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XTL Biopharm Ltd (XTL)

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Monday 20 March, 2006

XTL Biopharm Ltd

Financial Results for the Year Ended December 3...

              XTL Biopharmaceuticals Announces Financial Results               
                     for the Year Ended December 31, 2005                      

New York, New York, March 20, 2006 - XTL Biopharmaceuticals, Ltd. (NASDAQ:
XTLB; LSE: XTL; TASE: XTL), a biotechnology company focused on the acquisition,
development and commercialization of therapeutics for the treatment of
infectious diseases, with a focus on hepatitis C, today announced its financial
results for year ended December 31, 2005.

Earlier today, XTL announced that it has entered into definitive agreements
with institutional investors relating to a private placement of $28 million in
gross proceeds through the issuance of ordinary shares, represented by American
Depositary Receipts (ADRs), and warrants. JPMorgan Securities Inc. acted as the
lead-placement agent. Brean Murray, Carret & Co., LLC, Oppenheimer & Co., Inc.,
and Punk, Ziegel & Company, L.P. served as co-placement agents in the
transaction. The Company has agreed to register the ordinary shares, including those 
issuable upon exercise of the warrants, under the Securities Act of 1933, list the 
ADR's for trading on the Nasdaq Stock Market and to apply to the UK Listing Authority for
the new ordinary shares to be admitted to trading on the London Stock Exchange. The
proceeds of the private placement will be held in escrow until the securities
are registered and listed for trading. The Company believes that proceeds raised from
this offering will be sufficient to fund its operations into 2008.

At December 31, 2005, the Company had cash and cash equivalents of $13.4
million, compared to cash, cash equivalents and short-term bank deposits of
$22.9 million at December 31, 2004. The year-over-year decrease of $9.5 million
is attributable primarily to operating expenses associated with the development
of our hepatitis C product candidates, XTL-2125 and XTL-6865, as well as to the
development of the DOS hepatitis C pre-clinical program, recently acquired from
Vivo Quest, Inc. This decrease was partially offset by approximately $1.5
million in proceeds from the exercise of share options during 2005.

The loss for the year ended December 31, 2005 was $14,015,000, or $0.08 per
ordinary share, compared to the loss of $16,473,000, or $0.12 per ordinary
share, for the year ended December 31, 2004, representing a decrease in net
loss of $2,458,000. The decrease in loss was primarily attributable to a
decrease of $4,672,000 in research and development costs and due to a $583,000
reduction in business development costs. This was partially offset by a
$1,783,000 charge associated with acquired in-process research and development
pursuant to the VivoQuest license and asset purchase agreements that were
completed in September 2005, and an increase of $1,323,000 in general
administrative expenses. In 2005, general and administrative expenses included
a non-cash compensation charge of $2,641,000 associated with stock options in
accordance with FAS 123R, that was adopted by the Company in 2005.

Ron Bentsur, Chief Executive Officer of XTL, commented, "First, I want to take
this opportunity to thank the investors who participated in our highly
successful private placement which priced yesterday in which we raised $28
million. This transaction serves as a strong first step in introducing XTL to
the U.S. marketplace. Mr. Bentsur added, "2005 was an important year for the
Company. We completed a refocusing plan designed to enable the Company to focus
its resources on the development of its lead programs through to clinical
proof-of principle. We initiated a Phase 1 clinical trial of XTL-6865 for the
treatment of hepatitis C chronic patients in September 2005 and we are weeks
away from commencing dosing into our placebo-controlled Phase 1 study for
XTL-2125, also in hepatitis C chronic patients. We further strengthened our
hepatitis C program with the completion of the Vivo Quest transaction in
September 2005. On the HepeX-B front, we successfully completed the transition
of the HepeX-B development activities to Cubist and were very pleased with the
Phase 2b clinical trial results released at year's end."


