EX-99.1 2 file2.htm FINANCIAL STATEMENTS

INDEX TO CYCLACEL LIMITED FINANCIAL STATEMENTS

PAGE

Report of Independent Registered Public Accounting Firm................. 2

Balance Sheets as of December 31, 2004 and 2005......................... 3

Statements of Operations for the nine months ended December 31, 2003,
the years ended December 31, 2004 and 2005 and the period from
August 13, 1996 (inception) to December 31, 2005...................... 4

Statements of Shareholders' Equity (Deficit) for the period from
August 13, 1996 (inception) to December 31, 2005...................... 5

Statements of Cash Flows for the nine months ended December 31, 2003,
the years ended December 31, 2004 and 2005 and the period from
August 13, 1996 (inception) to December 31, 2005...................... 10

Notes to the Financial Statements....................................... 12

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
Cyclacel Limited

We have audited the balance sheets of Cyclacel Limited (a development
stage company) at December 31, 2004 and 2005 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the nine months
ended December 31, 2003, the years ended December 31, 2004 and 2005 and the
period from August 13, 1996 (inception) to December 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cyclacel Limited (a
development stage company) at December 31, 2004 and 2005 and the results of its
operations and its cash flows for the nine months ended December 31, 2003, the
years ended December 31, 2004 and 2005 and the period from August 13, 1996
(inception) to December 31, 2005, in conformity with United States generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that
Cyclacel Limited (a development stage company) will continue as a going concern.
As discussed more fully in Note 1 to the financial statements, the ability of
the Company to continue as a going concern is dependent on its ability to access
further cash resources through the completion of the proposed purchase of the
whole of the issued share capital of the Company by Xcyte Therapies, Inc. and
obtaining a commitment from Xcyte Therapies Inc. that sufficient cash resources
will be made available to the Company. However, if the proposed transaction with
Xcyte Therapies, Inc. does not complete, the Company's ability to continue as a
going concern is dependent on the ability of Cyclacel Group plc, its parent
company, to raise further funds and to commit that such funds will be made
available to the Company. Cyclacel Group plc would seek to raise such funds
through a combination of equity issues or debt arrangements or in undertaking a
cash generative corporate transaction. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also disclosed in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/S/ ERNST & YOUNG LLP

London, England
March 27, 2006

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

DECEMBER 31,
------------
2004 2005
---------- ----------
$000 $000

ASSETS

Current assets:

Cash and cash equivalents................................................ 7,766 3,117

Short-term investments................................................... 15,152 10,690

Prepaid expenses and other current assets................................ 4,846 3,219
---------------- ----------------

Total current assets..................................................... 27,764 17,026

Property, plant and equipment (net)............................................ 3,412 2,045
---------------- ----------------

Total assets................................................................... 31,176 19,071
================ ================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Current portion of Government loan....................................... 482 --

Accounts payable......................................................... 2,528 2,159

Amounts due to parent company............................................ 2,196 10,467

Accrued liabilities...................................................... 1,177 1,869

Other current liabilities................................................ 161 128

Current portion of equipment financing................................... 311 251
---------------- ----------------

Total current liabilities................................................ 6,855 14,874

Equipment financing, net of current............................................ 368 78

Government loan, net of current................................................ -- --
---------------- ----------------

Total liabilities.............................................................. 7,223 14,952
---------------- ----------------
Commitments and contingencies

Shareholders' equity (deficit):

Preferred Ordinary shares:

Preferred Ordinary "D" shares, 0.1p par value:

Authorized: 21,000,000 at December 31, 2004 and 2005

Issued and outstanding: 17,965,835 at December 31, 2004 and 2005.
Aggregate liquidation preference of $223,617,000 ($12.45 per share)
at December 31, 2004 and $210,954,000 ($11.74 per share) at December
31, 2005.............................................................. 30 30

Ordinary shares:

Ordinary shares, 0.1p par value:

Authorized: 5,748,428 at December 31, 2004 and 2005

Issued and outstanding: 1,871,210 at December 31, 2004 and 2005 ......... 2 2

Deferred shares, 0.1p par value:

Authorized: 7,051,572 at December 31, 2004 and 2005

Issued and outstanding: nil at December 31, 2004 and 2005................ -- --

Additional paid in capital..................................................... 116,063 116,063

Accumulated other comprehensive loss........................................... (1,172) (2,958)

Deficit accumulated during the development stage............................... (90,970) (109,018)
---------------- ----------------

Total shareholders' equity..................................................... 23,953 4,119
---------------- ----------------

Total liabilities and shareholders' equity..................................... 31,176 19,071
================ ================

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

PERIOD FROM
NINE MONTHS AUGUST 13, 1996
ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005 2005
-----------------------------------------------------------
$000, EXCEPT PER SHARE AND SHARE AMOUNTS

REVENUES:

Collaboration and
research
and development
revenue............ 8 102 245 2,759
Grant revenue......... 504 823 111 3,321
-------------- ------------- ------------- --------------
512 925 356 6,080

OPERATING EXPENSES:
Research and
development........ (13,258) (20,332) (15,841) (100,770)
General and
administrative..... (2,142) (3,554) (5,290) (23,634)
-------------- ------------- ------------- --------------
TOTAL OPERATING EXPENSES.... (15,400) (23,886) (21,131) (124,404)
-------------- ------------- ------------- --------------

Operating loss.............. (14,888) (22,961) (20,775) (118,324)
Other income (expense):
Costs associated with aborted
2004 IPO................. -- (3,550) -- (3,550)
Interest income............. 430 1,425 887 6,279
Interest expense............ (2,005) (112) (60) (3,662)
-------------- ------------- ------------- --------------
Total other income
(expense)................ (1,575) (2,237) 827 (933)
-------------- ------------- ------------- --------------
LOSS BEFORE TAXES........... (16,463) (25,198) (19,948) (119,257)
Income tax benefit.......... 1,486 2,456 1,900 10,239
-------------- ------------- ------------- --------------
NET LOSS.................... (14,977) (22,742) (18,048) (109,018)
Dividends on Preferred Ordinary
shares................... (4,425) (11,053) (11,876) (35,296)
-------------- ------------- ------------- --------------
NET LOSS APPLICABLE TO
ORDINARY SHAREHOLDERS.... (19,402) (33,795) (29,924) (144,314)
============== ============= ============= ==============
Net loss per share - basic and
diluted................. ($2.25) ($1.72) ($1.51) ($16.45)
============== ============= ============= ==============
Weighted average Ordinary
shares outstanding....... 8,623,516 19,608,365 19,837,045 8,773,083
============== ============= ============= ==============

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

PREFERRED ORDINARY ADDITIONAL
"D" SHARES ORDINARY SHARES DEFERRED SHARES PAID-IN
--------------------- -------------------- ----------------- CAPITAL
No. $000 No. $000 No. $000 $000
-------- --------- ----------- --------- -------- ------- ----------

On incorporation, August 13, 1996...... -- -- 1 -- -- -- --
Subdivision into shares of $0.0015
each, August 1996................... -- -- 999 -- -- -- --
Issue of shares for cash, at par,
September 1996...................... -- -- 959,000 1 -- -- --
Translation adjustment................. -- -- -- -- -- -- --
Loss for the period.................... -- -- -- -- -- -- --
Comprehensive loss for the period...... -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 1997.............. -- -- 960,000 1 -- -- --
Issue of shares for cash, at $6.56 per
share, May 1997..................... -- -- 625,000 1 -- -- 4,098
Issue of shares for IP rights
agreement, May 1997................. -- -- 40,000 -- -- -- 262
Issue of shares for cash, at $6.56 per
share, August 1997.................. -- -- 25,000 -- -- -- 159
Expense of share issues................ -- -- -- -- -- -- (41)
Deferred stock-based compensation...... -- -- -- -- -- -- 2,002
Amortization of deferred stock-based
compensation........................ -- -- -- -- -- -- --
Translation adjustment................. -- -- -- -- -- -- --
Loss for the year...................... -- -- -- -- -- -- --
Comprehensive loss for the year........ -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 1998.............. -- -- 1,650,000 2 -- -- 6,480
Exercise of share options for cash, at
par, July 1998...................... -- -- 4,792 -- -- -- --
Amortization of deferred stock-based
compensation........................ -- -- -- -- -- -- --
Translation adjustment................. -- -- -- -- -- -- --
Loss for the year...................... -- -- -- -- -- -- --
Comprehensive loss for the year........ -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 1999.............. -- -- 1,654,792 2 -- -- 6,480

DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING
COMPREHENSIVE DEFERRED DEVELOPMENT
INCOME/(LOSS) COMPENSATION STAGE TOTAL
$000 $000 $000 $000
------------- ------------- ------------ ---------

