SOURCE: XTL Biopharmaceuticals Ltd

September 07, 2005 02:01 ET

XTL Biopharmaceuticals Ltd announces Interim Results for the Six Months Ended 30 June 2005

Rehovot, Israel -- (MARKET WIRE) -- September 7, 2005 --XTL Biopharmaceuticals Ltd

Interim Results for the Six Months Ended 30 June 2005

Rehovot, Israel, 7 September 2005: XTL Biopharmaceuticals Ltd. (LSE: XTL) ("XTLbio" or the "Company")a biopharmaceutical company developing drugs against hepatitis, today announces interim financial results for the six months ended 30 June 2005.

Highlights:
     
-    Re-focusing plan designed to enable the Company to realize value 
     from its Research and Development programs and focus its resources 
     on the development of its lead programs through to clinical proof-
     of principle.
-    Decrease in the loss for the period by 50% - the loss for the 
     period was $5 million compared to $10 million during the same 
     period last year.
-    Strengthening the hepatitis C small molecule pipeline and discovery
     capabilities - XTLbio signed an in-license and asset purchase 
     agreement with VivoQuest Inc.
-    Transition of HepeX-B development activities from XTLbio to Cubist 
     was completed.
-    FDA granted XTL-6865 "Fast Track" designation for the treatment of 
     HCV re-infection following a liver transplant.
-    Submitted a US investigational new drug application to the FDA in 
     order to commence a Phase Ia/Ib clinical trial later this year for
     XTL-6865, the dual-MAb product.
-    Shares listed on two new stock exchanges - Nasdaq and the Tel 
     Aviv Stock Exchange
Commenting on the results, Michael S. Weiss, Chairman, said: "The Company's management is taking significant actions to focus its business activities in areas with the highest potential. The financial results for the first half of the year reflect the start of this process. Trading on NASDAQ and the Tel-Aviv Stock Exchanges provides an important milestone for the Company and will help us attract investors and analysts. The Company will continue to develop its various clinical products while at the same time, continue to seek to in-license or acquire additional candidates or complementary technologies."

Contacts:

XTLbio
Jonathan Burgin, Chief Financial Officer Tel: +972 8 930 4440
About XTL Biopharmaceuticals Ltd.

XTL Biopharmaceuticals Ltd. (XTLbio) is a biopharmaceutical company developing drugs against hepatitis. Established in 1993, XTLbio became a public company in 2000 and its ordinary shares are listed on the Official List of the UK Listing Authority and are traded on the London Stock Exchange under the symbol XTL, on the Tel Aviv Stock Exchange, Israel and on NASDAQ under the symbol XTLB.

Cautionary Statement

Some of the statements included in this press release may be forward-looking statements that involve a number of risks and uncertainties. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the US Private Securities Litigation Reform Act of 1995. Among the factors that could cause our actual results to differ materially, and therefore affect interest by investors in our ADR's, are the following: our ability to successfully complete cost-effective clinical trials for the drug candidates in our pipelines and other risk factors identified from time to time in our reports filed with the various regulatory bodies. Any forward-looking statements set forth in this press release speak only as of the date of this press release. We do not intend to update any of these forward-looking statements to reflect events or circumstances that occur after the date hereof. This press release and prior releases are available at www.xtlbio.com. The information in our website is not incorporated by reference into this press release and is included as an inactive textual reference only.

Chairman's Review

We are pleased to report that XTLbio has made progress in the first half of the year on the back of changes in the Company. In February, the shareholders at an Extraordinary General Meeting decided on changing the Board of Directors.

Strategy

The new board undertook a review of the business and agreed in March 2005 on a re-focusing plan designed to enable the Company to realize value from its Research and Development programs. Integral to the strategy is the board's initiative to focus its resources on the development of its lead programs through to clinical proof-of-principle. The plan also provided for cost savings as is evident from the decrease in the loss for the period of $5 million compared to $10 million during the same period last year.

XTL-6865 (Product for the Prevention of Re-Infection of HCV and treatment of chronic HCV disease)

XTL-6865 (formerly known as HepeX-C) 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, XTLbio submitted a US investigational new drug application (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 FDA granted XTL-6865 "Fast Track" designation for the treatment of HCV re-infection following a liver transplant.

