UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

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

OR

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

For the fiscal year ended ______________

OR

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

Commission file number _________________________________________________________

XTL BIOPHARMACEUTICALS LTD.

(Exact name of registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

Kiryat Weizmann Science Park

3 Hasapir Street, Building 3, PO Box 370

Rehovot 76100, Israel

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

American Depositary Shares,

each representing [___] Ordinary Shares, par value NIS 0.02

(Title of Class)

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.

168,079,196 ordinary shares

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 o No x

Indicate by a check mark which financial statement item the registrant has elected to follow.

o Item 17 x Item 18

XTL BIOPHARMACEUTICALS LTD.

REGISTRATION STATEMENT 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	3
ITEM 4	Information on the Company	16
ITEM 5	Operating and Financial Review and Prospects	30
ITEM 6	Directors, Senior Management and Employees	43
ITEM 7	Major Shareholders and Related Party Transactions	52
ITEM 8	Financial Information	52
ITEM 9	The Offer and Listing	53
ITEM 10	Additional Information	54
ITEM 11	Quantitative And Qualitative Disclosures About Market Risk	69
ITEM 12	Description of Securities other than Equity Securities	69

PART II
ITEM 13	Defaults, Dividend Arrearages and Delinquencies	75
ITEM 14	Material Modifications to the Rights of Security Holders and Use of Proceeds	75
ITEM 15	Controls and Procedures	75
ITEM 16	Reserved	75
ITEM 16A	Audit Committee Financial Expert	75
ITEM 16B	Code of Ethics	75
ITEM 16C	Principal Accountant Fees And Services	75
ITEM 16D	Exemptions From The Listing Standards For Audit Committees	75
ITEM 16E	Purchases Of Equity Securities By The Issuer And Affiliated Purchasers	75

PART III
ITEM 17	Financial Statements	76
ITEM 18	Financial Statements	76
ITEM 19	Exhibits	76

SIGNATURES		77

This Registration Statement on Form 20-F contains trademarks and trade names of XTL Biopharmaceuticals Ltd., including our name and logo. The following are registered trademarks of XTL Biopharmaceuticals Ltd.: “HepeX-B,” “HepeX-C,” and “Trimera.”

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. Such forward-looking statements include, but are not limited to, those relating to:

·	our expectations for increases or decreases in expenses;

·	our expectations for the development, manufacturing, and approval of our current product candidates or any other products we may acquire or in-license;

·	our expectations for incurring additional capital expenditures to expand our research and development capabilities;

·	our expectations for generating revenue or becoming profitable on a sustained basis;

·	our expectations or ability to enter into marketing and other partnership agreements;

·	our expectations or ability to enter into product acquisition and in-licensing transactions;

·	our estimates of the sufficiency of our existing cash and cash equivalents and investments to finance our operating and capital requirements;

·	our expected losses; and

·	our expectations for future capital requirements.

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.

We qualify all of our forward-looking statements by these cautionary statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

PART I

Unless the context requires otherwise, references in this report to “XTLbio,” the “Company,” “we,” “us” and “our” refer to XTL Biopharmaceuticals Ltd. and our wholly-owned subsidiary, XTL Biopharmaceuticals, Inc.

We have prepared our consolidated financial statements in United States dollars and in accordance with accounting principles generally accepted in the United States. All references herein to "dollars" or "$" are to United States dollars, and all references to "Shekels" or "NIS" are to New Israeli Shekels.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Directors and Senior Management

The following table presents certain information regarding our directors and executive officers as of March 31, 2005.

Name¹	Age	Position
Michael S. Weiss²	39	Interim Chairman of the Board of Directors
Rusi K. Kathoke³	57	Non executive Director⁴
William J. Kennedy, Ph.D	60	Non executive Director
Patricia A. Smith, M.D⁵	47	Non executive Director⁴
Jonathan R. Spicehandler, M.D⁶	56	Non executive Director
Ben Zion Weiner, Ph.D⁷	61	Non executive Director
Jonathan Burgin	43	Chief Financial Officer
Shlomo Dagan, Ph.D	54	Chief Scientific Officer
Neil Graham, M.B.B.S., M.D, M.P.H⁸	46	Chief Medical Officer

1	Unless otherwise indicated, the business address for such director or officer is at the Company’s headquarters: XTL Biopharmaceuticals Ltd., Kiryat Weizmann Science Park, 3 Hasapir Street, Building 3, PO Box 370, Rehovot 76100, Israel.

2	Mr. Weiss’s business address is c/o Keryx Biopharmaceuticals, Inc., 750 Lexington Avenue, 20^th Floor, New York, New York 10022, U.S.A.

3	Mr. Kathoke’s business address is c/o Jenrus Management Limited, 54-58 Athol Street, Douglas, Isle of Man, IM1 1JD, British Isles.

4	Designated as an External Director under the Israeli Companies Act.

5	Dr. Smith’s business address is c/o BMR, BMR House, Parkmore Business Park West, Galway, Ireland.

6	Dr. Spicehandler’s business address is c/o Schering-Plough Research Institute, 2000 Galloping Hill Road, Kenilworth, NJ 07033, U.S.A.

7	Dr. Weiner’s business address is c/o Teva Pharmaceutical Industries Ltd., 5 Basel St. Petah-Tikva 49131, Israel.

8	Dr. Graham's business address is c/o XTL Biopharmaceuticals Inc., 2530 Meridian Pkwy, Suite 200, Durham, NC 27713, U.S.A.

Auditors

Kesselman & Kesselman, a member of PricewaterhouseCoopers International Limited, has acted as our auditor since 2001. Kesselman & Kesselman’s offices are located at Trade Tower, 25 Hamered Street, Tel Aviv 68125, Israel.

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, 2004, 2003, 2002, 2001 and 2000. We have derived the selected financial data for the fiscal years ended December 31, 2004, 2003 and 2002, and as of December 31, 2004 and 2003, from our audited financial statements, included with this registration statement at “Item 18 - Financial Statements.” We have derived the selected financial data for fiscal years ended December 31, 2001 and 2000, and as of December 31, 2002, 2001 and 2000, from other audited financial statements not appearing in this report, which have been prepared in accordance with U.S. 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.”

	Years ended December 31,
	2004			2003			2002			2001			2000
	(in thousands, except share and per share amounts)
Statement of Operations Data:
Revenues:
Reimbursed out of pocket expenses	$	3,269		$	—		$	—		$	—		$	—
License		185			—			—			—			—
		3,454			—			—			—			—
Cost of revenues:
Reimbursed out of pocket expenses		3,269			—			—			—			—
License		32			—			—			—			—
		3,301			—			—			—			—

Gross margin		153			—			—			—			—

Research and development:
Research and development costs		11,985			13,668			13,231			12,187			6,002
Less participations		—			3,229			75			1,133			1,821
		11,985			10,439			13,156			11,054			4,181

General and administrative		4,134			3,105			3,638			3,001			2,334
Business development costs		810			664			916			1,067			486
Impairment of asset held for sale		—			354			—			—			—

Operating loss		(16,776	)		(14,562	)		(17,710	)		(15,122	)		(7,001	)

Other income (expense):
Financial income, net		352			352			597			2,448			1,517
Taxes on income		(49	)		(78	)		(27	)		—			(7	)

Net loss	$	(16,473	)	$	(14,288	)	$	(17,140	)	$	(12,674	)	$	(5,491	)

Net loss per ordinary share
Basic and diluted	$	(0.12	)	$	(0.13	)	$	(0.15	)	$	(0.11	)	$	(0.13	)*
Weighted average shares outstanding		134,731,766			111,712,916			111,149,292			110,941,014			40,871,338	*
* Restated

	As of December 31,
	2004		2003		2002		2001		2000
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents, bank deposits and marketable securities	$	22,924	$	22,262	$	35,706	$	52,188	$	64,969
Working capital		20,240		19,967		33,396		50,433		53,752
Total assets		25,624		24,853		38,423		55.106		67,876
Long-term obligations		2,489		1,244		1,017		526		707
Total shareholders’ equity		19,602		20,608		34,830		51,953		64,586

Capitalization and Indebtedness

The following table sets forth our capitalization as of December 31, 2004. You should read this table in conjunction with our consolidated financial statements and related notes set forth elsewhere in this registration statement.

	December 31, 2004
	(in thousands)

Shareholders’ equity
Ordinary shares, par value NIS 0.02, 300,000,000 shares authorized, 168,079,196 shares issued and outstanding	$	841
Additional paid-in capital		104,537*
Deferred share-based compensation		—*
Deficit accumulated during the development stage		(85,776	)
Total shareholders’ equity		19,602
Total capitalization	$	19,602
* Reclassified

Risk Factors

You should carefully consider the following risks and uncertainties. If any of the following occurs, our business, financial condition or operating results could be materially harmed. These factors could cause the trading price of our ordinary shares and ADRs to decline, and you could lose all or part of your investment.

Risks Related to Our Business

We have a limited operating history and have incurred substantial operating losses since our inception. We expect to continue to incur losses in the future and may never become profitable.

We have a limited operating history. You should consider our prospects in light of the risks and difficulties frequently encountered by development stage companies. In addition, we have incurred operating losses since our inception and expect to continue to incur operating losses for the foreseeable future. As of December 31, 2004, we had an accumulated deficit of approximately $85.8 million. We may continue to incur substantial operating losses even if we begin to generate revenues from our drug candidates or technologies. Consequently, if those revenues are insufficient to cover development and other expenditures we may incur, we may never become profitable.

We have not yet commercialized any products 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 successfully commercialize our drug candidates and technologies.

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 product candidates.

We depend on independent clinical investigators, contract research organizations and other third-party service providers to conduct the clinical trials of our product candidates 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 U.S. 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 trials 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 product candidates or result in enforcement action against us.

If the clinical data related to our drug candidates do not track positive preclinical or early clinical data, our corporate strategy and financial results will be adversely impacted.

Certain of our drug candidates are at a relatively early stage of development and, in certain cases, the drugs have not yet been tested in humans. Preliminary results of pre-clinical or clinical studies do not necessarily predict their final results, and acceptable results in early pre-clinical or clinical studies might not be obtained in later studies. 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 materially impact our corporate strategy and our financial results may be adversely impacted.

If our drug candidates do not receive the necessary regulatory approvals, we will be unable to commercialize our drug candidates.

We have not received, and may never receive, regulatory approval for commercial sale for any of our drug candidates. 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 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 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 advanced 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 may be materially impaired. In addition, we have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approval in the United States 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 in some of our proprietary technologies from third-parties, some of these third-parties could prevent us from out licensing our drug candidates.

We do not own all of our drug candidates. We have licensed the patent rights to some of these drug candidates and technologies from others. 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 technologies and pay the patent filing, prosecution and maintenance costs related to the licenses. 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.

In addition, under the terms of certain of our license agreements, we are required to obtain approval from such third parties in order to grant sub-licenses to collaborative partners to develop or commercialize its products or products derived from its technologies. The requirement of obtaining these approvals, and any conditions that such third parties 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.

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

We are an emerging company and do not possess all of the capabilities to fully commercialize our product candidates 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 drug candidates.

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 technologies independently, which could result in delays. Further, such failure could result in the termination of license rights to one or more of our 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 products based on our technologies. Accordingly, to the extent that we rely on third parties to research, develop or commercialize products based on our technologies, we are unable to control whether such products will be scientifically or commercially successful.

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 product candidates;

·	the rates of adoption of our products by medical practitioners and the target populations for our products;

·	the potential advantages that our product candidates offer over existing treatment methods or other products that may be developed;

·	the cost-effectiveness of our product candidates relative to competing products;

·	the availability of government or third-party payor reimbursement for our product candidates;

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

·	the effectiveness of our sales, marketing and distribution efforts.

Because we expect sales of our product candidates to generate substantially all of our revenues in the long-term, the failure of our drugs 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 ourselves the drug products that we need to conduct our clinical trials and rely upon a limited number of manufacturers to supply our drug products. We have no experience in manufacturing products 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 products for use in clinical trials and for future sales. In order to commercialize our drug candidates, 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 product candidates for use in our clinical trials. If our contract manufacturers or other third parties fail to deliver our product candidates for clinical use on a timely basis, with sufficient quality, and at commercially reasonable prices, and we fail to find replacement manufacturers, we may be required to delay or suspend clinical trials or otherwise discontinue development and production of our product candidates.

Our contract manufacturers are required to produce our clinical product candidates in strict compliance with current Good Manufacturing Practices in order to meet acceptable standards for our clinical trials. If such standards change, the ability of contract manufacturers to produce our product 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 product candidates. Any difficulties or delays in our contractors’ manufacturing and supply of product 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 drug candidates 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 product candidates, 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 drug candidates. 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. 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.

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 technologies and products that could render our technologies or our drug candidates obsolete or noncompetitive.

If we lose our key personnel or are unable to attract and retain additional personnel, our business could be harmed.

