---

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UNITED STATES
  SECURITIES AND EXCHANGE COMMISSION
    Washington, D.C.
20549

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FORM 10-K

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FOR ANNUAL AND
TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

| |  | For the
      fiscal year ended December 31, 2006
| |  | -------------------------------------------------

OR

||_| |  | TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
      SECURITIES EXCHANGE ACT OF
      1934
|--- |  | -----------------------------------------------------------------------------------------------------------

| |  | For the
      transition period from _____________________ to __________________________
| |  | ----------------------------------------------------------------------------------------

001-33357
  (Commission file number)

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PROTALIX
  BIOTHERAPEUTICS, INC.(Exact
  name of registrant as specified in its charter)

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|Florida(State or other jurisdiction
        of incorporation or organization) | 65-0643773(I.R.S. Employer
        Identification No.)
|----------------------------------------------------------------------------- | ------------------------------------------------------
|                                                                              |                                                       
|2 Snunit Street 
        Science Park 
        POB 455 Carmiel, Israel        | 21000                                                 
|(Address of principal executive office)                                       | (Zip Code)                                            





972-4-988-9488(Registrants
  telephone number, including area code)

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

|Title of each class
        Common stock, par value $0.001 per share | Name of each exchange on which registered
        American Stock Exchange
|-------------------------------------------------------------------- | -------------------------------------------------------------------------



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

None

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Indicate
  by check mark if the registration is a well-known seasoned issuer, as defined
  in Rule 405 of the Securities Act. Yes |_|No |X|

Indicate
  by check mark if the registrant is not registered to file reports pursuant to
  Section 13 or Section 15(d) of the Act. Yes |_| No |X|

| |  | 
| |  | 

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Indicate
by check mark whether the  registrant  (1) has filed all reports required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934  during  the  preceding  12
months  (or for such  shorter  period  that the registrant was required to file such
reports),  and (2) has been subject to such filing requirements for the past 90 days. Yes
|X| No |_|

Indicate
by check mark if  disclosure of  delinquent  filers  pursuant to Item 405 of Regulation
S-K is not contained  herein,  and will not be contained, to the best of the  registrants
 knowledge,  in definitive proxy or information statements  incorporated  by  reference
 in Part  III of this  Form  10-K or any amendment to this Form 10-K. |_|

Indicate
by check mark  whether  the  registrant  is a large  accelerated filer, an accelerated
 filer,  or a  non-accelerated  filer.  (See definition of large accelerated filer and
accelerated  filer in Rule 12b-2 of the Exchange Act). (check one):

Large
accelerated filer  |_|    Accelerated filer  |_|   Non-accelerated filer  |X|

Indicate
by check mark  whether  the  registrant  is a shell  company (as defined in Rule 12b-2 of
the Exchange Act). Yes |_| No |X|

The
aggregate market value of the voting stock held by  non-affiliates of the Registrant,  as
of June 30, 2006 was approximately $12.6 million (based upon the closing price for shares
of the Registrants common stock as reported by the OTC Bulletin  Board® as of
June 30, 2006 of $5.05),  without  giving effect to the one-for-ten reverse stock split
we completed on December 29, 2006. Shares of common  stock  held by each  officer,
 director  and holder of 5% or more of the outstanding  common stock have been  excluded
in that such persons may be deemed to be affiliates.  This  determination  of affiliate
status is not necessarily a conclusive determination for other purposes.

On
March 15, 2007,  approximately  65,657,181  shares of the Registrants common stock,
$0.001 par value, were outstanding.

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| | ii | 
| | -- | 

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FORM 10-K
                                TABLE OF CONTENTS

|         |                                                                                                                                  | Page
|-------- | -------------------------------------------------------------------------------------------------------------------------------- | ----
|         | PART I                                                                                                                           |     
|         | Cautionary Statement Regarding Forward-Looking Statements                                                                        | 1   
|Item 1.  | Business                                                                                                                         | 2   
|Item 1A. | Risk Factors                                                                                                                     | 16  
|Item 1B. | Unresolved Staff Comments                                                                                                        | 28  
|Item 2.  | Properties                                                                                                                       | 29  
|Item 3.  | Legal Proceedings                                                                                                                | 29  
|Item 4.  | Submission of Matters to a Vote of Security Holders                                                                              | 29  
|         |                                                                                                                                  |     
|         | PART II                                                                                                                          |     
|Item 5.  | Market for the Registrants Common Equity, Related
      Stockholder Matters and Issuer
          Purchases of Equity Securities | 30  
|Item 6.  | Selected Financial Data                                                                                                          | 31  
|Item 7.  | Managements Discussion and Analysis of Financial
      Condition and Results of Operations                                      | 32  
|Item 7A. | Quantitative and Qualitative Disclosures About
      Market Risk                                                                 | 41  
|Item 8.  | Financial Statements and Supplementary Data                                                                                      | 42  
|Item 9.  | Changes in and Disagreements with Accountants
      on Accounting and Financial Disclosure                                       | 42  
|Item 9A. | Controls and Procedures                                                                                                          | 42  
|Item 9B. | Other Information                                                                                                                | 43  
|         |                                                                                                                                  |     
|         | PART III                                                                                                                         |     
|Item 10. | Directors, Executive Officers and Corporate
      Governance                                                                     | 44  
|Item 11. | Executive Compensation                                                                                                           | 47  
|Item 12. | Security Ownership of Certain Beneficial Owners
      and Management and Related
          
       Stockholder Matters           | 56  
|Item 13. | Certain Relationships and Related Transactions,
      and Director Independence                                                  | 58  
|Item 14. | Principal Accountant Fees and Services                                                                                           | 59  
|         |                                                                                                                                  |     
|         | PART IV                                                                                                                          |     
|Item 15. | Exhibits and Financial Statement Schedules                                                                                       | 61  
|         |                                                                                                                                  |     
|         | Signatures                                                                                                                       | 64  





| | iii | 
| | --- | 

---

PART I

Except
where the context otherwise requires, the terms, we, us, our or
the Company, refer to the business of Protalix BioTherapeutics, Inc. and its
consolidated subsidiaries, and Protalix or Protalix Ltd. refers
to the business of Protalix Ltd., our wholly-owned subsidiary and sole operating
unit.

CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS

The
statements set forth under the captions  Business,  Managements
Discussion and Analysis of Financial  Condition and Results of Operations,  and
Risk Factors, and other statements included elsewhere in this Annual Report
on Form 10-K, which are not historical,  constitute  Forward  Looking  Statementswithin
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section  21E of
the  Securities  Exchange  Act of 1934,  as  amended,  including statements regarding the
expectations, beliefs, intentions or strategies for the future. When used in this report,
the terms anticipate, believe, estimate,expect and
intend and words or phrases of similar import,  as they relate to our  or
 our   subsidiaries  or  our   management,   are  intended  to  identify forward-looking
 statements.  We intend that all  forward-looking  statements be subject to the
 safe-harbor  provisions  of the  Private  Securities  Litigation Reform Act of 1995.
 These  forward-looking  statements are only predictions and reflect our views as of the
date they are made with respect to future events and financial performance.
 Forward-looking statements are subject to many risks and uncertainties  that could cause
our actual results to differ materially from any future results expressed or implied by
the forward-looking statements.

Examples
of the risks and uncertainties include, but are not limited to the following:

| |  |  | the
inherent risks and uncertainties in developing drug platforms and products of the type we
are developing;
| | - |  | -------------------------------------------------------------------------------------------------------------

| |  |  | delays
in our preparation and filing of applications for regulatory approval;
| | - |  | -----------------------------------------------------------------------------

| |  |  | delays
in the approval or potential rejection of any applications we file with the FDA, or other
health regulatory                   authorities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | any
lack of progress of our research and development (including the results of clinical
trials being conducted by us);
| | - |  | ----------------------------------------------------------------------------------------------------------------------

| |  |  | obtaining
on a timely basis sufficient  patient  enrollment in                   our clinical
 trials;  the impact of  development of competing                   therapies and/or
technologies by other companies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
ability to obtain additional  financings  required to fund                   our
 research  programs;  the risk that we will not be able to                   develop a
successful  sales and  marketing  organization  in a                   timely manner, if
at all;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our
 ability to  establish  and  maintain  strategic  license,
                  collaboration and distribution  arrangements and to manage our
                  relationships with collaborators, distributors and partners;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | potential
 product  liability  risks  and  risks  of  securing                   adequate  levels
 of  product  liability  and  clinical  trial                   insurance coverage;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the
availability of reimbursement to patients from health care payors for procedures in which
our products are used;
| | - |  | --------------------------------------------------------------------------------------------------------------------

| |  |  | the
possibility of infringing a third partys patents or other intellectual property
rights;
| | - |  | --------------------------------------------------------------------------------------------

| |  |  | the
uncertainty of obtaining patents covering our products and processes and in successfully
enforcing them against third                   parties; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the possible disruption of our operations due to terrorist                   activities
 and armed  conflict,  including as a result of the                   disruption  of
 operations  of  regulatory  authorities,   our                   subsidiaries,  our
manufacturing facilities and our customers,                   suppliers,  distributors,
 couriers,  collaborative  partners,                   licensees, and clinical trial
sites.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
 addition,   companies  in  the   pharmaceutical  and  biotechnology industries have
suffered  significant setbacks in advanced clinical trials, even after  obtaining
 promising  earlier  trial  results.  These and other risks and uncertainties  are

| |  | 
| |  | 

---

detailed  under Risk  Factors in
this Annual Report on Form 10-K.  We  undertake  no  obligation  to update,  and we do
not have a policy of updating or revising, these forward-looking statements.

Item 1.  Business

General

We
are a  clinical  stage  biopharmaceutical  company  that is focused on developing and
manufacturing  recombinant therapeutic proteins that are produced through our
 proprietary  plant cell system.  In the  biotechnology  field,  the production or
manufacture of recombinant proteins is commonly referred to as the expression  of
such proteins.  Recombinant  therapeutic  proteins are proteins that are produced by
different  genetically  modified  organisms  following  the insertion  of the  relevant
 DNA into  their  genome  and are the  basis of most biopharmaceutical  drugs  currently
 under  development.  We use our plant  cell culture and bioreactor technology for the
expression of recombinant  therapeutic proteins, and we are currently developing several
such biotherapeutic  products. Our lead product candidate,  prGCD, is being developed as
a treatment of Gaucher Disease. Our wholly-owned  subsidiary and sole operating unit,
Protalix Ltd., is an Israeli  corporation.  Our  principal  business  address is 2 Snunit
 Street, Science Park, POB 455,  Carmiel,  Israel 21000,  where we operate a research and
manufacturing facility.

Our
patented  plant cell system  enables the expression in plant cells of specific   genes,
  most  often  genes   coding   expression   for  proteins  of pharmaceutical or
therapeutic value. Once a therapeutic  protein is expressed in plant cells,  the cells
may be grown on an  industrial-scale  in our proprietary bioreactor  system.
 Subsequently,  the expressed  protein is extracted from the plant cells and purified to
a clinical grade. The glycosiliation of a protein is the addition of a glycan,  or sugar,
 residue  structure on the protein that, in certain  cases,  binds the protein to a
target  cell and  enables the  proteins therapeutic  function and/or its
bioactivity.  Our system presents a proprietary method for the  expression of
 recombinant  proteins that we believe is safe and scalable and will allow for the
 cost-effective  industrial-scale  production of such recombinant human therapeutic
 proteins.  In addition,  we believe that our proprietary  plant-cell  system has a
number of advantages over other expression methodologies, as follows:

| |  |  | There
 is  significantly  reduced  risk of  disease  or  virus                   transmission
 to humans as our system does not involve the use                   of mammalian cells or
mammalian components;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 relatively  uniform  glycosilation  pattern of  proteins  produced in our system
promotes drug product consistency;
| | - |  | ------------------------------------------------------------------------------------------------------------------------

| |  |  | When
 compared to other  protein  expression  techniques,  our                   system
 includes  simpler  production   elements,   is  easily                   scalable and
requires  fewer capital  expenditures  and initial                   capital investments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
expect our system to involve lower operational  expenses as                   it
 requires  minimal  personnel  training  and less  hands-on                   maintenance;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
may  be  able  to  express  certain  proteins  through  our                   proprietary
 plant  cell  system  without  infringing  certain                   patents  that  cover
the  mammalian  cell  production  of such                   proteins.  In certain cases,
the protein product is not itself                   subject  to  patent  protection.
  However,   the  process  of                   manufacturing  the protein  product in
 mammalian or bacterial                   cell  systems may be  protected  by patents.
 Our  proprietary                   manufacturing  methods for expressing  proteins in
plant cells                   may present a  manufacturing  process  that does not
 infringe                   these process patents; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | A
protein expressed using our system may provide the basis for                  patents
covering both the protein and methods of producing the                   protein, thereby
providing potential market advantage.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
 lead  product  candidate,  prGCD,  is  a  proprietary  plant  cell expressed
 recombinant  form of  Glucocerebrosidase  (GCD) for the  treatment of Gaucher Disease, a
lysosomal storage disorder in humans.  Glucocerebrosidase  is an  enzyme-based  protein,
 the lack of which is a symptom of  Gaucher  Disease. Enzymes are proteins that catalyze,
or accelerate,  chemical reactions in cells. Gaucher Disease is commonly treated through
enzyme replacement  therapy (ERT), a medical  treatment in which an enzyme is replaced in
patients in whom the enzyme is lacking or dysfunctional.  The only recombinant
 Glucocerebrosidase currently available  on the market and  approved  worldwide  for the
 treatment of Gaucher Disease is Cerezyme®,  which is produced by Genzyme Corporation.
 According to public  reports  issued by Genzyme,  annual sales of Cerezyme were $1
billion in 2006. We received  approval  from the United  States Food & Drug
 Administration (FDA) to commence Phase I clinical trials of prGCD under an IND
(Investigational New Drug)  application in July 2005. The Phase I

| | 2 | 
| | - | 

---

clinical study was completed in June
2006, and we believe that the data  presented in the final clinical  report of this
 trial  was  promising  for  proceeding  to the next  phase of  clinical testing.  Based upon our correspondence with the FDA, we
have submitted an application  for FDA approval to initiate a Phase III pivotal trial of
prGCD, which we expect to commence in 2007.

We
believe that we have  demonstrated  the  potential of our plant cell expression platform
to become a safe and efficacious  expression  technology for the manufacture or
expression of a wide variety of  biopharmaceutical  products. Accordingly, we are
employing a two-pronged business strategy that enables us to pursue our goal of becoming
a fully  integrated  biopharmaceutical  company.  In addition  to our  focused
 development  of  prGCD,  we  are  using  our  protein expression technology to develop
an innovative  proprietary product pipeline. We are evaluating and initiating  additional
 internal  research  programs  through collaboration  agreements with academic
institutions,  such as the Yeda Research and  Development  Company  Limited,  the
 technology  transfer  arm of  Israels Weizmann Institute of Science. In addition,
 we continually review and consider development and commercialization alliances with
potential corporate partners in specific and identified  markets  worldwide for specific
products or territories in order to enable us to optimize our resources and effectively
penetrate target markets. We entered into such an agreement with Teva  Pharmaceutical
 Industries Ltd. in September 2006.

Company Background

Our
company was originally formed as Embassy Acquisition Corp., a Florida corporation,  in
 November  1995 for the  purpose of  effecting a merger with an operating  business.  In
April  1998,  we merged  with an  orthodontic  practice management  company and acquired
 assets and assumed  certain  liabilities of 26 orthodontic  practices  in  exchange  for
 shares  of our  common  stock and the entering into of practice  management  service
 agreements with these practices. Upon completing these acquisitions, we changed our name
to Orthodontix, Inc. and began managing the business aspects of these practices. By
November 1999, we had ceased providing practice  management  services.  By May 2001, we
had terminated our  affiliation  with all these  practices and, during the years ended
December 31,  2000 and 2001,  we sold  each of these  practices  until we had no  further
operations.

Protalix
Ltd., was originally incorporated in Israel as Metabogal Ltd. on December  27,  1993.
 During  1999,  it changed  its focus from plant  secondary metabolites  to the
 expression  of  recombinant  therapeutic  proteins in plant cells,  and  changed its
name to Protalix  Ltd. in April 2004.  On December  31, 2006, we acquired  through a
merger with our wholly-owned  subsidiary,  Protalix Acquisition  Co.  Ltd.,  all of the
 outstanding  shares of  Protalix  Ltd.,  in exchange for shares of our common stock, par
value $0.001 per share. As a result, Protalix Ltd. is now our wholly-owned subsidiary. In
connection with the merger, we effected a one-for-ten reverse stock split. Unless
otherwise  indicated,  all share  numbers in this Annual  Report on Form 10-K give
 effect to such  reverse stock split.

On
February  26, 2007,  we changed our name to Protalix  BioTherapeutics, Inc.

The Biogeneric Protein
Expression Market

Recombinant
technologies have become the cornerstone of the modern medical biotechnology
industry. There is a strong demand in the market for the discovery and development
of recombinant DNA products such as therapeutic proteins, vaccines and
antibodies. According to a 2006 report issued by BioWorld®, a leading
publisher of information about the biotechnology industry, the total annual market
for biotechnological drugs is anticipated to approach $100 billion by 2010.

As
  patents   relating   to   various   therapeutic   proteins   expire, pharmaceutical
companies seek to produce biogeneric versions of such proteins in order to  capture a
portion  of the  market  share of the  proteins.  Biogeneric proteins are the
 therapeutic  equivalents of a referenced  protein.  Biogeneric drugs face  significant
 barriers to market  entry,  such as the  difficulty  of developing an effective product
and cell culture manufacturing  process,  strong branded  competition and the complex
patent coverage still  surrounding  many of the recombinant  therapeutic proteins with
high annual sales. Companies that can demonstrate  superior  methods of  production  may
take  advantage of commercial opportunities in the market for biogeneric products.

We
believe  that one of our  competitive  strengths is our ability to use our plant cell
 expression  system to overcome such barriers to market entry. We believe  that our
system will allow us, in certain  cases,  to produce  proteins without infringing
 method-based  patents or other intellectual  property rights held by third  parties
 relating to various drug  candidates.  These factors are important features for
 differentiation in the biogeneric  therapeutic field and allow for the  establishment
 of new  production  lines for the  development  of biogeneric  products.  We anticipate
that a number of biogeneric products may be developed  in  collaboration   with  large
  pharmaceutical   and  biotechnology companies,  and we expect to be able to generate
up-front milestones and royalty revenue by entering early-stage deals with such partners
to develop and scale up their  biogeneric

| | 3 | 
| | - | 

---

and  innovative  product
 candidates.  In September  2006, we entered into a collaboration agreement with Teva
Pharmaceutical  Industries Ltd. for the development and manufacture of two proteins using
our bioreactor  system and for the potential  development  and  commercialization  of
products based on such proteins.

Current Expression
Technologies

The
current industry  standard for expression of recombinant  therapeutic glycoproteins,
 proteins that contain sugar residues,  is expression in cultured mammalian cells,  which
is very costly and complicated to effect. The cells most often used in connection with
mammalian  protein  expression are Chinese hamster ovary (CHO) cells, which are grown in
highly  sophisticated and costly stainless steel  bioreactors.  Despite their  widespread
 use, such  mammalian  expression systems have a number of disadvantages.  The
stainless-steel bioreactors used in such systems  involve  extensive  and very rigid
 monitoring  and  regulation of environmental  conditions,  such as temperature,  pH
levels,  and oxygen levels, making such systems expensive and complicated to operate.
 Mammalian  expression systems require large quantities of  sophisticated  and expensive
growth medium. In order for a GCD  enzyme  to be  effective  in  connection  with ERT,
 exposed terminal mannose sugar residues,  the structures on the protein that bind to the
target cell and  facilitate the  internalization  of the protein into the target cell,
 must be present on the sugar  residue  covering  the  protein in order to permit
 binding to macrophage  mannose  receptors,  the  structures to which the terminal
mannose residues attach. The expression of therapeutic proteins through mammalian
 systems,  in certain cases,  produces a mixture of different forms of the   proteins
  requiring   complex   post-expression   modifications   to  the glycosilation structure
of the desired protein. For example, with respect to the expression  of GCD,
 modifications  to the  expressed  protein are  necessary to achieve the sugar residue
structure  necessary for the expressed protein to have binding  qualities for  attachment
 to a target cell,  and for the protein to be able  to  effect  the  desired
 bioactivity.  Without  such  modifications,  the expressed  protein  would not be
effective in  connection  with the treatment of Gaucher Disease by ERT as it will neither
bind with a target cell nor effect the desired bioactivity. Lastly, the mammalian systems
present the potential risk of transferring  mammalian-derived pathogenic agents, such as
viruses, resulting in the need for viral inactivation and monitoring for unexpected toxic
agents.

Another
 protein  expression  methodology is prokaryotic  systems,  which involve the expression
of proteins in a bacterial culture.  The industrial-scale production  of  recombinant
  proteins  through   prokaryotic  systems  is  more cost-effective  than  other
 expression  methodologies.   However,  the  use  of prokaryotic  expression systems is
limited to the expression of simple proteins, such as insulin or growth hormones,
 because  bacterial  cultures cannot produce glycoproteins,  which  are  complex  forms
of  proteins.  This is a  significant limitation  because  glycoproteins  constitute  the
majority of newly  developed biotherapeutic drugs and those currently under development.
In addition, several companies  and  research  institutions  have  explored the
 expression  of human proteins  in  genetically-modified   organisms,  or  GMOs,  such
 as  transgenic field-grown plants and transgenic animals.  However,  these alternate
techniques may be  restricted  by  environmental  risks and by the  difficulty  in
applying current good  manufacturing  practices (cGMPs)  standards of the  pharmaceutical
industry to these expression technologies.

Our Proprietary
Expression Technology

As
an alternative to current expression methodologies,  we have developed a novel and
proprietary  bioreactor system for the expression and manufacture of recombinant
 proteins  that  uses  plant  cells,  such as carrot  cells,  as the platform. Our
flexible and disposable bioreactors are well-suited for plant cell growth  using a
simple,  chemically-defined  growth  medium.  The  reactors  are custom-designed  and
optimized  for plant cell  cultures,  easy to use,  rapidly scalable at a low cost,
 require less hands-on  maintenance  between  cycles and entail very low initial capital
investment.