Financial Review

As at 30 June 2005, the Company's cash and short term investments were US$16.6 million (31 December 2004: US$22.9 million).

The Company recorded revenue of US$2.6 million compared to US$0.7 million in the same period last year. Revenue for the period was primarily due to the reimbursement for development expenses for HepeX-B that was incurred pursuant to XTLbio's licensing agreement with Cubist and was also due to in-licensing revenue pursuant to the agreement with Cubist. The Company entered into its agreement with Cubist in June 2004.

Research and Development costs decreased by US$4.7 million to US$3.5 million from US$8.2 million for the first half of 2004. The decrease in Research and Development costs was due primarily to the absence of expenses related to early stage discovery research activities related to infectious diseases, a decrease in expenses related to the development and clinical program of HepeX-B, due to the initiation of the collaboration agreement with Cubist, as well as due to a decrease in expenses related to the development and clinical program of HepeX-C. This decrease was partially offset by an increase in expenses associated with XTLbio's HCV-SM program.

General and administrative expenses increased by US$0.2 million to US$1.6 million in comparison to US$1.4 million in the parallel period last year. The increase in general and administrative expenses was due primarily to costs related to our NASDAQ listing and shareholder meetings.

Business development costs decreased by US$0.4 million to US$0.1 million in contrast to US$0.5 million in the first half of 2004.

Strengthening hepatitis C Small Molecule Pipeline and Discovery Capabilities

As part of the aforementioned plan, XTLbio signed an in-license and asset purchase agreement with VivoQuest Inc.

VivoQuest's lead program focuses on development of compounds for the treatment of hepatitis C virus (HCV) infection, and has identified multiple lead candidates in this disease area that have shown significant activity in preclinical model systems, which is equal to or greater than the most promising molecules in clinical development today.

Under the license, XTLbio has the exclusive worldwide rights to VivoQuest's intellectual property and technology, including its HCV compounds and compound library. XTLbio will be responsible for the further development and commercialization of VivoQuest's HCV program.

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

HepeX-B was recently studied in a Phase IIb clinical trial in liver transplant patients. In August 2005, we announced that the dosing portion of the study ended. In August 2005, we also announced the recent review of the safety data from all patients enrolled in the study by an Independent Data and Safety Monitoring Board, or DSMB, and no safety concerns were raised. Cubist plans to review data from this Phase IIb trial with the FDA as part of a discussion of design elements of a Phase III clinical trial.

In August 2005, we also announced that the transition of HepeX-B development activities from XTLbio to Cubist was completed. This transition will enable us to focus all our current resources on our HCV programs.

Shares listed on NASDAQ and the Tel-Aviv Stock Exchange

Recently we listed our shares on NASDAQ and the Tel-Aviv Stock Exchange in addition to our trading on the London Stock Exchange since 2000. We believe that this is a major milestone for the Company and will help us attract new investors from the US, Israel and around the world. XTLbio is now one of the few companies whose shares are traded on three stock exchanges which allows for virtually round the clock trading.

Current Strategy

Under our current strategy, we plan to:

   - commence the clinical development of XTL-6865 and our small 
     molecule development efforts;
   - continue our efforts to bring one or more products into clinical
     development from our small molecule development programs; and
   - seek to in-license or acquire additional candidates or 
     complementary technologies.


Michael S. Weiss
Chairman

6 September 2005

The Board of Directors of
XTL Biopharmaceuticals Ltd.

Re:   Review of condensed consolidated unaudited interim financial 
      statements for the six months period ended June 30, 2005

At your request, we have reviewed the condensed consolidated interim balance sheet of XTL Biopharmaceuticals Ltd. (hereafter - the Company) and its subsidiary at June 30, 2005 and the condensed consolidated statements of operations, changes in shareholders' equity and cash flows for the six months period then ended. We have also reviewed the consolidated statements of operations and cash flows for the period from March 9, 1993 (incorporation date) to June 30, 2005 (the amounts included therein, which relate to the period through December 31, 2000, are based on the financial statements for 2000, which were audited by another accounting firm).

