her designee (who shall be a senior executive), who shall attempt in good faith to resolve such dispute by negotiation and consultation for a thirty (30) day period following receipt of such written notice .
 
(b)    In the event the Parties’ CEOs (or designees) are not able to resolve such dispute, either Party may at any time after such 30-day period submit such dispute to be finally settled by arbitration administered   in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“ AAA ”) in effect at the time of submission. The arbitration shall be heard and determined by three (3) arbitrators. XTL and DOV shall each appoint one (1) arbitrator and the third arbitrator shall be selected by the two Party-appointed arbitrators, or, failing agreement within sixty (60) days following the date of receipt by the respondent of the claim,   by the AAA. Such arbitration shall take place in New York, NY. The arbitration award so given shall be a final and binding determination of the dispute, shall be fully enforceable in any court of competent jurisdiction, and shall not include any damages expressly prohibited by Section  10.4 .
 
(c)    Costs of arbitration are to be divided by the Parties in the following manner: XTL shall pay for the arbitrator it chooses, DOV shall pay for the arbitrator it chooses, and the costs of the third arbitrator shall be divided equally between the Parties. Except in a proceeding to enforce the results of the arbitration or as otherwise required by law, neither Party nor any arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of both Parties.
 
12.8    Applicable Law . This Agreement shall be governed by and construed in accordance with the Laws of the State of New York, without regard to its conflicts of law provisions.
 
12.9    Further Assurances . Each Party agrees to do and perform all such further acts and things and shall execute and deliver such other agreements, certificates, instruments and documents necessary or that the other Party may deem advisable in order to carry out the intent and accomplish the purposes of this Agreement and to evidence, perfect or otherwise confirm its rights hereunder.
 
26

 
12.10    Relationship of the Parties . Each Party is an independent contractor under this Agreement. Nothing contained herein is intended or is to be construed so as to constitute DOV and XTL as partners, agents or joint venturers. Neither Party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party or to bind the other Party to any contract, agreement or undertaking with any Third Party. There are no express or implied third party beneficiaries hereunder (except for XTL Indemnitees other than XTL and DOV Indemnitees other than DOV for purposes of Section  10.6 ).
 
12.11    Entire Agreement . This Agreement (along with the Exhibits), together with the Wyeth Agreement, contains the entire understanding of the Parties with respect to the subject matter hereof and supersedes and replaces any and all previous arrangements and understandings, including the Confidentiality Agreement, whether oral or written, between the Parties with respect to the subject matter hereof.
 
12.12    Headings . The captions to the several Sections hereof are not a part of this Agreement, but are merely guides or labels to assist in locating and reading the several Sections hereof.
 
12.13    Waiver of Rule of Construction . Each Party has had the opportunity to consult with counsel in connection with the review, drafting and negotiation of this Agreement. Accordingly, the rule of construction that any ambiguity in this Agreement shall be construed against the drafting party shall not apply.
 
12.14    Interpretation . Whenever any provision of this Agreement uses the term “including” (or “includes”), such term shall be deemed to mean “including without limitation” (or “includes without limitations”). “Herein,” “hereby,” “hereunder,” “hereof” and other equivalent words refer to this Agreement as an entirety and not solely to the particular portion of this Agreement in which any such word is used. All definitions set forth herein shall be deemed applicable whether the words defined are used herein in the singular or the plural. Unless otherwise provided, all references to Sections and Exhibits in this Agreement are to Sections and Exhibits of this Agreement. References to any Sections include Sections and subsections that are part of the related Section ( e.g ., a section numbered “Section  2.1 ” would be part of “ Section 2 ”, and references to “Section  2.1 ” would also refer to material contained in the subsection described as “Section  2.1(a) ”)
 
12.15    Counterparts; Facsimiles . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. Facsimile execution and delivery of this Agreement by either Party shall constitute a legal, valid and binding execution and delivery of this Agreement by such Party.
 