We
 believe  that our plant  cell  expression  system  has the  following advantages over
other expression systems:

| |  |  | There
 is  significantly  reduced  risk of  disease  or  virus                   transmission
 to humans as our system does not involve the use                   of mammalian cells or
mammalian components;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The
 relatively  uniform  glycosilation  pattern of  proteins  produced in our system
promotes drug product consistency;
| | - |  | ------------------------------------------------------------------------------------------------------------------------

| |  |  | When
 compared to other  protein  expression  techniques,  our                   system
 includes  simpler  production   elements,   is  easily                   scalable and
requires  fewer capital  expenditures  and initial                   capital investments;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | We
expect our system to involve lower operational  expenses as                   it
 requires  minimal  personnel  training  and less  hands-on                   maintenance;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4 | 
| | - | 

---

| |  |  | We
may  be  able  to  express  certain  proteins  through  our                   proprietary
 plant  cell  system  without  infringing  certain                   patents  that  cover
the  mammalian  cell  production  of such                   proteins.  In certain cases,
the protein product is not itself                   subject  to  patent  protection.
  However,   the  process  of                   manufacturing  the protein  product in
 mammalian or bacterial                   cell  systems may be  protected  by patents.
 Our  proprietary                   manufacturing  methods for expressing  proteins in
plant cells                   may present a  manufacturing  process  that does not
 infringe                   these process patents; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | A
protein expressed using our system may provide the basis for                   patents
covering both the protein and methods of producing the                   protein, thereby
providing potential market advantage.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe,  based upon our research and  development  efforts,  that our plant cell
expression  system is capable of producing human like proteins with an amino
acid  structure of the desired human protein as well as a very similar, but not
identical,  glycan, or sugar,  structure.  Our research has demonstrated that by having a
glycan and amino acid structure  similar to naturally  produced proteins,  the plant cell
expressed  proteins  maintain the biological  activity that  characterizes  the human
 protein when tested in the  relevant  biological assays.  Taken  together,  our research
 suggests that proteins  produced by our plant cell system are likely to mimic the
 therapeutic  functions of the natural human proteins that they are produced to replace.

We
have  successfully  demonstrated  the  feasibility  of our  system  by producing, on an
exploratory,  research scale, a variety of therapeutic proteins belonging to different
 drug classes,  such as enzymes,  hormones,  interferons, monoclonal  antibodies and
vaccines.  However,  our system is still in the early stages of development and
optimization, and we can not provide assurance that we will be able to develop
 marketable  drugs  using our novel  technology.  We are currently conducting research on
prGCD and a number of additional proteins.

prGCD for the
Treatment of Gaucher Disease

Our
lead proprietary  product  candidate,  prGCD, is a plant  recombinant Glucocerebrosidase
 enzyme (GCD) for the treatment of Gaucher  Disease.  In July 2005, we received FDA
approval of our IND application for prGCD,  allowing us to initiate an FDA-approved
 clinical  development  program for prGCD that does not require us to conduct Phase II
clinical  trials.  The Phase I clinical trial was completed in June 2006. We expect that,
based upon the results of such concluded Phase I clinical trial together with the results
of certain preclinical studies, we should be able to obtain FDA  approval to initiate a
pivotal  Phase III trial of prGCD for the treatment of Gaucher Disease.  We have
submitted an application for FDA approval to initiate a Phase III pivotal trial of prGCD,
which we expect to commence in 2007. However,  there can be no assurance that we will
obtain FDA approval to initiate such Phase III trial on a timely basis, if at all.

Gaucher
 Disease is the most  prevalent  lysosomal  storage  disorder  in humans. Lysosomes are
small membrane-bound  organelles within cells that contain hydrolytic  enzymes  necessary
for intracellular  digestion.  Gaucher Disease is caused by mutations or deficiencies in
the gene encoding GCD, a lysosomal enzyme that  catalyzes  the  degradation  of
 glucosylceramide   (GlcCer).  The  normal degradation  products  of GlcCer  are  glucose
 and  ceramide,  which are easily excreted by the cells through  normal  biological
 processes.  The absence of an active GCD enzyme  leads to the  accumulation  of GlcCer
in lysosomes of certain white blood cells called macrophages. Macrophages affected by the
disease become highly  enlarged  due to the  accumulation  of  GlcCer  and are  referred
 to as Gaucher  cells. Gaucher cells  accumulate in the spleen,  liver,
 lungs,  bone marrow and brain.

There
are three  different types of Gaucher  Disease,  each determined by the level of GCD
activity.  The associated  clinical  symptoms of Type I Gaucher Disease include severe
enlargement of the spleen and liver (hepatosplenomegaly), anemia,   thrombocytopenia,
  osteoporosis,   skeletal  deterioration  and  bone fractures. Type 1 Gaucher Disease
occurs worldwide in all populations;  however, it is most  prevalent  in the  Ashkenazi
 Jewish  population  (Jewish  people of Eastern  European  ancestry)  where it occurs at
a rate of  approximately  1:450 births.  Type 2 Gaucher Disease involves an accumulation
of Gaucher cells in the brain  leading to acute brain damage and is usually fatal during
the first three years of life. Type 2 Gaucher Disease occurs at a rate of 1:100,000
births. Type 3 Gaucher Disease is the chronic neuropathic form of the disease and occurs
at a rate of 1:50,000  births.  Neurological  symptoms of Type 3 Gaucher  Disease may
include loss of motor control, mental deterioration and myoclonic seizures. Type 3
Gaucher Disease is generally  fatal within 20 to 30 years of birth.  According to
published scientific studies, types 2 and 3 show no ethnic predilection.

Gaucher
Disease is currently treated by enzyme replacement  therapy (ERT) using  recombinant  GCD
to replace the mutated or deficient  natural GCD enzyme. The  only  recombinant  GCD
 currently  available  on the  market  and  approved worldwide for the treatment of
Gaucher Disease is Cerezyme, produced by Genzyme. There are no known  severe side
 effects to the use of Cerezyme and its approved use over the past decade suggests that
it is an effective  treatment.  According to public reports issued by Genzyme, annual
sales of Cerezyme were $1 billion in 2006.  Cerezyme is expressed in mammalian

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Chinese hamster ovary (CHO) cells.
In order for a  GCD  enzyme to be  effective  in  connection  with ERT,  exposed
terminal mannose sugar residues,  the structures on the protein that bind to the target
cell and  facilitate the  internalization  of the protein into the target cell,  must be
present on the sugar  residue  covering  the  protein in order to permit  binding to
macrophage  mannose  receptors,  the  structures to which the terminal  mannose  residues
 attach.  Cerezyme  production  involves  sequential complex  laboratory
 de-glycosilation  processing in order to modify the drug to expose the terminal mannose
residues so they can bind to the macrophage  mannose receptors of the target cells, a
procedure that increases the production cost of Cerezyme.  According to Genzymes
public reports,  Cerezyme is currently used to treat approximately 4,800 patients.

Another
 much less  frequently  used drug for the  treatment  of  Gaucher Disease is Zavesca®
 (miglustat),  marketed by Actelion Ltd.  Zavesca has been approved by the FDA for use in
the United States as an oral treatment.  However, it has side effects and the FDA has
approved it only for   administration  to those patients who cannot be treated
through enzyme replacement  therapy (ERT), such as Cerezyme,  and, accordingly,  have no
other treatment alternative.  As a result,  Zavescas  use has been very  limited
and  Actelion  reported  sales of Zavesca of approximately CHF $18 million for the nine
months ended September 30, 2006.

Our
prGCD expression in carrot cells permits  intracellular  manipulation of the protein
glycosilation process,  generating terminal mannose structures in vivo directly by the
cells.  This enables the production of a ready to use GCD enzyme, thus
precluding the need for the costly post-production de-glycosilation modification
 required for proteins generated through mammalian cell expression. The prGCD  terminal
 mannose  residues on the sugar  chains of prGCD  facilitate elevated  uptake  and
 internalization  into the  target  cells as  compared  to Cerezyme.  Furthermore,  when
compared to Cerezyme, prGCD displays a superior to equivalent level of the desired
enzymatic activity,  depending on the biological test used.  prGCD is  potentially  very
safe and less expensive to produce as it does not require mammalian-derived  components
in the manufacturing process. For the foregoing reasons,  we believe that prGCDs
elevated  internalization  rates and bioactivity may lead prGCD to become a highly
effective, and cost effective, treatment alternative for Gaucher Disease patients.

We
have filed process patents,  as well as composition of matter patents, for prGCD thereby
providing us with patent-pending  manufacturing  methodologies with respect to GCD. We
believe that our strong  intellectual  property position in combination with the
potential cost-effectiveness and superior bioactivity of prGCD,  which may be demonstrated
 in the  anticipated  Phase III clinical trial, should allow aggressive penetration and
establishment of prGCD as a treatment in the market of Gaucher Disease treatment;
however, there can be no assurance that prGCD, even if approved for marketing, will
effectively penetrate such market.

Pipeline Drug
Candidates

We
 are  also  developing  the  expression  of a  number  of  recombinant therapeutic
 proteins in our plant cell system that are currently being marketed at a high cost,
which we believe does not infringe the  method-based  patents or other  intellectual
  property  rights  of  third  parties  in  connection  with production  of such
 proteins.  In order to  select  additional  candidates  for clinical development,  we
are testing,  in-house and through collaborations with academic partners,  several
product candidates oriented towards specialty market segments.  We have  expressed  a
 number  of  different  proteins  demonstrating biological  activity.  We continually
evaluate potential protein drug candidates for different therapeutic indications.

PRX-102

We
are developing a proprietary alpha Galactosidase  enzyme, which is a therapeutic  enzyme
for the treatment of Fabry disease, a rare genetic lysosomal storage  disorder in humans,
 the symptoms of which involve the  accumulation of lipids  in the cells of the  kidneys,
 heart and  other  organs.  Fabry  disease affects more than 8,000 people globally.  We
believe that the treatment of Fabry disease is a specialty  clinical niche with a high
growth  potential.  Currently there  are  two  drugs   available  on  the  market  to
 treat  Fabry   disease. Fabrazyme®,  made by Genzyme,  was approved for the treatment
of Fabry disease in  Europe  in 2001 and in the  United  States in 2003.  Genzyme
 reported  $359 million  in  sales  of  Fabrazyme®  in  2006.  Another  approved  drug
for the treatment of Fabry disease in the European Union is  Replagal®,  which is sold
by Shire plc.

PRX-111

We
are developing two variants of a human fertility hormone targeted at the infertility
 market.  We believe that the market for infertility  treatments presents a strong
opportunity.  We are currently  performing further research in order to evaluate the
potential of these proteins.  To date, we believe that our in vitro  experiments  have
 demonstrated  promising  biochemical  and  cellular results when compared to the
currently marketed  biotherapeutic proteins used in approved  infertility   treatments.
  However,  we  are  performing   additional evaluation  studies to  determine  whether
it is in our interest to continue the research and development of these hormones.

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Acetyl Choline
Esterase

On
January 31,  2007,  we entered into an  agreement  in  principle,  the Principles  of a
Research and License  Agreement,  with the Yissum  Research and Development  Company,
 the technology  transfer arm of the Hebrew  University of Jerusalem,  and the Boyce
 Thompson  Institute,  Inc.  pursuant  to which we are developing  a  proprietary  plant
 based  acetylcholinestrase   (AChE)  and  its molecular  variants  for  the  use  in
 several   therapeutic  and  prophylactic indications,  including  a  Biodefense
 program.  Pursuant  to the  terms of the agreement in principle, we expect to license
the technology underlying AChE from Yissum  and  Boyce  Thompson.  The terms of the
 license  are  subject  to final negotiation.  We are currently  performing initial
feasibility research in order to evaluate the  potential  for AChE and its  variants  for
various  therapeutic fields.

Oral Platform

We
have begun to develop a new method for delivering  active  recombinant proteins
  systematically   through   enteral   administration   via  the   oral administration
 of transgenic plant cells. The transgenic plant cells would then express a desired
 therapeutic protein that we believe will, in combination with the new oral  delivery
 method,  result in  systemically  delivered  recombinant protein in an effective amount
to a patient.

Strategic
Collaborations

Teva Pharmaceutical
  Industries

On
September 14, 2006,  Protalix Ltd.  entered into a  collaboration  and licensing
agreement with Teva Pharmaceutical Industries Ltd. for the development and  manufacturing
of two proteins using our plant cell expression  system.  The proteins,  which we
anticipate  developing as treatments  for diseases for which there  exist a large
 market,  are not part of our current  product  development pipeline.  We have launched
preliminary  feasibility studies with respect to one protein under such agreement.
 Pursuant to the agreement, we will collaborate on the  research  and  development  of
the two  proteins  utilizing  our plant cell expression  system.  If the research and
development  efforts for either protein are successful,  we will grant to Teva an
exclusive license to commercialize the developed products in return for royalty and
milestone payments payable upon the achievement  of certain  pre-defined  goals.  We will
retain  certain  exclusive manufacturing rights with respect to the active pharmaceutical
ingredient of the proteins  following the first  commercial  sale of a licensed  product
under the agreement and other rights thereafter. To date,  we have made no
payments to Teva under this arrangement.

Weizmann Institute
of Science/Yeda Research and Development Company Limited

In
 March  2006,  Protalix  Ltd.  entered  into a  Research  and  License Agreement with the
Yeda Research and Development Company Limited, the technology transfer arm of Israels
Weizmann  Institute of Science,  pursuant to which Yeda is using its technology to design
a next generation of Glucocerebrosidase  (GCD) for the treatment of Gaucher  Disease that
can be expressed using our plant cell system. The licensed  technology  provides a
methodology for the rational design of an improved  drug for the  treatment  of Gaucher
 Disease by ERT based on the 3-dimensional  crystal  structure  of GCD that was solved by
certain  scientists associated with the Weizmann  Institute during their research in
recent years. A team  of  scientists   at  the  Weizmann   Institute  has  attempted  to
 design modifications  to the enzyme  structure that may lead to development of a second
generation enzyme for the treatment of Gaucher Disease.  The research activities under
the  license  are also  funded by a grant by the  Magneton  program of the Ministry  of
 Industry  and Trade of Israel,  a program  created to support  the transfer  of
 emerging  technologies  from  the  academy  to  the  industry.  In consideration for Yedas
research,  Protalix Ltd. agreed to pay a fixed research budget  amount.  Yeda has granted
 Protalix  Ltd. a license to use the  licensed information   for  the   development,
  manufacture,   production  and  sale  of enzymatically  active  mutations  of  GCD  and
 derivatives  therefrom  for  the treatment  of  Gaucher  Disease.  We are  responsible
 for  commercializing  the products  developed under the license.  Commencing upon the
fifth anniversary of the execution of the agreement and  continuing  through the 19th
 anniversary of the  agreement,  we are  obligated to pay certain  minimum  royalty
 amounts and varying  fixed  royalty  amounts on net sales of products  for the
 treatment of Gaucher Disease,  products for other indications and for sublicensing
 revenues. Accordingly,  we will owe these payment  obligations  to Yeda even if we fail
to generate  any  sales  revenue  from  these  products.

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Licensing Arrangements

ICON Genetics-
Bayer Innovations

In
April  2004,  Protalix  Ltd.  entered  into a  Collaborative  Research Agreement  with
Icon  Genetics  AG (which  was  subsequently  acquired  by Bayer Corporation)  regarding
 certain  proteins  and  an  option  to  license  Icons amplification  technology
 for  utilization in the expression of our products to improve our yield. In connection
with such option,  Protalix Ltd. entered into a license agreement with Icon on April 12,
2005,  pursuant to which we received an exclusive  worldwide  license to develop,  test,
 use and  commercialize  Icons technology to make certain proteins in our
bioreactor platform.  In addition, we are entitled to a  non-exclusive  worldwide
 license to make and have made other proteins   expressed  by  using  Icons
  technology  in  our   technology.   In consideration  for the  licenses,  we are
 obligated to pay to Icon  development milestone  payments and  royalties.  To date,  we
have made no such  payments to Icon.

Patents and Other
Intellectual Property

Our
competitive  position and future revenues,  if any, depend in part on our ability, and
that of our licensees,  to obtain and leverage the intellectual property covering our
product  candidates,  know-how,  methods,  processes,  and other  technologies,  to
protect our trade secrets, to prevent others from using our intellectual  property,  and
to operate without  infringing the intellectual property  of third  parties.  Our policy
is to seek to protect  our  competitive position by filing United States,  Israeli and
other foreign patent applications covering our  technology,  including  both new
technology  and  improvements  to existing  technology.  Our patent strategy  includes
 obtaining  patents,  where possible, on methods of manufacture,  compositions of matter
and methods of use. We also rely on know-how,  continuing  technological  innovation,
 licensing and partnership  opportunities  to develop and  maintain our  competitive
 position. Lastly,   we  monitor  third  parties  for  activities  that  may  infringe
 our intellectual  property,  as  well  as the  progression  of  third  party  patent
applications  that may cover our  products  or  methods  and thus,  potentially,
interfere with the development of our business.  We are aware,  for example,  of United
States  patents,  and  corresponding  international  counterparts of such patents,  owned
by  third  parties  that  contain  claims  covering  methods  of producing GCD. We do not
believe that, if any claim of  infringement  were to be asserted  against us based upon
such  patents,  prGCD would be found to infringe any valid claim under such patents.
 However,  there can be no assurance  that a court  would find in our favor or that,  if
we choose or are  required to seek a license to any one or more of such  patents,  a
license would be available to us on acceptable terms or at all.

Our
patent portfolio  consists of several patent families  (consisting of patents and patent
 applications)  covering our technology.  We have been issued patents in the United
States, Israel, the European Community (the EC), Mexico, Poland, Hong Kong,
and India that cover our disposable bioreactor system used in the  expression of
proteins.  We have also been issued  patents that protect the methods that we use for
culturing and  harvesting  plant cells and/or tissues in consecutive  cycles.  Another
patent family in our patent  portfolio  covers our system and method for producing
 glycosilated  proteins,  including  prGCD, in a plant culture,  particularly  proteins
having a high mannose  glycosilation.  An additional patent family covers a system and
method for production of antibodies in a plant cell culture,  and antibodies produced in
such a system. In addition, our patent portfolio includes a patent for a new method for delivering active recombinant proteins systematically through enteral administration via the oral administration of transgenic plant cells. We have 46 granted and pending patent applications related to these aspects of our technology. Lastly, our patent  portfolio  includes a patent  family containing five patent applications that we co-own and that covers
human  glycoprotein hormone and chain splice  variants,  including  isolated  nucleic
acids encoding these variants.  More  specifically,  this patent  portfolio covers a new
splice variant  of human  follicle-stimulating  hormone,  or FSH.

Virginia
  Tech   Intellectual   Properties,   Inc.   has  granted  us  a non-exclusive   license
 to  certain   production   patents  and   continuing applications     thereof,
    including     divisions,     substitutions     and continuations-in-part (but only to
extent that the claims thereof are enabled by disclosure of the parent application);  any
patents issuing on said applications including reissues, reexaminations and extensions;
and any corresponding foreign applications  or patents.  See Risk  FactorsIf
 Protalix  fails to adequately protect or enforce its intellectual  property rights or
secure rights to patents of others, the value of its intellectual  property rights would
diminish and its business and competitive position would suffer.

Manufacturing

Our
drug product  candidates,  including prGCD, must be manufactured in a sterile environment
and in compliance with current good manufacturing  practices (cGMPs) set by the FDA and
other relevant worldwide regulatory  authorities.  We use our current  facility,  which
has  approximately  5,000 sq/ft of clean rooms built according to industry standards, to
develop, process and manufacture prGCD and other  recombinant  proteins.  The entire
protein  production  process takes place in a controlled  environment.  We outsource
certain services in connection with final manufacturing  processes to Teva. We anticipate
entering into further internal and  partnership  programs in the future that will
 require  additional scale-up  of  our  manufacturing  capacity.  Consequently,  we are
 planning  to establish larger scale manufacturing facilities that will satisfy our
production needs for the foreseeable future,  which would increase our capital
expenditures significantly.

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Under
the terms of certain grants and other benefits granted to us by the Israeli  government
and entities  affiliated  with the Israeli  government,  our technology is subject to
certain transfer of technology and manufacturing rights restrictions.  For a description
of such restrictions,  see Israeli  Government Programs.

Raw Materials and
Suppliers

We
 believe  that  the raw  materials  that  we  require  throughout  the manufacturing
 process of our current and potential drug product  candidates are widely  available
 from numerous  suppliers  and are generally  considered to be generic  industrial
 biological  supplies.  We do not rely on a single or unique supplier  for the  current
 production  of any  biotherapeutic  proteins  in our pipeline.

Development
and regulatory  approval of our  pharmaceutical  products are dependent upon our ability
to procure active  ingredients and certain  packaging materials from  FDA-approved
 sources.  Since the FDA approval  process requires manufacturers  to specify their
 proposed  suppliers of active  ingredients  and certain  packaging   materials  in
 their   applications,   FDA  approval  of  a supplemental  application  to use a new
 supplier  in  connection  with any drug candidate or approved product,  if any, would be
required if active  ingredients or such  packaging  materials  were  no  longer
 available  from  the  specified supplier,  which could result in  manufacturing  delays.
 From time to time,  we intend to identify alternative FDA approved suppliers to ensure
continued supply of necessary raw materials.

Competition

The
 biotechnology  and  pharmaceutical  industries are  characterized by rapidly  evolving
 technology  and  significant  competition.  Competition  from numerous  existing
 companies and others entering the fields in which we operate is intense and expected to
increase.  Most of these companies have substantially greater  research  and
  development,   manufacturing,   marketing,   financial, technological  personnel and
managerial resources than we do. In addition,  many specialized  biotechnology  companies
 have  formed  collaborations  with large, established companies to support research,
 development and commercialization of products that may be competitive with our current
and future product  candidates and technologies. Acquisitions of competing companies by
large pharmaceutical or biotechnology companies could enhance such competitors financial,
marketing and other resources.  Academic institutions,  governmental agencies and other
public and private research  organizations are also conducting  research activities and
seeking  patent  protection  and  may  commercialize   competitive  products  or
technologies  on their own or through  collaborations  with  pharmaceutical  and
biotechnology companies.