Our review was performed in accordance with auditing standards generally accepted in Israel and the standards of the Public Company Accounting Oversight Board (United States), including those prescribed by the Institute of Certified Public Accountants in Israel. Inter alia, these procedures include: reading of the financial statements referred to above, reading of minutes of meetings of shareholders, the board of directors and its committees, and making inquiries of Company officers responsible for financial and accounting matters. Since our review was limited in scope and did not constitute an audit in accordance with auditing standards generally accepted in Israel and in the United States, we do not express an opinion on the condensed consolidated interim financial statements.

In performing our review, nothing came to our attention that indicated that material adjustments should be made to the interim condensed consolidated financial statements referred to above in order for them to be considered as having been prepared in accordance with the accounting principles generally accepted in the United States.


Sincerely yours,
Kesselman & Kesselman
Certified Public Accountants (Israel)
A member of PricewaterhouseCoopers International

Tel Aviv, Israel
September 6, 2005

                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                                 BALANCE SHEETS
                                AT JUNE 30, 2005

                                      June 30           December
                                                             31,
                                      2005       2004       2004
                               (Unaudited)             (Audited)
                                        $ In thousands

A s s e t s

CURRENT ASSETS:
Cash and cash equivalents            4,967      7,841     12,788
Short-term deposits                 11,658      5,026     10,136
Marketable securities                             336
Accounts receivable:
Trade                                1,667        700        543
Other                                  318        630        306
                                 ---------  --------- ----------
T o t a l current assets            18,610     14,533     23,773
SEVERENCE PAY FUNDS                    465        745        830
RESTRICRED LONG-TERM DEPOSITS          108        107        113
PROPERTY AND EQUIPMENT, net            791        904        908
                                 ---------  --------- ----------
                                    19,974     16,289     25,624
                                 =========  ========= ==========
Liabilities and shareholders'
equity
CURRENT LIABILITIES:
accounts payable and accruals:
Trade                                1,020      1,913      1,108
Other                                1,660      1,828      2,026
Deferred gain, see note 4              399        164        399
                                 ---------  --------- ----------
T o t a l current liabilities        3,079      3,905      3,533
                                 ---------  --------- ----------
LIABILITY FOR EMPLOYEE RIGHTS
UPON
RETIREMENT                             752      1,294      1,291
DEFERRED GAIN, see note 4              998        572      1,198
                                 ---------  --------- ----------
T o t a l long-term                  1,750      1,866      2,489
liabilities
                                 ---------  --------- ----------
SHAREHOLDERS' EQUITY:
Share capital                          846        594        841
Additional paid in capital         105,029    89,314*   104,537*
Deferred share - based                              *          *
compensation
Accumulated other                                (19)
comprehensive loss
Deficit accumulated during the
development
stage                             (90,730)   (79,371)   (85,776)
                                 ---------  --------- ----------
T o t a l shareholders' equity      15,145     10,518     19,602
                                 ---------  --------- ----------
                                    19,974     16,289     25,624
                                 =========  ========= ==========


* Reclassified

Date of approval of the interim financial statements: 
September 6, 2005.

              Michael Weiss                          Ido Seltenreich
             Chairman of the                             Director
           Board of Directors

            The accompanying notes are an integral part of the 
                     condensed financial statements.
                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
                 FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005

                                                      Year      Period
                                                     ended        from
                          Six months ended          Decem-    March 9,
                                                   ber 31,       1993*
                               June 30                2004          to
                                                 (Audited)        June
                              2005        2004                     30,
                                                                  2005
                             (Unaudited)                   (Unaudited)

                                       $ In thousands
                              ---------------------------------

REVENUES
Reimbursed                   2,408         700       3,269       5,677
out-of-pockets
expenses
License                        200          18         185         385
                          --------   ---------  ----------  ----------
                             2,608         718       3,454       6,062
COST OF REVENUES
Reimbursed                   2,408         700       3,269       5,677
out-of-pockets
expenses
License (with respect                        4          32          32
to royalties)
                          --------   ---------  ----------  ----------
                             2,408         704       3,301       5,709
GROSS MARGIN                   200          14         153         353
                          --------   ---------  ----------  ----------
RESEARCH AND
DEVELOPMENT
COSTS                        3,549       8,178      11,985      78,582
L E S S -                                                       10,950
PARTICIPATIONS
                          --------   ---------  ----------  ----------
                             3,549       8,178      11,985      67,632
GENERAL AND
ADMINISTRATIVE
EXPENSES                     1,600       1,395       4,134      25,320
BUSINESS DEVELOPMENT           130         548         810       4,416
COSTS
IMPAIRMENT OF ASSET                                                354
HELD FOR SALE
                          --------   --------- -----------  ----------
OPERATING LOSS               5,079      10,107      16,776      97,369