As of March 31, 2005, we have 45 full-time employees. To successfully develop our drug candidates, we must be able to attract and retain highly skilled personnel. The retention of their services cannot be guaranteed. In addition, if we lose the services of certain of our current personnel, our ability to continue to execute on our business plan could be materially impaired.

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 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 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.

If any of these risks occur, it could have an adverse effect on both the business we acquire and our existing operations.

We face product liability risks and may not be able to obtain adequate insurance.

The use of our drug candidates 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 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;

·	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. Based on our current plans, we believe our existing cash and cash equivalents and short-term bank deposits will be sufficient to fund our operating expenses and capital requirements through the end of 2006; however, the actual amount of funds that we will need prior to or after that date will be determined by many factors, some of which are beyond our control. As a result, we may need funds sooner or in different amounts than we currently anticipate. 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.

Based on our current business plan, we will have to raise additional funds. 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 additional shares of our capital stock, the ownership interests of our stockholders will be diluted. If we need to raise additional funds through the sale or license of our technology, we may be unable to do so on terms favorable to us.

Our current restructuring plan may not achieve the results we intend and may harm our business.

In March 2005, we initiated a restructuring plan for our company, which included a workforce reduction principally of research personnel and certain managerial and administrative staff. If we are unable to implement our restructuring plan effectively, we may not successfully achieve our business strategy or reduce our costs. Moreover, we may be required to further reduce our headcount and/or program-specific expenditures, which could require us to further scale back or abandon any of our development activities, or license to others products or technologies we would otherwise have sought to commercialize ourselves.

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 U.S. 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. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date. Accordingly, the patents we use may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. The patents we use may be challenged or invalidated or may fail to provide us with any competitive advantage.

Generally, patent applications in the U.S. 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 United States that claim technology also claimed by us, we may have 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. 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.

Moreover, we 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 with our research collaborators and scientific advisors. If we cannot maintain the confidentiality of this information, our ability to receive patent protection or protect our proprietary information will be at risk.

Specifically, we 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 aware that third parties have patent protection covering HCV antigens and antibodies, and as a result, we may be required to enter into licensing arrangements with these third parties in order to commercialize our XTL-6865 product. If we are unable to achieve commercially acceptable terms, our 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 its licensees or development partners.

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 United States, or, diseases that affect more than 200,000 individuals in the United States 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.

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 technologies 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 technologies 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 processes competitive with ours. If patents are granted to other parties that contain claims having a scope that is interpreted to cover any of our products (including the manufacture thereof), there can be no assurance that we will be able to obtain licenses to such patents at reasonable cost, if at all, or be able to develop or obtain alternative technology.

Risks Related to Our Ordinary Shares and ADRs

Our 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, 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.

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

Our ordinary shares are traded on the London Stock Exchange and ADRs representing our ordinary shares will be traded on the Nasdaq National Market. Trading in our securities on these markets will be 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 United States and the United Kingdom. Consequently, the effective trading prices of our shares on these two 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 United States residents may be required to pay additional income taxes.

There is a risk that we will be classified as a Passive Foreign Investment Company, or PFIC. If we are classified as a PFIC, a U.S. 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. A determination as to a corporation's status as a PFIC must be made annually. However, such a determination is fundamentally factual in nature and generally cannot be made until the close of the applicable taxable year. 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 either value or adjusted basis, depending on the circumstances) that produce or are held for the production of passive income is at least 50%. The risk that we will be classified as a PFIC arises because under applicable rules issued by the U.S. Internal Revenue Service, or the 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. Furthermore, because the goodwill of a publicly-traded corporation is largely a function of the trading price of its shares, the valuation of that goodwill is subject to significant change throughout each year.

If we are classified as a PFIC at any time during the U.S. holder’s holding period for our stock, the federal income tax imposed on a U.S. holder with respect to income derived from our stock will be determined under a special regime, which applies upon (a) the receipt of any “excess distribution” from us (generally, distributions in any year that are greater than 125% of the average annual distributions received by such U.S. holder in the three preceding years or its holding period, if shorter) and (b) the sale or disposition of our stock. Under this special regime, the excess distribution or realized gain is treated as ordinary income. 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 U.S. holder's holding period; (ii) tax is determined for amounts allocated to the first such year in which we qualified as a PFIC and all subsequent years (except the year in which the excess distribution 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 for the period from the due date of the income tax return for such year to the due date of the return for the year in which in which the excess distribution or the disposition occurred; and (iv) amounts allocated to a year prior to the first year in the U.S. holder’s holding period in which we were a PFIC or to the year in which the excess distribution or the disposition occurred are taxed as ordinary income.

A U.S. holder may generally avoid this regime by electing to treat its PFIC shares, as a “qualified electing fund.” If a U.S. holder elects to treat PFIC shares as a qualified electing fund, the U.S. 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 U.S. holder. We currently do not plan to comply with the reporting requirements that are a prerequisite to making a “qualified electing fund” election. Therefore, a U.S. holder will not be eligible to make the qualified electing fund election with respect to our shares.

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 stock.

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.

The Companies 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 shareholder with over 25% of the voting rights in the company. This rule does not apply if there is already another shareholder of the company with 25% or more of the voting rights. Similarly, the Companies 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 voting rights in the company, unless there is a shareholder with 50% or more of the voting rights in the company. These rules do not apply if the acquisition is made by way of a merger. Regulations promulgated under the Companies 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 U.S. tax law. See "Item 10. Additional Information - Anti-Takeover Provisions Under Israeli Law" below.

Risks Relating to Operations in Israel

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

Our headquarters, 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 you 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 negatively affected by the obligation of our employees to perform military service.

Some of our employees are obligated to perform military reserve duty and are subject to being called to active duty for extended periods of time under emergency conditions. To date, calls to active duty have not affected us materially. However, it is possible that there will be additional call-ups in the future, which may have a material effect on us. The absence of one or more of our key employees due to military service could disrupt our operations and may have an adverse impact on 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 U.S. dollars. While a substantial amount of our operating expenses are in U.S. 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 U.S. 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 our drug 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, 2004, we have received $7.8 million in grants from the Office of the Chief Scientist for several projects, some of which are currently under development. 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 royalty 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.

We may not continue to be entitled to certain tax benefits from the Israeli government.

The tax benefits that we are entitled to receive are a function of the "approved enterprise" status of our existing facilities in Israel. 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 continue to meet certain reporting requirements. If we cease to become entitled to tax benefits, we may be required to pay increased taxes on the taxable income that we may generate in the future.

It may be difficult to enforce a U.S. judgment against us, our officers or our directors or to assert U.S. 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 United States, may be difficult to obtain within the United States. In addition, because substantially all of our assets and some of our directors and officers are located outside the United States, any judgment obtained in the United States against us or any of our directors and officers may not be collectible within the United States.

ITEM 4. INFORMATION ON THE COMPANY

History and Development of the Company

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. Our ordinary shares are traded on the London Stock Exchange under the symbol “XTL.” We operate under the laws of the State of Israel, under the Israeli Companies Act and the regulations of the United Kingdom Listing Authority, which governs our listing on the London Stock Exchange. Our principal offices are located at the Kiryat Weizmann Science Park, Building 3, 3 Hasapir Street, Rehovot 76100, Israel, and our telephone number is +972-8-930-4444. The principal offices of XTL Biopharmaceuticals, Inc., our wholly-owned U.S. subsidiary and agent for service of process in the U.S., are located at 275 Grove Street, Suite 2-400, Newton, MA 02466, U.S.A., and its telephone number is 1-617-663-4789. Our primary internet address is www.xtlbio.com. None of the information on our website is incorporated by reference into this registration statement.

We were established to use the Trimera technology for discovering, developing and commercializing therapeutic drugs. The Trimera technology, developed at the Weizmann Institute, in Rehovot, Israel, was exclusively licensed to us by Yeda Research and Development Company Ltd., the commercialization arm of the Weizmann Institute. The Trimera technology is a method to introduce functional human tissue into a mouse, which can then be used to generate fully human monoclonal antibodies, or hMAbs, and as a sophisticated animal model of human disease. Until 1999, our therapeutic focus was on the development of human monoclonal antibodies to treat viral, autoimmune and oncological diseases. Our first therapeutic programs focused on antibodies against the hepatitis B virus, interferon - γ and the hepatitis C virus.

We are currently engaged in the acquisition, development and commercialization of pharmaceutical products for the treatment of infectious diseases, particularly the prevention and treatment of hepatitis B and C. One of our products, HepeX-B is designed to prevent re-infection with hepatitis B in liver transplant patients, and is currently in a Phase IIb trial in liver transplant patients. Worldwide rights for HepeX-B were recently licensed to Cubist Pharmaceuticals Inc., or Cubist, in exchange for certain milestone payments and future royalties on Cubist’s net sales. Another of our drug candidates, XTL-6865, is being developed to prevent hepatitis C re-infection following a liver transplant and for the treatment of chronic hepatitis C. Following a pilot clinical program with one monoclonal antibody (MAb), the program is now in the second stage of the development strategy – evaluation of the dual-MAb product in clinical trials. We are also developing XTL-2125, the lead product candidate from our HCV-SM small molecule development program, which is in preclinical development, targeted at treating chronic hepatitis C.

In September-October 2000, we raised net proceeds of $45.7 million in an initial public offering on the London Stock Exchange, in which we sold 23,750,000 of our ordinary shares, including the exercise of the underwriter’s over-allotment option, at a price of 150 British pence per share. In August 2004, we raised net proceeds of $15.4 million in a placing and open offer transaction of our ordinary shares, resulting in the sale of 56,009,732 ordinary shares at a price of 17.5 British pence per share. Since September 2000, our ordinary shares are listed on the Official List of the UK Listing Authority and are traded on the London Stock Exchange's market for listed securities under the symbol “XTL.”

Since inception, we raised net proceeds of approximately $104.4 million to fund our activities, including net proceeds of $45.7 million from our initial public offering and $15.4 million in a placing and open offer transaction.

For the years ended December 31, 2004, 2003, and 2002 our capital expenditures were $180,000, $81,000 and $659,000, 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, 2004, 2003, and 2002.

Business Overview

Introduction

We are a biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products for the treatment of infectious diseases, particularly the prevention and treatment of hepatitis B and C.

We currently have three products under development:

HepeX-B is being developed to prevent re-infection with hepatitis B, known as HBV, in liver transplant patients. HepeX-B is a mixture of two fully human monoclonal antibodies, which bind to the HBV surface antigen, or HBsAg. HepeX-B is currently in a Phase IIb trial in liver transplant patients. Worldwide rights for HepeX-B were licensed to Cubist in 2004, in exchange for certain milestone payments and future royalties on Cubist’s net sales.

XTL-6865 is being developed to prevent hepatitis C, known as HCV, re-infection following a liver transplant and for the treatment of chronic HCV. 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. 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 a U.S. investigational new drug application, known as an IND, to the FDA in order to commence a Phase Ia/Ib clinical trial later this year for XTL-6865, the dual-MAb product.

XTL-2125 is the lead product candidate from our HCV-SM small molecule development program. XTL-2125 (also referred to as BC2125) is a small molecule non-nucleoside polymerase inhibitor for the treatment of chronic hepatitis C. XTL-2125 is currently in formal toxicity testing, and we expect to make an IND filing to the FDA at the end of 2005 or early in 2006, assuming no toxicity concerns arise.

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 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.

Our Strategy

Under our current strategy, we plan to:

·	continue the clinical development of XTL-6865 and XTL-2125;

·	complete the HepeX-B Phase IIb clinical trial on behalf of our partner Cubist and transition all aspects of HepeX-B development to Cubist; and

·	seek to in-license or acquire additional clinical stage compounds, or compounds in advanced pre-clinical development.

Products Under Development

HepeX-B (Product for the Prevention of Re-Infection of Hepatitis B)

HepeX-B is being developed to prevent re-infection with HBV in liver transplant patients. Protection of the transplanted liver from recurrent HBV infection is critical to preserving graft function. Life-long HBV prophylactic treatment is typically necessary, since the virus remains in several other body compartments following removal of the infected liver. Without treatment, Hepatitis B infection of the transplanted liver reoccurs rapidly resulting in progressive disease, graft failure, and death.

HepeX-B is a mixture of two fully human monoclonal antibodies which bind to the HBV surface antigen, or HBsAg. HepeX-B is being developed as an alternative to the present standard-of-care, hepatitis B Immunoglobulin, or HBIg, which has several disadvantages, among them complicated and uncomfortable patient administration (intravenous or painful intra-muscular injection). The present market size of HBIg is estimated to be about $100 million per year worldwide.

In previous clinical studies, HepeX-B maintained serum antibody levels similar to HBIg, using significantly less protein, thus enabling the development of a low-volume “patient friendly” formulation. In addition, as HepeX-B is not isolated from human blood, risk of infection from blood-borne organisms is minimal.