We
specifically face competition from companies with alternate treatments of Gaucher Disease
and other lysosomal diseases,  including Genzyme Corp., Shire Pharmaceuticals Group plc,
Actelion Ltd. and Amicus Therapeutics,  Inc., as well as  companies  that  are
 developing  other  platforms  for  the  production  of recombinant therapeutic
 pharmaceuticals and biogeneric producers in general. We are aware of other  companies
that are developing  alternative  technologies  to develop and produce  protein
 therapeutics  in anticipation of the expiration of certain  patent  claims  covering
 marketed  proteins.   Competitors  developing alternative   expression    technologies,
   including   alternate   plant-based technologies,  include Biolex, Inc., Chlorogen,
Inc., Greenovation Biotech GmbH, Dow Agroscience, Crucell N.V., Glycofi, Inc. and Shire
Pharmaceuticals.

Several
biogeneric  companies are pursuing the opportunity to develop and commercialize
 follow-on versions of other currently marketed biologic products, including  growth
 factors,  hormones,  enzymes,   interferons,  and  monoclonal antibodies,  areas that
 interest us. These  companies  include,  among  others, Novartis AG/Sandoz
Pharmaceuticals,  BioGeneriX AG, Barr Pharmaceuticals,  Stada Arzneimittel AG,
BioPartners GmbH and Teva.

Government Regulation

The
testing, manufacture, distribution, advertising and marketing of drug products  are
 subject  to  extensive  regulation  by  federal,  state and local governmental
authorities in the United States, including the FDA, and by similar agencies  in other
 countries.  Any  product  that we develop  must  receive all relevant regulatory
 approvals or clearances,  as the case may be, before it may be marketed in a particular
country.

The
regulatory process, which includes overseeing preclinical studies and clinical  trials of
each  pharmaceutical  compound to  establish  its safety and efficacy  and  confirmation
 by the  FDA  that  good  laboratory,  clinical  and manufacturing  practices were
maintained during testing and  manufacturing,  can take many years,  requires the
expenditure of substantial  resources,  and gives larger companies with greater financial
 resources a competitive  advantage over us. Delays or

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terminations  of clinical  trials
that we undertake  would likely impair our  development  of product  candidates.  Delays
or  terminations  could result from a number of factors,  including stringent enrollment
criteria,  slow rate of  enrollment,  size of patient  population,  having to compete
with other clinical trials for eligible patients, geographical considerations and others.

The
FDA review  process  can be  lengthy  and  unpredictable,  and we may encounter delays or
rejections of our applications when submitted. Generally, in order to gain FDA  approval,
 we must  first  conduct  preclinical  studies in a laboratory and in animal models to
obtain preliminary  information on a compound and to identify any safety problems.  The
results of these studies are submitted as part of an IND  application  that the FDA must
review  before human  clinical trials of an investigational drug can commence.

Clinical
 trials  are  normally  done  in  three  sequential  phases  and generally  take two to
five years or longer to  complete.  Phase I  consists  of testing  the  drug  product  in
a  small  number  of  humans,  normally  healthy volunteers,  to determine  preliminary
safety and tolerable dose range. Phase II usually  involves  studies  in a limited
 patient  population  to  evaluate  the effectiveness  of the drug  product  in humans
 having  the  disease  or medical condition for which the product is  indicated,
 determine  dosage  tolerance and optimal dosage and identify  possible  common adverse
 effects and safety risks. Phase III consists of additional  controlled  testing at
multiple clinical sites to establish clinical safety and effectiveness in an expanded
patient population of  geographically  dispersed  test sites to evaluate  the overall
 benefit-risk relationship for  administering the product and to provide an adequate
basis for product  labeling.  Phase IV clinical  trials may be conducted after approval
to gain  additional  experience  from the  treatment  of patients  in the  intended
therapeutic indication.

After
 completion  of  clinical  trials  of a new drug  product,  FDA and foreign regulatory
authority marketing approval must be obtained.  Assuming that the  clinical  data
 support  the  products  safety and  effectiveness  for its intended  use,  a New
Drug  Application  (NDA) is  submitted  to the FDA for its review.  Generally, it takes
one to three years to obtain approval. If questions arise during the FDA review process,
 approval may take a  significantly  longer period of time. The testing and approval
processes require  substantial time and effort and we may not  receive  approval  on a
timely  basis,  if at all, or the approval that we receive may be for a narrower
indication than we had originally sought, potentially undermining the commercial
viability of the product. Even if regulatory  approvals are obtained,  a marketed
 product is subject to continual review,  and later discovery of previously unknown
problems or failure to comply with the applicable  regulatory  requirements  may result
in restrictions on the marketing of a product or  withdrawal  of the product from the
market as well as possible civil or criminal  sanctions.  For marketing outside the
United States, we also will be subject  to  foreign  regulatory  requirements  governing
 human clinical  trials  and  marketing  approval  for  pharmaceutical   products.  The
requirements  governing  the  conduct of  clinical  trials,  product  licensing, pricing
and reimbursement vary widely from country to country.

None
of our products under development has been approved for marketing in the United States or
elsewhere. We may not be able to obtain regulatory approval for any such products under
 development in a timely manner,  if at all. Failure to obtain requisite governmental
approvals or failure to obtain approvals of the scope  requested  will  delay or
 preclude  us, or our  licensees  or  marketing partners,  from  marketing  our
 products,  or limit the  commercial  use of our products,  and thereby  would have a
material  adverse  effect on our  business, financial condition and results of
operations.  See Risk  FactorsProtalix may not obtain the necessary U.S. or
worldwide regulatory approvals to commercialize its drug candidates which would severely
 undermine its business by reducing the number of salable products and, therefore,
corresponding product revenues.

The
United States federal government regulates healthcare through various agencies,
 including  but not  limited  to the  following:  (i) the  FDA,  which administers  the
Federal Food,  Drug, and Cosmetic Act (FDCA),  as well as other relevant laws;  (ii) the
Center for Medicare & Medicaid  Services  (CMS),  which administers  the Medicare and
Medicaid  programs;  (iii) the Office of Inspector General  (OIG) which  enforces
 various laws aimed at  curtailing  fraudulent or abusive  practices,  including  by way
of example,  the  Anti-Kickback  Law, the Anti-Physician  Referral Law, commonly referred
to as Stark, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that
authorize the OIG to exclude healthcare  providers  and  others  from  participating  in
 federal  healthcare programs;  and (iv) the Office of Civil Rights,  which  administers
 the privacy aspects of the  Health  Insurance  Portability  and  Accountability  Act of
1996 (HIPAA).  All of the aforementioned are agencies within the Department of Health and
Human Services (HHS).  Healthcare is also provided or regulated, as the case may be, by
the Department of Defense through its TriCare program, the Department of Veterans
 Affairs,  especially  through the Veterans Health Care Act of 1992, the Public Health
 Service  within HHS under Public Health  Service Act ss. 340B (42 U.S.C. ss. 256b), the
Department of Justice through the Federal False Claims Act and various criminal statutes,
 and state governments under the Medicaid and other state  sponsored or funded programs
and their internal laws regulating all healthcare activities.

Medicare
is the federal  healthcare program for those who are (i) over 65 years of age, (ii)
disabled,  (iii)  suffering  from end-stage  renal disease or (iv) suffering  from Lou
Gehrigs  disease.  Medicare  consists of part A, which covers  inpatient  costs,
 part B,  which  covers  services  by  physicians  and laboratories,  durable  medical
 equipment and certain  drugs,  primarily  those administered  by  physicians,  and part
D, which provides drug coverage for most prescription drugs other than those covered
under part B. Medicare also offers a managed care option under part C. Medicare is
 administered by CMS. In

| | 10 | 
| | -- | 

---

contrast, Medicaid is a
state-federal  healthcare program for the poor and is administered by the states
 pursuant to an agreement  with the  Secretary of Health and Human Services. Most state
Medicaid programs cover most outpatient prescription drugs.

International
Regulation

We
are subject to regulations and product registration  requirements in many foreign
countries in which we may sell our products, including in the areas of: product
standards; packaging requirements; labeling requirements; import and export restrictions;
 and tariff regulations,  duties and tax requirements.  The time required to obtain
clearance required by foreign countries may be longer or shorter than that required for
FDA clearance,  and  requirements for licensing a product in a foreign country may differ
significantly from FDA requirements.

The
primary  regulatory  environment in Europe is that of the EU, which consists of 25
countries encompassing most of the major countries in Europe.

Israeli Government
Programs

The
 following  is a summary of the  current  principal  Israeli tax laws applicable to us
and Protalix Ltd., and of the Israeli Government  programs from which we benefit. Some
parts of this discussion are based on new tax legislation that  has  not  been  subject
 to  judicial  or  administrative  interpretation. Therefore,  the views expressed in the
discussion may not be accepted by the tax authorities  in  question.  The  discussion
 should not be construed as legal or professional tax advice and does not cover all
possible tax considerations.

General Corporate
Tax Structure in Israel

Israeli
 companies are generally  subject to corporate tax based on their taxable  income.  This
rate was 34% in 2005 and 35% for 2004.  Pursuant to a new tax reform plan,  this tax rate
is  scheduled to decline to 31% in 2006,  29% in 2007,  27% in 2008,  26% in 2009 and 25%
in 2010 and  thereafter.  As  discussed below, the corporate tax rate is effectively
 reduced for income derived from an Approved Enterprise.

Law for the
Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments,  1959, known as the Investment  Law,
 provides  certain  incentives  for  capital  investments  in a production facility (or
other eligible assets). Generally, an investment program that is  implemented in
accordance  with the  provisions of the Investment  Law, referred to as an Approved
Enterprise, is entitled to benefits. These benefits may include  cash grants from
the Israeli  government  and tax  benefits,  based upon,  among other things,  the
location of the facility in which the investment is made or the election of the grantee.

The
Investment Law was  significantly  amended  effective  April 2005. We will continue to
enjoy the tax benefits under the pre-revision provisions of the Investment  Law, but if
we are granted any new benefits in the future we will be subject  to the  provisions  of
 the  amended  Investment  Law.  Therefore,  the following  discussion is a summary of
the  Investment Law prior to its amendment as well as the relevant changes contained in
the new legislation.

Under
the Investment Law prior to its amendment, a company that wished to receive  benefits had
to receive an approval from the  Investment  Center of the Israeli  Ministry of
 Industry,  Trade and Labor,  or  Investment  Center.  Each certificate  of  approval
 for an  Approved  Enterprise  relates  to a  specific investment program in the Approved
Enterprise,  delineated both by the financial scope of the investment and by the physical
 characteristics  of the facility or the asset.

An
Approved  Enterprise may elect to forego any entitlement to the grants otherwise
 available  under the Investment Law and,  instead,  participate in an alternative
 benefits  program  under  which the  undistributed  income from the Approved  Enterprise
is fully exempt from  corporate tax for a defined period of time.  Under the  alternative
 package of  benefits,  a companys  undistributed income derived from an approved
enterprise will be exempt from corporate tax for a period of between  two and 10 years
 from the first  year of  taxable  income, depending upon the geographic location within
Israel of the Approved Enterprise. Upon expiration of the exemption period, the Approved
Enterprise is eligible for the reduced tax rates  otherwise  applicable  under the
 Investment  Law for any remainder  of the  otherwise  applicable  benefits  period  (up
to an  aggregate benefits  period of either  seven or 10 years,  depending on the
location of the company or its  definition as a foreign  investors  company).  If a
company has more than one  Approved  Enterprise  program or if only a portion of its
capital investments  are  approved,  its  effective tax rate is the result of a weighted
combination of the applicable  rates.  The tax

| | 11 | 
| | -- | 

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benefits from any  certificate of
approval  relate only to taxable profits  attributable to the specific  Approved
Enterprise. Income derived from activity that is not integral to the activity of the
 Approved   Enterprise  must  be  allocated  among  the  different  Approved Enterprises
and therefore does not enjoy tax benefits.

A
company  that has an Approved  Enterprise  program may be eligible  for further tax
benefits if it qualifies as a foreign investors  company. A foreign investors  company
 eligible for benefits is essentially a company that is more than 25% owned  (measured by
both share  capital,  and  combined  share and loan capital)  by  non-Israeli  residents.
 A  company  that  qualifies  as a foreign investors  company and has an Approved
 Enterprise  program is eligible for tax benefits for a 10 year benefit period and may
enjoy a reduced corporate tax rate of 10% to  25%,  depending  on  the  amount  of the
 companys  shares  held  by non-Israeli shareholders.

If
a company  that has an Approved  Enterprise  program is a wholly owned subsidiary of
another  company,  then the  percentage of foreign  investments is determined based on
the percentage of foreign  investment in the parent company. The tax rates and  related
 levels of foreign  investments  are set forth in the following table:

|Percent
      of
      Foreign Ownership |  |  | Rate ofReduced Tax
|---------------------------------------- |  |  | ------------------
|                                         |  |  |                   
|0-25%                                    |  |  |                   
|25-49%                                   |  |  |                   
|49-74%                                   |  |  |                   
|75-90%                                   |  |  |                   
|90-100%                                  |  |  |                   

In
  addition, if a company that has an approved enterprise distributes a dividend
  during the tax benefit period or within 12 years thereafter (or, in the case
  of a foreign investors company, without time limitation), the dividend
  recipient is taxed at the reduced rate of 15% applicable to dividends from approved
  enterprises.

Our
facility in Israel has been granted Approved Enterprise status, and we have
elected to participate in the alternative  benefits  program.  Under the terms of our
 Approved  Enterprise  program,  the  facility  is located in a top priority location,
 or Zone A, and,  therefore,  our income from that Approved Enterprise  will
be tax  exempt in Israel  for a period of 10 years,  commencing with  the  year in which
we first  generate  taxable  income  from the  relevant Approved  Enterprise.  The
 current  benefits  program  may not  continue  to be available and we may not continue
to qualify for its benefits.

A
company that has elected to  participate  in the  alternative  benefits program and that
subsequently pays a dividend out of the income derived from the Approved Enterprise
during the tax exemption period will be subject to corporate tax in  respect  of the
 amount  distributed  at the rate that  would  have been applicable  had  the  company
 not  elected  the  alternative  benefits  program (generally 10% to 25%). If the
dividend is distributed within twelve years after the commencement of the benefits
period,  the dividend recipient is taxed at the reduced  withholding  tax rate of 15%, or
at the lower rate under an  applicable tax treaty.  After this period, the withholding
tax rate is 25%, or at the lower rate under an  applicable  tax treaty.  In the case of a
company  with a foreign investment  level  (as  defined  by the  Investment  Law)  of 25%
or  more,  the twelve-year  limitation on reduced  withholding tax on dividends does not
apply. The company  must  withhold  this tax at its source,  regardless  of whether the
dividend is converted into foreign currency.

The
Investment Law also provides that an Approved  Enterprise is entitled to accelerated
 depreciation  on its property and equipment that are included in an approved  investment
 program.  This benefit is an  incentive  granted by the Israeli  government  regardless
of whether the alternative  benefits  program is elected.

The
benefits  available to an Approved  Enterprise are  conditioned  upon terms  stipulated
in the  Investment  Law and  regulations  and the criteria set forth in the  applicable
 certificate  of approval.  If Protalix  Ltd.  does not fulfill these  conditions in
whole or in part,  the benefits can be canceled and Protalix  Ltd. may be required to
refund the amount of the  benefits,  linked to the Israeli  consumer price index and with
the addition of interest.  We believe that  Protalix  Ltd.  currently  operates  in
 compliance  with  all  applicable conditions and criteria,  but there can be no
assurance that it will continue to do so. There can be no assurance that any Approved
 Enterprise status granted to Protalix  Ltd.s  facilities will entitle us to the
same benefits to which it is currently entitled.

Pursuant
to a recent amendment to the Investment Law, the approval of the Investment  Center is
required only for Approved  Enterprises  that receive cash grants.  Approved  Enterprises
 that  do not  receive  benefits  in the  form of governmental  cash  grants,  but only
tax  benefits,  are no longer  required to obtain this approval.  Instead,  these Approved

| | 12 | 
| | -- | 

---

Enterprises are required to make
certain investments as specified in the law. These Approved  Enterprises may, at their
 discretion,  elect  to  apply  for a  pre-ruling  from  the  Israeli  tax authorities
 confirming  that they are in compliance  with the provisions of the law or Approved
 Enterprises may claim the benefits offered under the Investment Law in  their  tax
 returns  (provided  they  meet  the  criteria  for  such tax benefits).

The
amended  Investment Law specifies certain  conditions for an Approved Enterprise to be
entitled to benefits. These conditions include:

| |  |  | the
Approved Enterprises revenues from any single country or a separate customs
territory may not exceed 75% of the                   Approved Enterprises total
revenues; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | at
least 25% of the Approved  Enterprises revenues during the
                  benefits  period  must be  derived  from  sales  into a single
                  country or a separate  customs  territory with a population of
                  at least 12 million.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

There
can be no assurance  that we will comply with the above  conditions in the future or that
we will be entitled to any  additional  benefits under the Investment  Law. In addition,
 it is possible that we may not be able to operate in a way that maximizes utilization of
the benefits under the Investment Law.

Encouragement of
Industrial Research and Development Law, 1984

In
the past,  Protalix Ltd.  received grants from the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade and Labor, the OCS, for the financing of a portion of
its research and  development  expenditures in Israel. Since  inception,  Protalix  Ltd.
 received  or accrued  grants  from the OCS in respect  of its  continuing  operations
 totaling  approximately  $4.9  million. Protalix  Ltd.  is  required  to repay up to
100% of the  dollar  value of these grants (plus interest equal to the LIBOR rate applied
to the grants  received on or after January 1, 1999) to the OCS through  payments of
royalties at a rate of 3%  to 6% of  revenues  generated  (depending  on  the  sales
 period)  from  an OCS-funded  project  until the entire  amount is repaid,  plus
 interest.  As of December 31, 2006,  Protalix Ltd. had not paid or accrued royalties and
Protalix Ltd.s  contingent  liability  to the OCS with  respect to grants  received
 was approximately $4.2 million.

Under
the Israeli Law for the  Encouragement  of Industrial  Research and Development,  1984
and related  regulations,  or the Research Law, recipients of grants from the OCS are
prohibited from  manufacturing  products developed using these  grants  outside  of the
State of Israel  without  special  approvals.  If Protalix Ltd.  receives  approval to
 manufacture  the products  developed  with government  grants  outside of Israel,  it
will be required to pay an  increased total  amount  of  royalties  (possibly  up to 300%
of the  grant  amounts  plus interest),  depending on the  manufacturing  volume that is
performed outside of Israel, as well as a possible increased royalty rate.

Additionally,
 under the Research Law,  Protalix Ltd. is prohibited  from transferring  the OCS
financed  technologies and related  intellectual  property rights  outside of the State
of Israel  except under limited  circumstances  and only with the approval of the
Research  Committee of the OCS.  Protalix Ltd. may not receive the required  approvals
for any proposed  transfer and, if received, Protalix Ltd. may be required to pay the OCS
a portion of the consideration that it receives upon any sale of such technology by a
non-Israeli  entity. The scope of the support  received,  the royalties  that Protalix
Ltd. paid, the amount of time that elapsed between the date on which the know-how was
transferred and the date on which  the  grants  were  received,  and the sale  price and
the form of transaction,  will be taken into account in order to calculate the amount of
the payment.  Approval of the  transfer of  technology  to residents of the State of
Israel is  required,  and may be granted in specific  circumstances  only if the
recipient   abides  by  the  provisions  of  applicable   laws,   including  the
restrictions  on the transfer of know-how and the obligation to pay royalties in an
amount that may be  increased.  No assurances  can be made that  consent,  if requested,
will be granted.

The
 State  of  Israel  does  not own  intellectual  property  rights  in technology
 developed with OCS funding and there is no restriction on the export of products
 manufactured  using  technology  developed  with OCS  funding.  The technology  is,
 however,  subject to transfer of technology  and  manufacturing rights  restrictions  as
described  above.  OCS approval is not required for the export of any products  resulting
 from the research or  development  or for the licensing  of  any  technology  in  the
 ordinary  course  of  business.  For  a description of such restrictions,  please see
Risk  FactorsRisks  Relating to Our Operations in Israel.

| | 13 | 
| | -- | 

---

Special Provisions
Relating to Taxation under Inflationary Conditions

We
 are  taxed  in  Israel   under  the  Income  Tax  Law   (Inflationary Adjustments),
 1985, generally referred to as the Inflationary  Adjustments Law. The Inflationary
Adjustments Law is highly complex, and represents an attempt to overcome  the  problems
 presented  to a  traditional  tax  system by an economy undergoing  rapid  inflation.
 The  provisions  that  are  material  to  us  are summarized below:

| |  |  | Where
a companys equity, as calculated under the Inflationary
                  Adjustments  Law,  exceeds the  depreciated  cost of its fixed
                  assets (as defined in the  Inflationary  Adjustments  Law),  a
                  deduction  from  taxable  income  is  permitted  equal to this
                  excess  multiplied by the applicable annual rate of inflation.
                  The maximum  deduction  permitted  under this provision in any
                  single  tax year is 70% of  taxable  income,  with the  unused
                  portion permitted to be carried forward, linked to the Israeli
                  consumer price index.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Where
a companys depreciated cost of fixed assets exceeds its                   equity,
 then the excess  multiplied by the applicable  annual                   rate of
inflation is added to taxable income.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Subject
 to  specified  limitations,  depreciation  deductions                   carryforwards
 on fixed  assets and losses  are  adjusted  for                   inflation based on the
change in the consumer price index.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the  Inflationary  Adjustments  Law,  results for tax  purposes are measured in real
terms, in accordance with changes in the Israeli consumer price index. The difference
between the change in the Israeli consumer price index and the  exchange  rate of Israeli
 currency in relation to the dollar may in future periods cause  significant  differences
 between  taxable  income and the income measured in dollars as reflected in our
consolidated financial statements.

Law for the
  Encouragement of Industry (Taxes), 1969

We
  believe that Protalix Ltd. currently qualifies as an Industrial Company
  within the meaning of the Law for the Encouragement of Industry (Taxes), 1969,
  or the Industry Encouragement Law. The Industry Encouragement Law defines Industrial
  Company as a company resident in Israel that derives 90% or more of its
  income in any tax year (other than specified kinds of passive income such as
  capital gains, interest and dividends) from an Industrial Enterprise that
  it owns. An Industrial Enterprise is defined as an enterprise whose
  major activity in a given tax year is industrial production.