FINANCIAL INCOME, net          176          64         352       6,876
                          --------   ---------   ---------  ----------
LOSS BEFORE TAXES ON         4,903      10,043      16,424      90,493
INCOME

TAXES ON INCOME                 51          25          49         237
                          --------  ----------  ----------  ----------
NET LOSS FOR THE             4,954      10,068      16,473      90,730
PERIOD
                          ========    ========   =========  ==========

BASIC AND DILUTED PER
SHARE DATA:
Loss per ordinary          $(0.03)     $(0.09)     $(0.12)
share
Weighted average
number of
ordinary
shares used to compute
loss per
ordinary share         168,540,438 112,019,464 134,731,766
                            ======   =========    ========

                      * Incorporation date see note 1(a).

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

                                                                  (Continued) -1
                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005

                                    Number       Share     Additional
                                        of     Capital          paid-
                                    shares                         in
                                                              capital
                                        $ In thousands
                          -------------------------------------------

BALANCE AT
JANUARY 1,
2005 (audited)                 168,079,196         841       104,537*
CHANGES DURING THE SIX
MONTHS

ENDED JUNE 30, 2005
(unaudited):
Loss
Exercise of
employee and
non employee
stock options                    1,104,058           5            409
Employee stock
options
expenses                                                           72
Non employee
stock options
expenses                                                           11
                                     =====       =====           ====
BALANCE AT
JUNE 30,
2005(unaudited)                169,183,254         846       105,029*
                                     =====       =====          =====
BALANCE AT
JANUARY 1,
2004 (audited)                 112,019,464         594        89,303*
CHANGES DURING THE SIX
MONTHS

ENDED JUNE 30, 2004
(unaudited):
Loss
Net unrealized
gain

Comprehensive
loss
Non Employee
stock options
expenses                                                           11
                                      ====       =====          =====
BALANCE AT
JUNE 30, 2004
(unaudited)                    112,019,464         594        89,314*
                                      ====       =====           ====

* Reclassified


                         Deferred     Accu-    Deficit       Total
                          Share -   mulated      accu-
                            based     other    mulated
                             com-      com-     during
                             pen-      pre-        the
                           sation      hen-      Deve-
                                       sive       lop-
                                     income       ment
                                     (loss)      stage
                                     $ In thousands
                       -------------------------------------------

BALANCE AT
JANUARY 1,
2005 (audited)               -,-*       -,-   (85,776)      19,602
CHANGES DURING THE SIX
MONTHS

ENDED JUNE 30, 2005
(unaudited):
Loss                                           (4,954)     (4,954)
Exercise of
employee and
non employee
stock options                                                  414
Employee stock
options
expenses                                                        72
Non employee
stock options
expenses                                                        11
                             ====     =====      =====        ====
BALANCE AT
JUNE 30,
2005(unaudited)              -,-*       -,-   (90,730)      15,145
                             ====     =====      =====        ====
BALANCE AT
JANUARY 1,
2004 (audited)                  *        14   (69,303)      20,608
CHANGES DURING THE SIX
MONTHS

ENDED JUNE 30, 2004
(unaudited):
Loss                                          (10,068)    (10,068)
Net unrealized
gain                                   (33)                   (33)
                                                         ---------
Comprehensive
loss                                                      (10,101)
Non Employee
stock options
expenses                                                        11
                            =====     =====       ====        ====
BALANCE AT
JUNE 30, 2004
(unaudited)                     *      (19)   (79,371)      10,518
                             ====     =====       ====        ====

* Reclassified

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

                                                 (Concluded) - 2
                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                  STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                 FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005

                                     Number        Share        Addi-
                                         of      capital       tional
                                     shares                     paid-
                                                                   in
                                                              capital

                                         $ In thousands
                           ------------------------------------------

BALANCE AT
JANUARY 1,
2004 (audited)                  112,019,464          594      89,303*
CHANGES DURING THE YEAR
ENDED

DECEMBER 31, 2004
(audited):
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 (audited)                  168,079,196          841     104,537*
                                       ====          ===         ====

* Reclasified
** represents an amount
less than $ 1,000.