HepeX-B is presently being studied in a Phase IIb clinical trial in liver transplant patients. In November 2004, we announced the completion of first scheduled review of the first 15 patients enrolled to the study by an Independent Data and Safety Monitoring Board, or DSMB. The DSMB recommended the continuation of the trial.

In June 2004, we announced the completion of a license agreement with Cubist for the worldwide development and commercialization of HepeX-B. Under this agreement we will be responsible for completing the on-going Phase IIb, which will be fully funded by Cubist. Cubist will be responsible for completing the clinical development beyond Phase IIb and for registration and commercialization of the product worldwide.

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 $2 million as collaboration support to be paid in installments until the end of 2005, of which $1 million has been paid through March 31, 2005, and an additional amount of up to $3 million upon achievement of certain regulatory milestones. Under the agreement, we are entitled to receive royalties from net sales by Cubist, generally ranging from 10% to 17%.

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.

Orphan drug status, a regulatory designation that provides exclusive marketing rights to drug candidates that would not otherwise be commercially viable, has been granted for HepeX-B in the U.S. and Europe.

XTL-6865 and XTL-2125 (Products for Prevention of Re-Infection and Treatment for Hepatitis C)

Preventing Re-infection following Liver Transplant

Hepatitis C is the leading cause of liver transplants in the U.S. It is estimated that in 2004, over 2,000 liver transplants were performed in the U.S. in HCV positive patients. Although the HCV infected liver is removed during the transplant procedure, the newly transplanted healthy liver is re-infected with HCV from the patient’s serum. Re-infection occurs in all patients within days following the transplant. Recurrent HCV infection is the leading cause of graft failure: 10% of patients will die (or be re-transplanted) by year five due to recurrent HCV disease. A further 30% of patients will have cirrhosis at the end of year five.

There is no therapy available to prevent re-infection following a liver transplant. Once the liver has been re-infected, clinicians attempt to treat the recurrent disease. Response rate to this treatment is low (~20%). Therefore, re-infection following a liver transplant represents a significant unmet medical need.

One of the potential indications of XTL-6865 is preventing re-infection following a liver transplant. We estimate that a successful therapy for preventing re-infection with HCV following liver transplantation could reach annual worldwide sales of approximately $400 million.

Treating Chronic HCV

Chronic hepatitis C is a serious life-threatening disease, which affects around 170 to 200 million people worldwide. We estimate that between eight to 10 million of these people reside in the U.S., Europe and Japan. 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). Each year 10,000 to 12,000 people die from HCV in the U.S. alone. It is estimated that by the end of this decade, the number of deaths due to HCV in the U.S. will surpass the number of deaths due to AIDS.

The present worldwide market for the treatment of chronic HCV is estimated at $3 billion and represents 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. 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) and a better sustained response with a 48 week course. Despite this improvement in response rates, approximately half of today's patient population in the U.S. and Europe does not respond to therapy and has no therapeutic alternative. Therefore, there is a significant unmet medical need in the treatment of HCV.

XTL-6865

XTL-6865 is being developed to prevent hepatitis C re-infection following a liver transplant and for the treatment of chronic HCV. XTL-6865 is a combination of two fully human monoclonal antibodies (Ab68 and Ab65) against the hepatitis C virus E2 envelope protein. 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 later this year for XTL-6865, the dual-MAb product.

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 single antibody Hepex-C product candidate (Ab68) was tested in a pilot clinical program, which included:

A Phase Ia/Ib Clinical Program in Patients with Chronic HCV, which demonstrated the safety and tolerability of using single and multi-doses of Ab68 up to 120mg for a 28 day dosing period. In terms of efficacy, eight out of 25 patients had at least a 90% reduction in HCV-RNA levels from pre-treatment levels following administration of Ab68. These trials provided safety data, as well as a preliminary indication of anti-viral activity in humans.

A Phase IIa Clinical Trial with Ab68 Following Liver Transplant, which demonstrated the safety and tolerability of Ab68 up to 240mg dosed for 12 weeks. Higher doses were not tested due to a clinical hold as a result of an intraoperative death of the first patient tested at the 480mg dose level (later determined by the medical examiner to be related to pulmonary emboli (blood clots in the lung)). The FDA later cleared the clinical hold, but we decided to discontinue the study and focus further development efforts on the dual anti-body product, XTL-6865. No other drug-related serious adverse events were reported during this study. The 120mg and 240mg dose groups had a significantly greater reduction in viral load than the placebo group during the first week when dosed daily. This effect was less evident when dosed less frequently than daily. This data provided additional evidence of anti-viral activity in immunosuppressed patients.

Based on this information, we had a pre-IND meeting with the FDA in October 2004 regarding XTL-6865, at which we presented data on Ab68 and Ab65, which had just successfully completed pre-clinical development. In April 2005, we submitted an IND to the FDA in order to commence a Phase Ia/Ib clinical trial later this year for XTL-6865, the dual-MAb product.

XTL-2125

XTL-2125 is the lead product candidate from our HCV-SM small molecule development program. XTL-2125, also referred to as BC2125, is a small molecule non-nucleoside polymerase inhibitor for the treatment of chronic hepatitis C.

Our HCV-SM small molecule development program is targeted at treating chronic hepatitis C utilizing novel non-nucleoside polymerase inhibitors. The program is focused on developing synthetic small molecules to be orally-administered to patients for the inhibition of HCV viral RNA replication. We have identified two lead candidates from two distinct chemical series of compounds, which we licensed from B&C Biopharm Co. Ltd.

Each candidate has exhibited activity against HCV in our proprietary in vitro and in vivo preclinical drug validation systems. In preliminary in vivo animal studies, acceptable toxicity profiles and oral absorption have been shown.

XTL-2125 is currently in formal toxicity testing, and we expect to make an IND filing to the FDA at the end of 2005 or early in 2006, assuming no toxicity concerns arise.

Proprietary Technology

Our proprietary Trimera technology 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 (the “Trimera hMAb Technology”); and/or

·	as an animal model of human disease (the “Trimera Model Technology”).

These models can be used for testing various approaches to treat human disease, including the development of new prophylactic and therapeutic products and have been used to discover the HepeX-B product and to screen the activity of XTL-6865 and XTL-2125.

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 U.S. 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.

Generally, patent applications in the U.S. 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 United States that claim technology also claimed by us, we may have 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. 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.

If patents are issued to others containing preclusive or conflicting claims and these claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. 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 and validity of third-party proprietary rights. Litigation would create substantial costs. An adverse outcome in litigation could subject us to significant liabilities to third parties and require us to seek licenses of the disputed rights from third parties or to cease using the technology if such licenses are unavailable.

HepeX-B

Three patent families presently cover HepeX-B, including the two human monoclonal antibodies comprising HepeX-B and its use to treat HBV infection. The patents cover both the treatment of chronic HBV patients with the antibodies and the prevention of liver re-infection in liver transplant recipients. Two of the families correspond each to a separate antibody comprising HepeX-B, with one family owned by us, and the second family jointly owned by Yeda and us. A third family concerns treatment of HBV patients with the combination of the antibodies and is owned by us.

Currently, HepeX-B and its use to treat hepatitis B infection is covered by several issued patents that will expire in 2017. The patents covering the combination of antibodies, if issued, will expire in 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 B infection in liver transplant patients.

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 patents covering Ab68 are exclusively licensed to us from the DRK-Blutspendedienst Baden-Wurttemberg (Ulm University).

The patents 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 U.S. patent that will expire in 2019. Additional patents, if issued, will expire between 2019 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.

XTL-2125

Two patent families presently cover our in-licensed anti-HCV small molecules. Each patent family concerns a different compound and covers both the structure of the compound and its use for the treatment of chronic HCV patients. The patent applications cover the unique structure of the molecules and their use as a pharmaceutical composition for the treatment of HCV. The patents covering XTL-2125 are exclusively licensed to us by B&C Biopharm Co. Ltd.

Currently, XTL-2125 and its use to treat the hepatitis C infection are covered by two patent families that, 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. We believe that we will have sufficient time to commercially utilize the inventions directed to the treatment and prevention of hepatitis C infection.

Trimera Technology

Three patent families presently cover the Trimera technology, each covering a different use of the basic technology. The patents cover the Trimera mouse, a method for its production, and its various applications. The patents are exclusively licensed to us by Yeda.

Currently, the Trimera mouse and its various applications are covered by several issued patents that will expire between 2010 and 2015. The patents covering the hepatitis animal model will expire between 2012 and 2016. We believe that we will have sufficient time to commercially utilize the inventions directed to the Trimera technology.

Other Intellectual Property Rights

We depend upon trademarks, trade secrets, know-how and continuing technological advances to develop and maintain our competitive position. To maintain the confidentiality of trade secrets and proprietary information, we require our employees, scientific advisors, consultants and collaborators, upon commencement of a relationship with us, to execute confidentiality agreements and, in the case of parties other than our research and development collaborators, to agree to assign their inventions to us. These agreements are designed to protect our proprietary information and to grant us ownership of technologies that are developed in connection with their relationship with us. These agreements may not, however, provide protection for our trade secrets in the event of unauthorized disclosure of such information.

Licensing Agreements and Collaborations

We have formed strategic alliances with a number of companies for the manufacture and commercialization of our products. Our current key strategic alliances are discussed below.

Cubist License

We have entered into a licensing agreement with Cubist dated June 2, 2004, 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 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.

Cubist paid us an initial up-front payment of $1 million upon the signing of the agreement, a further aggregate amount of $2 million as collaboration support to be paid in installments until the end of 2005, of which $1 million has been paid through March 31, 2005, and an additional amount of up to $3 million upon achievement of certain regulatory milestones.

Under the agreement, 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 shall 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.

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 10 years after the first commercial sale of HepeX-B on a country-by-country basis.

XTL-6865 License

XTL-6865 is a combination of two human monoclonal antibodies against HCV, Ab68 and Ab65.

We have exclusively licensed Ab68 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 have licensed Ab65 from Stanford University. Under the terms of this agreement, we have exclusive rights to Ab65 worldwide, excluding China. In China, we have co-exclusive rights with Applied Immunogenetics LLC. Under the terms of this agreement, we are obligated to make royalty payments to Stanford University on sales of product incorporating Ab65. We are also obligated to make a milestone payment upon receiving regulatory approval from the FDA.

In addition, 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.

XTL-2125 License

XTL-2125, the lead product candidate from our HCV-SM small molecule development program, has been licensed from B&C Biopharm Co. Ltd. Under the terms of the agreement, we have exclusive rights to XTL-2125 worldwide, with the exception of Asia, which is shared between the two companies, and B&C retains exclusive rights in Korea. Under the terms of the agreement, we are obligated to make certain milestone payments, as well as royalties 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 in any country where a licensed patent covers a product sold under the license or other licensed activity until the date on which the last licensed patent expires or until 12 years from the later of the first commercial sale of a product (or first receipts to us from other licensed activity) in such country, and in any other country until 12 years from the first commercial sale of a product (or first receipts to us from other licensed activity) in that country. Under the agreement, any assignment 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 fees: 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.

In the most recent amendment of the Yeda Agreement, in order to facilitate 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 Preventing Re-Infection with Hepatitis B in Liver Transplant Patients

The present standard-of-care for preventing hepatitis B in liver transplant patients is HBIg. Our strategy is to replace the existing standard of care with HepeX-B.

Key producers of HBIg in the U.S. are NABI Biopharmaceuticals Inc. and Bayer Biological Products, a division of Bayer Healthcare. Key HBIg producers in the European Union, or E.U., are Biotest AG, ZLB Behring, a subsidiary of CSL Ltd., and Berna Biotech AG. We are not aware of any competing monoclonal antibody against HBV currently in clinical development.

Several small molecules against HBV are presently being used in liver transplant patients. They presently include Lamivudine, a product of Glaxo Smith Kline PLC, and Hepsera, a product of Gilead Sciences Inc., and may include additional small molecule drugs presently in Phase III clinical trials. These drugs are commonly prescribed in combination with HBIg, and not as a replacement. However, several centers terminate HBIg use and maintain patients on small molecule therapy alone. To our knowledge, the impact of this approach on efficacy has not been established.

Competing Products for Preventing Re-Infection with Hepatitis C Following Liver Transplants

There is no approved therapy for preventing re-infection with HCV following liver transplants. Other companies that may be developing competing treatments to XTL-6865 are:

·	NABI, which develops a hepatitis C immunoglobulin (polyclonal antibody preparation). This therapeutic did not prevent re-infection in Phase I/II trial in liver transplant patients.

·	GenMab A/S, which is developing a single MAb against HCV. This antibody is presently in pre-clinical development.