On incorporation, August 13, 1996...... -- -- -- --
Subdivision into shares of $0.0015
each, August 1996................... -- -- -- --
Issue of shares for cash, at par,
September 1996...................... -- -- -- 1
---------
Translation adjustment................. (4) -- -- (4)
Loss for the period.................... -- -- (290) (290)
---------
Comprehensive loss for the period...... -- -- -- (294)
------------- ------------- ------------ ---------
Balance at March 31, 1997.............. (4) -- (290) (293)
Issue of shares for cash, at $6.56 per
share, May 1997..................... -- -- -- 4,099
Issue of shares for IP rights
agreement, May 1997................. -- -- -- 262
Issue of shares for cash, at $6.56 per
share, August 1997.................. -- -- -- 159
Expense of share issues................ -- -- -- (41)
Deferred stock-based compensation...... -- (2,002) -- --
Amortization of deferred stock-based
compensation........................ -- 302 -- 302
---------
Translation adjustment................. 55 -- -- 55
Loss for the year...................... -- -- (2,534) (2,534)
---------
Comprehensive loss for the year........ -- -- -- (2,479)
------------- ------------- ------------ ---------
Balance at March 31, 1998.............. 51 (1,700) (2,824) 2,009
Exercise of share options for cash, at
par, July 1998...................... -- -- -- --
Amortization of deferred stock-based
compensation........................ -- 406 -- 406
---------
Translation adjustment................. 11 -- -- 11
Loss for the year...................... -- -- (3,964) (3,964)
---------
Comprehensive loss for the year........ -- -- -- (3,953)
------------- ------------- ------------ ---------
Balance at March 31, 1999.............. 62 (1,294) (6,788) (1,538)

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTD)

Issue of shares for cash at $7.42,
May 1999........................... -- -- 872,188 1 -- -- 6,470
Issue of shares on conversion of
bridging loan, May 1999............ -- -- 220,751 1 -- -- 1,637
Issue of shares in lieu of cash
bonus, May 1999.................... -- -- 22,075 -- -- -- 164
Issue of shares for research &
development agreement, May 1999.... -- -- 55,188 -- -- -- 409
Issue of shares for cash at $7.65,
August 1999........................ -- -- 840,336 2 -- -- 6,430
Exercise of share options for cash at
$7.28, September 1999.............. -- -- 5,519 -- -- -- 40
Expense of share issues............... -- -- -- -- -- -- (186)
Deferred stock-based compensation..... -- -- -- -- -- -- 167
Amortization of deferred stock-based
compensation....................... -- -- -- -- -- -- --
Translation adjustment................ -- -- -- -- -- -- --
Loss for the year..................... -- -- -- -- -- -- --
Comprehensive loss for the year....... -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------

Balance at March 31, 2000............. -- -- 3,670,849 6 -- -- 21,611
Deferred stock-based compensation..... -- -- -- -- -- -- 294
Amortization of deferred stock-based
compensation....................... -- -- -- -- -- -- --
Translation adjustment................ -- -- -- -- -- -- --
Loss for the year..................... -- -- -- -- -- -- --
Comprehensive loss for the year....... -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 2001............. -- -- 3,670,849 6 -- -- 21,905

DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING
COMPREHENSIVE DEFERRED DEVELOPMENT
INCOME/(LOSS) COMPENSATION STAGE TOTAL
$000 $000 $000 $000
------------- ------------- ------------ ---------

Issue of shares for cash at $7.42,
May 1999........................... -- -- -- 6,471
Issue of shares on conversion of
bridging loan, May 1999............ -- -- -- 1,638
Issue of shares in lieu of cash
bonus, May 1999.................... -- -- -- 164
Issue of shares for research &
development agreement, May 1999.... -- -- -- 409
Issue of shares for cash at $7.65,
August 1999........................ -- -- -- 6,432
Exercise of share options for cash at
$7.28, September 1999.............. -- -- -- 40
Expense of share issues............... -- -- -- (186)
Deferred stock-based compensation..... -- (167) -- --
Amortization of deferred stock-based
compensation....................... -- 433 -- 433
---------
Translation adjustment................ (194) -- -- (194)
Loss for the year..................... -- -- (5,686) (5,686)
---------
Comprehensive loss for the year....... -- -- -- (5,880)
------------- ------------- ------------ ---------
Balance at March 31, 2000............. (132) (1,028) (12,474) 7,983
Deferred stock-based compensation..... -- (294) -- --
Amortization of deferred stock-based
compensation....................... -- 275 -- 275
---------
Translation adjustment................ (466) -- -- (466)
Loss for the year..................... -- -- (10,382) (10,382)
---------
Comprehensive loss for the year....... -- -- -- (10,848)
------------- ------------- ------------ ---------
Balance at March 31, 2001............. (598) (1,047) (22,856) (2,590)

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTD)

Exercise of share options for cash at
par, April 2001.................... -- -- 3,050 -- -- -- --
Exercise of share options for cash at
par, April 2001.................... -- -- 46,950 -- -- -- --
Issue of shares for cash at $10.64,
June 2001.......................... -- -- 13,282 -- -- -- --
Exercise of share options for cash at
$6.04, July 2001................... -- -- 17,500 -- -- -- 106
Issue of shares for IP rights
agreement at $11.42, November 2001. -- -- 16,000 -- -- -- 183
Fair value of warrants issued to
shareholders, August and December
2001............................... -- -- -- -- -- -- 1,215
Deferred stock-based compensation..... -- -- -- -- -- -- 363
Amortization of deferred stock-based
compensation....................... -- -- -- -- -- -- --
Translation adjustment................ -- -- -- -- -- -- --
Loss for the year..................... -- -- -- -- -- -- --
Comprehensive loss for the year....... -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 2002............. -- -- 3,767,631 6 -- -- 23,772
Exercise of share options for cash at
$5.84, May 2002.................... -- -- 2,000 -- -- -- 12
Deferred stock-based compensation..... -- -- -- -- -- -- (84)
Amortization of deferred stock-based
compensation....................... -- -- -- -- -- -- --
Translation adjustment................ -- -- -- -- -- -- --
Loss for the year..................... -- -- -- -- -- -- --
Comprehensive loss for the year....... -- -- -- -- -- -- --
-------- --------- ----------- --------- -------- ------- ----------
Balance at March 31, 2003............. -- -- 3,769,631 6 -- -- 23,700

DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING
COMPREHENSIVE DEFERRED DEVELOPMENT
INCOME/(LOSS) COMPENSATION STAGE TOTAL
$000 $000 $000 $000
------------- ------------- ------------ ---------

Exercise of share options for cash at
par, April 2001.................... -- -- -- --
Exercise of share options for cash at
par, April 2001.................... -- -- -- --
Issue of shares for cash at $10.64,
June 2001.......................... -- -- -- --
Exercise of share options for cash at
$6.04, July 2001................... -- -- -- 106
Issue of shares for IP rights
agreement at $11.42, November 2001. -- -- -- 183
Fair value of warrants issued to
shareholders, August and December
2001............................... -- -- -- 1,215
Deferred stock-based compensation..... -- (363) -- --
Amortization of deferred stock-based
compensation....................... -- 672 -- 672
---------
Translation adjustment................ 191 -- -- 191
Loss for the year..................... -- -- (14,853) (14,853)
---------
Comprehensive loss for the year....... -- -- -- (14,662)
------------- ------------- ------------ ---------
Balance at March 31, 2002............. (407) (738) (37,709) (15,076)
Exercise of share options for cash at
$5.84, May 2002.................... -- -- -- 12
Deferred stock-based compensation..... -- 84 -- --
Amortization of deferred stock-based
compensation....................... -- 305 -- 305
---------
Translation adjustment................ (1,846) -- -- (1,846)
Loss for the year..................... -- -- (15,542) (15,542)
---------
Comprehensive loss for the year....... -- -- -- (17,388)
------------- ------------- ------------ ---------
Balance at March 31, 2003............. (2,253) (349) (53,251) (32,147)

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTD)

PREFERRED ORDINARY ADDITIONAL
"D" SHARES ORDINARY SHARES DEFERRED SHARES PAID-IN
----------------------- -------------------- ------------------- CAPITAL
No. $000 No. $000 No. $000 $000
------------ ---------- ----------- --------- ----------- ------- ----------

Exercise of share options for
cash at $7.17, April 2003... -- -- 15,957 -- -- -- 114
Exercise of share options for
cash at $6.65, October 2003. -- -- 100 -- -- -- --
Conversion of Ordinary and
Preferred "C" Ordinary
shares to Deferred Shares,
November 2003............... -- -- (2,251,572) (4) 6,792,541 10 58,142
Bonus issue of shares,
November 2003............... 12,666,580 21 -- -- -- -- (21)
Issue of shares for cash at
$6.90, November 2003........ 4,076,111 7 12,316 -- -- -- 28,221
Expense of share issues........ -- -- -- -- -- -- (592)
Amortization of deferred
stock-based compensation.... -- -- -- -- -- -- --
Translation adjustment......... -- -- -- -- -- -- --
Loss for the period............ -- -- -- -- -- -- --
Comprehensive loss for the
period...................... -- -- -- -- -- -- --
------------ ---------- ----------- --------- ----------- ------- ----------
Balance at December 31, 2003... 16,742,691 28 1,546,432 2 6,792,541 10 109,564
Issues of shares for cash at
$7.44, January 2004......... 1,162,068 2 -- -- -- -- 8,644
Expense of share issue......... -- -- -- -- -- -- (105)
Exercise of share options for
cash at par, April 2004..... -- -- 46,875 -- -- -- --
Exercise of share options for
cash at par, June 2004...... -- -- 25,000 -- -- -- --
Issue of share for cash at
$7.34, June 2004............ -- -- 1 -- -- -- --
Exercise of share warrants for
cash at par, June 2004...... 61,076 -- -- -- -- --
Conversion of deferred shares
to ordinary shares, June
2004........................ -- -- 252,902 -- (252,902) -- --
Buy-back of deferred shares at
$0.015, June 2004........... -- -- -- -- (6,539,639) (10) 10

DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING
COMPREHENSIVE DEFERRED DEVELOPMENT
INCOME/(LOSS) COMPENSATION STAGE TOTAL
$000 $000 $000 $000
------------- ------------- ------------ ---------

Exercise of share options for
cash at $7.17, April 2003... -- -- -- 114
Exercise of share options for
cash at $6.65, October 2003. -- -- -- --
Conversion of Ordinary and
Preferred "C" Ordinary
shares to Deferred Shares,
November 2003............... -- -- -- 58,148
Bonus issue of shares,
November 2003............... -- -- -- --
Issue of shares for cash at
$6.90, November 2003........ -- -- -- 28,228
Expense of share issues........ -- -- -- (592)
Amortization of deferred
stock-based compensation.... -- 217 -- 217
---------
Translation adjustment......... (1,343) -- -- (1,343)
Loss for the period............ -- -- (14,977) (14,977)
---------
Comprehensive loss for the
period...................... -- -- -- (16,320)
------------- ------------- ------------ ---------
Balance at December 31, 2003... (3,596) (132) (68,228) 37,648
Issues of shares for cash at
$7.44, January 2004......... -- -- -- 8,646
Expense of share issue......... -- -- -- (105)
Exercise of share options for
cash at par, April 2004..... -- -- -- --
Exercise of share options for
cash at par, June 2004...... -- -- -- --
Issue of share for cash at
$7.34, June 2004............ -- -- -- --
Exercise of share warrants for
cash at par, June 2004...... -- -- -- --
Conversion of deferred shares
to ordinary shares, June
2004........................ -- -- -- --
Buy-back of deferred shares at
$0.015, June 2004........... -- -- -- --

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTD)

Elimination of deferred stock-based
compensation on the acquisition
of Cyclacel Limited by Cyclacel
Group plc........................ -- -- -- -- -- -- (2,050)
Translation adjustment.............. -- -- -- -- -- -- --
Loss for the year................... -- -- -- -- -- -- --
Comprehensive loss for the year..... -- -- -- -- -- -- --
------------ ---------- ----------- --------- ----------- ------- ----------
Balance at December 31, 2004........ 17,965,835 30 1,871,210 2 -- -- 116,063
Translation adjustment ............. -- -- -- -- -- -- --
Loss for the year .................. -- -- -- -- -- -- --
Comprehensive loss for the year .... -- -- -- -- -- -- --
------------ ---------- ----------- --------- ----------- ------- ----------
Balance at December 31, 2005........ 17,965,835 30 1,871,210 2 -- -- 116,063
============ ========== =========== ========= =========== ======= ==========

DEFICIT
ACCUMULATED ACCUMULATED
OTHER DURING
COMPREHENSIVE DEFERRED DEVELOPMENT
INCOME/(LOSS) COMPENSATION STAGE TOTAL
$000 $000 $000 $000
------------- ------------- ------------ ---------

Elimination of deferred stock-based
compensation on the acquisition
of Cyclacel Limited by Cyclacel
Group plc........................ -- 132 -- (1,918)
---------
Translation adjustment.............. 2,424 -- -- 2,424
Loss for the year................... -- -- (22,742) (22,742)
---------
Comprehensive loss for the year..... -- -- -- (20,318)
------------- ------------- ------------ ---------
Balance at December 31, 2004........ (1,172) -- (90,970) 23,953
---------
Translation adjustment ............. (1,786) -- -- (1,786)
Loss for the year .................. -- -- (18,048) (18,048)
---------
Comprehensive loss for the year .... -- -- -- (19,834)
------------- ------------- ------------ ---------
Balance at December 31, 2005........ (2,958) -- (109,018) 4,119
============= ============= ============ =========

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

PERIOD FROM
NINE MONTHS AUGUST 13, 1996
ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005 2005
------------- -------------- -------------- -----------------
$000 $000 $000 $000

OPERATING ACTIVITIES:
Net loss.................. (14,977) (22,742) (18,048) (109,018)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........ 1,133 1,543 1,322 7,965
Deferred revenue....... -- -- -- (98)
Compensation for
warrants issued to
non employees....... -- -- -- 1,215
Shares issued for IP
rights.............. -- -- -- 446
Loss on disposal of
property, plant and
equipment........... -- 2 -- 25
Stock-based
compensation........ 217 279 (334) 2,554
Amortization of
issuance costs of
Preferred Ordinary
"C" shares.......... 1,925 -- -- 2,517
Changes in operating
assets and
liabilities:
Prepaid expenses
and other
current assets... (1,808) 913 1,174 (2,721)
Accounts payable
and other
current
liabilities...... (875) 372 745 4,264
------------- -------------- -------------- -----------------
Net cash used in
operating activities... (14,385) (19,633) (15,141) (92,851)
------------- -------------- -------------- -----------------
INVESTING ACTIVITIES:
Purchase of property,
plant and equipment.... (111) (210) (263) (6,002)
Short-term investments on
deposit, net of
maturities............. (27,770) 15,827 3,008 (10,510)
------------- -------------- -------------- -----------------
Net cash (used in)
provided by investing
activities............. (27,881) 15,617 2,745 (16,512)
------------- -------------- -------------- -----------------

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS (CONTD)

PERIOD FROM
NINE MONTHS AUGUST 13, 1996
ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005 2005
------------- -------------- -------------- -----------------
$000 $000 $000 $000

FINANCING ACTIVITIES:
Payments of capital
lease obligations... (716) (965) (294) (3,351)
Proceeds from issuance
of ordinary and
preferred ordinary
shares, net of
issuance costs...... 27,441 7,902 -- 90,858
Repayment of
government loan..... -- -- (455) (455)
Government loan
received............ -- -- -- 414
Loan received from
parent
company............. -- -- 9,103 9,103
Proceeds of
committable loan
notes issued from
shareholders........ -- -- -- 8,883
Loans received from
shareholders........ -- -- -- 1,645
------------- -------------- -------------- -----------------
Net cash provided by
financing activities 26,725 6,937 8,354 107,097
Effect of exchange
rate changes on
cash and cash
equivalents......... 3,328 510 (607) 5,383
Net (decrease)
increase in cash
and cash equivalents (15,541) 2,921 (4,042) (2,266)
Cash and cash
equivalents,
beginning of period. 16,548 4,335 7,766 --
------------- -------------- -------------- -----------------
Cash and cash
equivalents, end of
period.............. 4,335 7,766 3,117 3,117
============= ============== ============== =================
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash received during the
period for:
Interest......... 338 1,461 769 6,108
Taxes............ -- 3,844 2,441 8,833
Cash paid during the
period for:
Interest......... (79) (112) (131) (743)
SCHEDULE OF NON-CASH
TRANSACTIONS
Acquisitions of
equipment purchased
through capital
leases.............. 384 706 -- 3,470
Issuance of Ordinary
shares in
connection with
license agreements.. -- -- -- 592
Issuance of Ordinary
shares on
conversion of
bridging loan....... -- -- -- 1,638
Issuance of Preferred
Ordinary "C" shares
on conversion of
secured convertible
loan notes and
accrued interest.... -- -- -- 8,893
Issuance of Ordinary
shares in lieu of
cash bonus.......... -- -- -- 164
Deferred stock-based
compensation........ 217 279 (334) 2,554

See accompanying notes

CYCLACEL LIMITED

(A DEVELOPMENT STAGE COMPANY)

NOTES TO THE FINANCIAL STATEMENTS

1 FORMATION AND BUSINESS OF THE COMPANY

ORGANIZATION

Cyclacel Limited (the "Company" or "Cyclacel") was incorporated in Great
Britain on August 13, 1996 as Intercede 1190 Limited with an authorized share
capital of (pounds sterling)1,000 and issued share capital of (pounds sterling)
1. The Company changed its name to Ecdysis Limited on September 10, 1996, and
was renamed Cyclacel Limited on October 25, 1996. On June 30, 2004, in a
corporate reorganization as preparation for a public listing all of the issued
and outstanding Preferred Ordinary "D" shares, Ordinary shares and Deferred
shares of Cyclacel Limited were acquired by Cyclacel Group Limited in an
exchange of shares. Cyclacel shareholders received an equivalent number of
Preferred Ordinary "D" shares, and Ordinary shares in Cyclacel Group Limited. On
July 1, 2004, Cyclacel Group Limited re-registered as a public limited company
and changed its name to Cyclacel Group plc.

On July 28, 2005, Cyclacel Group plc issued (pounds sterling)5 million
($8.8 million) of convertible loan notes to Scottish Enterprise. The net
proceeds of $8.6 million were loaned to the Company to fund its operating
activities.