                           Deferred      Accu-       De-      Total
                            Share -    mulated     ficit
                              based      other     accu-
                               com-       com-   mulated
                               pen-       pre-    during
                             sation       hen-       the
                                          sive     deve-
                                        Income      lop-
                                        (loss)      ment
                                                   stage

                                       $ In thousands
                         ------------------------------------------

BALANCE AT
JANUARY 1,
2004 (audited)                    *         14  (69,303)     20,608
CHANGES DURING THE YEAR
ENDED

DECEMBER 31, 2004
(audited):
Comprehensive loss:
Net loss                                        (16,473)   (16,473)
Net unrealized
gain                                      (14)                 (14)
                                                          ---------
Comprehensive
loss                                                       (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 (audited)                    *        -,-  (85,776)     19,602
                               ====       ====      ====      =====

* Reclasified
** represents an amount
less than $ 1,000.


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

                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                 FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 2005
                                                             Period
                                                               from
                               Six months          Year       March
                                                  ended          9,
                                                  Dece-    1993(**)
                              ended June 30        mber          to
                                                    31,        June
                                                   2004         30,
                                2005     2004      (Au-        2005
                                                 dited)      (Unau-
                                                             dited)
                               (Unaudited)

                                        $ In thousands
                                ------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss for the period      (4,954) (10,068)  (16,473)    (90,730)
Adjustments to reconcile
loss
to net cash used in
operating
activities:
Depreciation and                 124      177       319       2,711
amortization
Capital loss (gain) on sale
of
property and equipment           (4)      (1)         1           8
Change in liability for
employee                       (539)       99        30         812
rights upon retirement
Impairment of asset held                                        354
for
sale
Loss (gain) from marketable
securities, net                           (7)        13       (410)
Employee and non employee
stock                             83       11        32         515
options expenses
Loss (gain) on amount
funded
in                                26                (4)          22
respect of employee
Changes in operating asset
and
liability items:
Decrease (increase) in
accounts receivable:
Trade                        (1,124)              (543)     (2,326)
Other                           (12)    (624)       400         388
Increase (decrease) in
deferred                       (200)      736     1,597       1,397
gain
Increase (decrease) in
accounts                       (454)      740       133       2,633
payable and accruals        -------- -------- --------- -----------
Net cash used in operating
activities*                  (7,054)  (8,937)  (14,495)    (84,626)
                            -------- -------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Short-term deposits, net     (1,522)   12,303     7,193    (11,658)
Long-term deposits, net            5       52        46       (108)
Investment in available for
sale                                                        (3,363)
securities
Proceeds from sales of
available for                             387       722       3,773
sale securities
Severance pay funded             339    (121)     (136)       (547)
Purchase of property and        (38)     (31)     (180)     (4,021)
equipment
Proceeds from sale of
property
and                               35        4         5         157
equipment                   -------- -------- --------- -----------
Net cash provided by (used
in)
investing activities         (1,181)   12,594     7,650    (15,767)
                            -------- -------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of share capital -
net of                                           15,430     104,376
share issuance expenses
Exercise of share warrants
and
employee stock options           414                 19         984
Proceeds from long-term                                         399
debt
Proceeds from short-term                                         50
debt
Payments relating to                                          (399)
long-term
debt
Payments relating to                                           (50)
short-term debt             -------- -------- --------- -----------
Net cash provided by
financing
activities                       414             15,449     105,360
                            -------- -------- --------- -----------
NET INCREASE IN CASH AND
CASH
EQUIVALENTS                  (7,821)    3,657     8,604       4,967
BALANCE OF CASH AND CASH
EQUIVALENTS
AT BEGINNING OF PERIOD        12,788    4,184     4,184
                            -------- -------- --------- -----------
BALANCE OF CASH AND CASH
EQUIVALENTS
AT END OF PERIOD               4,967    7,841    12,788       4,967
                              ======    =====    ======    ========
Supplementary information
on
financing activities not
involving cash flows -
conversion of convertible
subordinated debenture into
Shares                                                        1,700
Supplemental disclosures:
Income taxes paid                 57       34       107         378
                               =====    =====    ======     =======
Interest paid                                                   350
(*) Including effect of
changes in                        23               (73)     (1,816)
the exchange rate on cash      =====    =====    ======    ========
  (**) Incorporation date see note 1(a).