The following
  corporate tax benefits, among others, are available to Industrial Companies:

| |  |  | amortization of the cost of purchased know-how
      and patents over an eight-year period for tax purposes;
| | - |  | ------------------------------------------------------------------------------------------------------------

| |  |  | accelerated depreciation rates on equipment and
      buildings;
| | - |  | ----------------------------------------------------------------

| |  |  | under specified conditions, an election to file
      consolidated tax returns with additional related Israeli Industrial Companies;
      and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | expenses related to a public offering are deductible
      in equal amounts over three years.
| | - |  | ---------------------------------------------------------------------------------------------

Eligibility
  for the benefits under the Industry Encouragement Law is not subject to receipt
  of prior approval from any governmental authority. It is possible that Protalix
  Ltd. may fail to qualify or may not continue to qualify as an Industrial
  Company or that the benefits described above will not be available in
  the future.

Tax Benefits
  for Research and Development

Under
  specified conditions, Israeli tax laws allow a tax deduction by a company for
  research and development expenditures, including capital expenditures, for the
  year in which such expenditures are incurred. These expenses must relate to
  scientific research and development projects and must be approved by the OCS.
  Furthermore, the research and development projects must be for the promotion
  of the company and carried out by or on behalf of the company seeking such tax
  deduction. However, the amount of such deductible expenses is reduced by the
  sum of any funds received through government grants for the finance of such
  scientific research and development projects. Expenditures not so approved are
  deductible over a three-year period.

| | 14 | 
| | -- | 

---

Tax Ruling
  and Lock-up Agreements Related to the Merger

In
  connection with the merger, substantially all of the former shareholders of
  Protalix Ltd. entered into lock-up agreements to satisfy Israeli tax laws and
  contractual obligations. The lock-up agreements prohibit such former shareholders
  of Protalix Ltd. from, directly or indirectly, selling or otherwise transferring
  the shares of our common stock issued to them as a result of the merger during
  a period commencing upon the closing of the merger and ending on January 1,
  2009. However, during such period, each such former Protalix shareholder may,
  under the terms of the lock-up agreements and the tax ruling described below,
  sell an aggregate of 10% of each such shareholders original number of
  locked-up shares. All permitted sales of locked-up shares that may be made during
  such time period are cumulative.

Furthermore,
  under applicable tax law incorporated by reference into the tax ruling obtained
  by Protalix Ltd. from the Israeli tax authorities, during the lock-up period,
  we must maintain our holding of at least 51% of Protalix Ltd. and our shareholders
  at the time of the consummation of the merger must maintain, in the aggregate,
  holdings of at least 51% of our outstanding share capital.

We
  and Protalix Ltd. are entitled to issue up to 25% of our respective share capital
  to third parties or a higher number of shares in a public offering, provided
  that we and Protalix Ltd. each remain compliant with the limitations described
  above.

Notwithstanding
  the limitations described above, the following transactions shall not be subject
  to any limitation on the sale of shares under the ruling: (i) dispositions by
  any shareholder of our company that holds less than 5% of our voting rights
  or issued and outstanding share capital upon the merger; or (ii) a shareholder
  who is not subject to, or is exempt from, the payment of taxes in Israel. These
  transactions are restricted pursuant to the contractual lock-ups described above.

According to the tax ruling,
  until the second anniversary of the closing of the merger, the operation of
  our company and/or that of Protalix Ltd. shall be further limited as follows:

| |  |  | Most of Protalix Ltd.s operations and activities
      shall be directed to research and development activities. The Encouragement
      of Industrial Research and Development Law, 1984, of the State of Israel
      defines research and development activity to include certain expenses incurred
      by a company in connection with the transition to the manufacturing and
      marketing of the products or technology that result from the research and
      development efforts.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The consideration received and to be received in
      connection with the issuance of our shares or rights, or those of Protalix
      Ltd., shall be used and reinvested in research and development activity
      as defined above. Such consideration includes any investment made in Protalix
      Ltd. prior to the merger and the cash held by us as of the closing of the
      merger, after the deduction of any amounts required for the operation of
      our company in the United States.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | At least 75% of the research and development expenditures
      of Protalix Ltd. shall be made in Israel. However, the Israeli tax authorities
      may establish a lower percentage if Protalix Ltd. makes expenditures in
      connection with clinical and toxicology trials that cannot be conducted
      in Israel.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employees

We
  believe that our success will greatly depend on our ability to identify, attract
  and retain capable employees. As of February 28, 2007, we had 69 employees,
  of whom 14 have Ph.D.s in their respective scientific fields. We believe that
  our relations with these employees are good. We intend to continue to hire additional
  employees in research and development, manufacturing and administration in order
  to meet our operation plans. Expansion orders issued by the Israeli Ministry
  of Labor and Welfare make certain industry-wide collective bargaining agreements
  applicable to us. These agreements affect matters such as cost of living adjustments
  to salaries, length of working hours and week, recuperation, travel expenses,
  and pension rights. Otherwise, our employees are not represented by a labor
  union or otherwise represented under a collective bargaining agreement. See
  Risk FactorsProtalix depends upon key employees and consultants
  in a competitive market for skilled personnel. If Protalix is unable to attract
  and retain key personnel, it could adversely affect Protalixs ability
  to develop and market its products. We have no employees apart from those
  employed by Protalix Ltd.

Available Information

Our
  corporate website is www.protalix.com. We make available on our website, free
  of charge, our SEC filings, including our Annual Report on Form 10-K, Quarterly
  Reports on Form 10-Q, Current Reports on Form 8-K and any

| | 15 | 
| | -- | 

---

amendments to these reports,
  as soon as reasonably practicable after we electronically file these documents
  with, or furnish them to, the Securities and Exchange Commission. Information
  on our website is not part of this document.

Our
  website also includes printable versions of our Code of Business Conduct and
  Ethics and the charters for each of the Audit, Compensation and Nominating Committees
  of our Board of Directors. Each of these documents is also available in print
  to any stockholder who requests a copy by addressing a request to:

Protalix BioTherapeutics,
  Inc.
  2 Snunit Street
  Science Park
  POB 455
  Carmiel 2100, Israel
  Attn: Mr. Yossi Maimon, CFO

Item 1A. Risk
  Factors

Investors
  should carefully consider the risks described below together with the other
  information included in this Annual Report on Form 10-K. Our business, financial
  condition or results of operations could be adversely affected by any of these
  risks. If any of these risks occur, the value our common stock could decline.

Risks related
  to our business

Drug
  development and commercialization is very capital intensive. Until we receive
  approval from the FDA and other regulatory authorities for our drug candidates,
  we cannot sell our drugs and will not have product revenues. Therefore, for
  the foreseeable future, we will have to fund all of our operations and capital
  expenditures from the net proceeds of any equity or debt offerings, licensing
  fees and grants. We will need additional financing, which may not be available
  on favorable terms, if at all. Over the next twelve months, we expect to spend
  a minimum of approximately $6 million on clinical development for our products
  under development. Based on our current plans and capital resources, we believe
  that our cash and cash equivalents will be sufficient to enable us to meet our
  minimum planned operating needs for at least the next 18 months. However, changes
  may occur that could consume our existing capital at a faster rate than projected,
  including, among others, changes in the progress of our research and development
  efforts, the cost and timing of regulatory approvals and the costs of protecting
  our intellectual property rights. We expect to seek additional financing to
  implement and fund longer-term product development, pre-clinical studies and
  clinical trials for the drugs in our pipeline as well as additional drug candidates
  and other research and development projects. If we are unable to secure additional
  financing in the future on acceptable terms, or at all, we may be unable to
  commence or complete planned pre-clinical and clinical trials or obtain approval
  of our drug candidates from the FDA and other regulatory authorities. In addition,
  we may be forced to reduce or discontinue product development or product licensing,
  reduce or forego sales and marketing efforts and other commercialization activities
  or forego attractive business opportunities in order to improve our liquidity
  and to enable us to continue operations. Any additional sources of financing
  will likely involve the issuance of our equity securities, which will have a
  dilutive effect on stockholders.

We are not
  currently profitable and may never become profitable.

We
  expect to incur substantial losses for the foreseeable future and may never
  become profitable. We also expect to continue to incur significant operating
  and capital expenditures, and we anticipate that our expenses will increase
  substantially in the foreseeable future as we:

| |  |  | continue to undertake pre-clinical development
      and clinical trials for our current and new drug candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------

| |  |  | seek regulatory approvals for our drug candidates;
| | - |  | --------------------------------------------------

| |  |  | implement additional internal systems and infrastructure;
| | - |  | ---------------------------------------------------------

| |  |  | seek to license-in additional technologies to develop;
      and
| | - |  | ----------------------------------------------------------------

| |  |  | hire additional personnel.
| | - |  | --------------------------

We
  also expect to continue to experience negative cash flow for the foreseeable
  future as we fund our operating losses and capital expenditures. As a result,
  we will need to generate significant revenues in order to achieve and maintain

| | 16 | 
| | -- | 

---

profitability. We may not
  be able to generate these revenues or achieve profitability in the future. Our
  failure to achieve or maintain profitability could negatively impact the value
  of our common stock.

We have
  a limited operating history upon which to base an investment decision.

We
  are a business development stage company with a number of drug candidates. To
  date, we have not commercialized any of our drug candidates or received any
  FDA or other approval to market any drug. The successful commercialization of
  our drug candidates will require us to perform a variety of functions, including:

| |  |  | continuing to undertake pre-clinical development
      and clinical trials;
| | - |  | ---------------------------------------------------------------------------

| |  |  | participating in regulatory approval processes;
| | - |  | -----------------------------------------------

| |  |  | formulating and manufacturing products; and
| | - |  | -------------------------------------------

| |  |  | conducting sales and marketing activities.
| | - |  | ------------------------------------------

Our
  operations and those of Protalix Ltd., our subsidiary, have been limited to
  organizing and staffing our company, acquiring, developing and securing our
  proprietary technology and undertaking, through third parties, pre-clinical
  trials and clinical trials of our principal drug candidates. To date, only one
  drug candidate, prGCD, has completed Phase I clinical trials and the other four
  drug candidates have not commenced the preclinical trial phase of development.
  These operations provide a limited basis for investors to assess our ability
  to commercialize our drug candidates and whether to invest in us.

Our plant
  cell system is based solely on our bioreactor technology.

Our
  plant cell system is based on our proprietary bioreactor technology. Our business
  is dependent upon the successful development and approval of our product candidates
  produced through this technology platform. Any material problems with our technology
  platform could have a material adverse effect on our business.

We may not
  obtain the necessary U.S. or worldwide regulatory approvals to commercialize
  our drug candidates.

We
  will need FDA approval to commercialize our drug candidates in the United States
  and approvals from foreign regulators to commercialize our drug candidates elsewhere.
  In order to obtain FDA approval of any of our drug candidates, we must submit
  to the FDA a New Drug Application, or NDA, demonstrating that the drug candidate
  is safe for humans and effective for its intended use. This demonstration requires
  significant research and animal tests, which are referred to as pre-clinical
  studies, as well as human tests, which are referred to as clinical trials. Satisfaction
  of the FDAs regulatory requirements typically takes many years, and depends
  upon the type, complexity and novelty of the drug candidate and requires substantial
  resources for research, development and testing. Our research and clinical efforts
  may not result in drugs that the FDA considers safe for humans and effective
  for indicated uses. After clinical trials are completed, the FDA has substantial
  discretion in the drug approval process of the drug candidate and may require
  us to conduct additional clinical testing or to perform post-marketing studies.

The
  approval process may also be delayed by changes in government regulation, future
  legislation or administrative action or changes in FDA policy that occur prior
  to or during its regulatory review. Delays in obtaining regulatory approvals
  may:

| |  |  | delay commercialization of, and our ability to
      derive product revenues from, our drug candidates;
| | - |  | -------------------------------------------------------------------------------------------------------

| |  |  | require us to perform costly procedures; or
| | - |  | -------------------------------------------

| |  |  | otherwise diminish any competitive advantages that
      we may have.
| | - |  | ---------------------------------------------------------------------

Even
  if we comply with all FDA requests, the FDA may ultimately reject one or more
  of our NDAs, or we might not obtain regulatory clearance in a timely manner.
  Failure to obtain FDA approval of any of our drug candidates in a timely manner
  or if at all will severely undermine our business by reducing our potential
  marketable products and, ability to guarantee corresponding product revenues.

In
  foreign jurisdictions, we must receive approval from the appropriate regulatory
  authorities before we can commercialize any drug. Foreign regulatory approval
  processes generally include all of the risks associated with the FDA approval
  procedures described above. We might not be able to obtain the approvals necessary
  to commercialize our drug candidates for sale outside the United States in a
  timely manner, if at all.

| | 17 | 
| | -- | 

---

Clinical
  trials are very expensive, time-consuming and difficult to design and implement.

Human
  clinical trials are very expensive and difficult to design and implement, in
  part because they are subject to rigorous regulatory requirements. The clinical
  trial process is also time-consuming. Our drug candidates are in early stages
  of clinical or pre-clinical trials. We estimate that clinical trials of prGCD
  or any of our other potential drug candidates will take at least several years
  to complete. Furthermore, failure can occur at any stage of the trials, and
  we may encounter problems that cause us to abandon or repeat clinical trials.
  The commencement and completion of clinical trials may be delayed by several
  factors, including:

| |  |  | unforeseen safety issues;
| | - |  | -------------------------

| |  |  | determination of dosing issues;
| | - |  | -------------------------------

| |  |  | lack of effectiveness during clinical trials;
| | - |  | ---------------------------------------------

| |  |  | failure of third party suppliers to supply drug
      substance;
| | - |  | ----------------------------------------------------------------

| |  |  | slower than expected rates of patient recruitment;
| | - |  | --------------------------------------------------

| |  |  | inability to monitor patients adequately during
      or after treatment;
| | - |  | -------------------------------------------------------------------------

| |  |  | inability or unwillingness of medical investigators
      and institutional review boards to follow our clinical protocols; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

| |  |  | lack of sufficient funding to finance the clinical
      trials.
| | - |  | ----------------------------------------------------------------

In
  addition, we or the FDA may suspend our clinical trials at any time if it appears
  that we are exposing participants to unacceptable safety or health risks or
  if the FDA finds deficiencies in our IND submissions or the conduct of these
  trials.

If the results
  of our clinical trials do not support our drug candidate claims, the completion
  of development of such drug candidate may be significantly delayed or we may
  be forced to abandon development altogether, which will significantly impair
  our ability to generate product revenues.

The
  results of our clinical trials might not support our claims of safety or efficacy.
  Further, success in pre-clinical testing and early clinical trials does not
  ensure that later clinical trials will be successful, and the results of later
  clinical trials may not replicate the results of prior clinical trials and pre-clinical
  testing. The clinical trial process may fail to demonstrate that our drug candidates
  are safe for humans and effective for indicated uses. In addition, our clinical
  trials may involve a specific and small patient population. Because of the small
  sample size, the results of these early clinical trials may not be indicative
  of future results. Adverse or inclusive results may cause us to abandon a drug
  candidate and may delay development of other drug candidates. Any delay in,
  or termination of, our clinical trials will delay the filing of our NDAs with
  the FDA and, ultimately, our ability to commercialize our drug candidates and
  generate product revenues.

If physicians
  and patients do not accept and use our drugs, our ability to generate revenue
  from sales of our products will be materially impaired.

Even
  if the FDA approves any of our drug candidates for commercialization, physicians
  and patients may not accept and use such candidates. Future acceptance and use
  of our products will depend upon a number of factors including:

| |  |  | perceptions by members of the health care community,
      including physicians, about the safety and effectiveness of our drugs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | pharmacological benefit and cost-effectiveness
      of our products relative to competing products;
| | - |  | ----------------------------------------------------------------------------------------------------

| |  |  | effectiveness of education, marketing and distribution
      efforts by us and our licensees and distributors, if any; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | the price for our products and competing products.
| | - |  | --------------------------------------------------

Because
  we expect sales of our current drug candidates, if approved, to generate substantially
  all of our product revenues for the foreseeable future, the failure of any of
  these drugs to find market acceptance would harm our business and could require
  us to seek additional financing.

| | 18 | 
| | -- | 

---

Because
  our drug development program depends upon third-party researchers, the results
  of our clinical trials and such research activities are, to a certain extent,
  beyond our control.

We
  depend upon independent investigators and collaborators, such as universities
  and medical institutions, to conduct our pre-clinical and clinical trials. For
  example, the Phase I clinical trials of prGCD were conducted at Hadassah Medical
  Center, Jerusalem, Israel. These collaborators are not our employees, and we
  cannot control the amount or timing of resources that they devote to our programs.
  These investigators may not assign as great a priority to our programs or pursue
  them as diligently as we would if we were undertaking such programs directly.
  If outside collaborators fail to devote sufficient time and resources to our
  drug-development programs, or if their performance is substandard, the approval
  of our FDA applications, if any, and our introduction of new drugs, if any,
  may be delayed. These collaborators may also have relationships with other commercial
  entities, some of whom may compete with us. If our collaborators also assist
  our competitors, our competitive position could be harmed.

Our strategy,
  in many cases, is to enter into collaboration agreements with third parties
  with respect to our product candidates and we may require additional collaboration
  agreements. If we fail to enter into these agreements or if we or the third
  parties do not perform under such agreements, it could impair our ability to
  commercialize our products.

Our
  strategy for the completion of the required development and clinical testing
  of our products and for the marketing and commercialization of our products,
  in many cases, depends upon entering into collaboration arrangements with pharmaceutical
  companies to market, commercialize and distribute our products. To date, we
  have entered into an agreement with Teva, which relates to the development of
  two proteins, and licensing by Teva of such proteins in consideration for royalties
  and milestone payments. Under our agreement with Bayer (Icon), the parties agreed
  to perform collaborative research in connection with improvements to the yield
  of expressed proteins. We received the right to license Icons technology
  in consideration for royalties and milestone payments.

If
  we or any of our partners breach or terminate the agreements that make up such
  collaboration arrangements or such partners otherwise fail to conduct their
  collaboration-related activities in a timely manner or if there is a dispute
  about their obligations, we may need to seek other partners or we may have to
  develop our own internal sales and marketing capability for our current and
  future products. Accordingly, we may need to enter into additional collaboration
  agreements and our success may depend upon obtaining additional collaboration
  partners. In addition, we may depend on our collaboratorsexpertise and
  dedication of sufficient resources to develop and commercialize our proposed
  products.

We
  may, in the future, grant to collaboration partners rights to license and commercialize
  pharmaceutical products developed under collaboration agreements. Under these
  arrangements, our collaboration partners may control key decisions relating
  to the development of the products. The rights of our collaboration partners
  would limit our flexibility in considering alternatives for the commercialization
  of our products. If we fail to successfully develop these relationships or if
  our collaboration partners fail to successfully develop or commercialize any
  of our products, it may delay or prevent us from developing or commercializing
  our products in a competitive and timely manner and would have a material adverse
  effect on the commercialization of our products. See Risk Factors - We
  have no experience selling, marketing or distributing products and no internal
  capability to do so.

The manufacture
  of our products is an exacting and complex process, and if we or one of our
  materials suppliers encounter problems manufacturing our products, our business
  could suffer.

The
  FDA and foreign regulators require manufacturers to register manufacturing facilities.
  The FDA and foreign regulators also inspect these facilities to confirm compliance
  with cGMP or similar requirements that the FDA or foreign regulators establish.
  We or our materials suppliers may face manufacturing or quality control problems
  causing product production and shipment delays or a situation where we or the
  supplier may not be able to maintain compliance with the FDAs cGMP requirements,
  or those of foreign regulators, necessary to continue manufacturing our drug
  substance. Any failure to comply with cGMP requirements or other FDA or foreign
  regulatory requirements could adversely affect our clinical research activities
  and our ability to market and develop our products. Our current facility has
  not been audited by the FDA. There can be no assurance that we will be able
  to comply with FDA or foreign regulatory manufacturing requirements for our
  current facility or any future facility that we may establish, which would have
  a material adverse effect on our business.

We rely
  on third parties for final processing of our prGCD candidate, which exposes
  us to a number of risks that may delay development, regulatory approval and
  commercialization of our products or result in higher product costs.

We
  have no experience in the final filling and freeze drying steps of the drug
  manufacturing process. We have entered into a contract with Teva to perform
  the final filling and freeze drying steps for our prGCD drug candidate in connection
  with our clinical trials. If any of our drug candidates receive FDA approval,
  we will rely on Teva or other third-party contractors to perform the final manufacturing
  steps for our drugs on a commercial scale. We may be unable to identify

| | 19 | 
| | -- | 

---

manufacturers and replacement
  manufacturers on acceptable terms or at all because the number of potential
  manufacturers is limited and the FDA must approve any replacement manufacturer,
  including us, and we or any such third party manufacturer might be unable to
  formulate and manufacture our drug products in the volume and of the quality
  required to meet our clinical needs and commercial needs. If we engage any contract
  manufacturers, such manufacturers may not perform as agreed or may not remain
  in the contract manufacturing business for the time required to supply its clinical
  trials or to successfully produce, store and distribute its products. Each of
  these risks could delay our clinical trials, the approval, if any, of prGCD
  and our other potential drug candidates by the FDA, or the commercialization
  of prGCD and our other drug candidates or result in higher costs or otherwise
  deprive us of potential product revenues.

We have
  no experience selling, marketing or distributing products and no internal capability
  to do so.

We
  currently have no sales, marketing or distribution capabilities. While we intend
  to have a role in the commercialization of our products, we do not anticipate
  having the resources in the foreseeable future to develop global sales and marketing
  capabilities for all of the products we develop. Our future revenues depend,
  in part, on our ability to enter into and maintain collaborative relationships
  with other companies having sales, marketing and distribution capabilities,
  the collaborators strategic interest in the products under development
  and such collaborators ability to successfully market and sell any such
  products. We intend to pursue additional collaborative arrangements regarding
  the sales and marketing of our products; however, we might not be able to establish
  or maintain such collaborative arrangements, or if such arrangements are made,
  our counterparties might not have effective sales and marketing forces. To the
  extent that we decide not to, or are unable to, enter into collaborative arrangements
  with respect to the sales and marketing of our proposed products, significant
  capital expenditures, management resources and time will be required to establish
  and develop an in-house marketing and sales force with technical expertise.
  We may not be able to establish or maintain relationships with third party collaborators
  or develop in-house sales and distribution capabilities. To the extent that
  we depend on third parties for marketing and distribution, any revenues we receive
  will depend upon the efforts of such third parties, as well as the terms of
  our agreements with such third parties, which cannot be predicted at this early
  stage. We might not be able to market and sell our products in the United States
  or overseas.