Competing Products for Treatment of Chronic Hepatitis C

We believe that a significant number of drugs are currently under development that 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 Phase I stage of development. These compounds are developed by both established pharmaceutical companies, as well as by biotech companies. Examples of such companies are: Abbott Laboratories, Anadys Pharmaceuticals, Inc., Boehringer Ingelheim International GmbH, Bristol-Myers Squibb Company, F. Hoffman-LaRoche & Co., GlaxoSmithKline plc, Johnson & Johnson, Merck & Co., Inc., Pfizer Inc. and Schering-Plough Corporation, Chiron Corporation, Gilead Sciences, Inc., Human Genome Sciences, Inc., Idenix Pharmaceuticals, Inc., InterMune, Inc., Isis Pharmaceuticals, Inc., SciClone Pharmaceuticals, Inc. and Vertex Pharmaceuticals 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.

Supply and Manufacturing

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

HepeX-B

For our current HepeX-B clinical trial, we entered into a contract manufacturing agreement in 2001 with a U.S.-based manufacturer for the supply of our drug product. With the initiation of the license agreement with Cubist, the future supply of the clinical and commercial material will be manufactured by a contract manufacturer to be selected by Cubist, which will be responsible for developing a production process for high scale drug supply.

XTL-6865

In 2000, we entered into a contract manufacturing agreement with a U.S.-based manufacturer for the supply of the HepeX-C drug product, the single antibody version of XTL-6865, and subsequently under that 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. For commercial supply of XTL-6865, we intend to contract with a manufacturer to develop a production process for high scale drug supply.

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. For commercial supply of XTL-2125, we intend to contract with a manufacturer to develop a production process for high scale drug supply.

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 current Good Manufacturing Practice, or 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 U.S. 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 challenges 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.

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, 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 United States, 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 new drug application, or 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 a Phase IV to conduct post-marketing studies for purposes of gathering additional evidence of safety and efficacy.

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 in animals and in humans 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 in animals 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 United States, we must receive marketing authorization from the appropriate 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 E.U., registration procedures are available to companies wishing to market a product in more than one E.U. member state. If the regulatory authority is satisfied that a company has presented adequate evidence of safety, quality and efficacy, the regulatory authority will grant a marketing authorization. This foreign regulatory approval process involves all of the risks associated with FDA approval discussed above. Our current strategy does call for us to market our drug candidates outside the U.S.

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 United States or abroad.

Organizational structure

Our wholly-owned subsidiary, XTL Biopharmaceuticals, Inc., is incorporated in Delaware and has its principal place of business in Newton, Massachusetts, U.S.A.

Property, Plants and Equipment

We lease an aggregate of approximately 1,870 square meters of office and laboratory facilities in Rehovot, Israel. The lease in Rehovot expires in December 2006, with an option to extend for an additional year through December 31, 2007.

In addition, XTL Biopharmaceuticals, Inc. leases approximately 60 square meters of office space in Newton, Massachusetts, U.S.A. and approximately 145 square meters in Durham, North Carolina, U.S.A. The lease in Newton expires on August 31, 2005, and the lease in Durham expires on October 31, 2005. We have an option to renew our lease agreements, as needed.

We anticipate that these facilities will be sufficient for our needs through 2006. 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. As of December 31, 2004, the guarantee is secured by pledge on a long-term deposit amounting to $113,000 linked to the Israeli Consumer Price Index (“CPI”), which is included in the balance sheet as a restricted long-term deposit.

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 at the beginning of this registration statement.

You should read the following discussion and analysis in conjunction with our audited consolidated financial statements, including the related notes, prepared in accordance with U.S. GAAP for the years ended December 31, 2004, 2003 and 2002, respectively, contained in “Item 18 - Financial Statements” and with any other selected financial data included elsewhere in this registration statement.

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, 2004, 2003, 2002, 2001 and 2000. We have derived the selected financial data for the fiscal years ended December 31, 2004, 2003, and 2002, and as of December 31, 2004 and 2003, from our audited financial statements, included with this registration statement at “Item 18 - Financial Statements.” We have derived the selected financial data for fiscal years ended December 31, 2001 and 2000 and as of December 31, 2002, 2001 and 2000, from other audit financial statements not appearing in this report, which have been prepared in accordance with U.S. 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.”

	Years ended December 31,
	2004			2003			2002			2001			2000
	(in thousands, except per share amounts)
Statement of Operations Data:
Revenues:
Reimbursed out of pocket expenses	$	3,269		$	—		$	—		$	—		$	—
License		185			—			—			—			—
		3,454			—			—			—			—
Cost of revenues:
Reimbursed out of pocket expenses		3,269			—			—			—			—
License		32			—			—			—			—
		3,301			—			—			—			—

Gross margin		153			—			—			—			—

Research and development:
Research and development costs		11,985			13,668			13,231			12,187			6,002
Less participations		—			3,229			75			1,133			1,821
		11,985			10,439			13,156			11,054			4,181

General and administrative		4,134			3,105			3,638			3,001			2,334
Business development costs		810			664			916			1,067			486
Impairment of asset held for sale		—			354			—			—			—

Operating loss		(16,776	)		(14,562	)		(17,710	)		(15,122	)		(7,001	)

Other income (expense):
Financial income, net		352			352			597			2,448			1,517
Taxes on income		(49	)		(78	)		(27	)		—			(7	)

Net loss	$	(16,473	)	$	(14,288	)	$	(17,140	)	$	(12,674	)	$	(5,491	)

Net loss per ordinary share
Basic and diluted	$	(0.12	)	$	(0.13	)	$	(0.15	)	$	(0.11	)	$	(0.13	)*
* Restated

	As of December 31,
		2004		2003		2002		2001		2000
	(in thousands)
Balance Sheet Data:
Cash, cash equivalents, bank deposits and marketable securities	$	22,924	$	22,262	$	35,706	$	52,188	$	64,969
Working capital		20,240		19,967		33,396		50,433		53,752
Total assets		25,624		24,853		38,423		55.106		67,876
Long-term obligations		2,489		1,244		1,017		526		707
Total shareholders’ equity		19,602		20,608		34,830		51,953		64,586

Overview

We are a biopharmaceutical company engaged in the acquisition, research, development and commercialization of pharmaceutical products for the treatment of infectious diseases, particularly the prevention and treatment of hepatitis B and C.

We currently have three products under development:

HepeX-B is being developed to prevent re-infection with hepatitis B, known as HBV, in liver transplant patients. HepeX-B is a mixture of two fully human monoclonal antibodies, which binds to the HBV surface antigen, or HBsAg. HepeX-B is currently in a Phase IIb trial in liver transplant patients. Worldwide rights for HepeX-B were licensed to Cubist in 2004, in exchange for certain milestone payments and future royalties on Cubist’s net sales.

XTL-6865 is being developed to prevent hepatitis C, known as HCV, re-infection following a liver transplant and for the treatment of chronic HCV. 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. 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 later this year for XTL-6865, the dual-MAb product.

XTL-2125 is the lead product candidate from our HCV-SM small molecule development program. XTL-2125 is a small molecule non-nucleoside polymerase inhibitor for the treatment of chronic hepatitis C. XTL-2125 is currently in formal toxicity testing, and we expect to make an IND filing to the FDA at the end of 2005 or early in 2006, assuming no toxicity concerns arise.

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 are a development stage company and have devoted substantially all of our efforts to the discovery, development and in-licensing of drug candidates. We have incurred negative cash flow from operations each year since our inception. 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, and may include certain additional payments contingent upon achievement of regulatory milestones and royalties if our collaboration is successful. We recognize the license fee revenues from our agreement with Cubist ratably over the expected term 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.

Our cost of revenues consist of costs associated with the Cubist program 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 our out-licensed product candidate. 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, facilities-related and other expenses relating to the design, development, testing, and enhancement of our product candidates, as well as expenses related to in-licensing and acquisition of new 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 and for seeking new research and development collaborations. 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 and warrants. Compensation expense for fixed award options and warrants granted to employees, directors and consultants represents the intrinsic value (the difference between the stock price of the common stock and the exercise price of the options or warrants) of the options and warrants at the date of grant. For variable awards, we consider the difference between the stock price at reporting date and the exercise price, in the case where a measurement date has not been reached. The compensation cost is recorded over the respective vesting periods of the individual stock options and warrants. The expense is included in the respective categories of expense in the statement of operations. We may incur significant non-cash compensation expense in the future, as a result of adopting the revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment,” which we elected to adopt on January 1, 2005 (see “Recently Issued Accounting Standards” below).

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, 2004 and 2003

Revenue. Revenue for the year ended December 31, 2004, was $3,454,000, as compared to no revenue for the year ended December 31, 2003. Revenue for the year ended December 31, 2004, was due to $3,269,000 associated with reimbursement for development expenses for HepeX-B that were incurred pursuant to our licensing agreement with Cubist, as well as to $185,000 in licensing revenue pursuant to our agreement with Cubist. We signed our agreement with Cubist in June 2004.

We expect our revenue to increase over the next year as we continue to develop HepeX-B and as we benefit from further reimbursement for development expenses and a full-year of licensing revenue pursuant to our agreement with Cubist.

Cost of Revenues. Cost of revenues for the year ended December 31, 2004, was $3,301,000, as compared to no cost of revenues for the year ended December 31, 2003. Cost of revenues for the year ended December 31, 2004, was due to $3,269,000 in development expenses for HepeX-B that were incurred pursuant to our licensing agreement with Cubist, as well as due to $32,000 in licensing expense pursuant to our licensing agreement with Yeda.

We expect our cost of revenues to increase over the next year as we continue to develop HepeX-B, pursuant to our agreement with Cubist. In addition, we expect to incur a full year of expense amortization of Yeda’s portion of our licensing fee pursuant to our agreement with Cubist.

Research and Development Costs. Research and development costs decreased by $1,683,000 to $11,985,000 for the year ended December 31, 2004, as compared to expenses of $13,668,000 for the year ended December 31, 2003. The decrease in research and development costs was due primarily to the absence of approximately $1,565,000 in expenses related to early stage discovery research activities related to infectious diseases, a $735,000 decrease in expenses related to the development and clinical program of HepeX-B, due to the initiation of the collaboration agreement with Cubist and the subsequent inclusion of development costs related to HepeX-B in Cost of Revenues above and a decrease of approximately $835,000 in expenses related to the XTL-6865 development and clinical program. This decrease was partially offset by an approximate $1,452,000 increase in expenses associated with our HCV-SM small molecule development program (primarily XTL-2125).

We expect our research and development costs to decrease over the next year as a result of the inclusion of development costs related to HepeX-B in Cost of Revenues above and following the implementation of our 2005 restructuring plan, as described in “Trend Information” below.

Participations. There were no participations from the Office of the Chief Scientist for the year ended December 31, 2004, as compared to participations of $3,229,000 in for the year ended December 31, 2003. Participations received in 2003 were due to the Office of the Chief Scientist’s decision to approve our grant applications that we had submitted in 2003 and in 2002. We ceased requesting grants from the Office of the Chief Scientist in 2004 due to the potential contingent liability associated with the transfer of manufacturing rights outside Israel.

General and Administrative Expenses. General and administrative expenses increased by $1,029,000 to $4,134,000 for the year ended December 31, 2004, as compared to expenses of $3,105,000 for the year ended December 31, 2003. The increase in general and administrative expenses was due primarily to a $646,000 increase in payroll and related costs, which included a $382,000 charge related to the termination of our former Chief Executive Officer pursuant to his employment agreement as well to increased expenses related to patent registration fees and professional fees.

We expect our general and administrative costs to decrease over the next year following the implementation of our 2005 restructuring plan, as described in “Trend Information” below.

Business Development Costs. Business development costs increased by $146,000 to $810,000 for the year ended December 31, 2004, as compared to expenses of $664,000 for the year ended December 31, 2003. The increase in business developments costs was due primarily to a $244,000 increase in professional fees associated with our agreement with Cubist that was signed in June 2004, offset by reduced travel-related expenses.

Impairment of Asset Held For Sale. There was no impairment charge recorded for the year ended December 31, 2004, as compared $354,000 in impairment charges for the year ended December 31, 2003. The impairment charge recorded for the year ended December 31, 2003, was as a result of our decision to sell certain assets associated with early stage discovery research activities, which we decided to cease during 2003.

Financial Income. Financial income for the year ended December 31, 2004, was $352,000, as compared to financial income of $352,000 for the year ended December 31, 2003. Financial income was flat due to reduced interest income earned on lower average cash balances for the year ended December 31, 2004, as compared to the year ended December 31, 2003, offset by an absence of foreign exchange losses which we incurred in 2003.

Income Taxes. Income tax expense decreased by $29,000 to $49,000 for the year ended December 31, 2004, as compared to expenses of $78,000 for year ended December 31, 2003. Our Income tax expense is attributable to taxable income from the continuing operations of our subsidiary in the United States. This income is eliminated upon consolidation of our financial statements.

Years Ended December 31, 2003 and 2002

Revenue. We did not have any revenue for the years ended December 31, 2003, and December 31, 2002.

Cost of Revenues. We did not have any cost of revenue expenses for the years ended December 31, 2003 and December 31, 2002.

Research and Development Costs. Research and development costs increased by $437,000 to $13,668,000 for the year ended December 31, 2003, as compared to expenses of $13,231,000 for the year ended December 31, 2002. The increase in research and development costs was due primarily to an increase of approximately $2,796,000 in expenses related to the XTL-6865 development and clinical program, and a $794,000 increase in expenses associated with our HCV-SM small molecule development program (primarily XTL-2125). This increase was partially offset by a decrease of approximately $2,905,000 in expenses related to early stage discovery research activities related to infectious diseases, which we ceased in 2003, and due to a $248,000 decrease in expenses related to the development and clinical program of HepeX-B.

Participations. Participations increased by $3,154,000 to $3,229,000 for the year ended December 31, 2003, as compared to $75,000 for the year ended December 31, 2002. The increase in participations was due to the Office of the Chief Scientist’s decision to approve our grant applications that we had submitted in the current and prior year.

General and Administrative Expenses. General and administrative expenses decreased by $533,000 to $3,105,000 for the year ended December 31, 2003, as compared to expenses of $3,638,000 for the year ended December 31, 2002. The decrease in general and administrative expenses was due primarily to a $460,000 decrease in employee compensation expenses and a $370,000 decrease in corporate communications expenses. This decrease was partially offset by a one-time $344,000 expense related to our annual general meeting that took place in June 2003.

Business Development Costs. Business development costs decreased by $252,000 to $664,000 for the year ended December 31, 2003, as compared to expenses of $916,000 for the year ended December 31, 2002. The decrease in business development costs was due primarily to a $159,000 decrease in employee compensation expenses associated with the departure of one of our business development staff.

Impairment of Asset Held for Sale. For the year ended December 31, 2003, we recorded a $354,000 impairment charge as a result of our decision to sell certain assets associated with early stage discovery research activities related to infectious diseases which we decided to cease during 2003. There was no impairment charge recorded for the year ended December 31, 2002.

Financial Income. Financial income for the year ended December 31, 2003 decreased by $245,000 to $352,000 as compared to financial income of $597,000 for the year ended December 31, 2002. The decrease in financial income resulted from a lower level of invested funds and the general decline in market interest rates when compared to the prior year.

Income Taxes. Income tax expense increased by $51,000 to $78,000 for the year ended December 31, 2003, as compared to expenses of $27,000 for year ended December 31, 2002. Our Income tax expense is attributable to taxable income from the continuing operations of our subsidiary in the United States. This income is eliminated upon consolidation of our financial statements.

2003 and 2002 Restructurings

In 2003, we implemented and completed a restructuring, which we sometimes refer to as the “2003 restructuring.” As a result of this restructuring, we ceased all early-stage discovery research activities related to infectious diseases. The 2003 restructuring included a 20-person reduction in our workforce in Israel, 18 of whom were in research and development and two of whom were in general and administrative. As part of the 2003 restructuring, we took a charge in 2003 of $74,000, relating to employee dismissal costs, $58,000 of which was included in research and development costs and $16,000 of which was included in general and administrative expenses. We paid all of these amounts in 2003. As part of the 2003 restructuring, we reevaluated our long-lived assets in accordance with FAS No. 144, “Accounting for the Impairment or Disposal of Long Lived Assets,” and recorded a non-cash impairment charge of $354,000 of fixed assets for the year ended December 31, 2003.

During 2002, we implemented and completed a restructuring, which we sometimes refer to as the “2002 restructuring.” As a result of this restructuring, we reduced certain early stage research expenditures and focused our efforts on our later stage products. The 2002 restructuring included a 16-person reduction in our workforce, primarily in Israel, 11 of whom were in research and development, four of whom were in general and administrative and one of whom was in business development. As part of the restructuring, we took a charge in 2002 of $147,000, relating to employee dismissal costs, $65,000 of which was included in research and development costs, $68,000 of which was included in general and administrative expenses and $14,000 of which was included in business development expenses. We paid all of these amounts in 2002.

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 U.S. generally accepted accounting principles. 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:

Functional Currency. In preparing our consolidated financial statements, we translate non-U.S. dollar amounts in the financial statements into U.S. dollars. Under relevant accounting guidance, the treatment of any gains or losses resulting from this translation is dependent upon management’s determination of the functional currency. The functional currency is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting our business. Generally, the currency in which a company transacts a majority of its transactions would be considered the functional currency. The currency of the primary economic environment in which our operations are conducted is the U.S. dollar. We generate all of our revenues in U.S. dollars, and significant parts of our operating expenses and capital expenditures are in U.S. dollars. In addition, we hold most of our cash, cash equivalents, bank deposits and marketable securities in U.S. dollars. Thus, our functional currency is the U.S. dollar.

Since the U.S. dollar is the primary currency in the economic environment in which we operate, monetary accounts maintained in currencies other than the U.S. dollar (principally cash and liabilities) are re-measured using the representative foreign exchange rate at the balance sheet date. Operational accounts and non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction.

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 terms, we are required to defer all revenue from multiple-element arrangements if sufficient objective and reliable evidence of fair value does not exist for the allocation of revenue to the various elements of the arrangement. 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.

In addition, Cubist has requested that we provide development services that are reimbursed by them. As required by EITF 01-14 “Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred,” amounts paid by us, as a principal, as “out-of-pocket” costs are included in the cost of revenues as reimbursable out-of-pocket expenses, and the reimbursements we receive as a principal are reported as reimbursed out-of-pocket revenues.

Stock Compensation. We have granted options to employees, directors and consultants, as well as warrants to other third parties. We account for stock-based employee compensation arrangements using the intrinsic value method in accordance with provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” or APB 25, and Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” or FIN 28, and we comply with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” or FAS 123 as amended by FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” or FAS 148.

Under APB 25, compensation expense is based on the difference, if any, on the date of grant, between the fair value of our ordinary shares and the exercise price. When the number of the underlying shares or the exercise price is not known at the grant date, we update each period the compensation expenses until such data becomes known.

The alternative method to the intrinsic value method of accounting for stock-based compensation is the fair value approach prescribed by FAS 123, as amended by FAS 148. If we followed the fair value approach, we would be required to record deferred compensation based on the fair value of the stock option at the date of grant. The fair value of the stock option is required to be computed using an option-pricing model, such as the Black-Scholes option valuation model, at the date of the stock option grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option.

We account for equity instruments issued to non-employees in accordance with the fair value method prescribed by FAS 123 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.

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. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. We have fully offset our Israeli deferred tax assets with a valuation allowance. Our lack of earnings history and the uncertainty surrounding our ability to generate taxable income in the future were the primary factors considered by management in establishing the valuation allowance. Our current income tax expense results from taxes imposed on our U.S.-based subsidiary.

Paragraph 9(f) of FAS 109, “Accounting for Income Taxes”, or FAS 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. We have complied with FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or FAS 144, since January 1, 2002. Pursuant to FAS 144, long-lived 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 FAS 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.

Recently Issued Accounting Standards

FAS 123 (Revised 2004) Share-based Payment. In December 2004, the Financial Accounting Standards Board, or FASB, issued the revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment,” or FAS 123R, which addresses the accounting for share-based payment transactions in which we obtain employee services in exchange for (a) our equity instruments or (b) liabilities that are based on the fair value of our equity instruments or that may be settled by the issuance of such equity instruments. 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 will be effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Early adoption of FAS 123R is encouraged.

On April 15, 2005, the Securities and Exchange Commission (the “SEC”) approved a new rule allowing companies to implement FAS 123R at the beginning of their first annual period, rather than the first interim period, beginning after June 15, 2005. The SEC’s new rule does not change the accounting required by FAS 123R; it only changes the dates of compliance with the standard.

We implemented FAS 123R effective January 1, 2005. FAS 123R applies to all awards granted or modified after the statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the statement’s 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.

We estimate that the cumulative effect of adopting FAS 123R as of January 1, 2005, based on the awards outstanding as of December 31, 2004, will be approximately $22,000. We expect that upon the adoption of FAS 123R, we will apply the modified prospective application transition method, as permitted by the statement. Under such transition method, upon the adoption of FAS 123R, our financial statements for periods prior to the effective date of the statement will not be restated.

We expect that this statement may have material effect on our financial position and results of operations. The impact of this statement on our financial statements or results of operations in 2005 and beyond will depend upon various factors, among them our future compensation strategy.

FAS 153 “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29.” In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29” or FAS 153. FAS 153 amends APB Opinion No. 29, Accounting for Nonmonetary Transactions (Opinion 29). The amendments made by FAS 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the exception for non-monetary exchanges of similar productive assets and replace it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The provisions in FAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after December 15, 2005 (January 1, 2006 for us). Early application of the FAS 153 is permitted. The provisions of FAS 153 shall be applied prospectively. We do not expect the adoption of FAS 153 to have a material effect on our financial statements or our results of operations.

Impact of Inflation and Currency Fluctuations

We generate all of our revenues and hold most of our cash, cash equivalents, bank deposits and marketable securities in U.S. dollars. While a substantial amount of our operating expenses are in U.S. 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 U.S. 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 U.S. 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 35%, which was reduced to 34% in January 2005 and will be further reduced to 32% in 2006 and 30% in 2007. 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 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. These benefits should result in income recognized by us being tax exempt or taxed at a lower rate for a specified period after we begin to report taxable income and exhaust any net operating loss carry-forwards. However, these benefits may not be applied to reduce the U.S. federal tax rate for any income derived by our U.S. subsidiary. There can be no assurance that such tax benefits will continue in the future at their current levels or otherwise.

As of December 31, 2004, we did not have any taxable income. As of December 31, 2004, our net operating loss carry-forwards for Israeli tax purposes amounted to approximately $92 million. Under Israeli law, these net-operating losses may be carried forward indefinitely and offset against future taxable income, including capital gains, 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" in this Item 5 below.

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, 2004, we had received net proceeds of $45.7 million from our initial public offering, net proceeds of $15.4 million from the recent placing and open offer transaction, net proceeds of approximately $43.3 million from various private placement transactions, and proceeds of $0.5 million from the exercise of options and warrants.

Following the initiation of our 2005 restructuring discussed below, we believe that our current cash, cash equivalents, and short-term bank deposits will provide us with capital to support our clinical and pre-clinical programs for our drug candidates within our portfolio through the end of 2006.

As of December 31, 2004, we had $22.9 million in cash, cash equivalents, and short-term bank deposits, an increase of $0.6 million from December 31, 2003. Cash used in operating activities for the year ended December 31, 2004, was $14.5 million, as compared to $13.3 million for the year ended December 31, 2003. 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, 2004, net cash used in investing activities of $7.7 million was primarily the result of making short-term bank deposits following the placing and open offer transaction that closed in August 2004. For the year ended December 31, 2004, net cash provided by financing activities of $15.4 million was primarily the result of the net proceeds of $15.4 million generated from our placing and open offer transaction that closed in August 2004.

We believe that our $22.9 million in cash, cash equivalents and short-term bank deposits as of December 31, 2004, will be sufficient to enable us to meet our planned operating needs and capital expenditures through the end of 2006. Our cash and cash equivalents and short-term securities, as of December 31, 2004, are invested in highly liquid investments such as cash and short-term bank deposits. As of December 31, 2004, 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 throughout 2005 will continue to be funded from existing cash, cash equivalents and short-term bank deposits.

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 stockholders 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.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.

Obligations and Commitments

As of December 31, 2004, we have known contractual obligations, commitments and contingencies of $2,352,000. Of this amount, $1,129,000 relates to research and development agreements, all of which is due within the next year. The additional $1,223,000 relates to our current operating lease obligations, of which $381,000 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		More than 3 years
Research & development agreements	$	1,129,000	$	1,129,000	$	—	$	—
Operating leases		1,223,000		381,000		842,000		—
Total	$	2,352,000	$	1,510,000	$	842,000	$	—

Additionally, we have undertaken to make contingent milestone payments to certain licensors of up to approximately $14.5 million over the life of the licenses, of which $8.8 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.

In addition, we have undertaken to make contingent payments to the Office of the Chief Scientist of up to approximately $16.1 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.

Research and Development, Patents and Licenses

Research and development costs for the years ended December 31, 2004, 2003 and 2002 were $11,985,000, $13,668,000 and $13,231,000, respectively, not including government participations of $0 in 2004, $3,229,000 in 2003 and $75,000 in 2002. Research and development expenses 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, as well as expenses related to in-licensing of new product candidates.

Israeli Government Research and Development Grants

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 received grants from the Office of the Chief Scientist for the years ended December 31, 2004, 2003 and 2002 of $0, $3,229,000 and $75,000, respectively. We have not applied for grants from the Office of the Chief Scientist for the years 2004 and 2005.

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, 2004, the maximum amount of the contingent liability in respect of royalties related to ongoing projects is $3,683,000.

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 shall 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.

We have received the approval of the Israeli government 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, 2004, the aggregate amount received from the Office of the Chief Scientist for the financing of the HepeX-B project including interest and LIBOR rate is equal to $4,145,000. At December 31, 2004, the maximum amount of the contingent liability in respect of royalties related to HepeX-B product is $12,435,000.

Trend Information

Industry Trends

There is a general trend towards consolidation and increased competitiveness in the pharmaceutical industry. Our competitors include pharmaceutical companies and biotechnology companies, as well as universities and public and private research institutions. 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 technologies and products that could render our technologies or our drug candidates obsolete or noncompetitive.

2005 Restructuring Plan

On March 31, 2005, we announced that we are implementing a restructuring plan designed to focus our resources on the development of our lead programs, XTL-6865 and XTL-2125, with the goal of moving these programs through to clinical proof of concept. The plan will extend our cash resources through the end of 2006.

The key points of the plan include:

·	a reduction in headcount of approximately 20 individuals, primarily in research and development, as our programs advance into the clinical stages of development and our commercialization partner for HepeX-B, Cubist, takes over more responsibility for its development;

·	a streamlining of operations across the business; and

·	the deferral of all research and development activity not supporting the lead clinical programs until proof of concept has been achieved in at least one of the two lead programs.

In order to diversify our clinical product portfolio, strengthen our franchise in infectious diseases and broaden our clinical pipeline, we will seek to in-license or acquire complementary product candidates.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The following sets forth information with respect to our directors and executive officers as of March 31, 2005.

Name	Age	Position
Michael S. Weiss	39	Interim Chairman of the Board of Directors
Rusi K. Kathoke	57	Non executive and external Director
William J. Kennedy, Ph.D	60	Non executive Director
Patricia A. Smith, Ph.D	47	Non executive and external Director
Jonathan R. Spicehandler, M.D	56	Non executive Director
Ben Zion Weiner, Ph.D	61	Non executive Director
Jonathan Burgin	43	Chief Financial Officer
Shlomo Dagan, Ph.D	54	Chief Scientific Officer
Neil Graham, M.B.B.S., M.D, M.P.H	46	Chief Medical Officer

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. 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. Mr. Weiss is on the Board of Directors of Genta, Inc., a publicly-traded biotechnology company. 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.

Rusi K. Kathoke is a Chartered Accountant and has served as a director of our company since December 2000. As the Chief Financial Officer of BTG plc since 1986, Mr. Kathoke was responsible for negotiating BTG’s employee and management buyout in 1992, for managing its subsequent listing on the London Stock Exchange in 1995, demerging and listing a subsidiary in 1998 and raising further funds from institutional investors. BTG, which is based in London and Philadelphia finds, develops and commercializes technologies, many of which are in the life sciences field. Mr. Kathoke has over 20 years of experience investing in technology, managing early and development stage companies, fund raising and realizing value through the creation, protection and commercialization of intellectual property. He is also a trustee of the Triangle Trust, a charitable foundation established to assist the disabled and disadvantaged.

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.

Patricia A. Smith has served as a director of our company since December 2000. Dr. Smith was a practicing physician in hospital cardiology and general medicine for several years before entering the pharmaceutical industry. She has held senior positions in international clinical development and international marketing at Zeneca plc and gained experience in business development and business planning. In 1997, she left her role as U.K. Marketing Director at Zeneca having been involved in 11 drug registrations and product launches in three years, with annual sales of £125 million, to establish an independent healthcare consultancy working with biotechnology companies, big pharma and investment banks to evaluate healthcare opportunities. Dr Smith is CEO of Bio-Medical Research Ltd, an Irish company that designs, develops and distributes EMS, TENS and fitness equipment. Products are available by medical prescription from the medical devices division and by over the counter sale from the consumer division. She is also a director of Paratek Pharmaceuticals (U.S.A), an antibiotic development company. Dr. Smith is a member of the Royal College of Physicians (U.K.).

Jonathan R. Spicehandler has served as a director of our company since February 2005. Dr. Spicehandler is the chairman of Schering-Plough Research Institute, the pharmaceutical research arm of Schering-Plough Corporation, a research-based company engaged in the discovery, development, manufacturing and marketing of pharmaceutical and health care products worldwide. Dr. Spicehandler assumed his present position in March 2002. He serves as a scientific advisor to the Schering-Plough Operating Committee as well as to senior management. Dr. Spicehandler most recently was President, Schering-Plough Research Institute. He joined the company in 1982 as senior director - immunology and anti-infective clinical research in 1991; Vice President - operations in 1992; and President, Schering-Plough Research Institute in 1993. Dr. Spicehandler received his B.A. in biology from Union College in New York and his M.D. degree, cum laude, from the St. Louis University School of Medicine.

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.A. He received his Ph.D in Chemistry from the Hebrew University of Jerusalem. Since 2002 he has been appointed to Group Vice President, Global Products at Teva, 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.

Jonathan Burgin is a C.P.A. and has served as Chief Financial Officer of the Company since August 1999. Before joining the Company, he was the Chief Financial Officer at YLR Capital Markets, a leading Israeli investment bank which was publicly traded on the Tel Aviv Stock Exchange. From 1984 to 1997, Mr. Burgin worked at Kesselman & Kesselman, an accounting firm and a member of PricewaterhouseCoopers International Limited. During the last three years of his tenure there, Mr. Burgin served as Senior Manager.

Shlomo Dagan has served as Chief Scientific Officer of the Company since May 1994. Before joining the Company, Dr. Dagan was Acting Director of Molecular Biology at ImClone Systems. His expertise includes work on cytokine muteines, chimeric, single chain and humanized antibodies. Dr. Dagan also served as Department Head of Clinical Reagents Production at Biomakor from 1974 to 1983, where his group worked on RIA kits, clinical reagents and production of control materials. Dr. Dagan's doctorate in cell biology/immunology was received from the Weizmann Institute of Science.

Neil Graham has served as Chief Medical Officer of the Company since September 2002. Before joining the Company, Dr. Graham was Vice President, Clinical Research and Medical Affairs at Tibotec-Virco N.V., a subsidiary of Johnson and Johnson Corporation involved in the development of treatments for HIV. Prior to that, Dr. Graham worked at GlaxoWellcome, Inc. (now GlaxoSmithKline) as Director of HIV Programs in the U.S. Before moving to industry, Dr. Graham spent 7 years as a faculty member in Infectious Diseases Epidemiology at Johns Hopkins Medical Institutions in Baltimore. He received his Medical degree, Masters of Public Health and Doctorate in Epidemiology from the University of Adelaide, Australia.

Compensation

The aggregate compensation paid by us and by our wholly-owned subsidiary to all persons who served as directors or senior management for the year 2004 (12 persons) was approximately $2.4 million. This amount includes payments made for social security, pension and disability insurance premiums, payments made in lieu of statutory severance, payments for continuing education plans, payments made for the redemption of accrued vacation, as well as amounts expended by us for automobiles made available to our officers. In addition, this amount includes a payment that was made to our former Chief Executive Officer in February 2005 for severance and vacation redemption that had been accrued through December 31, 2004.

During 2004, we granted a total of 480,000 options to purchase ordinary shares to our directors and senior management, as a group. These options are exercisable at a range of between $0.236 to $0.485 per share, and expire ten years after their respective date of grant. In 2004, 300,000 of these options were forfeited, and in 2005, 157,500, of these options were forfeited. The remaining 22,500 options are exercisable at $0.301 per share.

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 six members, including our interim 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, Jonathan Spicehandler and Michael S. Weiss. 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 the Articles. Such directors appointed by the board shall be in office until the next annual general meeting of the shareholders in which their term of office shall expire. In November 2004, our board of directors appointed Michael Weiss to serve as one of our directors. In February 2005, at an extraordinary general meeting of our shareholders, Ben Zion Weiner, William Kennedy and Jonathan Spicehandler were appointed to serve as directors of our company. Unless they resign before the end of their term or are removed in accordance with our Articles of Association, all our directors, other than our external directors, will serve as directors until our next annual general meeting of shareholders.

Patricia Smith and Rusi Kathoke serve as external directors pursuant to the provisions of the Israeli Companies Law for a second three-year term ending in December 2006, as more fully described below. After this date, their term of service may not be renewed.

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

None of our directors are entitled to receive any severance or similar benefits upon termination of his or her service.

Our Articles of Association permit us to maintain directors and officers’ liability insurance and to indemnify our directors and officers for actions performed on behalf of us, subject to specified limitations. We maintain a directors and officers insurance policy which covers the liability of our directors and officers as allowed under Israeli Companies Law.

External and Independent Directors

The 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. External directors may be removed only by the same percentage of shareholders as is required for their election, or by a court, and then only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their 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.

Patricia Smith and Rusi Kathoke 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.

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. 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 intend to comply with both of these requirements not later than our initial listing.

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 four non-executive directors: The audit committee is chaired by Rusi Kathoke, who serves as the audit committee financial expert, with Ben Zion Weiner, William Kennedy and Patricia Smith 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 are currently preparing a written charter for our audit committee, setting forth its responsibilities as outlined by Nasdaq rules and the regulations of the SEC, which we intend to adopt not later than our initial listing with Nasdaq. In addition, our audit committee is developing 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, which will be in place no later than our initial listing.

Approval of Compensation to Our Officers

The Companies Law prescribes that compensation to officers must be approved by a company's board of directors.

Our remuneration committee consists of four non-executive directors: Michael Weiss (Chairman of the remuneration committee), William Kennedy, Rusi Kathoke and Patricia Smith. The responsibilities of the remuneration 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 remuneration committee’s policies are that senior managers should receive compensation which is appropriate given their performance, level of responsibility and experience. Remuneration 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 remuneration committee reviews surveys on executive pay, obtains external professional advice and considers individual performance.

Internal Auditor

Under the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company's actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor cannot be an office holder, an interested party or a relative of an office holder or interested party, and he or she may not be the company's independent accountant or its representative. We comply with the requirement of the Israeli Companies Law relating to internal auditors. Our internal auditors examine whether our various activities comply with the law and orderly business procedure.

Compliance with Nasdaq Corporate Governance Requirements

Under the Nasdaq corporate governance rules, foreign private issuers are exempt from many of the requirements if they instead elect to comply with home country practices and disclose where they have elected to do so. As noted above, we are currently evaluating the composition of our board of directors and our audit committee and intend to satisfy the respective Nasdaq and SEC requirements no later than our initial listing. Our board of directors and our audit committee are preparing and intend to adopt a written charter for the audit committee setting forth the responsibilities of the audit committee as required by the SEC and Nasdaq.

We currently have in place nomination and remuneration committees, as discussed in more detail above. Based on the current composition and responsibilities of our nomination committee and remuneration committee, we believe these committees will substantially address the concerns underlying the Nasdaq corporate governance rules, although they may not comply with the technical requirements.

Finally, we do not intend to adopt a separate code of ethics applicable to all directors, executive officers and employees, as we believe our current corporate governance structure, the existence of the internal auditor, the existing culture of our directors and senior management, and the requirements of Israeli law provide assurances that we will maintain applicable standards.

Employees

As of March 31, 2005, we had 45 full-time 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, 2004, 2003, 2002, the number of our employees engaged in the specified activities, by geographic location, are presented in the table below.

	Year ended December 31,
	2004		2003		2002
Research and Development
Israel		44		42		57
U.S.		8		5		4
		52		47		65
Financial and general management
Israel		7		6		7
U.S.		—		—		—
		7		6		7
Business development
Israel		—		—		—
U.S.		1		2		2
		1		2		2
Total		60		55		74

Average number of full-time employees		58		68		89

Share Ownership

Share Ownership by Directors and Senior Management

The following table sets forth certain information as of March 31, 2005, 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 after March 31, 2005.

	Amount and nature of beneficial ownership
	Ordinary shares beneficially owned excluding options		Options exercisable within 60 days after March 31, 2005		Total ordinary shares beneficially owned		Percent of ordinary shares beneficially owned
Michael S. Weiss Interim Chairman of the Board		—		—		—		*
William Kennedy Director		—		—		—		*
Jonathan Spicehandler Director		—		—		—		*
Ben Zion Weiner Director		—		—		—		*
Rusi Kathoke Director		15,000		—		15,000		*
Patricia A. Smith Director		71,890		—		71,890		*
Jonathan Burgin Chief Financial Officer		20,000		1,382,053		1,402,053		*
Shlomo Dagan Chief Scientific Officer		57,000		2,031,333		2,088,333		1.2	%
Neil Graham Chief Medical Officer		10,000		200,000		210,000		*
All directors and executive officers as a group (9 persons)		173,890		3,613,386		3,787,276		2.2	%

* Less than 1% of ordinary shares.