The principal activity of the Company is research and development of
therapeutics for cancer and other serious diseases. Through December 31, 2005,
the Company, operating from research facilities in Dundee, Scotland and
Cambridge, England, has been primarily engaged in conducting research,
developing drug candidates, recruiting personnel and raising capital.

The Company has not yet generated substantial revenues from its
operations. Accordingly, through the date of these financial statements, the
Company is considered to be in the development stage.

The Company's fiscal year end since incorporation was March 31. However,
the Company changed its fiscal year end to December 31 during 2003 in
anticipation of an initial public offering and this resulted in shortening of
the March 31, 2004 fiscal year to the nine-month period ended December 31, 2003.

On December 15, 2005 Cyclacel Group plc and Xcyte Therapies, Inc.
("Xcyte") entered into a stock purchase agreement (the "Stock Purchase
Agreement") whereby the entire share capital of Cyclacel would be acquired by
Xcyte for which Cyclacel Group plc would receive newly issued common stock of
Xcyte. Subject to satisfaction of certain closing conditions, including the
approval of the shareholders of Cyclacel Group plc and Xcyte, the transaction is
anticipated to close on March 27, 2006. If the stock purchase agreement is
consummated, Cyclacel will become a wholly-owned subsidiary of Xcyte.

The accompanying financial statements include an allocation of all the
costs associated with the employees, executive directors and Board of Directors
of Cyclacel Group plc. These costs include directors' compensation, Board fees
and associated expenses, and share option compensation charges. All of the
allocations in the accompanying financial statements are based on assumptions
that we believe are reasonable under the circumstances. As a consequence of the
reorganization which occurred on June 30, 2004, options granted by the Company
became exercisable over ordinary shares in Cyclacel Group plc. As a result, the
deferred compensation and additional paid-in capital of $1.8 million related to
the stock-based compensation plans were eliminated and transferred to Cyclacel
Group plc by the creation of an amount payable by the Company. Subsequent
stock-based compensation costs (credits) of $397,000 and $(334,000) have been
allocated to the Company for the six months ended December 31, 2004 and the year
ended December 31, 2005, respectively.

NEED TO RAISE ADDITIONAL CAPITAL

The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
net losses and negative cash flows since its inception. At December 31, 2005,
the Company had an accumulated deficit of $109,018,000.

As of March 27, 2006, on the basis of forecast cash flows of the Company,
the directors believe that the currently available cash and cash equivalents and
short term investments will provide sufficient funds to enable the business to
meet its obligations at least through August 31, 2006. If the Company is unable
to raise further funds prior to that date, it may be required to delay, reduce
the scope of, or eliminate one or more of its development programs or obtain
funds through collaborative arrangements with others which may require the
Company to relinquish rights to certain of its product candidates, or products
that it would otherwise seek to develop or commercialize itself.

The ability of the Company to continue as a going concern beyond August
2006 is dependent on its ability to access further cash resources through the
successful conclusion of one of the following scenarios:

o provided that Xcyte commits to making sufficient cash resources
available to the Company, the consummation of the Stock Purchase
Agreement with Xcyte would give the Company access to Xcyte's cash
resources and would enhance the Company's ability to conclude further
partnering arrangements with pharmaceutical and/or biotechnology
companies; or

o if the Stock Purchase by Xcyte does not complete, the Company will be
dependent on the ability of its parent company, Cyclacel Group plc, to
raise sufficient funds to fund the operations of the group for the
foreseeable future and to commit that such funds will be made available
to the Company. Cyclacel Group plc would seek to raise such funds
through a combination of equity issues or debt arrangements or in
undertaking a cash generative corporate transaction. In addition, the
Company would undertake to raise further funds through revenue deals
with commercial partners in the form of collaboration or services
agreements.

However, there is no assurance that the proposed transaction with Xcyte
will be completed or that Cyclacel Group plc's subsequent efforts to raise
additional private or public funding will be successful. If these efforts are
unsuccessful there is uncertainty as to whether the funds available to the
Company would be sufficient to allow it to continue in operational existence for
the foreseeable future and to meet its liabilities as they fall due.

While the directors are presently uncertain as to the outcome of the
matters mentioned above, they believe that sufficient funding to meet the
Company's ongoing working capital requirements will be provided through the
successful conclusion of one of the above scenarios. Accordingly, the directors
believe it is appropriate to prepare the financial statements on a going concern
basis. The financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial information contained in these financial statements does not
constitute statutory accounts as defined in section 240 of the Companies Act
1985, as amended, of Great Britain. Statutory accounts for the year ended
December 31, 2004 and for the nine months ended December 31, 2003 have been
delivered to the Registrar of Companies for England and Wales. Statutory
accounts for the year ended December 31, 2005 have not yet been delivered to the
Registrar. The auditors' reports on these accounts were unqualified and did not
contain a statement under section 237(2) or (3) of that Act.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES

Financial instruments which potentially subject the Company to
concentrations of risk consist principally of cash and cash equivalents,
short-term investments and accounts receivable.

The Company's cash and cash equivalents are invested in deposits with
banks in the United Kingdom.

The Company does not perform an ongoing credit evaluation of its
customers' financial conditions and generally does not require collateral to
secure accounts receivable. The Company's exposure to credit risk, associated
with non-payment is affected principally by conditions or occurrences within its
customers' operations. The Company historically has not experienced any losses
relating to accounts receivable from its primary customer. $700,000 (56%) of the
Company's revenues for the year ended March 31 2003 were derived from one
customer. The arrangements with this primary customer came to a conclusion
during the nine months ended December 31, 2003.

Drug candidates developed by the Company may require approvals or
clearances from the U.S. Food and Drug Administration ("FDA") or other
international regulatory agencies prior to commercialized sales. There can be no
assurance that the Company's drug candidates will receive any of the required
approvals or clearances. If the Company was denied approval or clearance or such
approval was delayed, it may have a material adverse impact on the Company.

At December 31, 2005, the Company did not believe it had any concentration
of credit risk.

FOREIGN CURRENCY AND CURRENCY TRANSLATION

Monetary assets and liabilities in foreign currencies are translated into
pounds sterling, the Company's functional currency, at the rate ruling at the
date of transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated into pounds sterling at the rate of exchange ruling
at the balance sheet date. Transaction gains and losses are recognized in
operating expenses within the Statement of Operations.

These financial statements are presented in U.S. dollars. Translation of
balance sheet data from pounds sterling to U.S. dollars is made at the exchange
rate ruling at the balance sheet date. Translation of operating statement and
cash flow amounts is made at the average exchange rate for the period.
Translation gains and losses are recognized within "Accumulated other
comprehensive income (loss)."

CASH AND CASH EQUIVALENTS

Cash equivalents are stated at cost, which equates to market value. The
Company considers all highly liquid investments with an original maturity of
three months or less at the time of initial deposit to be cash equivalents.

SHORT-TERM INVESTMENTS

The Company invests its surplus cash in bank term deposits, having a
maturity period of between one day and one year. These deposits can be
terminated early at a nominal cost. Accordingly, all cash resources with
original maturity of three months or less have been classified as cash and cash
equivalents and those with original maturity of more than three months as
short-term investments.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For financial instruments consisting of cash and cash equivalents,
short-term investments, accounts payable and accrued liabilities included in the
Company's financial statements, the carrying amounts are reasonable estimates of
fair value due to their short maturities. Based on borrowing rates currently
available to the Company, the carrying value of the equipment financing lines
approximate fair value.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets, which
are generally three to five years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the related assets, typically 15 years.
Upon sale or retirement of assets, the costs and related accumulated
depreciation and amortization are removed from the balance sheet and the
resulting gain or loss is reflected in operations. Maintenance and repairs are
charged to operations as incurred.

IMPAIRMENT OF LONG-LIVED ASSETS

In accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived
assets, including property, plant and equipment, for impairment whenever events
or changes in business circumstances indicate that the carrying amount of the
assets may not be fully recoverable. Under SFAS No. 144, an impairment loss
would be recognized when estimated undiscounted future cash flows expected to
result from the use of the asset and its eventual disposition are less than its
carrying amount. Impairment, if any, is measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value. Through December
31, 2004 and up until December 31, 2005 there have been no such impairments.

REVENUE RECOGNITION

Revenues are earned from collaborative agreements and amounts invoiced to
customers in respect of goods supplied. The Company recognizes revenue when
persuasive evidence of an arrangement exists; delivery has occurred or services
have been rendered; the fee is fixed and determinable; and collectability is
reasonably assured. Determination of whether persuasive evidence of an
arrangement exists and whether delivery has occurred or services have been
rendered are based on management's judgments regarding the fixed nature of the
fee charged for research performed and milestones met, and the collectability of
those fees. Should changes in conditions cause management to determine these
criteria are not met for certain future transactions, revenue recognized for any
reporting period could be adversely affected.

Research and development revenues, which are earned under agreements with
third parties for contract research and development activities, are recorded as
the related expenses are incurred. Milestone payments are non-refundable and
recognized as revenue when earned, as evidenced by achievement of the specified
milestones and the absence of ongoing performance obligations. Any amounts
received in advance of performance are recorded as deferred revenue. None of the
revenues recognized to date are refundable if the relevant research effort is
not successful.