We may enter
  into distribution arrangements and marketing alliances, which could require
  us to give up rights to our product candidates.

We
  may rely on third-party distributors to distribute our products or enter into
  marketing alliances to sell our products. We may not be successful in entering
  into distribution arrangements and marketing alliances with third parties. Our
  failure to successfully develop a marketing and sales team or to enter into
  these arrangements on favorable terms could delay or impair our ability to commercialize
  our product candidates and could increase our costs of commercialization. Our
  dependence on distribution arrangements and marketing alliances to commercialize
  our product candidates will subject us to a number of risks, including:

| |  |  | we may be required to relinquish important rights
      to our products or product candidates;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | we may not be able to control the amount and timing
      of resources that our distributors or collaborators may devote to the commercialization
      of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | our distributors or collaborators may experience
      financial difficulties;
| | - |  | ------------------------------------------------------------------------------

| |  |  | our distributors or collaborators may not devote
      sufficient time to the marketing and sales of our products thereby exposing
      us to potential expenses in terminating such distribution agreements; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | business combinations or significant changes in
      a collaborators business strategy may adversely affect a collaborators
      willingness or ability to complete its obligations under any arrangement.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
  may need to enter into additional co-promotion arrangements with third parties
  where our own sales force is neither well situated nor large enough to achieve
  maximum penetration in the market. We may not be successful in entering into
  any co-promotion arrangements, and the terms of any co-promotion arrangements
  may not be favorable to us. In addition, if we enter into co-promotion arrangements
  or market and sell additional products directly, we may need to further expand
  our sales force and incur additional costs.

If
  we fail to enter into arrangements with third parties in a timely manner or
  if they fail to perform, it could adversely affect sales of our products. We
  and any of our third-party collaborators must also market our products in compliance
  with federal, state and local laws relating to the providing of incentives and
  inducements. Violation of these laws can result in substantial penalties.

| | 20 | 
| | -- | 

---

Developments
  by competitors may render our products or technologies obsolete or non-competitive.

We
  compete against fully integrated pharmaceutical companies and smaller companies
  that are collaborating with larger pharmaceutical companies, academic institutions,
  government agencies and other public and private research organizations, including
  Genzyme Corp., Shire Pharmaceuticals Group plc, Actelion Ltd. and Amicus Therapeutics,
  Inc. Genzyme currently sells proprietary compounds for the treatment of Gaucher
  Disease. In addition, companies pursuing different but related fields, as well
  as other protein expression platforms, represent substantial competition. Most
  of our competitors, either alone or together with their collaborative partners,
  operate larger research and development programs, staff and facilities and have
  substantially greater financial resources than we do, as well as significantly
  greater experience in:

| |  |  | developing drugs;
| | - |  | -----------------

| |  |  | undertaking pre-clinical testing and human clinical
      trials;
| | - |  | -----------------------------------------------------------------

| |  |  | obtaining FDA and other regulatory approvals of
      drugs;
| | - |  | ------------------------------------------------------------

| |  |  | formulating and manufacturing drugs; and
| | - |  | ----------------------------------------

| |  |  | launching, marketing and selling drugs.
| | - |  | ---------------------------------------

These
  organizations also compete with us to attract qualified personnel, acquisitions
  and joint ventures candidates and for other collaborations.

If we fail
  to adequately protect or enforce our intellectual property rights or secure
  rights to third party patents, the value of our intellectual property rights
  would diminish and our business and competitive position would suffer.

Our
  competitive position and future revenues will depend in part on our ability
  and the abilities of our licensors and collaborators to obtain and maintain
  patent protection for our products, methods, processes and other technologies,
  to preserve our trade secrets, to prevent third parties from infringing on our
  proprietary rights and to operate without infringing the proprietary rights
  of third parties. We have filed U.S. and Patent Cooperation Treaty (PCT)
  patent applications for process patents, as well as composition of matter patents,
  for prGCD. We also have 46 granted and pending patent applications that we own, and five patent applications that we co-own, as discussed under Item
  1, BusinessPatents and Other Intellectual Property.

However,
  we cannot predict:

| |  |  | the degree and range of protection any patents
      will afford us against competitors, including whether third parties will
      find ways to invalidate or otherwise circumvent our licensed patents;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | if and when patents will issue;
| | - |  | -------------------------------

| |  |  | whether or not others will obtain patents claiming
      aspects similar to those covered by our licensed patents and patent applications;
      or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | whether we will need to initiate litigation or
      administrative proceedings, which may be costly whether we win or lose.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------

If
  patent rights covering our products are not sufficiently broad, they may not
  provide us with sufficient proprietary protection or competitive advantages
  against competitors with similar products and technologies. Furthermore, if
  the United States Patent and Trademark Office or foreign patent offices issue
  patents to us or our licensors, others may challenge the patents or circumvent
  the patents, or the patent office or the courts may invalidate the patents.
  Thus, any patents we own or license from or to third parties may not provide
  any protection against our competitors.

Furthermore,
  the life of our patents is limited. The basic platform patent will expire in
  2016. If patents issue from other currently submitted patent applications, those
  patents will expire between 2023 and 2025.

We rely
  on confidentiality agreements that could be breached and may be difficult to
  enforce.

Although
  we believe that we take reasonable steps to protect our intellectual property,
  including the use of agreements relating to the non-disclosure of confidential
  information to third parties, as well as agreements that purport to require
  the disclosure and assignment to us of the rights to the ideas, developments,
  discoveries and inventions of our employees and consultants while we employ
  them, the agreements can be difficult and costly to enforce. Although we seek
  to obtain these types of agreements from our contractors, consultants, advisors
  and research collaborators, to the extent that they apply or independently develop
  intellectual property in connection with any of our projects, disputes may arise
  as to the

| | 21 | 
| | -- | 

---

proprietary rights to this
  type of information. If a dispute arises, a court may determine that the right
  belongs to a third party, and enforcement of our rights can be costly and unpredictable.
  In addition, we rely on trade secrets and proprietary know-how that we will
  seek to protect in part by confidentiality agreements with our employees, contractors,
  consultants, advisors or others. Despite the protective measures we employ,
  we still face the risk that:

| |  |  | these agreements may be breached;
| | - |  | ---------------------------------

| |  |  | these agreements may not provide adequate remedies
      for the applicable type of breach;
| | - |  | -------------------------------------------------------------------------------------------

| |  |  | our trade secrets or proprietary know-how will
      otherwise become known;
| | - |  | ----------------------------------------------------------------------------

| |  |  | our competitors will independently develop similar
      technology; or
| | - |  | -----------------------------------------------------------------------

| |  |  | our competitors will independently discover our
      proprietary information and trade secrets.
| | - |  | ------------------------------------------------------------------------------------------------

If we infringe
  the rights of third parties we could be prevented from selling products, forced
  to pay damages, and required to defend against litigation.

If
  our products, methods, processes and other technologies infringe the proprietary
  rights of other parties, we could incur substantial costs and we may have to:

| |  |  | obtain licenses, which may not be available on
      commercially reasonable terms, if at all;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | redesign our products or processes to avoid infringement;
| | - |  | ---------------------------------------------------------

| |  |  | stop using the subject matter claimed in the patents
      held by others, which could cause us to lose the use of one or more of our
      drug candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | defend litigation or administrative proceedings
      that may be costly whether we win or lose, and which could result in a substantial
      diversion of management resources; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | pay damages.
| | - |  | ------------

We
  have not received to date any claims of infringement by any third parties. However,
  as our drug candidates progress into clinical trials and commercialization,
  if at all, our public profile and that of our drug candidates may be raised
  and generate such claims.

If we cannot
  meet requirements under our license agreements, we could lose the rights to
  our products.

We
  depend on licensing agreements with third parties to maintain the intellectual
  property rights to certain of our products under development. Presently, we
  have licensed rights from Icon (Bayer), and Yeda. These agreements require us
  to make payments and satisfy performance obligations in order to maintain our
  rights under these licensing agreements. All of these agreements last either
  throughout the life of the patents, or with respect to other licensed technology,
  for a number of years after the first commercial sale of the relevant product.

In
  addition, we are responsible for the cost of filing and prosecuting certain
  patent applications and maintaining certain issued patents licensed to us. If
  we do not meet our obligations under our license agreements in a timely manner,
  we could lose the rights to our proprietary technology.

Finally,
  we may be required to obtain licenses to patents or other proprietary rights
  of third parties in connection with the development and use of our products
  and technologies. Licenses required under any such patents or proprietary rights
  might not be made available on terms acceptable to us, if at all.

If we are
  unable to successfully manage our growth, our business may be harmed.

In
  addition to our own internally developed drug candidates, we proactively seek
  opportunities to license in and advance recombinant DNA products such as therapeutic
  proteins, vaccines and antibodies that are strategic and have value-creating
  potential to take advantage of our development know-how. Any additional drug
  candidates may significantly increase our capital requirements and place further
  strain on the time of our existing personnel, which may delay or otherwise adversely
  affect the development of our existing drug candidates, or cause us to re-prioritize
  our drug pipeline if we do not have the necessary capital resources to develop
  all of our drug candidates. Alternatively, we may be required to hire more

| | 22 | 
| | -- | 

---

employees and increase our
  facilities and corporate infrastructure, further increasing the size of our
  organization and related expenses. If we are unable to manage our growth effectively,
  we may not efficiently use our resources, which may delay the development of
  our drug candidates and negatively impact our business, results of operations
  and financial condition.

We depend
  upon key employees and consultants in a competitive market for skilled personnel.
  If we are unable to attract and retain key personnel, it could adversely affect
  our ability to develop and market our products.

We
  are highly dependent upon the principal members of our management team, especially
  our President and Chief Executive Officer, Dr. David Aviezer, as well as our
  directors, scientific advisory board members, consultants and collaborating
  scientists. Many of these people were involved in the formation of Protalix
  Ltd. or have otherwise been involved with Protalix Ltd. for many years, have
  played integral roles in the progress of Protalix Ltd. and we believe that they
  will continue to provide value to us. A loss of any of these personnel may have
  a material adverse effect on aspects of our business and clinical development
  and regulatory programs. We have employment agreements with Dr. Aviezer and
  four other officers that may be terminated by us or the officer at any time
  with varying notice periods of 60 to 90 days. Although these employment agreements
  generally include non-competition covenants and provide for severance payments
  that are contingent upon the applicable employees refraining from competition
  with us, the applicable noncompetition provisions can be difficult and costly
  to monitor and enforce. The loss of any of these persons services would
  adversely affect our ability to develop and market our products and obtain necessary
  regulatory approvals. Further, we do not maintain key-man life insurance.

We
  also will depend in part on the continued service of our key scientific personnel
  and our ability to identify, hire and retain additional personnel, including
  marketing and sales staff. We experience intense competition for qualified personnel,
  and the existence of non-competition agreements between prospective employees
  and their former employers may prevent us from hiring those individuals or subject
  us to suit from their former employers. While we attempt to provide competitive
  compensation packages to attract and retain key personnel, many of our competitors
  are likely to have greater resources and more experience than we have, making
  it difficult for us to compete successfully for key personnel.

Under current
  U.S. and Israeli law, we may not be able to enforce employees covenants
  not to compete and therefore may be unable to prevent our competitors from benefiting
  from the expertise of some of our former employees.

We
  have entered into non-competition agreements with all of our employees. These
  agreements prohibit our employees, if they cease working for us, from competing
  directly with us or working for our competitors for a limited period. Under
  current U.S. and Israeli law, we may be unable to enforce these agreements against
  most of our employees and it may be difficult for us to restrict our competitors
  from gaining the expertise our former employees gained while working for us.
  If we cannot enforce our employees non-compete agreements, we may be unable
  to prevent our competitors from benefiting from the expertise of our former
  employees.

We may incur
  substantial expenses and liabilities and we may be required to limit commercialization
  of our products in response to product liability lawsuits.

The
  clinical testing of, marketing and use of our products exposes us to product
  liability claims in the event that the use or misuse of those products causes
  injury, disease or results in adverse effects. Use of our products in clinical
  trials, as well as commercial sale, could result in product liability claims.
  In addition, sales of our products through third party arrangements could also
  subject us to product liability claims. We presently carry clinical trial liability
  insurance with coverages of up to $5 million per occurrence and $5 million in
  the aggregate, an amount we consider reasonable and customary. However, this
  insurance coverage includes various deductibles, limitations and exclusions
  from coverage, and in any event might not fully cover any potential claims.
  We may need to obtain additional clinical trial liability coverage prior to
  initiating additional clinical trials. We expect to obtain product liability
  insurance coverage before commercialization of our proposed products; however,
  the insurance is expensive and insurance companies may not issue this type of
  insurance when we need it. We may not be able to obtain adequate insurance in
  the future at an acceptable cost. Any product liability claim, even one that
  was not in excess of our insurance coverage or one that is meritless and/or
  unsuccessful, could adversely affect our cash available for other purposes,
  such as research and development. In addition, the existence of a product liability
  claim could affect the market price of our common stock.

We expect
  to face uncertainty over reimbursement and healthcare reform.

In
  both the United States and other countries, sales of our products will depend
  in part upon the availability of reimbursement from third party payors, which
  include government health administration authorities, managed care providers
  and private health insurers. Third party payors are increasingly challenging
  the price and examining the cost effectiveness of medical products and services.
  We also cannot predict the effects of any health insurance or other healthcare
  reforms on the availability of reimbursement.

| | 23 | 
| | -- | 

---

Risks relating
  to our operations in Israel

Potential
  political, economic and military instability in the State of Israel, where the
  majority of our senior management and our research and development facilities
  are located, may adversely affect our results of operations.

Our
  office and research and development facilities are located in the State of Israel.
  Operations in Israel accounted for most of our operating expenses for 2005 and
  2006. Accordingly, political, economic and military conditions in Israel directly
  affect our business. Since the State of Israel was established in 1948, a number
  of armed conflicts have occurred between Israel and its Arab neighbors. Any
  hostilities involving Israel or the interruption or curtailment of trade between
  Israel and its present trading partners, or a significant downturn in the economic
  or financial condition of Israel, could affect adversely our operations. Since
  October 2000, terrorist violence in Israel has increased significantly. Ongoing
  and revived hostilities or other Israeli political or economic factors could
  harm our operations and product development and cause our revenues to decrease.
  Furthermore, several countries, principally those in the Middle East, still
  restrict business with Israel and Israeli companies. These restrictive laws
  and policies may limit seriously our ability to sell our products in these countries.

Although
  Israel has entered into various agreements with Egypt, Jordan and the Palestinian
  Authority, there has been an increase in unrest and terrorist activity since
  October 2000. The recent election of representatives of the Hamas movement to
  a majority of seats in the Palestinian Legislative Council has resulted in a
  further escalation in violence among Israel, the Palestinian Authority and other
  groups. Beginning in mid-2006, significant fighting has taken place between
  Israel and Hezbollah in Lebanon, resulting in rockets being fired from Lebanon
  up to 50 miles into Israel. Our facilities are located in northern Israel, are
  in range of rockets that were fired recently from Lebanon into Israel and suffered
  minimal damages during one of the rocket attacks. In the event that our facilities
  are damaged as a result of hostile action, our operations may be materially
  adversely affected.

Our operations
  may be disrupted by the obligations of our personnel to perform military service.

Many
  of our male employees in Israel, including members of senior management, are
  obligated to perform one month (in some cases more) of annual military reserve
  duty until they reach age 45 and, in the event of a military conflict, could
  be called to active duty. Our operations could be disrupted by the absence of
  a significant number of our employees related to military service or the absence
  for extended periods of military service of one or more of our key employees.
  A disruption could materially adversely affect our business.

Because a certain   portion of our
  expenses is incurred in New Israeli Shekels, or NIS, our results of operations
  may be seriously harmed by currency fluctuations.

We
  generate our limited revenues in U.S. dollars but we pay a  portion
  of our expenses in NIS. As a result, we are exposed to risk to the extent that
  the inflation rate in Israel exceeds the rate of devaluation of the NIS in relation
  to the U.S. dollar or if the timing of these devaluations lags behind inflation
  in Israel. In that event, the U.S. dollar cost of our operations in Israel will
  increase and our U.S. dollar-measured results of operations will be adversely
  affected. To the extent that the value of the NIS increases against the dollar,
  our expenses on a dollar cost basis increase. Our operations also could be adversely
  affected if we are unable to guard against currency fluctuations in the future.
  To date, we have not engaged in hedging transactions. In the future, we may
  enter into currency hedging transactions to decrease the risk of financial exposure
  from fluctuations in the exchange rate of the U.S. dollar against the NIS. These
  measures, however, may not adequately protect us from material adverse effects
  due to the impact of inflation in Israel.

The tax
  benefits available to us require that we meet several conditions and may be
  terminated or reduced in the future, which would increase our taxes.

We
  are able to take advantage of tax exemptions and reductions resulting from the
  Approved Enterprise status of its facilities in Israel. To remain
  eligible for these tax benefits, we must continue to meet certain conditions,
  including making specified investments in property and equipment (of NIS 5.4
  million), and financing at least 30% of such investments with share capital.
  If we fail to meet these conditions in the future, the tax benefits would be
  canceled and we may be required to refund any tax benefits we already have enjoyed.
  These tax benefits are subject to investment policy by the Israeli Government
  Investment Center and may not be continued in the future at their current levels
  or at any level. In recent years the Israeli government has reduced the benefits
  available and has indicated that it may further reduce or eliminate some of
  these benefits in the future. The termination or reduction of these tax benefits
  or our inability to qualify for additional Approved Enterprise approvals
  may increase our tax expenses in the future, which would reduce our expected
  profits. Additionally, if we increase our activities outside of Israel, for
  example, by future acquisitions, such increased activities generally may not
  be eligible for inclusion in Israeli tax benefit programs. As of December 31,
  2006, we had tax exempt income attributable to the Approved Enterprise
  in the amount of approximately $15 million.

| | 24 | 
| | -- | 

---

In
  addition, our Net Operating Loss (NOL) carry forward of approximately $3 million
  might be restricted under Section 382 of the Internal Revenue Code (IRC). IRC
  Section 382 applies whenever a corporation with an NOL experiences an ownership
  change. As a result of Section 382, the taxable income for any post-change year
  that may be offset by the pre-change NOL may not exceed the general Section
  382 limitation, which is the fair market value of the pre-change entity multiplied
  by the long term tax exempt rate.

The Israeli
  government grants we have received for certain research and development expenditures
  restrict our ability to manufacture products and transfer technologies outside
  of Israel and require us to satisfy specified conditions. If we fail to satisfy
  these conditions, we may be required to refund grants previously received together
  with interest and penalties.

Our
  research and development efforts have been financed, in part, through grants
  that we have received from the Office of the Chief Scientist of the Israeli
  Ministry of Industry, Trade and Labor, or OCS. We, therefore, must comply with
  the requirements of the Israeli Law for the Encouragement of Industrial Research
  and Development, 1984 and related regulations, or the Research Law.

Under
  the Research Law, the discretionary approval of an OCS committee is required
  for any transfer of technology developed with OCS funding. OCS approval is not
  required for the export of any products resulting from the research or development,
  or for the licensing of the technology in the ordinary course of business. We
  may not receive the required approvals for any proposed transfer. Such approvals,
  if granted, may be subject to the following additional restrictions:

| |  |  | we may be required to pay the OCS a portion of
      the consideration we receive upon any sale of such technology by an entity
      that is not Israeli. The scope of the support received, the royalties that
      were paid by us, the amount of time that elapses between the date on which
      the know-how is transferred and the date on which the grants were received,
      as well as the sale price, will be taken into account in order to calculate
      the amount of the payment; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the transfer of manufacturing rights could be conditioned
      upon an increase in the royalty rate and payment of increased aggregate
      royalties (up to 300% of the amount of the grant plus interest, depending
      on the percentage of the manufacturing that is foreign).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These restrictions may impair
  our ability to sell our technology assets or to outsource manufacturing outside
  of Israel. We have no current intention to manufacture or transfer technologies
  out of Israel. The restrictions will continue to apply even after we have repaid
  the full amount of royalties payable for the grants.

Investors
  may have difficulties enforcing a U.S. judgment, including judgments based upon
  the civil liability provisions of the U.S. federal securities laws, against
  us, our executive officers and directors or asserting U.S. securities laws claims
  in Israel.

Most
  of our directors and officers are not residents of the United States and most
  of our and their assets are located outside the United States. Service of process
  upon our non-U.S. resident directors and officers and enforcement of judgments
  obtained in the United States against us, some of our directors and executive
  officers may be difficult to obtain within the United States. We have been informed
  by our legal counsel in Israel, Baratz, Horn &Co., that there is doubt as
  to the enforceability of civil liabilities, including those judgments based
  upon U.S. federal securities laws, for original actions instituted in Israel.

An
  investor also may find it difficult to enforce in either a U.S. or an Israeli
  court a U.S. court judgment, including a judgment based on the civil liability
  provisions of U.S. federal securities laws against us, or against our directors
  and officers. Moreover, an investor may find it difficult to bring an original
  action in an Israeli court to enforce liabilities based upon the U.S. federal
  securities laws against us, or against our directors and officers.

Israeli
  courts might not enforce judgments rendered outside Israel, which may make it
  difficult to collect on judgments rendered against us, or against our directors
  and officers. Subject to certain time limitations, an Israeli court may declare
  a foreign civil judgment enforceable only if it finds that:

| |  |  | the judgment was rendered by a court that was,
      according to the laws of the state of the court, competent to render the
      judgment;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the judgment may no longer be appealed;
| | - |  | ---------------------------------------

| |  |  | the obligation imposed by the judgment is enforceable
      according to the rules relating to the enforceability of judgments in Israel
      and the substance of the judgment is not contrary to public policy; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 25 | 
| | -- | 

---

| |  |  | the judgment is executory in the state in which
      it was given.
| | - |  | -------------------------------------------------------------------

Even
  if these conditions are satisfied, an Israeli court will not enforce a foreign
  judgment if it was given in a state whose laws do not provide for the enforcement
  of judgments of Israeli courts (subject to exceptional cases) or if its enforcement
  is likely to prejudice the sovereignty or security of the State of Israel. An
  Israeli court also will not declare a foreign judgment enforceable if:

| |  |  | the judgment was obtained by fraud;
| | - |  | -----------------------------------

| |  |  | there is a finding of lack of due process;
| | - |  | ------------------------------------------

| |  |  | the judgment was rendered by a court not competent
      to render it according to the laws of private international law in Israel;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

| |  |  | the judgment is at variance with another judgment
      that was given in the same matter between the same parties and that is still
      valid; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | at the time the action was brought in the foreign
      court, a suit in the same matter and between the same parties was pending
      before a court or tribunal in Israel.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Risks related
  to investing in our common stock

An investment
  in our common stock is very speculative and involves a very high degree of risk.