Ron Bentsur, Chief Executive Officer Tel: +1 (212) 531-5971


XTL Biopharmaceuticals Ltd. ("XTL") is engaged in the acquisition, development
and commercialization of therapeutics for the treatment of infectious diseases,
with a focus on hepatitis C. XTL is developing XTL-2125 - a small molecule,
non-nucleoside inhibitor of the hepatitis C virus polymerase. XTL-2125 is
expected to enter Phase 1 clinical trial in chronic hepatitis C patients in 1H
2006. XTL is also developing XTL-6865 - a combination of two monoclonal
antibodies against the hepatitis C virus - presently in Phase 1 clinical trials
in patients with chronic hepatitis C. XTL's hepatitis C pipeline also includes
several families of pre-clinical hepatitis C small molecule inhibitors.  In
addition, XTL has out-licensed to Cubist Pharmaceuticals an antibody
therapeutic against hepatitis B, HepeX-B, which has recently completed a Phase
2b clinical study in transplant patients.  XTL is publicly traded on the
NASDAQ, London, and Tel-Aviv Stock Exchanges (NASDAQ: XTLB; LSE: XTL; TASE:

Cautionary Statement

Some of the statements included in this press release, particularly those
anticipating future financial performance, clinical and business prospects for
our clinical compounds for hepatitis C, XTL-2125 and XTL-6865, growth and
operating strategies and similar matters, may be forward-looking statements
that involve a number of risks and uncertainties. For those statements, we
claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Among the
factors that could cause our actual results to differ materially are the
following: our ability to successfully complete cost-effective clinical trials
for the drug candidates in our pipeline which would affect our ability to
continue to fund our operations with our available cash reserves, we may not be
able to meet anticipated development timelines for the drug candidates in our
pipeline due to recruitment, clinical trial results, manufacturing capabilities
or other factors; and other risk factors identified from time to time in our
reports filed with the Securities and Exchange Commission and the London Stock
Exchange . Any forward-looking statements set forth in this press release speak
only as of the date of this press release. We do not intend to update any of
these forward-looking statements to reflect events or circumstances that occur
after the date hereof. This press release and prior releases are available at The information in our website is not incorporated by
reference into this press release and is included as an inactive textual
reference only.

                          XTL BIOPHARMACEUTICALS LTD.                          
                         (A Development Stage Company)                         
                          CONSOLIDATED BALANCE SHEETS                          
                        (in thousands of U.S. dollars)                         

                                                           December 31        
                                                        2005         2004     
                                                     ___________  ___________ 
                    A s s e t s                                               
CURRENT ASSETS:                                                               
Cash and cash equivalents                                13,360        12,788 
Short-term bank deposits                                      --       10,136 
Accounts receivable - trade                                   --          543 
Accounts receivable - other                                 431           306 
                                                     ___________   ___________
T o t a l current assets                                 13,791        23,773 
                                                     ___________   ___________
EMPLOYEE SEVERANCE PAY FUNDS                                449           830 
                                                     ___________   ___________
RESTRICTED LONG-TERM DEPOSIT                                110           113 
                                                     ___________   ___________
PROPERTY AND EQUIPMENT, NET                                 762           908 
                                                     ___________   ___________
INTANGIBLE ASSETS, NET                                       39            -- 
                                                     ___________   ___________
T o t a l assets                                         15,151        25,624 
                                                       =========     =========
        Liabilities and shareholders' equity                                  
CURRENT LIABILITIES:                                                          
Accounts payable and accruals                             2,007         3,134 
Deferred gain                                               399           399 
                                                     ___________   ___________
T o t a l current liabilities                             2,406         3,533 
                                                     ___________   ___________
LIABILITY IN RESPECT OF EMPLOYEE                                              
SEVERANCE OBLIGATIONS                                       695         1,291 
DEFERRED GAIN                                               798         1,198 
                                                     ___________   ___________
COMMITMENTS AND CONTINGENCIES (Note 7)                                        
T o t a l liabilities                                     3,899         6,022 
                                                     ___________   ___________
SHAREHOLDERS' EQUITY:                                                         
Ordinary shares of NIS 0.02 par value (authorized:          864           841 
as of December 31, 2005 and 2004; issued and                                  
outstanding: 173,180,441 as of December 31, 2005 
and 168,079,196 as of December 31, 2004)                                      
Additional paid in capital                              110,179       104,537 
Deficit accumulated during the development stage        (99,791)      (85,776)
                                                     ___________   ___________
T o t a l shareholders' equity                           11,252        19,602 
                                                     ___________   ___________
T o t a l liabilities and shareholders' equity           15,151        25,624 
                                                       =========     =========

        Michael Weiss                     Ron Bentsur        
   Chairman of the Board of         Chief Executive Officer  