[ Remainder of this Page Intentionally Left Blank ]
 
27

 
IN WITNESS WHEREOF, the Parties have caused this License Agreement to be executed by their respective duly authorized officers as of the Effective Date.
     
 
DOV PHARMACEUTICAL, INC.
 
 
 
 
 
 
By:  
 

(Signature)
     
  Name:
 

  Title:
 

  Date:
 

 
     
 
XTL DEVELOPMENT, INC.
 
 
 
 
 
 
By:  
 

  (Signature)
     
 
Name:
 
 
 

  Title:
 

 
  Date:
 

 
 

 
EXHIBIT A
 
SPECIFIC DOV KNOW-HOW
 
-  
All Wyeth Know-How (as defined in the Wyeth Agreement) to which DOV has a license pursuant to the Wyeth Agreement.
 

 
*****Confidential material redacted and filed separately with the Commission.
 
EXHIBIT B
 
DOV PATENT RIGHTS *
 
Dkt. No.
 
Filing date
 
Filing number
 
Pub. Date
 
Grant date
 
Grant number
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
 
*****
       
*****
 
*****
 
*****
           
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
 
*****
       
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
     
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
           
*****
 
*****
 
*****
 
*****
       
*****
 
*****
 
*****
           
       
*****
           
*****
 
*****
 
*****
           
   
*****
 
*****
     
*****
 
*****
   
*****
 
*****
 
*****
       
   
*****
 
*****
 
*****
       
   
*****
 
*****
 
*****
       
 
* *****.
# *****.
 

 
*****Confidential material redacted and filed separately with the Commission.
 
EXHIBIT C
 
INVENTORY
 
***** INVENTORY 1   *****
 
*****
Manufacturer
 
Manufacturer Batch Number
 
Manufacturing Date
 
Quantity (KG)
 
Current Storage Location
 
Comment
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****

Footnote 1 *****.
Footnote 2 – *****.
 

 
*****Confidential material redacted and filed separately with the Commission.
 
***** INVENTORY 3   *****
 
Intermediate Manufacturer
 
Manufacturer Batch Number
 
Manufacturing Date
 
Quantity (KG)
 
Current Storage Location
 
Comment
*****
 
Various
 
*****
 
*****
 
*****
 
*****
 
Footnote 3  – *****.
***** INVENTORY 4   *****

***** Manufacturer
 
Manufacturer Batch Number
 
Manufacturing Date
 
Quantity (KG)
 
Current Storage Location
 
Comment
*****
 
Various
 
*****
 
*****
 
*****
   
 
Footnote 4  – *****.


 
*****Confidential material redacted and filed separately with the Commission.
 
***** INVENTORY 5   *****
 
Drug Product Manufacturer
 
Lot Number
 
Manufacturing Date
 
Quantity 6
 
Current Storage Location
 
Comment
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   

Footnote 5  – *****.
Footnote 6  – *****.
 
***** INVENTORY 7   *****
 
Drug Product Manufacturer
 
Lot Number
 
Manufacturing Date
 
Quantity
 
Current Storage Location
 
Comment
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
 
*****
 
Footnote 7  – *****.
 

 
*****Confidential material redacted and filed separately with the Commission.
 
***** INVENTORY 8   *****
 
Drug Product Manufacturer
 
Lot Number
 
Manufacturing Date
 
Quantity 9
 
Current Storage Location
 
Comment
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
   
*****
 
*****
 
*****
 
*****
 
*****
 
*****
 
Footnote 8 – *****.
Footnote 9 – *****.
 

 
*****Confidential material redacted and filed separately with the Commission.
EXHIBIT D
 
A. Clinical Deliverables
 
1.  
***** .
 
2.  
***** .
 
3.  
***** .
 
4.  
***** .
 
5.  
***** .
 
B. CMC Deliverables
 
1.  
***** .
 
2.  
***** .
 
3.  
***** .
 