To
  date, we have generated no revenues from product sales and only minimal revenues
  from license payments and other fees. Our accumulated deficit as of December
  31, 2006, was $20.5 million. For the years ended December 31, 2006, 2005, and
  2004, we had net losses of $9.4 million, $5.7 million and $2.4 million, respectively,
  primarily as a result of expenses incurred through a combination of research
  and development activities related to the various technologies under its control
  and expenses supporting those activities. Until we receive approval from the
  FDA and other regulatory authorities for its drug candidates, we cannot sell
  our drugs and will not generate product revenues. Therefore, for the foreseeable
  future, we will have to fund all of our operations and capital expenditures
  from the net proceeds of any equity or debt offerings, cash on hand, licensing
  fees and grants. Although we plan to pursue additional financing, we may not
  be able to secure financing when needed or obtain such financing on terms satisfactory
  to us, if at all.

The market
  price of our common stock may fluctuate significantly.

The
  market price of our common stock may fluctuate significantly in response to
  numerous factors, some of which are beyond our control, such as:

| |  |  | the announcement of new products or product enhancements
      by us or our competitors;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | developments concerning intellectual property rights
      and regulatory approvals;
| | - |  | ------------------------------------------------------------------------------------

| |  |  | variations in our and our competitors results
      of operations;
| | - |  | -------------------------------------------------------------------

| |  |  | changes in earnings estimates or recommendations
      by securities analysts, if our common stock is covered by analysts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | developments in the biotechnology industry; and
| | - |  | -----------------------------------------------

| |  |  | general market conditions and other factors, including
      factors unrelated to our operating performance.
| | - |  | ------------------------------------------------------------------------------------------------------------

Further,
  the stock market in general, and the market for biotechnology companies in particular,
  has recently experienced price and volume fluctuations. Continued market fluctuations
  could result in extreme volatility in the price of our common stock, which could
  cause a decline in the value of our common stock. Price volatility of our common
  stock may be worse if the trading volume of our common stock is low. We have
  not paid, and do not expect to pay, any cash dividends on our common stock as
  any earnings generated from future operations will be used to finance our operations.
  As a result, investors will not realize any income from an investment in our
  common stock until and unless their shares are sold at a profit.

| | 26 | 
| | -- | 

---

Future sales
  of our common stock could reduce our stock price.

Sales
  by stockholders of substantial amounts of our shares, the issuance of new shares
  by us or the perception that these sales may occur in the future, could affect
  materially and adversely the market price of our common stock.

Some
  or all of the restricted shares of our common stock issued to former
  stockholders of Protalix Ltd. in connection with the merger or held by other
  stockholders may be offered from time to time in the open market pursuant to
  an effective registration statement or Rule 144, and these sales may have a
  depressive effect on the market for our common stock. We have agreed to use
  our best efforts to file a shelf registration statement with the Securities
  and Exchange Commission covering the resale of all shares of common stock received
  by Protalix Ltd.s former stockholders after our common stock has been
  listed for trading on the American Stock Exchange, and to use our best efforts
  to cause such registration statement to be declared effective as promptly as
  possible after filing. We are obligated to maintain the effectiveness of this
  shelf registration statement until the shares registered under it are eligible
  for resale under Rule 144(k) of the Securities Act of 1933, as amended.

However,
  under the terms of a tax ruling obtained by Protalix Ltd. from the Israeli tax
  authorities in connection with the merger, we and Protalix Ltd. are subject
  to various restrictions and conditions in connection with the issuance of shares
  for a period commencing upon the closing of the merger through January 1, 2009,
  including, but not limited to, a requirement that we maintain our holdings of
  at least 51% of the outstanding shares of Protalix Ltd. and that the shareholders
  at the time of the closing of the merger maintain aggregate holdings of at least
  51% of our outstanding shares.

All liabilities
  of Orthodontix, Inc. have survived the merger and Orthodontix, Inc. may have
  undisclosed liabilities that could harm our revenues, business, prospects, financial
  condition and results of operations.

Protalix
  Ltd. and its counsel conducted due diligence on Orthodontix, Inc. customary
  and appropriate for the reverse merger transaction consummated on December 31,
  2006. However, the due diligence process may not have revealed all our material
  liabilities then existing or that could be asserted in the future against us
  relating to our activities before the consummation of the merger. In addition,
  the merger agreement contained no stockholder post-closing adjustments to the
  number of shares of common stock issued to pre-merger Protalix Ltd. stockholders
  as a means of providing a remedy for breaches of representations made in the
  merger agreement by Orthodontix, Inc., nor does it provide any relevant indemnifications.
  Any such potential liabilities of Orthodontix, Inc. survive the merger and could
  harm our revenues, business, prospects, financial condition and results of operations.

Trading
  of our common stock is limited.

Our
  common stock began trading on the American Stock Exchange in March 2007. To
  date, the liquidity of our common stock is limited, not only in terms of the
  number of shares that can be bought and sold at a given price, but also through
  delays in the timing of transactions and reduction in security analyst and media
  coverage, if at all. These factors may result in lower prices for our common
  stock than might otherwise be obtained and could also result in a larger spread
  between the bid and ask prices for our common stock. In the absence of an active
  public trading market, an investor may be unable to liquidate his investment
  in our common stock. Trading of a relatively small volume of our common stock
  may have a greater impact on the trading price of our stock than would be the
  case if our public float were larger. Further, the limited liquidity could be
  an indication that the trading price is not reflective of the actual fair market
  value of our common stock.

Directors,
  executive officers, principal stockholders and affiliated entities own a significant
  percentage of our capital stock, and they may make decisions that an investor
  may not consider to be in the best interests of our stockholders.

Our
  directors, executive officers, principal stockholders and affiliated entities
  beneficially own, in the aggregate, approximately 70% of our outstanding common
  stock. As a result, if some or all of them acted together, they would have the
  ability to exert substantial influence over the election of our Board of Directors
  and the outcome of issues requiring approval by our stockholders. This concentration
  of ownership may have the effect of delaying or preventing a change in control
  of our company that may be favored by other stockholders. This could prevent
  transactions in which stockholders might otherwise receive a premium for their
  shares over current market prices.

| | 27 | 
| | -- | 

---

Failure
  to achieve and maintain effective internal controls in accordance with Section
  404 of the Sarbanes-Oxley Act could have a material adverse effect on our business
  and operating results. In addition, current and potential stockholders could
  lose confidence in our financial reporting, which could have a material adverse
  effect on the price of our common stock.

Effective
  internal controls are necessary for us to provide reliable financial reports
  and effectively prevent fraud. If we cannot provide reliable financial reports
  or prevent fraud, our operating results could be harmed.

Section
  404 of the Sarbanes-Oxley Act of 2002 requires annual management assessments
  of the effectiveness of our internal controls over financial reporting and a
  report by our independent registered public accounting firm addressing these
  assessments. Under current regulations, we are required to comply with the internal
  control evaluation and managements assessment thereof as of the end of
  our 2007 fiscal year; we will be  required to provide the report of our independent
  registered public accounting firm on our assessment for the fiscal year ending December 31,
  2008. We are in the process of determining whether our existing
  internal controls over financial reporting systems are compliant with Section
  404, and we may identify deficiencies that we may not be able to remediate in
  time to meet the deadlines imposed by the Sarbanes-Oxley Act. This process may
  divert internal resources and will take a significant amount of time and effort
  to complete.

If
  it is determined that we are not in compliance with Section 404, we may be required
  to implement new internal control procedures and reevaluate our financial reporting.
  We may experience higher than anticipated operating expenses as well as increased
  independent auditor fees during the implementation of these changes and thereafter.
  Further, we may need to hire additional qualified personnel. In addition, if
  we fail to maintain the adequacy of our internal controls, as such standards
  are modified, supplemented or amended from time to time, we may not be able
  to conclude on an ongoing basis that we have effective internal controls over
  financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act,
  which could result in our being unable to obtain an unqualified report on internal
  controls from our independent auditors, which is required under current regulation for the fiscal year ended December 31, 2008. Failure to achieve and maintain an effective
  internal control environment could also cause investors to lose confidence in
  our reported financial information, which could have a material adverse effect
  on the price of our common stock.

Compliance
  with changing regulation of corporate governance and public disclosure may result
  in additional expenses and divert managements attention from operating
  our business.

There
  have been other changing laws, regulations and standards relating to corporate
  governance and public disclosure in addition to the Sarbanes-Oxley Act as well
  as new regulations promulgated by the Commission and rules promulgated by the
  national securities exchanges and the NASDAQ. These new or changed laws, regulations
  and standards are subject to varying interpretations in many cases due to their
  lack of specificity, and as a result, their application in practice may evolve
  over time as new guidance is provided by regulatory and governing bodies, which
  could result in continuing uncertainty regarding compliance matters and higher
  costs necessitated by ongoing revisions to disclosure and governance practices.
  As a result, our efforts to comply with evolving laws, regulations and standards
  are likely to continue to result in increased general and administrative expenses
  and a diversion of management time and attention from revenue-generating activities
  to compliance activities. Our board members, Chief Executive Officer and Chief
  Financial Officer could face an increased risk of personal liability in connection
  with the performance of their duties. As a result, we may have difficulty attracting
  and retaining qualified board members and executive officers, which could harm
  our business. If our efforts to comply with new or changed laws, regulations
  and standards differ from the activities intended by regulatory or governing
  bodies,  our reputation may be harmed.

We are a
  holding company with no operations of our own.

We
  are a holding company with no operations of our own. Accordingly, our ability
  to conduct our operations, service any debt that we may incur in the future
  and pay dividends, if any, is dependent upon the earnings from the business
  conducted by Protalix, Ltd., our only subsidiary. The distribution of those
  earnings or advances or other distributions of funds by our subsidiary to us
  are contingent upon its earnings and are subject to various business considerations
  and Israeli law. If Protalix Ltd. is unable to make sufficient distributions
  or advances to us, we may not have the cash resources necessary to conduct our
  corporate operations.

Item 1B. Unresolved
  Staff Comments

None.

| | 28 | 
| | -- | 

---

Item 2. Properties

Our
  manufacturing facility and executive offices, which are leased for a period
  ending in April 2009, are located in Carmiel, Israel. The facilities contain
  approximately 1,300 square meters of laboratory and office space and are leased
  at a rate of approximately $10,000 per month. Our facilities are equipped with
  the requisite laboratory services required to conduct our business, and we believe
  that the existing facilities are adequate to meet our needs for the foreseeable
  future. In addition, we sublease an office in Ramat Gan, Israel, for approximately
  $1,400 per month.

Item 3. Legal
  Proceedings

We
  are not involved in any material legal proceedings.

Item 4. Submission
  of Matters to a Vote of Security Holders

On
  December 13, 2006, the holders of a majority of our issued and outstanding voting
  securities approved actions by written consent in lieu of a special meeting
  in accordance with the relevant sections of the Florida Business Corporation
  Act to amend our Articles of Incorporation to change our name from Orthodontix,
  Inc. to Protalix BioTherapeutics, Inc. and to terminate our 1998 Stock Option
  Plan and adopt our 2006 Stock Incentive Plan.

| | 29 | 
| | -- | 

---

PART II

Item 5. Market
  for Registrants Common Equity, Related Stockholder Matters and Issuer
  Purchases of Equity Securities

Our
  common stock began trading on the American Stock Exchange under the symbol PLX
  on March 12, 2007. Prior to March 12, 2007, our common stock was quoted on the
  OTC Bulletin Board® under the symbols PXBT.OB, ORTX.OB, and OTIX.OB. High
  and low closing bid quotations, for the last two fiscal years, do not give effect
  to the one-for-ten reverse stock split effected on December 31, 2006, and were:

|              | 2006  | 2005 
|------------- | ----- | -----
|Quarter Ended | High  | Low  
|March 31      | $4.25 | $3.58
|June 30       | $5.39 | $3.50
|September 31  | $5.30 | $3.20
|December 31   | $3.95 | $1.52

These quotations reflect
  prices between dealers and do not include retain mark-ups, mark-downs, and commissions
  and may not necessarily represent actual transactions.

There
  were approximately 514 stockholders of record at March 15, 2007. To date, we
  have not declared or paid any cash dividends on our common stock. We do not
  anticipate paying any dividends on our common stock in the foreseeable future.

Equity Compensation
  Plan Information

The
  following table provides information as of December 31, 2006 with respect to
  the shares of our common stock that may be issued under our existing equity
  compensation plan.



|                                                                         | A                                                                                         | B                                                                    | C                                                                                                                                                                          
|------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Plan Category                                                            | Number of Securities
      
      to be IssuedUpon Exercise of 
      Outstanding Options | Weighted Average 
      Exercise Price of 
      Outstanding Options | Number of Securities Remaining
      
      Available for Future Issuance 
      Under Equity Compensation Plans 
      (Excluding Securities Reflected in 
      Column A)
|Equity Compensation Plans Approved
      by     Shareholders             | 5,375,174                                                                                 | $
       0.30                                                        | 4,366,481                                                                                                                                                                  
|Equity Compensation Plans Not
      Approved 
           by Shareholders | 6,341,618                                                                                 | $
       7.14                                                        |                                                                                                                                                                           
|                                                                         |                                                                                           |                                                                      |                                                                                                                                                                            
|Total                                                                    | 11,716,792                                                                                | $
       4.00                                                        | 4,366,481                                                                                                                                                                  
|                                                                         |                                                                                           |                                                                      |                                                                                                                                                                            



| | 30 | 
| | -- | 

---

Item 6. Selected
  Financial Data

The
  selected consolidated financial data below should be read in conjunction with
  Managements Discussion and Analysis of Financial Condition and Results
  of Operations and our consolidated financial statements and the related
  notes included elsewhere in this Annual Report on Form 10-K. The selected consolidated
  statements of operations data for the years ended December 31, 2006, 2005 and
  2004 and for the period from December 27, 1993 through December 31, 2006 and the selected consolidated balance sheet data as of December 31, 2006
  and 2005, are derived from, and are qualified by reference to, the audited consolidated
  financial statements included elsewhere in this Annual Report. The statement
  of operations data for the years ended December 31, 2002 and 2003 and the balance
  sheet data as of December 31, 2002, 2003 and 2004 are derived from audited financial
  statements not included in this Annual Report. The historical results presented
  below are not necessarily indicative of future results.

|                                                                                                                                       | Year Ended December 31,                                   
|-------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------
|                                                                                                                                       | 2002                                                      
|                                                                                                                                       | (in
        thousands, except share and per share amounts)
|Consolidated Statement
      of Operations Data:                                                                                       |                                                           
|Revenues                                                                                                                               |                                                          
|Cost of revenues                                                                                                                       |                                                          
|Gross profit                                                                                                                           |                                                          
|Research and development expenses,
      net                                                                                           | 375                                                       
|General and administrative expenses                                                                                                    | 502                                                       
|Finance expense (income)                                                                                                               | (11)                                                      
|                                                                                                                                       |                                                           
|Net loss before change in accounting
      principle                                                                                   | $
      866                                               
|Cumulative effect of change in
      accounting
           principle                                                                   |                                                          
|                                                                                                                                       |                                                           
|Net loss                                                                                                                               | $
      866                                               
|                                                                                                                                       |                                                           
|Net loss per share of common stock,
      basic and
          diluted:                                                                 |                                                           
|Prior to cumulative effect of change
      in accounting
           principle                                                          | $ 0.05                                                    
|Cumulative effect of change in
      accounting
           principle                                                                   |                                                          
|Net loss per share of common stock,
      basic and
          diluted (1)                                                              | $ 0.05                                                    
|                                                                                                                                       |                                                           
|Weighted average number of shares
      of common
           stock used in computing net loss per share of
           common stock (2) | 18,801,527                                                
|                                                                                                                                       |                                                           
|Consolidated Balance Sheet Data:                                                                                                       |                                                           
|Cash and cash equivalents                                                                                                              | $
      215                                               
|Other assets                                                                                                                           | 281                                                       
|Total assets                                                                                                                           | 496                                                       
|Current Liabilities                                                                                                                    | 343                                                       
|Liabilities                                                                                                                            | 390                                                       
|Shareholders equity                                                                                                                   | 106                                                       



---

|*   |  | Represents less than $1.                                                                                                                                                                                                                                                                                                                    
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Reflects the retroactive
      effects of the impact of our merger with Protalix Ltd. and the resulting
      exchange of shares of common stock  for the ordinary shares of Protalix
      Ltd. at an exchange ratio of approximately 61.08 shares of our common stock
      per ordinary share of Protalix Ltd. for all periods presented.

|(2) |  | In connection with the merger, we effected a one-for-ten reverse stock split, therefore all share numbers presented in this Annual Report on Form 10-K give retroactive effect to the reverse stock split.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 31 | 
| | -- | 

---

Item 7. Managements
  Discussion and Analysis of Financial Condition and Results of Operations

You
  should read the following discussion and analysis of our financial condition
  and results of operations together with our consolidated financial statements
  and the related notes included elsewhere in this Annual Report on Form 10-K.
  Some of the information contained in this discussion and analysis, particularly
  with respect to our plans and strategy for our business and related financing,
  includes forward-looking statements that involve risks and uncertainties. You
  should read Risk Factors in Item 1A of this Annual Report for a
  discussion of important factors that could cause actual results to differ materially
  from the results described in or implied by the forward-looking statements contained
  in the following discussion and analysis.

Overview

Our
  only business is conducted by our wholly owned subsidiary, Protalix Ltd., which
  we acquired through a reverse merger transaction effective December 31, 2006.
  The accounting treatment for the merger transaction was a recapitalization and
  as such the results of operations discussed below are those of Protalix Ltd.
  Prior to the merger transaction, we had not conducted any operations for several
  years. Protalix Ltd. was originally incorporated in Israel in December 1993.

We
  are a clinical stage biopharmaceutical company that is developing and producing
  recombinant therapeutic proteins that are expressed through our proprietary
  plant cell system. Recombinant therapeutic proteins are proteins that are produced
  by different genetically modified organisms following the insertion of the relevant
  DNA into their genome and are the basis of most biopharmaceutical drugs currently
  under development. We are leveraging our plant cell culture and bioreactor technology
  for the production of recombinant therapeutic proteins, and we are currently
  developing several such biotherapeutic products. Our patented plant cell system
  enables the expression in plant cells of specific human genes, most often genes
  coding for proteins of pharmaceutical or therapeutic value. Once the plant cells
  produce a therapeutic protein, such protein may be grown on an industrial scale
  in our proprietary bioreactor system. Subsequently, the protein is extracted
  from the cells and purified to a clinical grade. Our system presents a proprietary
  method for the production of recombinant proteins that we believe is safe and
  scalable and may allow for the cost-effective industrial scale production of
  such recombinant human therapeutic proteins.

Our
  lead product candidate, prGCD, is a proprietary plant cell expressed recombinant
  Glucocerebrosidase enzyme-based protein for the treatment of Gaucher Disease.
  In July 2005, we received FDA approval of our Investigational New Drug application,
  or IND, for prGCD, allowing us to initiate an FDA-approved clinical development
  program for prGCD and which does not require us to conduct Phase II clinical
  trials. The Phase I clinical trial was completed in June 2006. We have submitted
  an application for FDA approval to commence a Phase III pivotal trial of prGCD,
  which we expect to commence in 2007.

We
  believe that we have demonstrated the potential of our plant cell manufacturing
  platform to become a safe and efficacious expression technology for the manufacturing
  of a wide variety of biopharmaceutical products. Accordingly, we are employing
  a two-pronged business strategy that enables us to pursue our goal of becoming
  a fully integrated biopharmaceutical company. In addition to our development
  of prGCD, we are using our protein expression technology to develop an innovative
  proprietary product pipeline. We are evaluating and initiating additional internal
  research programs through collaboration agreements with academic institutions,
  such as the Yeda Research and Development Company Limited, the technology transfer
  arm of the Weizmann Institute of Science. In addition, we continually review
  and consider development and commercialization alliances with corporate partners
  in specific and identified markets worldwide for products or territories in
  order to enable us to optimize our resources and effectively penetrate target
  markets. We  recently entered into such an agreement with Teva Pharmaceutical
  Industries Ltd. in September 2006.

Since
  its inception in December 1993, Protalix Ltd. has generated significant losses
  in connection with the research and development of its technology, including
  the clinical development of prGCD, and at December 31, 2006, we had an accumulated
  deficit of $20.5 million. Since we do not generate revenue from any of our
  product candidates, we expect to continue to generate losses in connection with
  the continued clinical development of prGCD and the research and development
  activities relating to our technology and other drug candidates. Such research
  and development activities are budgeted to expand over time and will require
  further resources if we are to be successful. As a result, we believe that our
  operating losses are likely to be substantial over the next several years. We
  will need to obtain additional funds to further develop our research and development
  programs.

| | 32 | 
| | -- | 

---

Critical Accounting
  Policies

Our
  significant accounting policies are more fully described in Note 1 to our consolidated
  financial statements appearing at the end of this Annual Report. We believe
  that the accounting policies below are critical for one to fully understand
  and evaluate our financial condition and results of operations.

The
  discussion and analysis of our financial condition and results of operations
  is based on our financial statements, which we prepared in accordance with U.S.
  generally accepted accounting principles. The preparation of these financial
  statements requires us to make estimates and assumptions that affect the reported
  amounts of assets and liabilities and the disclosure of contingent assets and
  liabilities at the date of the financial statements, as well as the reported
  revenues and expenses during the reporting periods. On an ongoing basis, we
  evaluate such estimates and judgments, including those described in greater
  detail below. We base our estimates on historical experience and on various
  other factors that we believe are reasonable under the circumstances, the results
  of which form the basis for making judgments about the carrying value of assets
  and liabilities that are not readily apparent from other sources. Actual results
  may differ from these estimates under different assumptions or conditions.