Date of approval of the financial statements: March 17, 2006

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

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

                                                                       Period from  
                                                                     March 9, 1993* 
                                       Year ended December 31        to December 31,
                                    2005        2004        2003          2005      
                                ___________  ___________ ___________   (Unaudited)  
Reimbursed out-of-pockets             2,743       3,269            --        6,012  
License                                 454         185            --          639  
                                ___________  ___________  ___________   __________  
                                      3,197       3,454            --        6,651  
COST OF REVENUES:                                                                   
Reimbursed out-of-pockets             2,743       3,269            --        6,012  
License (with respect to                 54          32            --           86  
                                ___________  ___________  ___________   __________  
                                      2,797       3,301            --        6,098  
GROSS MARGIN                            400         153            --          553  
                                ___________  ___________  ___________   __________  
RESEARCH AND DEVELOPMENT                                                            
COSTS (includes non-cash                                                            
of $112, $30 and $0, in 2005,                                                       
and 2003, respectively)               7,313      11,985       14,022        82,890  
L E S S - PARTICIPATIONS                 --          --        3,229        10,950  
                                ___________  ___________  ___________   __________  
                                      7,313      11,985       10,793        71,940  
IN - PROCESS RESEARCH AND                                                           
DEVELOPMENT COSTS                     1,783           --           --        1,783  
GENERAL AND ADMINISTRATIVE                                                          
EXPENSES (includes non-cash                                                         
of $2,641, $2 and $0, in 2005,                                                      
and 2003, respectively)              5,457        4,134        3,105        29,012  
BUSINESS DEVELOPMENT COSTS                                                          
non-cash compensation of $10 in                                                     
2005, and                                                                           
$0, in 2004 and 2003,                   227         810          664         4,513  
                                __________   ___________  ___________   __________  
OPERATING LOSS                      14,380       16,776       14,562       106,695  
FINANCIAL INCOME - net                  443         352          352         7,143  
                                __________   ___________  ___________   __________  
LOSS BEFORE INCOME TAXES            13,937       16,424       14,210        99,552  
INCOME TAXES                            78           49           78           239  
                                ___________  ___________  ___________   __________  
LOSS FOR THE PERIOD                  14,015      16,473       14,288        99,791  
                                  =========    =========    =========     ========  
BASIC AND DILUTED LOSS PER                                                          
SHARE                                 $0.08       $0.12        $0.13                
                                  =========    =========    =========               
WEIGHTED AVERAGE NUMBER OF                                                          
SHARES USED IN COMPUTING BASIC                                                      
AND DILUTED LOSS PER ORDINARY                                                       
SHARE                           170,123,003 134,731,766  111,712,916                
                                  =========    =========    =========               

* Incorporation Date

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

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

                                                                   Period from 
                                                                     March 9,  
                                                                     1993 (a)  
                                         Year ended December 31    to December 
                                        2005     2004      2003        2005    
                                      ________ ________  ________  (Unaudited) 
CASH FLOWS FROM OPERATING ACTIVITIES:                                          
Loss for the period                    (14,015) (16,473) (14,288)      (99,791)
Adjustments to reconcile loss to net                                           
cash used in operating activities:                                             
Depreciation and amortization               242     319      440         2,829 
Linkage difference on restricted              3      --       --             3 
long-term deposits                                                             
Acquisition of in process research        1,783      --       --         1,783 
and development                                                                
Loss on disposal of property and              6       1        2            18 
Increase (decrease) in liability in                                            
respect of employee                                                            
severance obligations                     (159)      30      129         1,228 
Impairment charges                           26      --      354           380 
Loss (gain) from sales of available          --      13      (27)         (410)
for sale securities                                                            
Stock based compensation expenses                                              
(employee and non-employee)               2,763      32       --         3,278 
Loss (gain) on amounts funded in                                               
respect of employee                                                            
severance pay funds                         (6)      (4)       5           (91)
Changes in operating assets and                                                
Decrease (increase) in accounts             543    (543)      --            -- 
receivable - trade                                                             
Decrease (increase) in accounts           (125)     400     (440)         (431)
receivable - other                                                             
Increase (decrease) in accounts         (1,127)     133      499         2,007 
payable and accruals                                                           
Increase (decrease) in deferred gain      (400)   1,597       --         1,197 
                                         ______ ________ ________      ________
Net cash used in operating activities  (10,466) (14,495) (13,326)      (88,000)
                                       ________ ________ ________      ________
CASH FLOWS FROM INVESTING ACTIVITIES:                                          
Decrease in short-term deposits          10,136   7,193   14,724            -- 
Restricted long-term deposits, net           --      46      (20)         (113)
Investment in available for sale             --      --      (71)       (3,363)
Proceeds from sales of available for         --     722    1,048         3,773 
sale securities                                                                
Employee severance pay funds               (50)    (136)    (112)         (891)
Purchase of property and equipment         (38)    (180)     (81)       (4,021)
Proceeds from disposals of property          27       5        2           149 
and equipment                                                                  
Acquisition in respect of license and     (548)      --       --          (548)
purchase of assets                                                             
                                       ________ ________ ________      ________
Net cash provided by (used in)            9,527   7,650   15,490        (5,014)
investing activities                                                           
                                       ________ ________ ________      ________

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

                                                                   Period from 
                                                                  March 9, 1993
                                        Year ended December 31     to December 
                                        2005     2004      2003       2005     
                                      ________ ________  ________  (Unaudited) 
CASH FLOWS FROM FINANCING ACTIVITIES:                                          
Issuance of share capital - net of           --  15,430       --       104,371 
share issuance expenses                                                        
Exercise of share warrants and stock      1,511      19        4         2,003 
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            1,511  15,449        4       106,374 
                                       ________ ________ ________      ________
NET INCREASE (DECREASE) IN CASH AND                                            
CASH EQUIVALENTS                            572   8,604    2,168        13,360 
BALANCE OF CASH AND CASH EQUIVALENTS                                           
AT BEGINNING OF PERIOD                   12,788   4,184    2,016            -- 
                                       ________ ________ ________      ________
BALANCE OF CASH AND CASH EQUIVALENTS                                           
AT END OF PERIOD                         13,360  12,788    4,184        13,360 
                                        =======  =======  =======       =======
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                    --      --       --         1,700 
subordinated debenture into shares                                             
Supplemental disclosures of cash flow                                          
Income taxes paid (mainly - tax                                                
advance in respect of                                                          
excess expenses)                             49     107      161           321 
                                        =======  =======  =======       =======
Interest paid                                --       --      --           350 
                                        =======  =======  =======       =======

(a) Incorporation Date

    The accompanying notes are an integral part of the financial statements    

                          XTL BIOPHARMACEUTICALS LTD.                          
                         (A Development Stage Company)                         


    The consolidated financial statements of the Company are presented on a
    going concern basis, which contemplates the realization of assets and
    satisfaction of liabilities in the normal course of business. The Company
    has experienced a significant loss from operations. For the year ended
    December 31, 2005, the Company incurred a net loss of $14 million and had
    an accumulated deficit of $100 million. These matters raise substantial
    doubt about the Company's ability to continue as a going concern.
    The Company's ability to continue as a going concern will depend upon its
    ability to raise additional capital in the short term. The Company is
    actively pursuing raising additional capital to fund its operations
    although there is no assurance that such capital will be available to the
    Company. Failure to secure additional capital or to expand its revenue base
    would result in the Company depleting its available funds and not being
    able to pay its obligations when they become due. The accompanying
    consolidated financial statements do not include any adjustments to reflect
    the possible future effects on the recoverability and classification of
    assets or the amounts and classification of liabilities that may result
    from the possible inability of the Company to continue as a going concern.
    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, 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.
    In connection with 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.
    The Company recognizes the revenue from the licensing agreement with Cubist
    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.
    Prior to January 1, 2005, the Company accounted for employee stock-based
    compensation under the intrinsic value model in accordance with Accounting
    Principles Board Opinion No. 25 - "Accounting for Stock Issued to
    Employees" ("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 is not known at the grant date, the Company updated, at each
    period, the compensation expenses until such data becomes known. In
    addition, in accordance with FAS 123 No. "Accounting for Stock-Based
    Compensation" ("FAS 123"), which was issued by the Financial Accounting
    Standards Board ("FASB"), the Company disclosed pro forma data assuming it
    had accounted for employee share option grantsusing the fair value-based
    method defined in FAS 123.
In December 2004, the FASB issued the revised FAS No. 123R "Share - Based
Payment" ("FAS 123R"), which 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. In March 2005, the SEC issued Staff Accounting
Bulletin No. 107 ("SAB 107") regarding the SEC's interpretation of FAS 123R.

FAS 123R eliminates the ability to account for employee share-based payment
transactions using APB 25, and requires instead that such transactions be
accounted for using the grant-date fair value based method. FAS 123R is
effective as of the annual reporting period that begins after June 15, 2005.
Early adoption of FAS 123R is encouraged. FAS 123R applies to all awards
granted or modified after the effective date of the standard. In addition,
compensation cost 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 FAS 123.

The Company implemented early adoption of FAS 123R, as of January 1, 2005,
using the modified prospective application transition method, as permitted by
FAS 123R. Under such transition method, the Company's financial statements for
periods prior to the effective date of FAS 123R (January 1, 2005) have not been
restated. As a result of the early adoption, the Company 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, which is consistent with the Company's
valuation techniques previously utilized for options in footnote disclosures
required under FAS 123, as amended by FAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." Such value is recognized as an
expense over the service period, net of estimated forfeitures, using the
straight-line method under FAS 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 FAS123R.

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.

The application of FAS 123R had the following effect on reported amounts, for
the year ended December 31, 2005, relative to amounts that would have been
reported using the intrinsic value method under previous accounting ($ in
thousands, except per share amounts):

                                   Using     Impact of the      As      
                                 previous     adoption of    reported   
                                               FAS 123R    ___________  
Loss for the year                 12,130         1,885        14,015    
Basic and diluted loss per        (0.07)                      (0.08)    
ordinary share                                                          

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

                                                     Period from   
                                                   March 9, 1993*   
                          Year ended December 31   to December 31,  
                             2004        2003          2004         
                              ($ in thousands except per share      
Loss for the period, as        16,473      14,288            85,776 
Deduct: stock- based                                                
compensation expense,                                               
included in reported loss          --           --             (483)
Add: stock-based employee                                           
compensation expense                                                
determined under fair                                               
method for all awards             239         821             6,355 
                           __________   __________        __________
Loss - pro-forma               16,712      15,109            91,648 
                           __________   __________        __________

Basic and diluted loss per                                        
As reported                        0.12        0.13               
                              =========   =========               
Pro-forma                          0.12        0.14               
                              =========   =========               

The Company accounts for equity instruments issued to third party service
providers (non - employees) in accordance with the fair value method prescribed
by FAS123, and as of January 1, 2005, by FAS 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").

    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 3 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 and
    $185,000 was recorded as revenue in the years ended December 31, 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
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 date
regulatory approval are reached, if earlier, and (ii) the milestone contingent
payments will be recorded as revenue when regulatory approval milestones are

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 levels
of net sales achieved by Cubist, subject to certain deductions based on patent
protection of HepeX-B in that territory, total cost of HepeX-B development,
third party license payments and indemnification obligations.

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.

Under a research and license agreement with Yeda, the Company paid during 2004,
$250,000 with respect to the $1 million up front fee received in June 2004, out
of which $54,000 and $32,000 was recorded as cost of revenues in 2005 and 2004,

The balance of the deferred gain, related to the revenue from Cubist, as of
December 31, 2004 and 2005, was presented in the balance sheet, net of the
above mentioned payment, as follows:

                                                 December 31,         
                                            2005            2004      
                                              ($ in thousands)        
Deferred revenue                                 1,361          1,815 
Less - Deferred expenses related to                164            218 
                                              ________        ________
Deferred gain                                    1,197          1,597 
                                               =======         =======


During September 2005, the Company licensed perpetually from VivoQuest Inc.
("VivoQuest"), a US privately-held company, which is a development stage
enterprise, exclusive worldwide rights to VivoQuest's intellectual property and
technology, covering a proprietary compound library, including 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 for a total of 1,314,420 ordinary shares (calculated based upon the
average of the closing prices per share for the period commencing two days
before, and ending two days after the closing of the transaction), made cash
payments of approximately $400,000 to cover VivoQuest's operating expenses
prior to the closing of the Transaction, and incurred $148,000 in direct
expenses associated with the Transaction;

(2) the Company agreed to make additional contingent milestone payments
triggered by certain regulatory and sales targets, totaling up to $34.6
million, $25.0 million of which will be due upon or following regulatory
approval or actual product sales, and are 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 FAS No. 142 "Goodwill and
Other Intangible Assets." Accordingly, the purchase price was allocated to the
individual assets acquired, based on their relative fair values, and no
goodwill was recorded.

The purchase price consisted of:

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

The tangible and intangible assets acquired consisted of the following:

                                               ($ in thousands)
Tangible assets acquired - property and                     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                      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 U.S. treasury securities,
as of the valuation date.

The fair value of the assembled workforce acquired was estimated by management
with the assistance of an independent third-party appraiser, based upon 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

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


a. Short-term bank deposits

The deposits are denominated in dollars and bear a weighted average annual
interest rate of 4.23 % as of December 31, 2005 (as of December 31, 2004 -

b. Accounts receivable - other:

                                                    December 31       
                                                  2005        2004    
                                                  ($ in thousands)    
Prepaid expenses                                       285         165
Employees                                               75          24
Value added tax authorities                             17         101
Other                                                   54          16
                                               __________   __________
                                                       431         306
                                                __________  __________

c. Accounts payable and accruals:

                                                    December 31       
                                                 2005         2004    
                                                  ($ in thousands)    
Suppliers                                            655         1,108
Accrued expenses                                     940         1,337
Institutions and employees in respect of                              
and related benefits                                 250           294
Provision for vacation pay and recreation pay        160           385
Other                                                  2            10
                                                _________   __________
                                                   2,007         3,134
                                                _________   __________

Statements of operations:

d. Research and development costs:

                                                                    Period from   
                                                                   March 9, 1993  
                                   Year ended December 31         to December 31, 
                               2005        2004         2003            2005      
                                               ($ in thousands)                  
Wages, salaries and related                                                      
(includes non-cash                                                               
of $67 in 2005, and $0                                                           
in 2004 and 2003)                  2,764     2,776        3,450            23,709
Outside service providers          2,054     6,430        6,799            35,910
Lab supplies                         558       754        1,128             8,964
Consultants (includes non-                                                       
compensation of $45 in 2005,                                                     
$30 in 2004 and $0 in 2003)          531       549          494             3,725
Rent and maintenance                 752       725          866             4,756
Impairment loss                       26                    354               380
Depreciation and                     212       277          369             2,929
Other                                416       474          562             2,517
                                ________  _________   __________        _________
                                   7,313    11,985       14,022            82,890
                                ________  _________   __________        _________

e. General and administrative expenses:

                                                                         Period from
                                                                       March 9, 1993
                                       Year ended December 31        to December 31,
                                      2005        2004          2003           2005 
                                               ($ in thousands)                     
Wages, salaries and related                                                         
(includes non-cash                                                                  
of $5 in 2005, and $0 in 2004                                                       
and 2003)                                454       1,890           1,244      11,534
Corporate communications                 140         289             228       2,350
Professional fees                        890         647             564       4,405
Director fees and related                                                           
non-cash compensation of                                                            
in 2005, and $0 in 2004 and            2,821         243             183       4,208
Rent and maintenance                      91          90             104         956
Communications                            25          34              33         220
Depreciation and amortization             30          42              70         619
Patent registration fees                 174         271             125       1,191
Other                                    832         628             554       3,529
                                   _________    ________       __________ __________
                                       5,457       4,134           3,105      29,012
                                   _________     _______       __________ __________

 f. Business development costs:

                                                    March 9, 1993
                     Year ended December 31          to December  
                2005          2004           2003       2005     
                                ($ in thousands)                  
salaries and                                                      
of $10 in                                                         
and $0 in         171          410            408        2,672 
2004 and                                                       
Travel             22           36            136          764 
Professional       34          364            120        1,077 
             _________     ________     __________     ________
                  227          810            664        4,513 
             _________     ________     __________     ________

g. Financial income, net:

                                                                  March 9, 1993  
                                    Year ended December 31       to December 31, 
                                  2005        2004       2003          2005      
                                               ($ in thousands)                  
Financial income:                                                                
Interest income                       503         297       458             9,228
Foreign exchange differences                                                     
gain                                   --          67         --              203
Gain from available for sale                                                     
securities                             --          13        62                13
Other                                  --           --        --              156
                                  ________    ________  ________         ________
                                      503         377       520             9,600
                                  ________    ________  ________         ________
Financial expenses:                                                              
Foreign exchange differences                                                     
loss                                   39           --      148             1,960
Interest expense                                    --        --              374
Loss from available for sale                                                     
securities                              --          --        --               14
Other                                  21          25        20               109
                                  ________    ________  ________         ________
                                       60          25       168             2,457
                                  ________    ________  ________         ________
Financial income, net                 443         352       352             7,143
                                  ========    ========   =======         ========


During March 2006, the Audit Committee and the Board of Directors of the
Company approved the grant to the CEO of 7,000,000 options, to the Chairman
9,898,719 options and to a non-executive director 750,000 options, to purchase
ordinary shares of the Company. 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. The option grant to the Chairman and to the non-executive
director is subject to shareholder approval.


a d v e r t i s e m e n t