Grant revenues from government agencies and private research foundations
are recognized as the related qualified research and development costs are
incurred, up to the limit of the prior approval funding amounts. Grant revenues
are not refundable.

Government grants in respect of capital expenditure are deferred and
released to revenue over the estimated useful lives of the related assets by
equal annual installments.

CLINICAL TRIALS ACCOUNTING

All of the Company's clinical trials are performed by contract research
organizations ("CROs") and participating clinical trial sites. Some CROs bill
monthly for services performed, and others bill based upon milestones achieved.
For the latter, the Company accrues clinical trial expenses based on the
services performed each period. Costs of setting up clinical trial sites for
participation in the trials are expensed immediately as research and development
expenses. Clinical trial site costs related to patient enrollment are accrued as
patients are entered into the trial reduced by any initial payment made to the
clinical trial site when the first patient is enrolled.

RESEARCH AND DEVELOPMENT EXPENDITURES

Research and development expenses consist primarily of costs associated
with the Company's product candidates, upfront fees, milestones, compensation
and other expenses for research and development personnel, supplies and
development materials, costs for consultants and related contract research,
facility costs, amortization of purchased technology and depreciation.
Expenditures relating to research and development are expensed as incurred.

PATENT COSTS

Costs relating to prosecution are charged to operations as incurred as
recoverability of such expenditure is uncertain.

LEASED ASSETS

The costs of operating leases are charged to operations on a straight-line
basis over the lease term.

Where the Company enters into a lease which entails taking substantially
all the risks and rewards of ownership of an asset, the lease is treated as a
capital lease. The asset is recorded in the balance sheet as an asset and is
depreciated in accordance with the above depreciation policies. The capital
elements of future lease payments are recorded as liabilities and the interest
is charged to operations over the period of the lease.

PENSION COSTS

The Company operates a defined contribution pension plan. Contributions
are charged to the operating statement as they become payable in accordance with
the rules of the plan.

INCOME TAXES

The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Credit is taken in the accounting period for research and development tax
credits, which will be claimed from H. M. Revenue and Customs, the United
Kingdom's taxation and customs authority, in respect of qualifying research and
development costs incurred in the same accounting period.

STOCK-BASED COMPENSATION

The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25"). Under APB 25,
compensation expense is based on the difference, if any, on the date of grant of
the option, between the estimated fair value of the Company's ordinary shares
and the exercise price of the option.

The Company accounts for equity instruments issued to non employees in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," and Emerging Issues
Task Force ("EITF") 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." SFAS No. 123 defines a "fair value" based method of
accounting for an employee stock option or similar equity investment.

The following table illustrates the effect on net loss if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation arrangements:

NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005
-------------- ------------ ----------------
$000, EXCEPT PER SHARE AMOUNTS

Net loss applicable to Ordinary
shareholders, as reported........................ (19,402) (33,795) (29,924)
Add: Stock-based employee compensation
included in reported loss........................ 217 279 (334)
Less: Total stock-based employee compensation determined
under fair value based method for all awards..... (791) (2,979) (1,892)
-------------- ------------ ----------------
Adjusted net loss................................... (19,976) (36,495) (32,150)
============== ============ ================
Net loss per share - basic and diluted.............
As reported................................. ($2.25) ($1.72) ($1.51)
============== ============ ================
Adjusted.................................... ($2.32) ($1.86) ($1.62)
============== ============ ================

The fair value of each option granted is estimated on the date of grant
using the Black Scholes option valuation model with the following weighted
average assumptions:

NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005
-------------- ------------ ----------------

Risk free interest rate............................... -- 4.3% 4.4%
Expected life (in years).............................. -- 3.5 3.0
Volatility............................................ -- 90% 90%
Dividend yield........................................ -- 0.00% 0.00%

Based on the above assumptions, the weighted average estimated fair values
of options granted were $4.98 and $2.17 for the years ended December 31, 2004
and 2005, respectively.

The employee stock-based compensation charge for the period from August
13, 1996 (inception) to December 31, 2005 of $2,554,000 was allocated $1,867,000
and $687,000 to research and development and general and administrative,
respectively. Stock-based compensation charges (credit) of $174,000, $291,000,
and $(295,000) were allocated to research and development for the nine months
ended December 31, 2003 and the years ended December 31, 2004 and 2005,
respectively. Stock-based compensation charges (credits) of $43,000, $(12,000),
and $(39,000) were allocated to general and administrative for the nine months
ended December 31, 2003 and the years ended December 31, 2004 and 2005,
respectively.

COMPREHENSIVE INCOME (LOSS)

In accordance with SFAS No. 130, "Reporting Comprehensive Income," all
components of comprehensive income (loss), including net income (loss), are
reported in the financial statements in the period in which they are recognized.
Comprehensive income (loss) is defined as the change in equity during a period
from transactions and other events and circumstances from non owner sources. Net
income (loss) and other comprehensive income (loss), including foreign currency
translation adjustments, are reported, net of any related tax effect, to arrive
at comprehensive income (loss).

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS No. 123R, which is a revision of SFAS No. 123, and
supersedes APB Opinion 25. SFAS 123R requires all share-based payments to
employees and directors, including grants of stock options, to be recognized in
the statement of operations based on their fair values, beginning with the first
annual period after June 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS No. 123 will no longer be an
alternative to financial statement recognition. As permitted by SFAS No. 123,
the Company currently accounts for share-based payments to employees using APB
Opinion 25's intrinsic value method.

Under SFAS 123R, the Company must determine the appropriate fair value
model and related assumptions to be used for valuing share-based payments, the
amortization method for compensation cost and the transition method to be used
at the date of adoption. The transition methods include modified prospective and
modified retrospective adoption alternative. Under the modified retrospective
method, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The modified prospective method requires
that compensation expense be recorded for all unvested stock options and
restricted stock at the beginning of the first quarter of adoption of SFAS 123R,
while the modified retrospective method would record compensation expense for
all unvested stock options and restricted stock beginning with the first period
restated. The Company plans to adopt SFAS 123R using the modified-prospective
method. As permitted by SFAS 123, the Company currently accounts for share-based
payments to employees using APB 25's intrinsic value method and expects that the
adoption of SFAS 123R will have a significant impact on the Company's results of
operations. The impact of adoption of SFAS 123R cannot be predicted at this time
because it will depend on the levels of share-based payments granted in the
future. However, had the Company adopted SFAS 123R in prior periods, the impact
would have approximated the impact of SFAS 123 as described in the disclosure of
pro forma net loss under Stock-based Compensation above. SFAS 123R also requires
the benefits of tax deductions in excess of recognized compensation costs to be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement may reduce net operating
cash flows and increase net financing cash flows in periods after adoption.

3 SIGNIFICANT CONTRACTS

LICENSING AND RESEARCH AGREEMENTS

The Company has entered into licensing agreements with academic and
research organizations. Under the terms of these agreements, the Company has
received licenses to technology and patent applications. The Company is required
to pay royalties on future sales of product employing the technology or falling
under claims of patent applications. Additional payments are due if the Company
sublicenses the technology or patent applications or if the Company achieves
predefined milestones.

In respect of Licensing Agreements, additional payments of $23.3 million
would be payable if the Company achieves predefined milestones subject to
achievement of all the specific contractual milestones and the Company's
decision to continue with these projects. Under these agreements the Company
makes annual payments that do not and will not exceed $0.1 million.

CLINICAL COLLABORATIONS

At December 31, 2004, the Company had entered into a number of agreements
with clinical research organizations (CROs) based at various universities and
hospitals. The maximum annual amount payable on any of the existing contracts is
approximately $0.8 million and the annual aggregate cost is approximately $1.7
million. The contracts vary in length with the last to expire/conclude in June
2006.

4 CASH AND CASH EQUIVALENTS

The following is a summary of cash and cash equivalents at December 31,
2004 and 2005:

DECEMBER 31,
-------------------
2004 2005
--------- --------
$000 $000

Cash.............................................................................. 560 3,117
Deposits with original maturity of less than three months......................... 7,206 --
--------- --------
7,766 3,117
========= ========

5 PREPAID EXPENSES AND OTHER CURRENT ASSETS

The following is a summary of prepaid expenses and other current assets at
December 31, 2004 and 2005:

DECEMBER 31,
-------------------
2004 2005
--------- --------
$000 $000

Research and development tax credit............................................... 2,583 1,796
Sales tax receivable.............................................................. 755 375
Prepayments....................................................................... 922 756
Other current assets.............................................................. 586 292
---------- ---------
4,846 3,219
========== =========

6 PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following:

Useful lives in years DECEMBER 31,
--------------------- -------------------
2004 2005
--------- --------
$000 $000

Leasehold improvements.................................................... Life of lease (15 yrs) 511 582
Research and laboratory equipment......................................... 3 to 5 yrs 8,331 7,410
Office equipment and furniture............................................ 3 to 5 yrs 1,174 1,081
--------- --------
10,016 9,073
Less: accumulated depreciation and amortization........................... (6,604) (7,028)
--------- --------
3,412 2,045
========= ========

The depreciation and amortization of property, plant and equipment
amounted to $1,133,000, $1,543,000 and $1,322,000 for the nine months ended
December 31, 2003 and the years ended December 31, 2004 and 2005, respectively.
These charges include depreciation of assets held under capital leases.

Depreciation and amortization expense for the period from inception
(August 13, 1996) through to December 31, 2005 was $7,965,000. Included in
property, plant and equipment are assets under capital lease obligations with an
original cost of $3,421,000, $3,853,000 and $3,442,000 as of December 31, 2003,
2004 and 2005, respectively. Accumulated depreciation on assets under capital
leases was $1,664,000, $1,884,000 and $2,327,000, respectively.

7 GOVERNMENT LOAN

The amounts outstanding under the Government loan are as follows:

DECEMBER 31,
-------------------
2004 2005
--------- --------
$000 $000

Current liabilities............................................................... 482 --
--------- --------
482 --
========= ========

The Government loan of $482,000 ((pounds sterling)250,000) had an interest
rate of 7% per annum and was wholly repayable on September 16, 2003. The loan
was renegotiated during the period ended December 31, 2003 with the repayment
date being extended to January 31, 2005, together with an amended interest rate
of 5% per annum from November 1, 2003. The loan was repaid in full on November
16, 2005 and the floating charge over certain of the Company's assets was
canceled.

8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

Accounts payable and accrued liabilities consisted of the following:

DECEMBER 31,
-------------------
2004 2005
--------- --------
$000 $000

Accounts payable.................................................................. 2,528 2,159
Amounts due to parent company..................................................... 2,196 10,467
Accrued liabilities............................................................... 1,177 1,869
Other current liabilities......................................................... 161 128
---------- --------
6,062 14,623
========== ========

Amounts due to parent company represent transactions between the Company
and Cyclacel Group plc being (1) an intercompany loan of $8,604,000 and (2)
costs allocated by Cyclacel Group plc to Cyclacel Limited related to stock-based
compensation accrued in Cyclacel Group plc. On July 28, 2005, Cyclacel Group plc
issued (pounds sterling)5 million ($8.8 million) of convertible loan notes.
The cash received was transferred to the Company and is being utilized by the
Company to fund its operating activities.

As a consequence of the reorganization which occurred on June 30, 2004,
options granted by the Company became exercisable over ordinary shares in
Cyclacel Group plc. As a result, the deferred compensation and additional
paid-in capital of $1.8 million related to the stock-based compensation plans
were eliminated and transferred to Cyclacel Group plc by the creation of an
amount payable by the Company. Subsequent stock-based compensation costs
(credits) of $397,000 and $(334,000) have been allocated to the Company for the
six months ended December 31, 2004 and the year ended December 31, 2005,
respectively.

9 RELATED PARTY TRANSACTIONS

PRIVATE PLACEMENT

Cancer Research Technology Limited ("CRT"), formerly Cancer Research
Campaign Technology Limited ("CRCT") owned 494,973 ordinary shares of 1p each,
which represented 2.6% of the Company's outstanding shares, at December 31,
2003.

LICENSE AND OPTION AGREEMENT

The Company has license and option agreements with CRT covering several
technologies and research tools. The latest of these agreements terminated on
September 10, 2005. CRT retains rights to materials and intellectual property
outside the relevant fields, and for non-commercial research.

FEES PAID TO SHAREHOLDERS

Up to June 30, 2004, when Cyclacel was acquired by Cyclacel Group Limited
(now Cyclacel Group plc) in an exchange of shares, Cyclacel paid fees to
shareholders for the services and expenses of their directors appointed to the
Company. From July 1, 2004 these services were provided to Cyclacel Group plc
and the fees were payable by Cyclacel Group plc. Since July 1, 2004 all of these
fees have been allocated to the Company based on assumptions that the directors
believe are reasonable under the circumstances. The directors believe these
allocations are indicative of the costs that Cyclacel would have incurred if it
had operated on a standalone basis or as an entity independent of Cyclacel Group
plc.

NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005
-------------- ------------ ---------------
$000 $000 $000

Merlin Venture Limited.............................. 15 22 24
Kleinwort Benson Life Science Partnership........... 10 -- --
Invesco............................................. 23 22 22

The following fees were outstanding at the period end.

DECEMBER 31,
--------------
2004 2005
--------- --------
$000 $000

Merlin Venture Limited............................................................ 6 5
Kleinwort Benson Life Science Partnership......................................... -- --
Invesco........................................................................... 82 94

Noble Grossart Limited charged fees of $79,000 for the provision of
services in relation to the raising of new funds during the year ended December
31, 2004.

SERVICES PROVIDED BY CXR BIOSCIENCES LIMITED

CXR Biosciences Limited (Dundee, Scotland, U.K.), a contract research
organization, charged costs for research services of $447,000, $175,000, $1,900
for the nine months ended December 31, 2003 and the years ended December 31,
2004 and 2005, respectively. As of December 31, 2004 and 2005, the company owed
CXR Biosciences $1,000 and $nil, respectively. On August 14, 2003, Mr. Rombotis,
the Company's Chief Executive Officer, acquired as part of a private equity
financing approximately 2% of the equity of CXR Biosciences.

10 COMMITMENTS

LICENSING AND RESEARCH AGREEMENTS

The Company has entered into various research, license and collaboration
agreements to support its research and development activities. At December 31,
2004 and December 31, 2005, the Company had no financial commitments under these
agreements which were unconditional on future performance.

Through December 31, 2004 and December 31, 2005, the Company had no
minimum royalty commitments under licensing and research agreements.

LEASES

In October 2000, the Company entered into a 25 year lease for its new
corporate headquarters and research and development facility in Dundee, U.K. The
Company also leases a second research facility at the Babraham Research Campus,
Cambridge, U.K. The Company entered into this 5-year lease in August 2005. There
is an option to terminate the lease on July 31, 2007 at a cost to the Company of
$104,000.

Rent expense, which includes lease payments related to the Company's
corporate headquarters and research and development facility and other rent
related expenses, was $344,172, $603,588, and $686,105 for the nine months ended
December 31, 2003 and the years ended December 31, 2004 and 2005, respectively.

As at December 31, 2005, the Company had $3,442,000 of property, plant and
equipment financed through long-term obligations. The obligations under the
equipment leases are secured by the equipment financed, bear interest at a
weighted average rate of 7.2% and are due in monthly and quarterly installments
through May 2007.

Annual future minimum payments are as follows at December 31, 2005:

CAPITAL OPERATING
LEASES LEASES
------------- -----------
$000 $000

2006.............................................................................. 268 791
2007.............................................................................. 80 777
2008.............................................................................. -- 754
2009.............................................................................. -- 718
2010.............................................................................. -- 587
Thereafter........................................................................ -- 414
-------------- -----------
348 4,041
Less amount representing interest................................................. (19)
--------------
Present value of future minimum lease payments.................................... 329
Less current portion.............................................................. (251)
--------------
78
==============

PURCHASE OBLIGATIONS

The Company had minimum purchase obligations of $1,285,000 at December 31,
2005 in respect of clinical trials falling due during the year ending December
31, 2006.

11 CONTINGENCIES

In the ordinary course of business the Company may be subject to legal
proceedings and claims. The Company is not currently subject to any legal
proceedings.

12 SHAREHOLDERS' EQUITY (DEFICIT)

PREFERRED ORDINARY "D" SHARES

In November 2003, 4,076,111 Preferred Ordinary "D" shares of 0.1p each
were issued at $6.90 for cash consideration of $28,143,248. There was an
associated bonus issue of 12,666,580 Preferred Ordinary "D" shares of 0.1p each
given to existing Preferred Ordinary "C" shareholders and Ordinary shareholders
who participated in the "D" funding round on a basis of 1:4 and 1:3,
respectively, by way of capitalization of part of the additional paid-in
capital. This was the first closing of two rounds. In January 2004, the Company
issued a further 1,162,068 Preferred Ordinary "D" shares at $7.44 per share to
new investors for net cash proceeds of $8,646,000 being the second and final
closing of the series "D" funding round. In June 2004, the Company issued a
further 61,076 Preferred Ordinary "D" shares of 0.1p each on the exercise of
certain warrants to existing shareholders for net cash proceeds of $110.

Under the Reorganization and Share Exchange Agreement of June 30, 2004,
the Preferred Ordinary "D" shares of 0.1p each in Cyclacel Limited were
exchanged for Preferred Ordinary "D" shares of 1p each in Cyclacel Group plc.

WINDING UP

Upon the winding up of the Company, Preferred Ordinary "D" shareholders
are, after all liabilities have been paid, entitled to the greater of:

(i) the subscription price per share multiplied by 1.5 together with
a sum equal to a fixed cumulative preferential dividend of 8% per annum
compounded quarterly; or

(ii) the pro-rata share of the proceeds between the Ordinary
shareholders and the Preferred Ordinary "D" shareholders, as if the
Preferred Ordinary "D" shares had been converted.

After such payments, the balance of such assets shall be distributed among
the ordinary shareholders in proportion to the amounts paid up.

The aggregate liquidation preference of the Preferred Ordinary "D" shares
at December 31, 2004 and 2005 was $223,617,000 ($12.45 per share) and
$210,954,000 ($11.74 per share), respectively. The accumulated dividends at
December 31, 2004 and 2005 were $12,824,000 and $22,678,000, respectively.

CONVERSION

The Preferred Ordinary "D" shares may at any time, at the option of the
holder, be converted into Ordinary shares at the rate of one Ordinary share for
every Preferred Ordinary "D" share.

VOTING

Preferred Ordinary "D" shares and Ordinary shares rank pari passu as
regards voting rights.

WARRANTS FOR PREFERRED ORDINARY "D" SHARES

On August 31, 2000, the Company issued warrants to loan-note holders to
subscribe for shares in the Company. In June 2001, these warrants became
exercisable immediately over 62,685 Preferred Ordinary "C" shares at a price of
$10.64 ((pounds sterling)7.53) per share and expire upon the earlier of ten
years from the date of original issuance, the listing of the Company's ordinary
shares or the sale of substantially all of the Company's assets. In November
2003, all Preferred Ordinary "C" shares were converted to deferred shares and
these warrants became exercisable over 116,260 Preferred Ordinary "D" shares at
a price of $6.90 ((pounds sterling)4.06) per share. These were immediately
exercisable and expire upon the earlier of ten years from the date of original
issuance, the listing of the Company's ordinary shares or the sale of
substantially all of the Company's assets. The warrants were assigned a fair
value of $588,000 which was recognized upon issuance. These warrants have not
been exercised. Under the Reorganization and Share Exchange Agreement of June
30, 2004, all of the above warrants are exercisable over shares in Cyclacel
Limited which will then be exchanged for shares in Cyclacel Group plc. Pursuant
to the Stock Purchase Agreement dated December 15, 2005 between Xcyte and
Cyclacel Group plc, the holders of the warrants agreed an amendment to the
warrant instruments such that the warrants became directly exercisable over
Preferred Ordinary "D" shares in Cyclacel Group plc.

In June 2001, the Company issued warrants to existing shareholders to
subscribe for a total of 61,076 Preferred Ordinary "C" shares. In November 2003,
these warrants became exercisable over 61,076 Preferred Ordinary "D" shares at a
price of $0.0015 ((pounds sterling)0.001) per share. The warrants were
immediately exercisable and will expire upon the earlier of ten years from the
date of original issuance or the sale of the whole of the issued share capital
to a third party. The warrants were assigned a fair value of $627,000 which was
recognized upon issuance. All 61,076 warrants were exercised in June 2004.

ORDINARY SHARES

Holders of ordinary shares of 0.1p each are entitled to one vote per share
on all matters to be voted upon by the shareholders of the Company. Subject to
the preferences that may be applicable to any outstanding shares of Preferred
Ordinary "D" shares, the holders of ordinary shares are entitled to receive
notably such dividends, if any, as may be declared by the Board of Directors. No
dividends have been declared to date.

Under the Reorganization and Share Exchange agreement of June 30, 2004,
the Ordinary Shares of 0.1p each in Cyclacel Limited were exchanged for Ordinary
Shares of 1p each in Cyclacel Group plc.

WARRANTS FOR ORDINARY SHARES

In 1999, the Company issued warrants to existing shareholders to subscribe
for a total of 23,500 Ordinary shares in the Company exercisable upon the sale
or listing of the Company. The subscription prices are $0.0015 (0.1p) per share
for 16,000 shares and 90% of the sale or listing price for 7,500 shares. The
warrants are exercisable upon a listing or a sale of substantially all of the
Company's assets and until 30 days after such an event. Under the Reorganization
and Share Exchange Agreement of 30 June 2004, the warrants are exercisable over
ordinary shares in Cyclacel Limited which will then be exchanged for ordinary
shares in Cyclacel Group plc.

Pursuant to the Stock Purchase Agreement dated December 15, 2005 between
Xcyte and Cyclacel Group plc, the holders of the warrants agreed an amendment to
the warrant instruments such that the warrants became directly exercisable over
ordinary shares in Cyclacel Group plc.

DEFERRED SHARES

In November 2003, as part of the series D funding round, 2,251,572
Ordinary shares of 0.1p each and 4,540,969 Preferred Ordinary "C" shares of 0.1p
each were converted into 6,792,541 Deferred shares of 0.1p each. During the year
ended December 31, 2004, the deferred shares were repurchased for a nominal sum
of 1p per holding.

The Deferred shares had the following rights and were subject to the
following restrictions:

a) on a return of capital on winding up or otherwise, the holders of
Deferred shares shall in that capacity only be entitled to receive an amount
equal to the par value thereof and only after payment in respect of each
Ordinary share and
22

Preferred Ordinary "D" share (collectively referred to as
"paid up shares") the amount paid up thereon plus $17,750,000 ((pounds
sterling)10,000,000) per paid up share and the Deferred shares shall not
otherwise entitle their holders to receive or participate in any way in any
profits or assets of the Company; and

b) the Deferred shares shall not entitle their holders to receive
notice of or attend or vote at any general meetings of the Company or
participate in any pre-emptive offer on issue or transfer of any shares
under these articles.

SHARE OPTION PLANS

Cyclacel operates a number of share option plans, which provide the
opportunity to all eligible individuals to participate in the potential growth
and success of the Company. In May 1997, the Company adopted the Cyclacel
Limited Share Option Plan ("1997 Plan"), which was approved by a shareholders'
resolution in May 1997. Under this plan, any person who is a Director or
employee of the Company is eligible to be granted options to purchase Ordinary
shares in the Company. In general, options granted under the "1997 Plan" may not
be exercised before the third anniversary of the date of grant and may not be
exercised later than the tenth anniversary of the date of grant. In February
2001, the Company adopted the Cyclacel Limited 2000 Employees' Share Option
Scheme under the Enterprise Management Incentive Scheme ("2000 Plan"), which was
approved by shareholders' resolution in December 2000. Under this plan any
person who is a Director (other than a non executive Director) or employee of
the Company is eligible to be granted options to purchase shares in the Company.

Options granted under the 2000 Plan may not be exercised more than ten
years after the date of grant and, to the extent not exercised by that time, the
Option shall lapse immediately. Options generally vest and become fully
exercisable over a three year period. Shares can be issued upon exercise of
options under the terms of the Company's employee share option plans up to a
maximum of 12.5% of the issued share capital immediately following the closure
of the series "D" funding round in November 2003.

On April 23, 2004, new options over 1,782,770 ordinary shares were granted
under the 1997 plan and the 2000 plan to employees at an exercise price of $2.66
((pounds sterling)1.50) per share of which 415,508 would only be exercisable
upon the achievement of certain corporate performance criteria. Subsequent to
the issuance of the 415,508 options the Company concluded that the exit related
performance criteria were inappropriate and the options were modified to remove
the exit valuation criteria. Prior to the grant of 1,782,770 options, 598,692
existing options, with higher exercise prices, were surrendered by these
employees. The new options will become exercisable in equal tranches on the
first, second and third anniversaries of the date of grant, the earliest option
exercise date being April 23, 2005 and the expiration date April 23, 2014. The
reasons for this event were that the surrendered options, many of which had
already vested, had an exercise price significantly in excess of the current
fair value of an ordinary share. Therefore the issue of these new options was
undertaken to retain existing employees and enable them to share in the future
success of the company.

The 598,692 options that were replaced and the 415,508 options that were
only exercisable upon the achievement of certain corporate performance criteria
are accounted for in accordance with the guidance on the modification of
stock-based compensation plans. This results in a stock based compensation
charge being accrued by Cyclacel Limited over the period from April 23, 2004 to
June 30, 2004.

As a consequence of the reorganization which occurred on June 30, 2004,
the 1997 Plan and 2000 Plan rules were amended to provide that the options
granted under the plans were, with effect from the reorganization, deemed to be
exercisable over the ordinary shares in Cyclacel Group plc and not Cyclacel
Limited.

No further options were granted under the 1997 Plan or the 2000 Plan. Up
to June 30, 2004 these awards will be accounted for by Cyclacel in accordance
with the provisions for variable compensatory plans as set out in Accounting
Principles Board Option No. 25, "Accounting for Stock Issued to Employees" ("APB
25"). From July 1, 2004, these awards have been accounted for by Cyclacel Group
plc in accordance with the provisions for variable compensatory plans as set out
in APB 25. As the options are related to individuals employed by Cyclacel
Limited, the stock-based compensation charge related to these options will be
allocated to Cyclacel Limited from Cyclacel Group plc.

On July 1, 2004 Cyclacel Group plc adopted a New Option Plan, (the
Cyclacel Group Plc Discretionary Share Option Plan), a New SAYE Plan, (the
Cyclacel Group Plc Savings Related Share Option Plan) and a New Restricted Share
and Co Investment Plan, (the Cyclacel Group Plc Restricted Share and Co
Investment Plan). We refer to these plans collectively as the New Share Plans.
The New Share Plans replace the 1997 Plan and the 2000 Plan. One Cyclacel
Limited employee has received grants of options under the New Option Plan. The
stock-based compensation charges related to these options have been allocated to
Cyclacel Limited from Cyclacel Group plc. No options have been awarded under the
other plans.

NEW OPTION PLAN

Options may be granted to selected employees and directors of the group at
the discretion of the remuneration committee. The exercise price will not be
less than the higher of the middle market quotation for an Ordinary share on the
day preceding the date of grant, or the average of such quotations for the three
days preceding the date of grant, and the nominal value of the ordinary shares.

Limits to the number of shares over which options may be granted are as
follows:

o in any ten year period not more than 10% of the issued Ordinary share
capital may be issued or issuable under the New Option Plan or any
other employees' share scheme; and

o in any ten year period not more than 5% of the issued Ordinary share
capital may be issued or issuable under the New Option Plan or any
discretionary share scheme.

Options will normally be exercisable between three and ten years following
the date of grant provided any specified performance target has been satisfied.

A member of senior management, employed by Cyclacel Limited, was granted
an option over 90,000 ordinary shares at an exercise price of $2.66 ((pounds
sterling)1.50) per share in December 2004. These awards will be accounted for by
Cyclacel Group plc in accordance with the provisions for variable compensatory
plans as set out in APB 25 and the associated charge allocated to Cyclacel
Limited.

SENIOR EXECUTIVE INCENTIVE PLAN

Mr. Rombotis, the chief executive officer, was granted rights to receive
an option to acquire additional ordinary shares in Cyclacel Limited following
successful completion by the Company of an initial public offering and listing
on a major stock exchange ("the original Incentive Option").

The terms of the original Incentive Option were agreed as part of Mr.
Rombotis's original contract of employment with Cyclacel limited dated August 1,
1997, and reflected in an appendix thereto. On July 17, 2004, Cyclacel Group plc
entered into an employment contract with Mr. Rombotis's and granted an amended
Incentive Option (the "amended Incentive Option").

The principal terms of the original Incentive Option, as agreed pursuant
to Mr. Rombotis's original contract of employment in August 1997 are as follows:

o Mr. Rombotis was initially to receive an option to acquire 200,000
ordinary shares in Cyclacel Limited at an exercise price of 0.1 pence
per share. The number of shares under the option would be subject to
adjustment depending on the valuation of the company immediately
following successful completion of an initial public offering on a
major stock exchange (including the London Stock Exchange or Nasdaq)
(the "Relevant Valuation"). Depending on the Relevant Valuation, this
adjustment could have resulted in Mr. Rombotis receiving an option over
shares equivalent to up to 7.5% of the share capital of Cyclacel
Limited on a fully diluted basis (subject to reduction to reflect
certain shares and options already held by him at the relevant time).
Following a listing on a major stock exchange, the option would be
exercisable in three equal tranches on the first, second and third
anniversaries of the major stock market listing.

o The original Incentive Option would have lapsed seven years after the
date of its grant.

The principal terms of the amended Incentive Option granted pursuant to
the Senior Executive Incentive Plan (which now replaces the right agreed
pursuant to Mr. Rombotis's original contract of employment in 1997) are as
follows:

o Mr. Rombotis has a right to acquire 1,720,903 ordinary shares in
Cyclacel Group plc at an exercise price of 1p per share.

o The amended Incentive Option will become exercisable by Mr. Rombotis
only following successful completion of the Offering or another listing
of part of the Ordinary share capital of Cyclacel Group plc on a major
stock exchange (including the London Stock Exchange or Nasdaq) or on a
sale or change of control of Cyclacel Group plc prior to any such
listing and only if Mr. Rombotis remains in employment with the
Cyclacel Group plc (and has not given or been given notice to leave) at
the time of exercise (unless Mr. Rombotis has been dismissed without
cause).

o Provided that Mr. Rombotis remains in employment with the Cyclacel
Group plc, the amended Incentive Option will become exercisable in
equal tranches on the first, second and third anniversaries of the
closing of the offering. The amended Incentive Option will also be
exercisable in full on any change of control of Cyclacel Group plc
pursuant to a general offer following the closing of this Offering.

o The amended Incentive Option will lapse on the earlier of the cessation
of employment of Mr. Rombotis with the Cyclacel Group plc and the tenth
anniversary of its grant in June 2004.

The original Incentive Option over 200,000 ordinary shares (as agreed
pursuant to Mr. Rombotis's original contract of employment in August 1997) has
been accounted for by Cyclacel in accordance with the provisions for variable
compensatory plans set out in Accounting Principles Board Option No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The stock-based
compensation charge has been accrued over the expected period to July 16, 2004,
being seven years from August 1, 1997, and has been adjusted during each
subsequent period to reflect changes in the fair value of the Ordinary shares.
Following the decision to abort the 2004 IPO, all of the compensation charges in
Cyclacel in the year ended December 31, 2004 were reversed.

The amended Incentive Option granted pursuant to the Senior Executive
Incentive Plan (which replaced the rights agreed pursuant to Mr. Rombotis's
original contract of employment in August 1997) is also accounted for in
accordance with the guidance on the modification of stock based compensation
plans. No compensation charge has been accrued in the financial statements of
Cyclacel Group plc in respect of this arrangement as it is not considered
probable that there will be a successful completion of an offering or the
listing of part the ordinary share capital on a major stock exchange (including
the London Stock Exchange or Nasdaq) or on a sale or change of control Cyclacel
Group plc prior to any such listing.

A summary of the share option activity and related information is as
follows:

NUMBER OF WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
------------- ----------------

Balance at April 1, 2002............................................................. 743,674 $ 4.48
Granted........................................................................ 177,000 11.65
Exercised...................................................................... (2,000) 6.19
Canceled....................................................................... (4,500) 11.17
-------------
Balance at March 31, 2003............................................................ 914,174 6.25
Exercised...................................................................... (16,057) 7.45
Canceled....................................................................... (10,600) 8.59
-------------
Balance at December 31, 2003......................................................... 887,517 7.01
Granted........................................................................ 3,643,673 1.46
Exercised...................................................................... (71,875) 0.002
Canceled....................................................................... (880,892) 7.42
-------------
Balance at December 31, 2004......................................................... 3,578,423 1.52
Granted........................................................................ 12,500 2.73
Canceled....................................................................... (402,533) 2.73
-------------
Balance at December 31, 2005......................................................... 3,188,390 1.21
=============

As a consequence of the reorganization which occurred on June 30, 2004,
options granted by the Company over its ordinary shares became exercisable over
ordinary shares in Cyclacel Group plc.

The following table summarizes information about options outstanding at
December 31, 2005:

OPTIONS EXERCISABLE OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------------------------------
EXERCISE EXERCISE NUMBER WEIGHTED AVERAGE NUMBER
PRICE PRICE OUTSTANDING REMAINING CONTRACTUAL LIFE EXERCISABLE
-------------- ----------- -------------- -------------------------- ----------------
(POUNDS STERLING) $

0.01 0.02 1,720,903 8.58 --
1.50 2.58 1,458,437 8.40 460,312
4.53 7.80 5,000 5.17 5,000
4.76 8.19 4,050 5.17 4,050
---------- ---------
3,188,390 8.49 469,362
========== =========

The options above were granted under Cyclacel share option plans. However,
following the reorganization on June 30, 2004, all outstanding options became
exercisable over ordinary shares in Cyclacel Group plc.

13 PENSION PLANS

The Company operates a defined contribution group personal pension plan
for substantially all of its employees. Company contributions to the plan
totalled $145,889, $206,035 and $188,277 in the nine months ended December 31,
2003 and the years ended December 31, 2004 and 2005, respectively.

14 TAXES

The Company has made a taxable loss in each of the operating periods since
incorporation. The income tax credits of $1,486,000, $2,456,000 and $1,900,000
for the nine months ended December 31, 2003 and the years ended December 31,
2004 and 2005, respectively, represent U.K. research and development tax credits
receivable against such expenditures in the United Kingdom.

A reconciliation of the (benefit) provision for income taxes with the
amount computed by applying the statutory corporation tax rate of 30% to loss
before income taxes is as follows:

NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2004 2005
-------------- ------------ ---------------
$000 $000 $000

Loss before income taxes............................. (16,463) (25,198) (19,948)
Income tax expense computed at statutory corporation
tax rate......................................... (4,939) (7,558) (5,984)
Disallowed expenses and non-taxable income........... 2,506 4,326 2,524
Depreciation in excess of capital allowances......... 149 190 105
Tax losses........................................... 2,284 3,043 3,355
Research and development tax relief.................. (1,857) (3,071) (2,375)
Research and development tax credit rate difference.. 371 614 475
-------------- -------------- ---------------
(1,486) (2,456) (1,900)
============== ============== ===============

Significant components of the Company's deferred tax assets are shown
below:

2004 2005
--------- --------
$000 $000

Deferred tax assets (liabilities).................... 20,985 22,691
Net operating loss carryforwards..................... (377) (248)
--------- --------
Total net deferred tax assets........................ 20,608 22,443
Valuation allowance for deferred tax assets.......... (20,608) (22,443)
--------- --------
Net deferred taxes................................... -- --
========= ========

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and tax purposes. A valuation allowance has been established, as realization of
such assets is uncertain.

The Company has, subject to agreement with the H.M. Revenue and Customs,
the following tax losses and accumulated tax losses available for carry forward
against future operations, which under U.K. tax laws do not expire:

2004 2005
--------- --------
$000 $000

Accumulated tax losses............................... 70,800 75,600
========= ========