Functional
  Currency

The
  currency of the primary economic environment in which our operations are conducted
  is the dollar. As a development stage company with no significant source of
  revenues, we considered the currency of the primary economic environment to
  be the currency in which we expend cash. Most of our expenses and capital expenditures
  are incurred in dollars, and a significant source of our financing has been
  provided in U.S. dollars.

Research
  and Development Expense

We
  expect our research and development expense to increase as we continue to develop
  our product candidates. Research and development expense consists of:

| |  |  | internal costs associated with research and development
      activities;
| | - |  | -------------------------------------------------------------------------

| |  |  | payments made to third party contract research
      organizations, contract manufacturers, investigative sites, and consultants;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | manufacturing development costs;
| | - |  | --------------------------------

| |  |  | personnel-related expenses, including salaries,
      benefits, travel, and related costs for the personnel involved in  research
      and development;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | activities relating to the advancement of product
      candidates through preclinical studies and clinical trials; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------

| |  |  | facilities and other allocated expenses, which
      include direct and allocated expenses for rent and maintenance of facilities,
      as well as laboratory and other supplies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
  costs and expenses are partially funded by grants we received from the Office
  of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor,
  or the OCS. For additional information regarding the grant process, see BusinessEncouragement
  of Industrial Research and Development Law, 1984 in Item 1 of this Annual
  Report. There can be no assurance that we will continue to receive grants from
  the OCS in amounts sufficient for our operations, if at all.

We
  have multiple research and development projects ongoing at any one time. We
  utilize our internal resources, employees, and infrastructure across multiple
  projects and track time spent by employees on specific projects. We are required
  to do so by the OCS in order to qualify for the grants we receive for our different
  projects. We expense research and development costs as incurred. We believe
  that significant investment in product development is a competitive necessity
  and plan to continue these investments in order to realize the potential of
  our product candidates. From inception in December 1993 through December 31,
  2006, we have incurred gross research and development expenses in the aggregate
  of $17.7 million, which includes salaries and related expenses equal to $7.2
  million (of which share-based compensation was $1.8 million), subcontractors
  expenses of $3.1 million, and expenses relating to materials and consumables
  of $2.7 million. These expenses were partially offset by grants received from
  the OCS totaling $5.1 million. We expect our research and development expenditures
  to increase significantly in the near future in connection with the anticipated
  commencement of the Phase III clinical trial for prGCD.

General
  and Administrative Expense

General
  and administrative expense consists primarily of salaries and other related
  costs, including share-based compensation expense, for persons serving as our
  executive, finance, accounting and administration functions. Other general

| | 33 | 
| | -- | 

---

and administrative expense
  includes facility-related costs not otherwise included in research and development
  expense, costs associated with industry and trade shows and professional fees
  for legal and accounting services. We expect that our general and administrative
  expenses will increase as we add additional personnel and continue to comply
  with the reporting and other obligations applicable to public companies in the
  United States. From inception in December 1993 through December 31, 2006, we
  have spent $9.0 million on general and administrative expense, including share-based
  compensation expense of $4.1 million for options granted to employees and consultants.

Financial
  Expense and Income

Financial Expense and Income
  consists of the following:

| |  |  | interest earned on our cash and cash equivalents;
| | - |  | -------------------------------------------------

| |  |  | interest expense on short term bank credit and
      loan; and
| | - |  | --------------------------------------------------------------

| |  |  | expense or income resulting from fluctuations of
      the New Israeli Shekel (NIS), in which a portion of our assets and liabilities
      are denominated, against the United States Dollar and other foreign currencies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Share-based
  compensation

The
  discussion below regarding share-based compensation relates to share-based compensation
  paid by Protalix Ltd., our wholly-owned subsidiary.

Until
  December 31, 2005, we accounted for employee share-based compensation in accordance
  with Accounting Principles Board (APB) Opinion No. 25, Accounting
  for Stock Issued to Employees (APB 25), and related interpretations.
  Under APB 25, compensation expense is based on the difference, if any, on the
  date of the grant, between the fair value of our ordinary shares and the exercise
  price. In addition, in accordance with Statement of Financial Accounting Standards
  (SFAS) No. 123, Accounting for Stock-Based Compensation(SFAS
  123), we disclosed pro forma data assuming we had accounted for employee
  share option grants using the fair value-based method defined in SFAS 123.

We
  apply Emerging Issue Task Force (EITF) 96-18, Accounting for
  Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
  in Conjunction with Selling, Goods or Services with respect to options
  granted in consideration of services granted by consultants.

As
  of January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based
  Payment (SFAS 123R), using the modified prospective method.
  This new standard requires measurement of share-based compensation cost for
  all share-based awards at the fair value on the grant date and recognition of
  share-based compensation over the service period for awards that we expect will
  vest. The fair value of stock options is determined based on the number of shares
  granted and the price of our ordinary shares, and calculated based on the Black-Scholes
  valuation model, which is consistent with our valuation techniques previously
  utilized for options in footnote disclosures required under SFAS 123, as amended
  by SFAS No. 148, Accounting for Stock-Based Compensation  Transition
  and Disclosure. We recognize such value as expense over the service period,
  net of estimated forfeitures, using the accelerated method under SFAS 123R.
  Due to our adoption of SFAS 123R, we no longer have employee share-based compensation
  awards subject to variable accounting treatment. The cumulative effect of our
  adoption of SFAS 123R, as of January 1, 2006, was not material.

| | 34 | 
| | -- | 

---

The
  following table illustrates the pro forma effect on loss and loss per share
  assuming we had applied the fair value recognition provisions of SFAS 123 to
  our share-based employee compensation:

|                                                                                                               | Year Ended December
      31,                       | Period from
       
      December 27, 1993 
      through December 31
|-------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------------------------
|                                                                                                               | 2004                                                | 2005                                                                  
|                                                                                                               | (Dollars in
      thousands, except per share data)
|Net loss as reported                                                                                           | ($2,421)                                            |                                                                       
|Add: share based employee
             compensation expense included in the
             reported net loss     | 149                                                 |                                                                       
|Deduct: share-based employee compensation
             expense determined under fair value
             method | (170)                                               |                                                                       
|Pro forma net loss                                                                                             | ($2,442)                                            |                                                                       
|Net loss per share of common stock:                                                                            |                                                     |                                                                       
|Basic  as reported                                                                                            | ($0.13)                                             |                                                                       
|Basic  pro forma                                                                                              | ($0.13)                                             |                                                                       
|Diluted  as reported                                                                                          | ($0.13)                                             |                                                                       
|Diluted  pro forma                                                                                            | ($0.13)                                             |                                                                       



The
  fair value of options granted to employees during 2005 was $939,000. No options
  were granted during 2004. The fair value of each option granted is estimated
  on the date of grant using the Black-Scholes option-pricing model, with the
  following weighted average assumptions (determined as described following the
  table):

|                         | 2005  | 2006 
|------------------------ | ----- | -----
|Dividend yield           | 0%    | 0%   
|Expected volatility      | 54%   | 44%  
|Risk-free interest rate  | 3.83% | 4.77%
|Expected life  in years | 5.7   | 5.9  

Protalix
  Ltd. had multiple classes of stock before the conversion of all preferred shares
  into ordinary shares in September 2006. Through December 31, 2005, Protalix
  Ltd. considered the three commonly used methods described by the American Institute
  of Certified Public Accountants (the AICPA) practice aid, Valuation
  of Privately-Held Company Equity Securities Issued as Compensation, and
  determined that  the Probability-Weighted Expected Return Method is the appropriate
  method to value its securities. We chose this method because it is forward-looking
  and incorporates future economic events and outcomes into the determination
  of value at the time of calculation. The method is limited, as are all forward-looking
  methods, in that it relies on a number of assumptions.

Under
  the Probability-Weighted Expected Return Method, the value of the ordinary shares
  of Protalix Ltd. is estimated based upon an analysis of future values for the
  enterprise assuming various future outcomes. Share value is based upon the probability-weighted
  present value of expected future investment returns, considering each of the
  possible future outcomes available to the enterprise, as well as the rights
  of each share class. Although the future outcomes considered in any given valuation
  model will vary based upon the enterprises facts and circumstances, common
  future outcomes modeled might include an initial public offering, merger or
  sale, dissolution, or continued operation as a viable private enterprise.

The
  Probability-Weighted Expected Return Method analysis presents value afforded
  to shareholders under four possible scenarios. Three of the scenarios assume
  a shareholder realization, either through an initial public offering, sale,
  merger or liquidation. The last scenario assumes operations continue as a private
  company and no realization transaction occurs. Fair value calculations of the
  ordinary shares of Protalix Ltd. were performed for dates close to the dates
  on which preferred shares were issued to third parties. We considered the issuance
  price of each series of preferred shares to third parties in the calculation
  of the fair value of the ordinary shares. For each of the first three realization
  scenarios, estimated future and present values for each of the share classes
  were calculated utilizing assumptions which consisted of the following:

| | 35 | 
| | -- | 

---

| |  |  | expected pre-money value at the realization date;
| | - |  | -------------------------------------------------

| |  |  | standard deviation around the above pre-money value;
| | - |  | ----------------------------------------------------

| |  |  | expected date of the realization scenario occurring;
| | - |  | ----------------------------------------------------

| |  |  | standard deviation around the expected realization
      scenario occurrence date (in days); and
| | - |  | ------------------------------------------------------------------------------------------------

| |  |  | an appropriate risk-adjusted discount rate.
| | - |  | -------------------------------------------

SFAS
  123R allows companies to estimate the expected term of the option rather than
  simply using the contractual term of an option. Because of lack of data on past
  option exercises by employees, the expected term of the options could not be
  based on historic exercise patterns. Accordingly, we adopted the simplified
  method as stipulated in the Securities and Exchange Commission Staff Accounting
  Bulletin (SAB) No.107, Share-Based Payment (SAB
  107), according to which companies that cannot provide a good estimation
  regarding their options expected life, may calculate the expected term
  as the average between the vesting date and the expiration date, assuming the
  option was granted as a plain vanilla option.

SAB
  107 defines plain vanilla share options as those having the following
  characteristics:

| |  |  | share options are granted at the money;
| | - |  | ---------------------------------------

| |  |  | exercisability is conditional only on performing
      service through the vesting date;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | if an employee terminates service prior to vesting,
      the employee forfeits the share options;
| | - |  | --------------------------------------------------------------------------------------------------

| |  |  | if an employee terminates service after vesting,
      the employee has a limited period of time (typically 30-90 days) to exercise
      the share options; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | share options are nontransferable and nonhedgeable.
| | - |  | ---------------------------------------------------

All
  of the outstanding options granted by Protalix Ltd. were granted at an exercise
  price that was lower than the then share price. Accordingly, we assumed that
  the exercise period will on average be shorter than the average period between
  the vesting and the expiration of the options. However, due to the lack of information
  regarding exercise behavior, we implemented the methodology proposed above for
  the calculation of the expected term for all grants including those that were
  in the money.

In
  performing the valuation, we assumed an expected 0% dividend yield in the previous
  years and in the next years. We do not have a dividend policy and given our
  development stage, dividends are not expected in the foreseeable future, if
  at all. SFAS 123R stipulates a number of factors that should be considered when
  estimating the expected volatility, including the implied volatility of traded
  options, historical volatility and the period that the shares of the company
  are being publicly traded. As we do not have any traded shares or options, the
  expected volatility figures used in this valuation have been calculated by using
  the historical volatility of traded shares of similar companies. In addition,
  we examined the standard deviation of shares of additional biotechnology companies
  that engage in research of cells and other relevant developments. We found that
  the standard deviation of the shares of comparable companies was in the range
  of 40%-60% over periods of three to six years. The volatility used for each
  grant differed based on its expected term. For the term of each grant of our
  options, the historical volatility was calculated based upon the overall trading
  history of the common stock of comparable companies.

The
  risk-free interest rate in the table above has been based on the implied yield
  of U.S. federal reserve zero-coupon government bonds. The remaining term of
  the bonds used for each valuation was equal to the expected term of the grant.
  This methodology has been applied to all grants valued by us. SFAS 123R requires
  the use of a risk-free interest rate based on the implied yield currently available
  on zero-coupon government issues of the country in whose currency the exercise
  price is expressed, with a remaining term equal to the expected life of the
  option being valued. This requirement has been applied for all grants valued
  as part of this report.

Ordinarily,
  a company will value options to acquire shares of common stock that are traded
  on a recognized exchange based on quotations of completed transactions in the
  shares, typically at the last quoted sales price on the valuation date because
  quoted market prices usually provide the most reliable measure of fair value.
  However, in certain situations, the fair value of stock options is not readily
  determinable by reference to the last quoted sales price. We have determined
  that it is not appropriate to base the fair value of the stock options granted
  to our consultants and non-employees on the last quoted sales price of our common
  stock as reported on the OTC Bulletin Board®, on which quotations for the
  common stock were displayed throughout 2006, for the following reasons.

The
  merger was consummated on December 31, 2006; therefore, all quoted sales prices
  of the common stock through December 31, 2006 did not fully reflect the value
  attributable to the operations of Protalix Ltd. Further, the trading volume

| | 36 | 
| | -- | 

---

for the common stock throughout
  2006 was very thin and trades were infrequent, which is common for a shell company
  that has no business operations. The average daily trading volume of the common
  stock during 2006 was approximately 800 shares. Under such circumstances, a
  small sales volume can have a disproportionate impact on sales price, a strong
  indication that the share price did not reflect true market valuation. Trading
  volume and trade frequency since December 31, 2006 also does not provide a guide
  to determining fair value because to date more than 99% of our shares are not
  registered and available for sale in the public market, the number of trades
  in the public market have been infrequent and the average daily volume continues
  to be very low. Therefore, we believe it is appropriate for the fair value of
  the options granted to our consultants and non-employees to be valued at fair
  value as determined in good faith by our management.

To determine the fair value of the
options granted to consultants and non-employees, we reviewed all transactions involving
the sale of shares of Protalix Ltd. during the last half of 2006 that were negotiated on
an arms length basis between independent and willing buyers and sellers, which we
believe is a reliable indicator of fair value.  We determined that the relevant share
transaction was the merger itself, which was effected pursuant to a merger agreement
executed in August 2006 and negotiated on an arms length basis with our then existing
management.  Concurrent with the execution of the merger agreement, certain investors,
none of which were shareholders of Protalix Ltd. and one of which was the controlling
shareholder of our company at that time, negotiated, on an arms length basis, with
Protalix Ltd. to purchase ordinary shares of Protalix Ltd. for $15,000,000 in cash (see
Note 6i to our consolidated financial statements).  The terms of the share purchase
agreement provided the investors with the right to exchange their ordinary shares of
Protalix Ltd. at an exchange ratio that would entitle them to 15% of the outstanding
share capital of our company, subsequent to the merger.  In connection with this
exchange, the investors would pay an additional $123,000 in cash.  The proceeds from the
purchase of the ordinary shares of Protalix Ltd., when added to the cash balance of our
company that existed at the date of the closing of the merger, which was $877,000,
resulted in a total investment of $16,000,000 in exchange for a 15% interest in our
company subsequent to the reverse merger with Protalix Ltd.  In both the share issuance
for $15,000,000 and the subsequent merger transaction, the implied aggregate fair value
of Protalix Ltd. after giving effect to the merger was approximately $1.50 per share.  We
believe the per share value determined in August is the reliable indicator of the fair
value of the ordinary shares of Protalix Ltd., as well as our common stock as of December
31, 2006, subsequent to the merger, because there were no other material transactions or
developments affecting Protalix Ltd. between August and December 2006.  Therefore, based
on the foregoing, we have determined that the basis for determining the fair value of the
common stock underlying the options granted to consultants and non-employees was $1.50
per share as of December 31, 2006.

Results of
  Operations

Year ended
  December 31, 2006 compared to the year ended December 31, 2005

Revenues

No
  revenues were recorded during the year ended December 31, 2006. Revenues were
  $150,000 for the year ended December 31, 2005. The revenues were generated in
  connection with our achievement of development milestones under a research and
  development program with a third party. This program was completed during fiscal
  year 2005, and $150,000 of development milestones payments payable to us in
  connection therewith were made in 2005.

Research and
  Development Expenses

Research
  and development expenses were $7.0 million for the year ended December 31, 2006,
  an increase of $2.3 million, or 49%, from $4.7 million for the year ended December
  31, 2005. The increase resulted primarily from the increase of $1.2 million
  in development expenses related to salaries for personnel involved in research
  and development and $0.7 million in related materials and general development
  expenses. The increase was partially offset by $800,000 from grants from the
  OCS equal to $1.8 million during 2006, compared to grants equal to $900,000
  during 2005.

We
  expect research and development expenses to continue to increase as we enter
  into a more advanced stage of clinical trials for our product candidates, especially
  with respect to the expected Phase III trial for prGCD.

General and
  Administrative Expenses

General
  and administrative expenses were $4.5 million for the year ended December 31,
  2006, an increase of $2.4 million, or approximately 114%, from $2.1 million
  for the year ended December 31, 2005. The increase resulted primarily from a
  $1.5 million increase in share-based compensation due to the application of
  SFAS 123R, resulting from additional stock option awards granted in 2006.

Financial Expenses
  and Income

Financial
  income was $344,000 for the year ended  December 31, 2006, an increase of
  $301,000, compared to $43,000 for the year ended December 31, 2005. The increase
  resulted primarily from a higher balance of cash and cash equivalents during
  the later period, primarily the result of the proceeds generated from the sale
  of ordinary shares of Protalix Ltd. in September 2006, which resulted in higher
  interest income.

| | 37 | 
| | -- | 

---

Year ended
  December 31, 2005 compared to year ended December 31, 2004

Revenues

Revenues
  were $150,000 for the year ended December 31, 2005, a decrease of $280,000,
  or 65%, from $430,000 for the year ended December 31, 2004. The revenues were
  generated in connection with our achievement of development milestones under
  the research and development program with a third party that was completed during
  fiscal year 2005. The decrease resulted primarily from our achievement of more
  significant development milestones under the program during 2004 compared to
  2005.

Research and
  Development Expenses

Research
  and development expenses were $4.7 million for the year ended December 31, 2005,
  an increase of $2.2 million, or 88%, from $2.5 million for the year ended December
  31, 2004. The increase resulted primarily from an increase of $1.2 million in
  development expenses related to salaries and related consulting and materials
  associated with the development of prGCD. The increase was incurred in connection
  with the higher costs associated with the end of our preclinical trials and
  with the initiation of our Phase I clinical trial for prGCD during 2005. In
  addition, we incurred a $498,000 increase in share-based compensation. The increase
  was partially offset by a $362,000 increase in grant funds we received from
  the OCS; we received grants equal to $935,000 during 2005 compared to grants
  equal to $573,000 during 2004.

General and
  Administrative Expenses

General
  and administrative expenses were $2.1 million for the year ended December 31,
  2005, an increase of $1.3 million, or 175%, from $807,000 for the year ended
  December 31, 2004. The difference resulted primarily from a $1.1 million increase
  in share-based compensation.

Financial Expenses
  and Income

Financial
  income was $43,000 for the year ended December 31, 2005, compared to an expense
  of $4,000 for the year ended December 31, 2004. The increase resulted primarily
  from the higher balance of cash and cash equivalents held during such periods
  and the incurrence of interest expense in connection with a $1.0 million loan.

Liquidity and
  Capital Resources

Sources of
  Liquidity

As
  a result of our significant research and development expenditures and the lack
  of any approved products to generate product sales revenue, we have not been
  profitable and have generated operating losses since our inception. To date,
  we have funded our operations primarily with proceeds equal to $31.3 million
  from the sale of convertible preferred and ordinary shares of Protalix Ltd.,
  and an additional $8.9 million in connection with the exercise of warrants issued
  in connection with the sale of such ordinary shares, through December 31, 2006.
  We believe that the funds currently available to us as are sufficient to satisfy
  our capital needs for the next 18 months.

The
  following table summarizes our past funding sources:

|Security                                       |  | Year |           | Number of
      Shares |  | Amount(1)
|---------------------------------------------- |  | ---- | --------- | ---------------------- |  | ---------
|                                              
|Ordinary Shares                                |  |      | 1996-2000 |                        |  |          
|Series A Convertible Preferred
      Shares    |  |      | 2001      |                        |  |          
|Series B Convertible
      Preferred Shares(3) |  |      | 2004-2005 |                        |  |          
|Series C Convertible Preferred
      Shares(4) |  |      | 2005      |                        |  |          
|Ordinary Shares(5)                             |  |      | 2006      |                        |  |          

---

|(1) |  | Gross proceeds; does not
      include proceeds from warrant exercises.
|--- |  | -----------------------------------------------------------------------

|(2) |  | Includes the issuance of
      ordinary shares to founders.
|--- |  | -----------------------------------------------------------

| | 38 | 
| | -- | 

---

|(3) |  | During 2005, 1,035,569
      Series B Preferred Shares were converted on a 1:1 basis into Series C Preferred
      Shares for no additional consideration. Also in connection with such funding,
      warrants to purchase 181,228 Series B Preferred Shares were issued for no
      additional consideration with a total exercise price of $100,000. As of
      the closing date of the merger, 168,034 of such warrants were exercised
      for net proceeds equal to approximately $96,000 and 13,194 of such warrants
      have been forfeited.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | In connection with such
      funding, warrants to purchase an additional 8,862,803 Series C Preferred
      Shares were granted to the investors for no additional consideration with
      a total exercise price equal to $9.0 million. As of the closing date of
      the merger, 5,296,279 of such warrants were exercised for net proceeds equal
      to $8.7 million, 3,384,502 were assumed by our company and 182,022 expired.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | In connection with such
      funding, warrants to purchase 3,875,416 ordinary shares were issued for
      no additional consideration with a total exercise price equal to $5.3 million.
      These warrants were exercised in January 2007.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash Flows

Net
  cash used in operations was $5.1 million for the year ended December 31, 2006.
  The net loss for 2006 of $9.4 million was mainly offset by non-cash charges
  for share-based compensation of $3.4 million, an increase in accounts payable
  of $1.3 million and depreciation of $502,000. Net cash used in investing activities
  for 2006 was $1.0 million and consisted primarily of purchases of property and
  equipment. Net cash provided by financing activities for 2006 was $16.7 million,
  consisting mainly of net proceeds of $14.9 million from the sale of ordinary
  shares of Protalix Ltd.

Net
  cash used in operations was $3.2 million for the year ended December 31, 2005.
  The net loss for 2005 of $5.7 million was mainly offset by $1.9 million of non-cash
  share-based compensation, a decrease in accounts receivable of $400,000 and
  depreciation equal to $311,000. Net cash used in investing activities for 2005
  was $903,000 and consisted primarily of $844,000 for purchases of property and
  equipment. Net cash provided from financing activities for 2005 was $7.4 million,
  which consisted primarily of net proceeds of $8.4 million from the sale of Series
  C Preferred Shares, which was partially offset by the repayment of a $1.0 million
  loan.

Future Funding
  Requirements

We
  expect to incur losses from operations for the foreseeable future. We expect
  to incur increasing research and development expenses, including expenses related
  to the hiring of personnel and additional clinical trials. We expect that general
  and administrative expenses will also increase as we expand our finance and
  administrative staff, add infrastructure, and incur additional costs related
  to being a public company in the United States, including the costs of directors
  and officers insurance, investor relations programs, and increased professional
  fees. In addition, we are considering a new manufacturing facility that would
  meet the FDA requirements for the manufacture of our product candidates, which
  would increase our capital expenditures significantly.

We
  believe that our existing cash and cash equivalents and short-term investments
  will be sufficient to enable us to fund our operating expenses and capital expenditure
  requirements for at least for the next 18 months. We have based this estimate
  on assumptions that are subject to change and may prove to be wrong, and we
  may be required to use our available capital resources sooner than we currently
  expect. Because of the numerous risks and uncertainties associated with the
  development and commercialization of our product candidates, we are unable to
  estimate the amounts of increased capital outlays and operating expenditures
  associated with our current and anticipated clinical trials.

Our
  future capital requirements will depend on many factors, including the progress
  and results of our clinical trials, the duration and cost of discovery and preclinical
  development, and laboratory testing and clinical trials for our product candidates,
  the timing and outcome of regulatory review of our product candidates, the costs
  involved in preparing, filing, prosecuting, maintaining, defending, and enforcing
  patent claims and other intellectual property rights, the number and development
  requirements of other product candidates that we pursue, and the costs of commercialization
  activities, including product marketing, sales, and distribution.

We
  will need to finance our future cash needs through public or private equity
  offerings, debt financings, or corporate collaboration and licensing arrangements.
  We currently do not have any commitments for future external funding. We may
  need to raise additional funds more quickly if one or more of our assumptions
  prove to be incorrect or if we choose to expand our product development efforts
  more rapidly than we presently anticipate. We may also decide to raise additional
  funds even before we need them if the conditions for raising capital are favorable.
  The sale of additional equity or debt securities will likely result in dilution
  to our shareholders. The incurrence of indebtedness would result in increased
  fixed obligations and could also result in covenants that would restrict our
  operations. Additional equity or debt financing, grants, or corporate collaboration
  and licensing arrangements may not be available on acceptable terms, if at all.
  If adequate funds are not

| | 39 | 
| | -- | 

---

available, we may be required
  to delay, reduce the scope of or eliminate our research and development programs,
  reduce our planned commercialization efforts or obtain funds through arrangements
  with collaborators or others that may require us to relinquish rights to certain
  product candidates that we might otherwise seek to develop or commercialize
  independently.

Effects of
  Inflation and Currency Fluctuations

Inflation
  generally affects us by increasing our cost of labor and clinical trial costs.
  We do not believe that inflation has had a material effect on our results of
  operations during the years ended December 31, 2004, 2005, or 2006.

Currency
  fluctuations could affect us by increased or decreased costs mainly for goods
  and services acquired outside of Israel. We do not believe currency fluctuations
  have had a material effect on our results of operations during the years ended
  December 31, 2004, 2005, or 2006.

Off-Balance
  Sheet Arrangements

We
  have no off-balance sheet arrangements as of December 31, 2005 and 2006. See
  Note 5 of the consolidated financial statements for a full description of certain
  contingent royalty payments.

Recently Issued
  Accounting Pronouncements

In
  June 2006, the Financial Accounting Standards Board (the FASB) issued
  FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
  in Income Taxes, an interpretation of SFAS 109, Accounting for Income
  Taxes. FIN 48 prescribes a comprehensive model for recognizing, measuring,
  presenting, and disclosing in the financial statements tax positions taken or
  expected to be taken on a tax return, including a decision whether to file or
  not to file in a particular jurisdiction. FIN 48 is effective for fiscal years
  beginning after December 15, 2006 (January 1, 2007 for us). If there are changes
  in net assets as a result of application of FIN 48, these will be accounted
  for as an adjustment to retained earnings. We believe that the application of
  Fin 48 will not have a material effect on our financial position and results
  of operations.

In
  September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
  (SFAS 157). SFAS 157 defines fair value, establishes a framework
  for measuring fair value in accordance with generally accepted accounting principles,
  and expands disclosures about fair value measurements. The provisions of SFAS
  157 are effective commencing upon the fiscal year beginning after September
  1, 2008. We are currently evaluating the impact of the provisions of SFAS 157
  on our financial position and results of operations.

In
  September 2006, the SEC released SAB No. 108, Considering the Effects
  of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
  Statements, which provides interpretive guidance on the consideration
  of the effects of prior year misstatements in quantifying current year misstatements
  for the purpose of a materiality assessment. We are required to initially apply
  SAB No. 108 during fiscal year 2007. The application of SFAS
  108 did  not have a material effect on our financial position and results of
  operations as of December 31, 2006.

On
  February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option
  for Financial Assets and Financial Liabilities (SFAS 159).
  Under this SFAS 159, we may elect to report financial instruments and certain
  other items at fair value on a contract-by-contract basis with changes in value
  reported in earnings. This election is irrevocable. SFAS 159 provides an opportunity
  to mitigate volatility in reported earnings that is caused by measuring hedged
  assets and liabilities that were previously required to use a different accounting
  method than the related hedging contracts when the complex provisions of SFAS
  133 hedge accounting are not met. SFAS 159 is effective for years beginning
  after November 15, 2007. Early adoption within 120 days of the beginning of
  our 2007 fiscal year is permissible, provided a company has not yet issued interim
  financial statements for 2007 and has adopted SFAS 157. We do not intend to
  adopt SFAS 157 early, and we are currently evaluating the impact of adopting
  SFAS 159 on our financial position, cash flows, and results of operations.

| | 40 | 
| | -- | 

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Contractual
  Obligations

The
  following table summarizes our significant contractual obligations at December
  31, 2006:

|                                      | Total  | Less than 1 year | 1-3 years | 3-5 years | More than 5 years
|------------------------------------- | ------ | ---------------- | --------- | --------- | -----------------
|Operating lease obligations           | $657   | $237             | $382      | $38       |                 
|Purchase obligations                  | $1,979 | $1,979           |          |          |                 
|Other long term liabilities reflected |        |                  |           |           |                  
|on the balance sheet under GAAP       | $436   |                 |          |          | $436             

Selected Quarterly Financial
  Data (unaudited)

|                                                                                                                                                          | Three Months Ended
        on
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------
|                                                                                                                                                          | 2005                         
|                                                                                                                                                          | March 31                     
|                                                                                                                                                          |                              
|Revenues                                                                                                                                                  | $150                         
|Cost of revenues                                                                                                                                          | 35                           
|Gross profit                                                                                                                                              | 115                          
|Net loss before change in accounting
              principle                                                                                              | 957                          
|Cumulative effect of change in
        
              accounting principle                                                                                |                             
|Net loss for the period                                                                                                                                   | $957                         
|                                                                                                                                                          |                              
|Net loss per share of common stock,
             basic and diluted prior to
             cumulative effect of change
             in accounting principle | $0.05                        
|Cumulative effect of change in
              accounting principle                                                                                         |                             
|Net Loss per share of common stock                                                                                                                        | $0.05                        
|                                                                                                                                                          |                              



Item 7A. Quantitative
  and Qualitative Disclosures About Market Risk

Currency Exchange
  Risk

The
  currency of the primary economic environment in which our operations are conducted
  is the dollar. We are currently in the development stage with no significant
  source of revenues; therefore we consider the currency of the primary economic
  environment to be the currency in which we expend cash. Most of our expenses
  and capital expenditures are incurred in dollars, and a significant source of
  our financing has been provided in U.S. dollars. Since the dollar is the functional
  currency, monetary items maintained in currencies other than the dollar are
  remeasured using the rate of exchange in effect at the balance sheet dates and
  non-monetary items are remeasured at historical exchange rates. Revenue and
  expense items are remeasured at the average rate of exchange in effect during
  the period in which they occur. Foreign currency translation gains or losses
  are recognized in the statement of operations.

Approximately
  50% of our costs, including salaries, expenses and office expenses, are incurred
  in New Israeli Shekels, the NIS. Inflation in Israel may have the effect of
  increasing the U.S. dollar cost of our operations in Israel. If the U.S. dollar
  declines in value in relation to the NIS, it will become more expensive for
  us to fund our operations in Israel. A revaluation of 1% of the NIS will affect
  our income before tax by less than 1%. The exchange rate of the U.S. dollar
  to the NIS, based

| | 41 | 
| | -- | 

---

on exchange rates published
  by the Bank of Israel, was as follows:

|                        |                        
|----------------------- | -----------------------
|                        | Year Ended December 31,
|                        | 2004                   
|Average rate for period | 4.4820                 
|Rate at year-end        | 4.3080                 



To
  date, we have not engaged in hedging transactions. In the future, we may enter
  into currency hedging transactions to decrease the risk of financial exposure
  from fluctuations in the exchange rate of the U.S. dollar against the NIS. These
  measures, however, may not adequately protect us from material adverse effects
  due to the impact of inflation in Israel.

Interest Rate
  Risk

Our
  exposure to market risk is confined to our cash and cash equivalents. We consider
  all short term, highly liquid investments, which include short-term deposits
  with original maturities of three months or less from the date of purchase,
  that are not restricted as to withdrawal or use and are readily convertible
  to known amounts of cash, to be cash equivalents. The primary objective of our
  investment activities is to preserve principal while maximizing the interest
  income we receive from our investments, without increasing risk. We invest any
  cash balances primarily in bank deposits and investment grade interest-bearing
  instruments. We are exposed to market risks resulting from changes in interest
  rates. We do not use derivative financial instruments to limit exposure to interest
  rate risk. Our interest gains may decline in the future as a result of changes
  in the financial markets.

Item 8. Financial
  Statements and Supplementary Data

See
  the Index to Consolidated Financial Statements on Page F-1 attached hereto.

Item 9. Changes
  in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls
  and Procedures

Evaluation
  of Disclosure Controls and Procedures

We
  maintain disclosure controls and procedures or controls and other procedures
  that are designed to ensure that the information required to be disclosed by
  us in the reports that we file or submit under the Securities Exchange Act of
  1934, or Exchange Act, is recorded, processed, summarized and reported, within
  the time periods specified in the rules and forms of the Securities and Exchange
  Commission. Disclosure controls and procedures include, without limitation,
  controls and procedures designed to ensure that information required to be disclosed
  in the reports that a company files or submits under the Exchange Act is accumulated
  and communicated to our management, including our Chief Executive Officer and
  Chief Financial Officer, as appropriate to allow timely decisions regarding
  required disclosure.

We
  carried out an evaluation, under the supervision and with the participation
  of our Chief Executive and Chief Financial Officers, of the effectiveness of
  the design and operation of our disclosure controls and procedures (as defined
  in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of December 31,
  2006. Based on this evaluation, our Chief Executive Officer and our Chief Financial
  Officer concluded that as of December 31, 2006, our disclosure controls and
  procedures were effective at providing reasonable assurance that the information
  required to be disclosed by us in reports filed under the Exchange Act is (i)
  recorded, processed, summarized and reported within the time periods specified
  in the SECs rules and forms; and (ii) accumulated and communicated to
  our management, including our Chief Executive Officer and Chief Financial Officer,
  as appropriate, to allow timely decisions regarding disclosure.

Changes in
  Internal Controls over Financial Reporting

During
  the fourth quarter of fiscal 2006, there were no changes in our internal control
  over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(f) under
  the Exchange Act) that have materially affected, or are reasonably likely to
  materially affect, our internal control over financial reporting.

| | 42 | 
| | -- | 

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Item 9B. Other
  Information

None.

| | 43 | 
| | -- | 

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PART III

Item 10. Directors,
  Executive Officers and Corporate Governance

Our directors and executive
  officers, their ages and positions as of March 15, 2007, are as follows:

|Name                         | Age | Position                                           
|---------------------------- | --- | ---------------------------------------------------
|Directors                    |     |                                                    
|Eli Hurvitz                  | 74  | Chairman of the Board                              
|David Aviezer, Ph.D., MBA    | 42  | Director, President and Chief Executive Officer    
|Yoseph Shaaltiel, Ph.D.      | 53  | Director and Executive VP, Research and Development
|Zeev Bronfeld (1)            | 55  | Director                                           
|Amos Bar-Shalev (2)(3)       | 53  | Director                                           
|Sharon Toussia-Cohen (1)(2)  | 47  | Director                                           
|Eyal Sheratzki (1)           | 38  | Director                                           
|Pinhas Barel Buchris(2)(3)   | 56  | Director                                           
|Phillip Frost, M.D           | 70  | Director                                           
|Jane H. Hsiao, Ph.D., MBA(3) | 59  | Director                                           
|                             |     |                                                    
|Executive Officers           |     |                                                    
|Einat Brill Almon, Ph.D.     | 47  | Vice President, Product Development                
|Yossi Maimon                 | 37  | Chief Financial Officer, Treasurer and Secretary   
|Iftah Katz                   | 42  | Vice President, Operations                         



---

|(1) |  | Member of Nominating Committee
|--- |  | ------------------------------

|(2) |  | Member of Audit Committee
|--- |  | -------------------------

|(3) |  | Member of Compensation
      Committee
|--- |  | --------------------------------------

Eli
  Hurvitz.Mr. Hurvitz
  serves as Chairman of our Board of Directors and has served as a director of
  Protalix Ltd. since 2005 and as our director since December 31, 2006. Mr. Hurvitz
  has served as Chairman of the Board of Teva since April 2002. Previously, he
  served as Tevas President and Chief Executive Officer for over 25 years
  and has been employed at Teva in various capacities for over 40 years. He serves
  as Chairman of the Board of The Israel Democracy Institute (IDI), Chairman of
  the Board of NeuroSurvival Technologies Ltd. (a private company) and a director
  of Vishay Intertechnology. He served as Chairman of the Israel Export Institute
  from 1974 through 1977 and as the President of the Israel Manufacturers Association
  from 1981 through 1986. He served as Chairman of the Board of Bank Leumi Ltd.
  from 1986 through 1987. He was a director of Koor Industries Ltd. from 1997
  through 2004 and a member of the Belfer Center for Science and International
  Affairs at the John F. Kennedy School of Government at Harvard University from
  2002 through 2005. He received his B.A. in Economics and Business Administration
  from the Hebrew University of Jerusalem in 1957.

David
  Aviezer, Ph.D., MBA. Dr. Aviezer has served as Protalix Ltd.s Chief
  Executive Officer since 2002 and as our director since December 31, 2006. On
  December 31, 2006, he became our President and Chief Executive Officer. Dr.
  Aviezer has over a decade of experience in biotechnology management, advancing
  products from early-stage research up to their regulatory approval and commercialization.
  Prior to joining Protalix Ltd., from 1996 to 2002, he served as General Manager
  of ProChon Biotech Ltd., an Israeli company focused on orthopedic disorders.
  Previously, Dr. Aviezer was a visiting scientist at the Medical Research Division
  of American Cyanamid, a subsidiary of Wyeth (NYSE:WEY), in New York. Dr. Aviezer
  is the recipient of the Clore Foundation Award and the J.F. Kennedy Scientific
  Award. He holds a Ph.D. in Molecular Biology and Biochemistry from the Weizmann
  Institute of Science and an M.B.A. from the Bar Ilan University Business School.

Yoseph
  Shaaltiel, Ph.D. Dr. Shaaltiel founded Protalix Ltd. in 1993 and has served
  as a member of our Board of Directors since December 31, 2006 and as Vice President,
  Research and Development. Prior to establishing Protalix Ltd., from 1988 to
  1993, Dr. Shaaltiel was a Research Associate at the MIGAL Technological Center.
  He also served as Deputy Head of the Biology Department of the Biological and
  Chemical Center of the Israeli Defense Forces and as a Biochemist at Makor Chemicals
  Ltd. Dr. Shaaltiel was a Postdoctoral Fellow at the University of California
  at Berkeley and at Rutgers University in New Jersey. He has co-authored over
  40 articles and abstracts on plant biochemistry and holds seven patents. Dr.
  Shaaltiel received his Ph.D. in Plant Biochemistry from the Weizmann Institute
  of Science, an Ms.C. in Biochemistry from the Hebrew University, and a B.Sc.
  in Biology from the Ben Gurion University.

| | 44 | 
| | -- | 

---

Zeev
  Bronfeld. Mr. Bronfeld has served as a director of Protalix Ltd. since 1996
  and as our director since December 31, 2006. Mr. Bronfeld brings to Protalix
  vast experience in management and value building of biotechnology companies.
  Mr. Bronfeld is an experienced businessman who is involved in a number of biotechnology
  companies. He is a co-founder of Biocell Ltd., an Israeli publicly traded holding
  company specializing in biotechnology companies and has served as its chief
  executive officer since 1986. Mr. Bronfeld currently serves as a director of
  Biocell Ltd., Nasvax Ltd., D. Medical Industries Ltd., and Biomedix Incubator
  Ltd., all of which are public companies traded on the Tel Aviv Stock Exchange.
  Mr. Bronfeld is also a director of each of the following privately-held companies:
  Meitav Technological Incubator Ltd., Innovetica Ltd., Ecocycle Israel Ltd.,
  Contipi Ltd., Nilimedix Ltd., G-Sense Ltd., and L.N. Innovative Technologies.
  Mr. Bronfeld holds a B.A. in Economics from the Hebrew University.

Amos
  Bar-Shalev.Mr. Bar-Shalev has served as a director of Protalix Ltd. since
  2005 and as our director since December 31, 2006. Mr. Bar Shalev brings to Protalix
  extensive experience in managing technology companies. Currently Mr. Bar Shalev
  is the President of 1andOne Technology, and manages the Technorov portfolio.
  Until recently he was the Managing Director of TDA Israel, a management company
  of the TGF (Templeton Tadiran) Fund. Mr. Bar-Shalev was Vice President of Eurofund
  and a senior analyst at Teuza. He has served on the board of directors of many
  companies, such as Schema, ScitexVision, MessageVine, Objet, Idanit and ART.
  Mr. Bar Shalev holds a B.Sc. in Electrical Engineering from the Technion, Israel
  and an M.B.A. from the Tel Aviv University. He holds the highest award from
  the Israeli Air Force for technological achievements.

Sharon
  Toussia-Cohen.Mr. Toussia-Cohen has served as a director of Protalix Ltd.
  since 2004 and as our director since December 31, 2006. Mr. Toussia-Cohen is
  the president, chief executive officer and a director of Marathon Investments,
  an Israeli publicly-traded company since 2004. During the period from 1996 to
  2002, he served as the chief executive officer of the Aleppo Group and also
  as Managing Director of Israels Airport City Project. From the years 2002
  through 2004, Mr. Toussia-Cohen was a partner and Managing Director of the Tiv
  Taam Group and from the years 2004 through 2006 he was the chief executive officer
  and a director of ISRI Investments Ltd. Mr. Toussia-Cohen currently serves on
  the Board of Directors of Bioview, an Israeli company traded on the Tel Aviv
  Stock Exchange, and several privately-held companies including Nanomotion, Margan
  Business Development Ltd., Pegasus, Chromat Ltd., and Yeulit. Mr. Toussia-Cohen
  is certified in Bank Management by the First International Bank of Israel and
  the Republic National Bank of New York. He was also the co-owner and director
  of a strategic consulting firm in Israel. Mr. Toussia-Cohen holds a Bachelors
  degree in Economics and Political Science and an M.B.A. from the Hebrew University.

Eyal
  Sheratzki. Mr. Sheratzki has served as a director of Protalix Ltd. since
  2005 and as our director since December 31, 2006. Mr. Sheratzki has served as
  a director of Ituran Location & Control, a publicly-traded company quoted
  on the Nasdaq, since 1995 and as a co-chief executive officer since 2003. Prior
  to such date, he served as an alternate chief executive officer of Ituran from
  2002 through 2003 and as Vice President of Business Development from 1999 through
  2002. Mr. Sheratzki also serves as a director of Moked Ituran Ltd. and of Iturans
  subsidiaries. From 1994 to 1999 he served as the chief executive officer of
  Moked Services, Information and Investments Ltd. and as legal advisor to several
  of Iturans affiliated companies. Mr. Sheratzki holds LL.B and LL.M degrees
  from Tel Aviv University School of Law and an Executive M.B.A. degree from Kellogg
  University.

Pinhas
  Barel Buchris.Mr. Buchris has served as a director of Protalix Ltd. since
  December 2006 and as our director since December 31, 2006. Mr. Buchris is currently
  a Venture Partner at Apax Partners and is a Managing Director of Tamares Capital
  Ltd., both of which positions he has held since 2002. From 2002 to the present,
  Mr. Buchris has been engaged, from time to time, as an independent consultant
  and advisor for several high-tech companies and security-based organizations.
  From 1974 through 2001, Mr. Buchris served in the Israeli Defense Forces where
  he achieved the rank of Brigadier General (retired). From 1997 through 2001,
  he led the Israeli Defense Forces largest technology information gathering
  unit, the Central Unit of Technology Intelligence. Mr. Buchris currently serves
  on the Board of Directors of Bezeq the Israeli Telecommunications Corp. Ltd.,
  an Israeli company traded on the Tel Aviv Stock Exchange, and several privately-held
  companies including Tamares Israel Investments Ltd., Tamares Capital Ltd., Global
  Medical Networks, and AGN Knafaim Holdings Ltd. Mr. Buchris holds a B.Sc. in
  Computer Science from the Technion Technology Institute of Haifa, Israel, and
  an M.B.A. from the Israeli extension of Derby University, United Kingdom. Mr.
  Buchris has also completed an Executive Finance program and an Advanced Directors
  program at the Israeli Management Center as well as an Advanced Management program
  at Harvard University. In 1993, Mr. Buchris was awarded the Israel Defense Prize,
  one of the most prestigious awards in Israel.

Phillip
  Frost, M.D. