XTL BIOPHARMACEUTICALS LTD.

Our business development costs consist primarily of salaries and related expenses for business development personnel, travel, professional
fees and transaction advisory fees to third party intermediaries. Our business development activities are related to partnering activities for our drug
programs, seeking new development collaborations and in-licensing opportunities. We expense our business development expenses as they are
incurred. The transaction advisory fee in the form of a SAR will be revalued, based on the then current fair value, at each subsequent reporting date,
until payment of the stock appreciation rights have been satisfied.
Our results of operations include non-cash compensation expense as a result of the grants of stock options. Compensation expense for awards
of options granted to employees and directors represents the fair value of the award recorded over the respective vesting periods of the individual stock
options. The expense is included in the respective categories of expense in the statement of operations. We experienced a significant increase in noncash
compensation in the fiscal year ended December 31, 2005, and continue to expect to incur significant non-cash compensation as a result of
adopting Statement of Financial Accounting Standards, or SFAS, No. 123, “Share Based Payment,” or SFAS 123R, on January 1, 2005.
For awards of options and warrants to consultants and other third-parties, compensation expense is determined at the “measurement date.” The
expense is recognized over the vesting period for the award. Until the measurement date is reached, the total amount of compensation expense remains
uncertain. We record compensation expense based on the fair value of the award at the reporting date. Unvested options are revalued at every reporting
period and amortized over the vesting period in order to determine the compensation expense.
Our ongoing clinical trials will be lengthy and expensive. Even if these trials show that our drug candidates are effective in treating certain
indications, there is no guarantee that we will be able to record commercial sales of any of our product candidates in the near future. In addition, we
expect losses to continue as we continue to fund development of our drug candidates. As we continue our development efforts, we may enter into
additional third-party collaborative agreements and may incur additional expenses, such as licensing fees and milestone payments. As a result, our
periodical results may fluctuate and a period-by-period comparison of our operating results may not be a meaningful indication of our future
performance.
Results of Operations
Years Ended December 31, 2007 and 2006
Revenues. Revenues for the year ended December 31, 2007, increased by $453,000 to $907,000, as compared to revenues of $454,000 for the
year ended December 31, 2006. The increase in revenues for the year ended December 31, 2007, was due to the recognition of unamortized deferred
revenue upon termination of the HepeX-B license by Cubist in July 2007. We currently expect to record license revenue as a result of the license
agreement signed with Presidio in March 2008 (see “Item 10. Additional Information -Material Contracts” and “Item 4. Information on the
Company”).
Cost of Revenues. Cost of revenues for the year ended December 31, 2007, increased by $56,000 to $110,000, as compared to cost of revenues
of $54,000, for the year ended December 31, 2006. The increase in cost of revenues was due to the recognition of unamortized license fees that were
recorded as deferred expenses upon termination of the HepeX-B license by Cubist in July 2007.
Research and Development Costs. Research and development costs net of participations increased by $8,713,000 to $18,942,000 for the year
ended December 31, 2007, as compared to $10,229,000 for the year ended December 31, 2006. The increase in research and development costs was
due primarily to an increase of $13,476,000 in expenses related to our Bicifadine clinical program (including the $7.5 million initial upfront license fee
to DOV) (see “Item 10. Additional Information -Material Contracts” and “Item 4. Information on the Company”), offset by a decrease of $4,166,000 in
expenses related to our legacy programs XTL-6865 and XTL-2125, that were terminated in 2007, and also due to a $597,000 decrease in expenses
associated with our preclinical DOS program.
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