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

                        XTL BIOPHARMACEUTICALS LTD.
                       (A Development Stage Company)
                         NOTES TO INTERIM CONDENSED 
                   CONSOLIDATED FINANCIAL STATEMENTS
                                AT JUNE 30, 2005
                                  (Unaudited)
1. General:

a. XTL Biopharmaceutical Ltd. ("the Company") was incorporated under the Israel Companies Ordinance on March 9, 1993. The Company is a development stage company in accordance with Financial Accounting Standard 7 ("FAS") "Accounting and Reporting by Development Stage Enterprises".

The principal activity of the Company is the development of therapeutic pipeline for the treatment of infectious diseases.

The Company has a wholly-owned subsidiary in the United States - XTL Biopharmaceuticals Inc. ("Subsidiary"), which was incorporated in 1999 under the law of the state of Delaware. The subsidiary is primarily engaged in business development and clinical activities.

b. Through June 30, 2005, the Company has incurred losses in an aggregate amount of US$ 90,730,000. Such losses have resulted primarily from the Company's activities as a development stage company. Considering the Company's current reserves the Company does not foresee any cash limitations to finance its operations for the coming year.

c. The interim financial statements at June 30, 2005 ("the interim statements") were drawn up in condensed form, in accordance with accounting principles generally accepted applicable to interim statements. Thus, the accounting principles applied in preparation of the interim statements are consistent with those applied in the preparation of annual financial statements. Nevertheless, the interim statements do not include all the information and explanations required for annual financial statements.

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

2. Functional currency

The currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar ("$" or "dollar"). Most of the Company's research and development expenses are incurred in dollars. Significant part of the Company's capital expenditures and substantially all of its financing is in dollars. Thus, the functional currency of the Company is dollar.

Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-dollar transactions and other items reflected in the statements of operations, the following exchange rates are used: (i) for transactions - exchange rates at transaction dates or average rates and (ii) for other items (derived from non-monetary balance sheet items) - historical exchange rates. The resulting currency transaction gains or losses are carried to financial income or expenses, as appropriate.

                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                        NOTES TO CONDENSED CONSOLIDATED 
                  INTERIM FINANCIAL STATEMENTS (continued)
                                AT JUNE 30, 2005
                                  (Unaudited)
2. Functional currency (continued):

Following are the changes in the exchange rate of the dollar and in the Israeli Consumer Price Index ("CPI"):

                                      Six months ended     Year ended
                                           June 30       December 31,
                                      2005        2004           2004
                                         %           %              %
                                       ---         ---            ---
Rate of change of the          
  Israeli currency
   against the dollar                  6.2         2.7           (1.6)
Changes in the Israeli CPI             0.5         1.4            1.2
Exchange rate of one dollar 
(at end of period)               NIS 4.574   NIS 4.497      NIS 4.308

3. Employee Stock Based Compensation

In December 2004, the Financial Accounting Standards Board ("FASB") issued the revised Statement of Financial Accounting Standards ("FAS") No. 123, Share-Based Payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. This Statement 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. This Statement will be effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005 (January 1, 2006 for the Company). Early adoption of FAS 123R is encouraged. Accordingly the Company decided to adopt this statement on January 1, 2005. This Statement 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.

Prior to January 1, 2005 the Company accounts for its employee stock option plans using the intrinsic value based method of accounting prescribed by APB 25 and related interpretations.

                          XTL BIOPHARMACEUTICALS LTD.
                         (A Development Stage Company)
                      NOTES TO CONDENSED CONSOLIDATED 
                  INTERIM FINANCIAL STATEMENTS (continued)
                                AT JUNE 30, 2005
                                  (Unaudited)
3. Employee Stock Based Compensation (continued)

The following table illustrates the effect on loss and loss per share assuming the Company had applied the fair value recognition provisions of FAS 123 (as amended by FAS 148) to its stock-based employee compensation for the period ended December 31, 2004.

           
                      Six months    Year ended       Period from
                      ended June      December    March 9, 1993*
                        30, 2004        31, 2004     to December
                                                        31, 2004
                       ---------      ----------     -----------

Loss for the 
period, as reported       10,068          16,473          85,776
Deduct: stock based 
employee compensation 
expense, included
in reported loss
Add: stock based 
employee                                                    (483)
compensation expense
determined under 
fair value
method for all awards        162             239           6,355
                        --------     -----------     -----------
Loss-pro-forma            10,230          16,712          91,648
                        ========     ===========     ===========
Basic and diluted loss 
per share:
As reported                $0.09           $0.12
                        ========     ===========
Pro-forma                  $0.09           $0.12
                        ========     ===========

                      * Incorporation date see note 1(a).
4. License agreement

The Company entered into a licensing agreement with Cubist in June 2004, under which the Company granted to Cubist an exclusive, worldwide license (with the right to sub-license) to commercialize HepeX-B and any other product containing a hMAb or humanized monoclonal antibody or fragment directed at the hepatitis B virus owned or controlled by the Company.

In August 2005, the Company amended its licensing agreement with Cubist. Under the terms of the agreement, as amended, Cubist paid the Company an initial up front nonrefundable payment of U.S.$1 million upon the signing of the agreement, and a payment of U.S.$1 million (out of which $200,000 was recorded as revenue in the 6 moths period ended June 30, 2005) as collaboration support paid in 2004 (instead of a total of $2 million to be paid in installments through 2005, as per the original agreement). Furthermore under the terms of the agreement, as amended, Cubist shall make a payment in the amount of U.S.$3 million upon achievement of certain regulatory milestones till 2007 or an amount of U.S.$2 million upon achievement of the same certain regulatory milestones till 2008.

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

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.

5. Recent accounting pronouncement:

FAS 154 Accounting Changes and Error Corrections - a replacement of Accounting Principles Board Opinion ("APB") No. 20 and FASB Statement No. 3.

In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error Corrections". FAS No. 154 is a replacement of Accounting Principles Board Opinion ("APB") No. 20 and FASB Statement No. 3. FAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. FAS No. 154also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Statement carries forward the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate.

FAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for the Company). The Company does not expect this standard to have a material effect on the Company's financial statements or results of operations.

6. Subsequent events

1. In August 2005, the Company entered into an asset purchase agreement with VivoQuest (hereafter - VQ) pursuant to which the Company agreed to purchase from VQ certain assets, including VQ's laboratory equipment, and to assume VQ's lease of its laboratory space.

In consideration, the Company will pay $450,000 to VQ, which payment will be satisfied by the issuance of ordinary shares having a fair market value in the same amount as of the closing date.

In addition, the Company entered into a license agreement with VQ pursuant to which, upon the closing under the asset purchase agreement, the Company will acquire exclusive worldwide rights to VQ's intellectual property and technology. The license covers a proprietary compound library, including VQ's lead HCV compounds. The terms of the license agreement include an initial upfront license fee of approximately $941,000 to be paid in ordinary shares at the time of closing of the asset purchase agreement. The license agreement also provides for additional milestone payments triggered by certain regulatory and sales targets. These milestone payments total $34.6 million, $25.0 million of which will be due upon or following regulatory approval or actual product sales, and are payable in cash or ordinary shares at the Company's election. In addition, the license agreement requires that the Company will make royalty payments on product sales. Pursuant to an interim funding letter, the Company has agreed to provide up to $400,000 to VQ to cover operating expenses prior to the closing of the transaction. The closing of the agreements is subject to customary closing conditions and is expected to occur in September 2005.

2. On August 1, 2005, the shareholders of the Company approved a grant of 2,000,000 options to purchase the Company ordinary shares, nominal value NIS 0.02 each, to a director, and a grant of 9,250,000 options to purchase the Company ordinary shares, nominal value NIS 0.02 each, to the Chairman. The options are exercisable for a period of five years from the date of issuance, and were granted in accordance with the terms and conditions of the Company 2001 Stock Option Plan. The options have an exercise price equal to $0.354 per share.

One third of each grant of options vests upon the Company achieving total market capitalization milestones of $150 million, $250 million and $350 million, respectively, provided that they are still directors of the Company at each such vesting. The Company expects that the grant of these options will result in a material charge to the Company's general and administrative expenses.

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