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 March 31, 2005, we have granted to employees, officers and directors options that are outstanding to purchase up to 17,536,262 ordinary shares, under the six share option plans discussed below and pursuant to certain grants apart from these plans.

1993 Share Option Plan

Under a share option plan established in 1993, referred to as the 1993 Plan, we granted options to employees to subscribe at nominal value of NIS 0.02 for ordinary shares, 2,600 of which are outstanding. These options were granted in accordance with Section 102 of the Israeli Income Tax Ordinance 1961, referred to as Tax Ordinance. The options are non-transferrable.

The 1993 Plan terminated in August 2003, but any options granted thereunder and outstanding are exercisable until May 1, 2005. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. The options were granted for no consideration. All options under the 1993 Plan are fully vested.

1998 Share Option Plan

Under a share option plan established in 1998, referred to as the 1998 Plan, we granted options to our employees which are held by a trustee under section 3(i) of the Tax Ordinance, of which 4,013,810 are outstanding at an exercise price per share of $0.497. The options are non-transferable.

The 1998 Plan will terminate in October 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. The options were granted for no consideration and are fully vested.

1999 Share Option Plan

Under a share option plan established in 1999, referred to as the 1999 Plan, we granted options to our employees which are held by a trustee under section 3(i) of the Tax Ordinance, of which 1,235,890 are outstanding, at an exercise price of $0.497. The options are non-transferable.

The 1999 Plan will terminate in August 2009. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. The options were granted for no consideration. All options are fully vested.

1999 International Share Option Plan

Under an international share option plan established in 1999, referred to as the International Plan, we granted options to our employees of which 1,680,000 are outstanding at an exercise price between $0.497 and $1.10. The options are non-transferable.

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. The options were granted for no consideration. All options are fully vested.

2000 Share Option Plan

Under a share option plan established in 2000, referred to as the 2000 Plan, we granted options to our employees which are held by a trustee under section 3(i) of the Tax Ordinance, of which 885,300 are outstanding, at an exercise price of $1.10. The options are non-transferable.

The 2000 Plan will terminate in April 2010. If the options are not exercised and the shares not paid for by such date, all interests and rights of any grantee shall expire. The options were granted for no consideration. All options are fully vested.

2001 Share Option Plan

Under a share option plan established in 2001, referred to as the 2001 Plan, we granted options to our employees, including directors who are employees, of which 3,708,742 are outstanding at an exercise price per share between $0.106 and $0.931. These options were granted 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 2001 Plan will terminate in May 2011, except with regard to options outstanding at that date. The options were granted for no consideration. All options vest on an annual basis over a period of three years. To date, 2,633,706 options are vested.

Beneficial owner	Number of ordinary shares beneficially owned	Percent of ownership
Bank Julius Baer	18,520,370	11.0	%
Perpetual Income & Growth Investment Trust Inc.	13,624,713	8.1	%

	British Pence (p)		U.S. Dollar
Last Six Calendar Months	High	Low	High	Low
March 2005	41.50	36.50	0.78	0.69
February 2005	43.50	30.00	0.82	0.56
January 2005	33.00	26.00	0.62	0.49
December 2004	25.50	23.25	0.48	0.44
November 2004	24.25	19.50	0.46	0.37
October 2004	18.00	13.00	0.34	0.24

Financial Quarters During the Past Two Full Fiscal Years
Fourth Quarter of 2004	25.50	13.00	0.48	0.24
Third Quarter 2004	19.50	13.75	0.37	0.26
Second Quarter 2004	32.25	17.00	0.61	0.32
First Quarter 2004	27.25	16.25	0.51	0.31
Fourth Quarter 2003	18.75	12.00	0.35	0.23
Third Quarter 2003	16.50	9.25	0.31	0.17
Second Quarter 2003	11.00	5.75	0.21	0.11
First Quarter 2003	11.50	5.75	0.22	0.11

Last Five Full Financial Years
2004	32.25	13.00	0.61	0.24
2003	18.75	5.75	0.35	0.11
2002	64.00	11.50	1.20	0.22
2001	153.00	33.50	2.88	0.63
2000-commencing September 26, 2000	169.50	137.50	3.19	2.59

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%

ADR holders must pay:	For:
[ ] per 100 ADSs	Each issuance of an ADS, including as a result of a distribution of shares or rights or other property. Each cancellation of an ADS, including if the agreement terminates.
[ ] per ADS	Any cash payment.
Registration or Transfer Fees	Transfer and registration of shares on the share register of the Foreign Registrar from your name to the name of The Bank of New York or its agent when you deposit or withdraw shares.
Expenses of The Bank of New York	Conversion of foreign currency to U.S. dollars. Cable, telex and facsimile transmission expenses. Servicing of shares or deposited securities.
[ ] per ADS per calendar year	Depositary services; provided that this fee will not be charged if a fee of [ ] was charged in the same calendar year for a cash distribution.
Taxes and other governmental charges	As necessary The Bank of New York or the Custodian have to pay on any ADR or share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes.

If we:		Then:
Change the nominal or par value of our shares; Reclassify, split up or consolidate any of the deposited securities; Distribute securities on the shares that are not distributed to you; or Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or takes any similar action.		The cash, shares or other securities received by The Bank of New York will become deposited securities. Each ADR will automatically represent its equal share of the new deposited securities. The Bank of New York may, and will if we ask it to, distribute some or all of the cash, shares or other securities it received. It may also issue new ADRs or ask you to surrender your outstanding ADRs in exchange for new ADRs, identifying the new deposited securities.

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

OR

o	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended ______________

OR

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

Exhibit Number	Exhibit Description
1	*Articles of Association
2.1	* Deposit Agreement Between The Bank of New York, XTL Biopharmaceuticals Ltd. and the Owners and Holders of American Depositary Receipts, dated [ ]
2.2	*Ordinary / ADR share specimen
4.1	* Research and License Agreement Between Yeda Research and Development Company Ltd. and Xenograft Technologies Ltd. dated April 7, 1993
4.2	*Amendment of Research and License Agreement Between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated August 31, 1995
4.3	*Second Extension Agreement Between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated August 14, 1996
4.4	*Third Extension Agreement Between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated November 25, 1997
4.5	*Amendment No. 2 to Research and License Agreement dated April 7, 1993, as amended on August 31, 1995, between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated January 25, 1998
4.6	*Amendment No. 3 to Research and License Agreement dated April 7, 1993 between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated January 26, 2003
4.7	*Amendment No. 4 to Research and License Agreement dated April 7, 1993 between Yeda Research and Development Company Ltd. and XTL Biopharmaceuticals Ltd. dated June 2, 2004
4.8	*License Agreement Between XTL Biopharmaceuticals Ltd. and Cubist Biopharmaceuticals, Inc., dated June 2, 2004
4.9	*License Agreement Between XTL Biopharmaceuticals Ltd. and DRK-Blutspendedienst Baden-Wurttemberg (Ulm University, Germany) dated April 18, 2000
4.10	*License Agreement Between XTL Biopharmaceuticals Ltd. and Stanford University, dated September 12, 2003
4.11	*License Agreement Between XTL Biopharmaceuticals Ltd. and Applied Immunogenetics LLC, dated September 12, 2003
4.12	1998 Share Option Plan dated October 19, 1998
4.13	1999 Share Option Plan dated June 1, 1999
4.14	1999 International Share Option Plan dated June 1, 1999
4.15	2000 Share Option Plan dated April 12, 2000
4.16	2001 Share Option Plan dated February 28, 2001
15.1	Consent of Kesselman & Kesselman, a Member of PricewaterhouseCoopers International Ltd., dated May 11, 2005
15.2	Consent of Somekh Chaikin, a Member of KPMG International, dated May 11, 2005


	XTL BIOPHARMACEUTICALS LTD. (Registrant)

	By:	/s/ Jonathan Burgin
		Jonathan Burgin Chief Financial Officer
Date: May 12, 2005

	Page
Reports of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2004 and 2003	F-4

Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002, and the period from March 9, 1993 to December 31, 2004	F-5

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2004, 2003, and 2002, and the period from March 9, 1993 to December 31, 2001	F-6

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002, and the period from March 9, 1993 to December 31, 2004	F-10

Notes to the Consolidated Financial Statements	F-12

	December 31
	2004			2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (note 1e)	12,788			4,184
Short-term bank deposits (note 9a)	10,136			17,329
Marketable securities (note 9b)	—			749
Accounts receivable - trade (note 2)		543			—
Accounts receivable - other (note 9c)		306			706
Total current assets		23,773			22,968
SEVERANCE PAY FUNDS (note 5)		830			673
RESTRICTED LONG-TERM DEPOSIT (note 7b(1))		113			159
PROPERTY AND EQUIPMENT (note 4):
Cost		3,312			3,143
Less - accumulated depreciation and amortization		2,404			2,090
		908			1,053
Total assets		25,624			24,853
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and accruals (note 9d)		3,134			3,001
Deferred gain (notes 1j and 2)		399			—
Total current liabilities		3,533			3,001
LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT (note 5)		1,291			1,244
DEFERRED GAIN (notes 1j and 2)		1,198			—
COMMITMENTS AND CONTINGENCIES (note 7)
Total liabilities		6,022			4,245
SHAREHOLDERS’ EQUITY (note 6):
Ordinary shares of NIS 0.02 par value (authorized: 300,000,000 as of December 31, 2004 and 2003; issued and outstanding: 168,079,196 as of December 31, 2004 and 112,019,464 as of December 31, 2003)		841			594
Additional paid in capital		104,537	*		89,303	*
Deferred share-based compensation		—	*		—	*
Accumulated other comprehensive loss		—			14
Deficit accumulated during the development stage		(85,776	)		(69,303	)
Total shareholders’ equity		19,602			20,608
Total liabilities and shareholders’ equity		25,624			24,853

/s/ Rusi K. Kathoke		/s/ Jonathan Burgin
Rusi K. Kathoke		Jonathan Burgin
Director		Chief Financial Officer

										Period from
										March 9, 1993*
	Year ended December 31									to December 31,
	2004			2003			2002			2004
REVENUES (notes 1j and 2):
Reimbursed out-of-pockets expenses	3,269			—			—			3,269
License	185			—			—			185
		3,454			—			—			3,454

COST OF REVENUES (notes 1j and 2):
Reimbursed out-of-pockets expenses		3,269			—			—			3,269
License (with respect to royalties)		32			—			—			32
		3,301			—			—			3,301

GROSS MARGIN		153			—			—			153

RESEARCH AND DEVELOPMENT COSTS (note 9e)		11,985			13,668			13,231			75,223
LESS - PARTICIPATIONS (note 7a(3))		—			3,229			75			10,950
		11,985			10,439			13,156			64,273

GENERAL AND ADMINISTRATIVE EXPENSES (note 9f)		4,134			3,105			3,638			23,555
BUSINESS DEVELOPMENT COSTS (note 9g)		810			664			916			4,286
IMPAIRMENT OF ASSET HELD FOR SALE (note 4c)		—			354			—			354

OPERATING LOSS		16,776			14,562			17,710			92,315

FINANCIAL INCOME - net (note 9h)		352			352			597			6,700
LOSS BEFORE TAXES ON INCOME		16,424			14,210			17,113			85,615

TAXES ON INCOME		49			78			27			161
NET LOSS FOR THE YEAR		16,473			14,288			17,140			85,776

BASIC AND DILUTED PER SHARE DATA:
Loss per ordinary share	$	( 0.12	)	$	( 0.13	)	$	( 0.15	)
Weighted average number of shares used to compute loss per ordinary share		134,731,766			111,712,916			111,149,292

	Preferred shares				Ordinary shares
	Number of shares		Amount		Number of shares	Amount	Additional paid-in capital
CHANGES DURING THE PERIOD FROM MARCH 9, 1993 (DATE OF INCORPORATION) TO DECEMBER 31, 2001:
Comprehensive loss:
Net loss	—		—		—	—	—
Net unrealized loss	—		—		—	—	—
Comprehensive loss	—		—		—	—	—
Deferred share-based compensation	—		—		—	—	377
Amortization of deferred compensation expenses	—		—		—	—	—
Non-employee stock option expenses	—		—		—	—	106
Exercise of share warrants	—		—		1,707,980	8	414
Exercise of employee stock options	15,600		**		221,638	1	26
Issuance of share capital, net of share issue expenses	43,571,850		250		—	—	26,187
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
Issuance of share capital	—		—		15,183,590	75	16,627
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, 2001	—		—		111,127,038	590	89,283	*

	Deferred share- based compensation			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, 2001:
Comprehensive loss:
Net loss		—			—			(37,875	)		(37,875	)
Net unrealized loss		—			(45	)		—			(45	)
Comprehensive loss		—			(45	)		(37,875	)		(37,920	)
Deferred share-based compensation		(377	)		—			—			—
Amortization of deferred compensation expenses		377			—			—			377
Non-employee stock option expenses		—			—			—			106
Exercise of share warrants		—			—			—			422
Exercise of employee stock options		—			—			—			27
Issuance of share capital, net of share issue expenses		—			—			—			26,437
Bonus shares		—			—			—			—
Conversion of preferred shares into ordinary shares		—			—			—			—
Receipts in respect of share warrants (expired in 1999)		—			—			—			89
Issuance of share capital		—			—			—			16,702
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, 2001		—	*		(45	)		(37,875	)		51,953

	Ordinary shares
	Number of shares		Amount		Additional paid in capital
BALANCE AT DECEMBER 31, 2001 - brought forward		111,127,038		590		89,283	*
CHANGES DURING 2002:
Comprehensive loss:
Net loss		—		—		—
Net unrealized loss		—		—		—
Comprehensive loss		—		—		—
Exercise of employee stock options		38,326		**		20
BALANCE AT DECEMBER 31, 2002		111,165,364		590		89,303	*
CHANGES DURING 2003:
Comprehensive loss:
Net loss		—		—		—
Net unrealized gain		—		—		—
Comprehensive loss		—		—		—
Exercise of employee stock options		854,100		4		—
BALANCE AT DECEMBER 31, 2003		112,019,464		594		89,303	*
CHANGES DURING 2004:
Comprehensive loss:
Net loss		—		—		—
Net unrealized gain		—		—		—
Comprehensive loss		—		—		—
Non-employee stock option expenses		—		—		32
Exercise of employee 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	*

	Deferred share- based compensation			Accumulated other comprehensive income (loss)			Deficit accumulated during the development stage			Total
BALANCE AT DECEMBER 31, 2001 - brought forward	—		^*	(45		)	(37,875		)	51,953
CHANGES DURING 2002:
Comprehensive loss:
Net loss	—			—			(17,140		)	(17,140		)
Net unrealized loss	—			(3		)	—			(3		)
Comprehensive loss		—			(3	)		(17,140	)		(17,143	)
Exercise of employee stock options		—			—			—			20
BALANCE AT DECEMBER 31, 2002		—	^*		(48	)		(55,015	)		34,830
CHANGES DURING 2003:
Comprehensive loss:
Net loss		—			—			(14,288	)		(14,288	)
Net unrealized gain		—			62			—			62
Comprehensive loss		—			62			(14,288	)		(14,226	)
Exercise of employee stock options		—			—			—			4
BALANCE AT DECEMBER 31, 2003		—	^*		14			(69,303	)		20,608
CHANGES DURING 2004:
Comprehensive loss:
Net loss		—			—			(16,473	)		(16,473	)
Net unrealized gain		—			(14	)		—			(14	)
Comprehensive loss		—			(14	)		(16,473	)		(16,487	)
Non-employee stock option expenses		—			—			—			32
Exercise of employee stock options		—			—			—			19
Issuance of shares, net of $2,426 share issuance expenses		—			—			—			15,430
BALANCE AT DECEMBER 31, 2004		—	^*		—			(85,776	)		19,602

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period	(16,473	)	(14,288	)	(17,140	)	(85,776	)
Adjustments to reconcile loss to net cash used in operating activities:
Depreciation and amortization	319		440		470		2,587
Capital loss (gain) on sale of property and equipment	1		2		(1	)	12
Change in liability for employee rights upon retirement	30		129		333		1,469
Impairment of asset held for sale	—		354		—		354
Loss (gain) from marketable securities, net	13		(27	)	41		(410	)
Stock based compensation expenses	32		—		—		515
Loss (gain) on amounts funded in respect of employee	(4	)	5		(1	)	(85	)
Changes in operating asset and liability items:
Increase in accounts receivable - trade	(543	)	—		—		(543	)
Decrease (increase) in accounts receivable - other	400		(440	)	606		(259	)
Increase (decrease) in accounts payable and accruals	133		499		(20	)	3,087
Increase in deferred gain	1,597		—		—		1,597
Net cash used in operating activities (a)	(14,495	)	(13,326	)	(15,712	)	(77,452	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Short-term deposits, net	7,193		14,724		1,058		(10,136	)
Long-term deposits, net	46		(20	)	2		(113	)
Investment in available for sale securities	—		(71	)	(1,219	)	(3,363	)
Proceeds from sales of available for sale securities	722		1,048		716		3,773
Severance pay funded	(136	)	(112	)	(97	)	(841	)
Purchase of property and equipment	(180	)	(81	)	(659	)	(3,983	)
Proceeds from sale of property and equipment	5		2		8		122
Net cash provided by (used in) investing activities	7,650		15,490		(191	)	(14,541	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of share capital - net of share issuance expenses	15,430		—		—		104,371
Exercise of share warrants and employee stock options	19		4		20		492
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	15,449		4		20		104,863

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	8,604		2,168		(15,883	)	12,788

BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	4,184		2,016		17,899		—

BALANCE OF CASH AND CASH EQUIVALENTS AT END OF PERIOD	12,788		4,184		2,016		12,788

Supplementary information on financing activity not involving cash flows -
Conversion of convertible subordinated debenture into shares	—		—		—		1,700

Supplemental disclosures of cash flow information:
Income taxes paid (mainly - tax advance in respect of excess expenses)	107		161		79		321
Interest paid	—		—		—		350
(a) Including effect of changes in the exchange rate on cash	(73	)	(9	)	(709	)	(1,839	)
(b) Incorporation date, see note 1a.

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

	Year ended December 31			Period from March 9, 1993* to December 31,
	2004	2003	2002	2004
	($ in thousands, except per share amounts)
Net loss for the period, as reported	16,473	14,288	17,140	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	821	1,297	6,355
Net loss - pro-forma	16,712	15,109	18,437	91,648
Basic and diluted loss per share:
As reported	0.12	0.13	0.15
Pro-forma	0.12	0.14	0.17

* Incorporation date, see note 1a.

Deferred revenue	1,815
Less - Deferred expenses related to Yeda	218
Deferred gain	1,597

Cost:
Laboratory equipment	1,828	1,727
Computers	517	497
Leasehold improvements	698	698
Furniture and office equipment	269	221
	3,312	3,143
Accumulated depreciation and amortization:
Laboratory equipment	1,120	932
Computers	488	438
Leasehold improvements	691	639
Furniture and office equipment	105	81
	2,404	2,090
	908	1,053

					Number	Exercise
Grant	The		Grant		of	price per	Vesting
number	grantees		date		options	option	period

1		Employees of the Company		May 1995	900,900	NIS 0.02	4 year period on a yearly basis
2		Employees of the Company		February 1997	3,955,090	$ 0.365	4 year period on a yearly basis
3		Employees of the Company		August 1998	423,680	$ 0.497	4 year period on a yearly basis, starting December 3, 1997
4		Senior officers of the Company		October 1998	5,038,360	$ 0.497	4 year period on a monthly basis

Grant number	The grantees		Grantdate		Number of options	Exercise price per option	Vesting period

5		Employees of the Company and its subsidiary		June 1999	1,672,500	$0.497	4 year period on a yearly basis
6		Senior officers of the Company		August 1999	678,720	$0.497	4 year period on a monthly basis
7		Employees of the Company and its subsidiary		April 2000	1,870,000	$1.1	4 year period on a monthly or yearly basis
8		Employees of the Company and its subsidiary		May 2001	1,942,900	$0.931	3 year period on a yearly basis starting May 2003
9		Employees of the Company and its subsidiary		September 2001	306,400	$0.766	3 year period on a yearly basis starting September 2003
10		Employees of the Company and its subsidiary		March 2002	425,800	$0.851	3 year period on a yearly basis starting March 2004
11		Employees of the Company and its subsidiary		September 2002	877,400	$0.482	3 year period on a yearly basis starting September 2004
12		Employees of the Company and its subsidiary		February 2003	699,900	$0.1055	3 year period on a yearly basis starting February 2005
13		Employees of the Company and its subsidiary		September 2003	125,000	$0.25	3 year period on a yearly basis starting September 2005
14		Employees of the Company		March 2004	103,200	$0.486	3 year period on a yearly basis starting March 2006
15		Employees of the Company		September 2004	148,800	$0.315	3 year period on a yearly basis starting September 2006
16		Senior officer of the Company		October 2004	120,000	$0.243	3 year period on a yearly basis starting October 2006

	Options outstanding				Options exercisable
			Weighted				Weighted
			average				average
	Balance at		remaining		Balance at		remaining
	December 31,		contractual		December 31,		contractual
	2004		life		2004		life
	Number		In years		Number		In years
Exercise prices:
NIS 0.02		2,600		0.22		2,600	0.22
U.S.$ 0.1055		537,400		8.16		—	—
U.S.$ 0.243		120,000		9.20		—	—
U.S.$ 0.25		125,000		8.68		—	—
U.S.$ 0.315		148,800		9.33		—	—
U.S.$ 0.365		3,511,780		2.11		3,511,780	2.11
U.S.$ 0.482		711,400		7.68		313,016	7.68
U.S.$ 0.486		103,200		9.75		—	—
U.S.$ 0.497		6,395,880		3.66		6,395,880	3.66
U.S.$ 0.766		147,600		6.71		113,652	6.71
U.S.$ 0.851		167,000		7.20		101,035	7.20
U.S.$ 0.931		2,049,701		6.38		1,895,873	6.38
U.S.$ 1.1		1,725,300		5.28		1,725,300	5.28
		15,745,661				14,059,136

Balance outstanding at beginning of year	2,205,000	2,280,000		2,430,000
Changes during the year:
Granted	380,000	—		—
Forfeited	—	(75,000	)	(150,000	)
Total at end of year (1)	2,585,000	2,205,000		2,280,000
(1) Exercise price:
$ 0.497-0.538	930,000	930,000		930,000
$ 2.11	1,275,000	1,275,000		1,350,000
$ 0.238-0.306	380,000	—		—
	2,585,000	2,205,000		2,280,000
Exercisable by year end:
Exercise price:
$ 0.497-0.538	922,188	894,063		847,188
$ 2.11	1,275,000	1,275,000		1,125,000
$ 0.238-0.306	75,901	—		—
	2,273,089	2,169,063		1,972,188

Gain (loss) before taxes on income	(16,582	)	158	(14,327	)	117	(17,211	)	98
Taxes on income	—		49	—		78	—		27
Net gain (loss) for the year	(16,582	)	109	(14,327	)	39	(17,211	)	71

Debentures:
Linked to the Israeli CPI	71	—	(2	)	69
Unlinked	561	19	(17	)	563
	632	19	(19	)	632


Sort-term treasury notes and bonds:
Linked to the U.S. dollar	10	—	—		10
Unlinked	93	14	—		107
	103	14	—		117
	735	33	(19	)	749

Balance at beginning of year	749		1,637		1,178
Investments	—		71		1,219
Proceeds from sales	(722	)	(1,048	)	(716	)
Reclassifications into earnings (loss) from other comprehensive income (loss)	(14	)	62		(3	)
Realized gain (loss) from sales	(13	)	27		(41	)
	—		749		1,637

Office of the Chief Scientist of the Israeli Ministry of Industry (“OCS”)	—	537
Prepaid expenses	165	119
Employees	24	36
Value Added Tax authorities	101	6
Sundry	16	8
	306	706

Suppliers	1,108	1,334
Accrued expenses	1,337	1,077
Institutions and employees in respect of salaries and related benefits	294	280
Provision for vacation pay and recreation pay	385	300
Sundry	10	10
	3,134	3,001

Wages, salaries and related benefits	2,776	3,450	3,958	20,945
Sub-contractors expenses	6,430	6,799	5,575	33,856
Laboratories supplies	754	1,128	1,653	8,406
Consulting	549	494	396	3,194
Rent and maintenance	725	866	926	4,004
Depreciation and amortization	277	369	415	2,717
Other	474	562	308	2,101
	11,985	13,668	13,231	75,223

Wages, salaries and related benefits	1,890	1,244	1,704	11,080
Corporate communications	289	228	598	2,210
Professional fees	647	564	662	3,515
Director fees	243	183	181	1,387
Rent and maintenance	90	104	135	865
Communication	34	33	43	195
Depreciation and amortization	42	70	55	589
Patent registration fees	271	125	71	1,017
Other	628	554	189	2,697
	4,134	3,105	3,638	23,555

Wages, salaries and related benefits	410	408	567	2,501
Travel	36	136	140	742
Professional fees	364	120	209	1,043
	810	664	916	4,286

Financial income:
Interest received	297	458	1,360	8,725
Foreign exchange differences gain	67	—	—	203
Gain from available for sale securities	13	62	—	(13	)
Other	—	—	—	156
	377	520	1,360	9,097
Financial expenses:
Foreign exchange differences loss	—	148	733	1,921
Interest paid	—	—	—	374
Loss from available for sale securities	—	—	3	14
Other	25	20	27	88
	25	168	763	2,397
Financial income, net	352	352	597	6,700