4.  
***** .
 
5.  
***** .
 
6.  
***** .
 
7.  
***** .
 
8.  
***** .
 
9.  
***** .
 
10.  
***** .


 
*****Confidential material redacted and filed separately with the Commission.
 
EXHIBIT E
 
1.    Deliverables and estimated completion dates for the following non clinical studies:
 
Studies
 
Work Remaining/Time and cost to Complete
(Refer to Item 5.a below for a table of DOV hourly billing rates.)
 
Estimated Deliverable, Date and Cost
*****
 
*****
 
*****
*****
 
*****
 
*****
*****
 
*****
 
*****


 
*****Confidential material redacted and filed separately with the Commission.
 
2.    Completion dates and deliverables for the following clinical studies:
 
Type of Study
 
Study
No.
 
Study Objective
 
Analysis/TFLs
 
 
Reports
 
Estimated Deliverable, Date and Cost
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
*****
 
*****
 
*****
 
*****
 
*****
 
*****
 

 
*****Confidential material redacted and filed separately with the Commission.
 
3. Additional deliverables
 
 
a.
***** .
 
 
b.
***** .
 
 
c.
***** .
 
4.
Support for providing the Exhibit F deliverables: ***** .
 
5.
Explanatory notes for cost estimates and deliverables.
 
 
a.
DOV billing rate table. The following table provides DOV hourly billing rates:
 
Classification
 
Rate
     
*****
 
*****
     
*****
 
*****
     
*****
 
*****
     
*****
 
*****
     
*****
 
*****
 
 
b.
***** .
 

 
SCHEDULE 10.2( f )

As set forth in Form 8-K filed by DOV on January 3, 2007, DOV is in default of that certain Indenture dated December 22, 2004 (the “Indenture”). The trustee has confirmed such default and made a demand for payment.
 

EMPLOYMENT AGREEMENT

This employment agreement (the “Agreement”) dated as of February 10, 2006, effective as of January 1, 2006 (the “Effective Date”), by and between XTL Biopharmaceuticals Ltd. , an Israeli company with its principal offices in Building No. 3 (third floor), Kiryat Weizmann, Rehovot, Israel, (the " Company "), and Bill Kessler I.D. Number: , an individual whose address is (the " Employee ").

WITNESSETH:
 
WHEREAS, the Company desires to employ Employee as its Director of Finance (the “Position”), and Employee desires to be employed by the Company in such capacity, on the terms and conditions set forth below:
 
NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants herein contained, the parties hereto agree as follows:

It is hereby agreed by and between the parties as follows:

1.
Preamble

The preamble to this Agreement and any attachments thereto are an integral part of this Agreement.

2.
Job Description

The Company hereby employs Employee, and Employee hereby accepts employment, to serve in a position of Director, Finance. At a time to be determined by the Chief Executive Officer and at the discretion of the Chief Executive Officer, the Employee shall be responsible for the financial and accounting management of the Company. He shall report directly to the Chief Executive Officer, or his designate, the Chief Financial Officer. The description of responsibilities set forth herein shall serve as a general statement of the duties, responsibilities and authority of the Employee. Additional duties, responsibilities and authority may be assigned to the Employee by the Chief Executive Officer, or his designate, the Chief Financial Officer, from time to time in his discretion.

3.
Working Hours

The Employee shall be employed by the Company on a full-time basis, namely for not less than forty-four (44) hours per week (inclusive of meal time). The Employee agrees that his position is considered to be a management position as defined in the Hours of Work and Rest Law - 1951, which requires a special measure of personal trust. Accordingly, the provisions of the Hours of Work and Rest Law - 1951 shall not apply and the Employee shall not be entitled to receive any additional payment for his work other than those that are set forth in this Agreement.
 

 
4.
Term of Agreement

This Agreement shall take effect from the Effective Date and shall remain in effect through the third anniversary of such date, unless it is earlier terminated as hereinafter provided.

5.
Annual Salary

5.1.
The Employee’s annual salary shall be as follows:

 
5.1.1.
The Employee shall receive an annual gross salary of seventy eight thousand dollars (US$78,000) payable in New Israeli Shekels according the representative rate of exchange in effect each month at the time Company salaries are calculated (the "Annual Salary"). In the event that (1) the Employee assumes the financial and accounting management of the Company, and (2) the departure of the Company’s current CFO, the Employee’s Annual Salary shall be increased to US$90,000 payable in New Israeli Shekels according the representative rate of exchange in effect each month at the time the Company salaries are calculated. The Employee’s Annual Salary shall be paid in twelve equal installments, monthly in arrears.
     
  5.1.2. On each anniversary date of this Agreement the Employee’s Annual Salary shall be increased by an amount to be determined by the Chief Executive Officer in consultation with the Board of Directors.
     
  5.1.3 The Annual Salary set forth in paragraph 5.1.1, above, shall be referred to as the “Global Salary”. The linkage of the Global Salary to the United States dollar is in lieu of any generally-applicable increases, whether the statutory cost of living increase (“Tosefet Yoker”) or any other industry-wide increase applicable as the result of collective bargaining agreements or other order of the Ministry of Labor and Welfare (such as Tzavei Harhava). By signing this Agreement and accepting employment pursuant to its terms, the Employee represents that he will not claim any such increase.
     
  5.1.4. The Employee shall not be entitled to receive from the Company any salary or payment of any kind other than the Global Salary and other payments specifically set forth in this Agreement or properly authorized by the Board of Directors.
 

 

 
5.2.
Other Terms of Employment

5.2.1.
Bonuses : The Employee shall be eligible to receive one or more bonuses during any calendar year at the discretion of the Chief Executive Officer, acting in consultation with the Board of Directors.

5.2.2.
Expenses : The Employee shall be entitled, in accordance with the Company’s standard policy in effect from time to time, to be reimbursed for expenses (Hotza’ot Eshel) incurred in Israel and abroad in connection with Company business against receipt by the Company of appropriate vouchers, receipts or other proof of the Employee’s expenditures.

5.2.3.
Continuing Education Fund : The Employee shall be entitled to participate in the Company’s continuing education fund (Keren Hishtalmut). The Company shall contribute an amount equal to seven and a half percent (7.5%) of the Employee’s Global Salary and shall deduct two and a half percent (2.5%) of the Employee’s Global Salary and transfer it as the Employee’s contribution. The Employee consents to the deduction of this amount as his contribution to the continuing education fund. These contributions will be calculated up to the permissible tax-exempt salary ceiling according to the income tax regulations in effect from time to time. If the amount of the Company’s contribution is greater than permitted by those regulations, the Employee shall not have the right to receive the excess amount.
 
5.2.4.
Reserve Duty : The Employee shall be entitled to receive his full Global Salary and other payments while performing reserve duty, provided that any amount received by the Employee from the I.D.F. or any other source (excluding Damei Calcala) is transferred to the Company or, in the alternative, an amount equal to that received from the I.D.F. or any other source is deducted from the Global Salary payable to the Employee.

5.2.5.
Annual Leave and Damei Havra’a : The Employee shall be entitled to fifteen (15) working days of paid annual leave each year. The Employee shall not be allowed to accrue more than fifteen (15) working days of annual leave except in unusual circumstances and with the permission of the Company. Any accrued and unused vacation days can be redeemed by the Employee in accordance with the provisions of the Annual Leave Law 1951. In addition, the Employee shall be entitled to paid leave on the major national and religious holidays celebrated in Israel, and in accordance with the normal practice of the Company in effect from time to time. The Company shall also pay the Employee an amount equivalent to five (5) days of damei havra’a each year in accordance with the law and the normal practice of the Company in effect from time to time.
 

 
5.2.7.
Sickness and Disability Insurance : The Employee shall be entitled to the number of days for sick leave permitted by law. Compensation for sick days utilized shall be paid according to his Global Salary only upon the presentation of medical documentation as required by the Company. As detailed under Section 5.3.1 below, the Employee shall be covered by disability insurance that provides monthly compensation. Notwithstanding the foregoing, the Employee shall not be entitled to receive compensation for sick leave if such compensation is covered by the Employee’s disability insurance referred to above. However, should the amounts received by the Employee pursuant to such disability insurance be less than the amount that is properly payable as compensation for the Employee’s available sick leave, according to the Global Salary, the Company shall pay the difference. It is understood and agreed that unused sick leave cannot be redeemed by the Employee. For the avoidance of doubt, it is understood and agreed that the payments made by the Company in consideration of sick leave covers all obligations of the Company pursuant to the Sick Leave Law - 1976.

 
5.3.
Pension Benefits and Severance Payments

5.3.1
Managers Insurance. Within ten days after the end of each month during the employment of Employee hereunder (or such other day as is consistent with the Company’s general practices), the Company shall pay an aggregate amount equal to 13-1/3% of the Employee’s monthly installment of the Global Salary for the preceding month to a Managers Insurance (Bituach Manahalim) policy (the “Policy”) and/or a comprehensive pension plan (“Pension Plan”) through an agency and with an insurance company or a pension fund, to be selected by the Employee, to be divided as follows: 8-1/3% towards Severance (the “Company’s Severance Contribution”); 5% toward provident (compensation) as required by the new regulations in effect as of January 2006, relating to payments made to provident funds. In addition to the 13-1/3% mentioned above, at the beginning of each month the Company shall deduct from the monthly installment of the Global Salary of Employee an amount equal to 5% of the Employee’s monthly installment of the Global Salary for the preceding month, and shall pay such amount as premium payable in respect of the provident compensation component of Policy. In addition the Company shall also pay up to 2.5% of the Employee’s monthly installment of the Global Salary towards disability insurance (depending on the cost to the Company necessary to provide coverage). In the event the Employee elects to be insured under a Pension Plan, the allocations shall be modified in accordance with the Pension Plans policies, provided, in any event they do not exceed the amounts set forth above.

(a)  
Section 14 of the Severance Compensation Law – 1963.
 

 
(i)  
It is hereby agreed that upon termination of employment under this Agreement, the Company shall release to the Employee all amounts accrued in the Managers Insurance on account of both the Company’s and Employee’s contributions. It is hereby clearly agreed and understood that the amounts accrued in the Managers Insurance on account the Company’s contribution [i.e. 13.33% of each monthly installment of the Global Salary payment] shall be in lieu and in full and final substation of any severance pay the Employee shall be or become entitled to under any applicable Israeli law.

(ii)  
The Company hereby waives in advance any right to any amounts accrued in the Managers Insurance, unless the Employee is either not entitled to Severance Pay according to Section 17 of the Severance Compensation Act, 1963, or has withdrawn amounts from the Managers Insurance not due or as a result of an “Entitling Event”, as such term is defined in the General Approval of the Labor Minister, dated June 30, 1998, issued in accordance to the said Section 14 (the “ General Approval ”).

(iii)  
Sub-Sections (i) and (ii) are in accordance with Section 14 of the Severance Compensation Act, 1963 and the General Approval, a copy of which is attached hereby to this Schedule A as Exhibit A .

 
5.4.
Company Automobile.

The Company will provide a leased automobile to the Employee, and will place such automobile at the disposal of the Employee under the terms of the Company’s general leasing plan (to be provided to the Employee upon provision of the automobile), for a period eual to the remaining term on the car assigned to the Employee. The Company will bear all expenses of the automobile, including gasoline, but excluding any traffic or parking fines resulting from the use of such automobile. All tax consequences resulting from the use of such automobile by the Employee shall be his sole and exclusive responsibility.
 
 
5.5.
Cellular Phone

The Company shall provide and maintain for the Employee a cellular telephone for as long as the Employee is employed by the Company. It is agreed that the Employee may transfer his own current cellular phone number to the Company. Upon cessation of the Employee’s employment with the Company for whatever reason, the Company agrees to return to the Employee his cellular phone number.
 

 
 
5.6.
Grant of Stock/Share Options

5.6.1.  
The Employee shall be entitled to receive one or more grants of options to purchase the Company’s ordinary shares. The amount of options granted and timing of each grant shall be determined at the sole discretion of the Chief Executive Officer in consultation with the Board of Directors. The options shall be granted in accordance with the Company’s share option plans. The grant of such options and the terms and conditions applicable thereto, are subject to (i) the inclusion of the of the Employee in the Company’s share option plan; (ii) approval of the Company’s Board of Directors; and (iii) such other terms and conditions as required in order to effect the grant of the options. All tax consequences resulting from the grant, vesting and exercise of the share options to or by the Employee shall be his sole and exclusive responsibility.

6.
Termination of Employment

6.1.
Either party may terminate the Employee’s employment with the Company without cause at any time upon three (3) month’s prior written notice. The Company shall have the right, in its sole discretion, to require the Employee to continue working for the Company during the notice period.

6.2.
The Employee’s employment shall be terminated by his death or disability. (For purposes of this section, “disability” shall be deemed to have occurred if the Employee is unable, due to any physical or mental disease or condition, to perform his normal duties of employment for 120 consecutive days or 180 days in any twelve month period.). In such an event, he shall be entitled to continue to receive his annual salary for three (3) months following his last day of actual employment by the Company. Such amount shall be in addition to any severance payment he is entitled to receive according the provisions of the Severance Compensation Law - 1963. In addition, in such events, the Board of Directors shall take the necessary steps so that (a) any outstanding, but unvested, options granted to the Employee shall vest upon the effective date of his termination; and (b) the period during which the Employee shall be permitted to exercise such options shall be extended to two (2) years from the effective date of his termination as defined in the Share Option Plan governing the options in question. Should the Employee’s employment be terminated as a result of his death, the benefits granted herein, shall be granted instead to his lawful heir or heirs.


 
7.
Taxes and Other Payments

7.1.
Unless otherwise specifically provided for in this Agreement, the Company shall not be liable for the payment of taxes or other payments for which the Employee is responsible as result of this Agreement or any other legal provision, and the Employee shall be personally liable for such taxes and other payments.

7.2.
The Employee hereby agrees that the Company shall deduct from his Global Salary the Employee’s national insurance fees, income tax and other amounts required by law or the terms of this Agreement. The Company shall provide the Employee with documentation of such deductions.

8.
The Obligations of the Employee  

 
8.1.
The Employee agrees to devote his entire business time, energy, abilities and experience to the performance of his duties, effectively and in good faith.

 
8.2.
During the period of his employment, the Employee shall not be employed, whether or not during regular business hours, for pay by any other party other than the Company, without the prior permission of the Company. The Company has approved that the Employee may continue his pre-existing consulting relationship with Keryx Biopharmaceuticals, Inc., provided such consulting relationship does not conflict in any way with the services provided to the Company hereunder.

 
8.3.
The Employee agrees to immediately inform the Company of any Company issue or transaction in which the Employee has a direct or indirect personal interest and/or where such issue or transaction could cause a conflict of interest for the Employee in the fulfillment of his responsibilities as an employee of the Company.

 
8.4.
The Employee hereby gives irrevocable instructions and permission to the Company to deduct from any amounts owed to the Employee by the Company, including amounts payable as severance compensation, (a) any debt he has or will have to the Company; and/or (b) any amount that was wrongfully or mistakenly paid to him by the Company. Any such amounts to be deducted shall be calculated in real terms as of the date of the deduction, including linkage to cost of living index.

 
8.5.
The Employee declares that the terms and conditions of his employment are personal and confidential and will not be disclosed by him.
 

 
 
8.6.
The Employee declares that he is free to enter into this Agreement and that he has no obligations of any kind to any third party that would impair this Agreement, either as an employee or an independent contractor. The Employee further declares that as long as he remains an employee of the Company, he will not incur any such obligations.

 
8.7.
The Employee agrees to keep confidential (a) all professional, scientific, commercial, and business information; and (b) any other information or document that comes to the Employee’s knowledge in connection with the affairs of the Company (collectively, the “Confidential Information”), and agrees not to use or exploit the Confidential Information or to disclose it to any third party where such use, exploitation or disclosure in not directly related to the affairs of the Company, unless the Company gives prior written authorization of such disclosure.

 
8.8.
The Employees agrees that during his employment by the Company and thereafter he (a) will not disseminate or otherwise make use of the Confidential Information or of other non-public information of which he learned while working for the Company, except where such dissemination or use is directly related to the affairs of the Company; (b) will maintain the confidentiality of the Confidential Information; and (c) will not in any way act to injure the reputation of the Company or any of its affiliated companies.

 
8.9
The Employee understands and recognizes that his services to the Company are special and unique. Therefore, he agrees that during the term of this Agreement and for one (1) year after the termination for any reason of his employment, he shall not be employed in or give any services to any business or third party that competes directly with the Company or whose activities conflict with the activities of the Company, unless the Chief Executive Officer has given his explicit written consent prior the commencement of such employment or the giving of such services.

8.10
Upon termination of his employment, the Employee agrees to assist the Company with an orderly transition of his responsibilities and to return to the Company any documents, information and/or materials that were given to him or which were created by him in connection with his employment.

9.
Intellectual Property Rights

9.1.
The Employee declares that he is aware that anything that is done by him in the Company or in connection with the Company, whether it be an invention, a discovery, or the development of an idea or a thing, all within the framework of the Company’s business (the Development”) shall belong to and be controlled by the Company, unless the Board of Directors shall, in writing, direct otherwise.

9.2.
The Company shall have the right to fully utilize and exploit the Development, as it sees fit, including changing it, registering part or all of it as a patent, whether in Israel or abroad, selling it, transferring it to a third party, all without being required to either receive the Employee’s consent or pay the Employee any additional payment for such Development apart from any payment he receives pursuant to this Agreement.
 

 
9.3.
The Development and any subsequent intellectual property arising therefrom shall remain the sole property of the Employer even after the Employee’s employment terminates for any reason. The termination of this Agreement, whether due to its breach or its own terms, shall not impair the Company’s exclusive rights in the Development. Notwithstanding the termination of this Agreement, the Board of Directors shall have the discretion to award the Employee a cash payment in accordance with the terms of paragraph 5.2.1, above, as a result of any Development or subsequent intellectual property arising therefrom developed primarily by the Employee.

9.4.
The Employee may not do anything with the Development or any related materials without the knowledge and prior consent of the Company. The Employee declares that he neither has nor will have any rights in the Development or its fruits and that all rights to the Development and its fruits shall fully reside in the Company.

9.5.
Even in the event that at the time of the termination of the Employee’s employment for any reason the Development has not been completed, the Employee shall be prohibited from any continued activity in connection with the subject of the Development, alone or in concert with others, that is not explicitly allowed in writing by the Company. The Company alone will be the sole owner of the uncompleted Development and shall have the sole right to complete the Development or to take any other action in connection with the Development.

10. Indemnification

The Company shall take whatever steps are necessary to indemnify the Employee, including, but not limited to the Employee, for all actions taken in good faith in pursuit of their duties and obligations to the Company. Such steps shall include, but shall not necessarily be limited to, the obtaining of an appropriate level of Directors and Officers Liability coverage, if appropriate. In the event the Employee will be signing the Company’s financial statements or other regulatory filings, then the Company shall include the Employee in its Directors and Officers Liability coverage.

11.
General

11.1.
It is agreed that the provisions of this Agreement represent the full scope of the agreement between the parties and that neither side shall be bound by any promises, declarations, exhibits, agreements or obligations, oral or written, that are not included in this Agreement prior to its execution. Any changes or amendments to this Agreement must be in writing and signed by both parties.

11.2.
This Agreement shall be governed by, and construed and interpreted under, the laws of the State of Israel. The parties agree that any legal claim lodged by one party against the other arising from the terms of this Agreement shall be adjudicated only by the appropriate court in Tel Aviv, Israel.
 

 
11.3.
If any provision of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced in whole or in part, the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and effect and enforceable, and no provision shall be deemed dependent upon any other covenant or provision unless so expressed herein.

11.4.
The rights, benefits, duties and obligations under this Agreement shall inure to, and be binding upon, the Company, its successors and assigns, and upon the Employee and his legal representatives. This Agreement constitutes a personal service agreement, and the performance of the Employee's obligations hereunder may not be transferred or assigned by the Employee.

11.5
The failure of either party to insist upon the strict performance of any of the terms, conditions and provisions of this Agreement shall not be construed as a waiver or relinquishment of future compliance therewith or with any other term, condition or provision hereof, and said terms, conditions and provisions shall remain in full force and effect. No waiver of any term or condition of this Agreement on the part of either party shall be effective or any purpose whatsoever unless such waiver is in writing and signed by such party.

11.6
The headings of Sections are inserted for convenience and shall not affect any interpretation of this Agreement.
 
12.
Notices

12.1.
A notice that is sent by registered mail to a party at its address as set forth in paragraph 12.2, below, shall be deemed received three (3) days after its posting, and the receipt stamped by the post office shall represent definitive evidence of the date of mailing.

12.2.
The addresses of the parties for the purposes of this Agreement are:

XTL Biopharmaceuticals Ltd.

Building No. 3 (third floor)
Kiryat Weizmann
Rehovot

Employee:

Bill Kessler

IN WITNESS WHEREOF the parties have hereunto set their hands at the place and on the date first above written.
 

 
XTL Biopharmaceuticals Ltd.

 
By:    / s/ Ron Bentsur     /s/ Michael Weiss

Name   Ron Bentsur
   
Michael Weiss
Title   Chief Executive Officer
Date: February 10, 2006
    Chairman
February 10, 2006
 
       
By:   /s/ Bill Kessler    

Name   Bill Kessler
   
Date: February 10, 2006
   
 



Exhibit 31.1
CERTIFICATION

I, Ron Bentsur, Chief Executive Officer of XTL Biopharmaceuticals Ltd. (the “Company”) certify that:

1. I have reviewed this annual report on Form 20-F of the Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.



 
/s/ Ron Bentsur
 
Ron Bentsur
 
Chief Executive Officer
Date: March 22, 2007
 
 
 



Exhibit 31.2
CERTIFICATION

I, Bill Kessler, Director of Finance of XTL Biopharmaceuticals Ltd. (the “Company”) certify that:

1. I have reviewed this report on Form 20-F of the Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and we have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.



 
/s/ Bill Kessler
 
Bill Kessler
 
Director of Finance
 
Principal Finance and Accounting Officer
Date: March 22, 2007


 
 

 
 
 
Exhibit 32.1



CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of XTL Biopharmaceuticals Ltd. (the “Company”) on Form 20-F for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Ron Bentsur, Chief Executive Officer of the Company, and Bill Kessler, Director of Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



 
/s/ Ron Bentsur
 
Ron Bentsur
 
Chief Executive Officer
 
 
 
/s/ Bill Kessler
 
Bill Kessler
 
Director of Finance
 
Principal Finance and Accounting Officer
Date: March 22, 2007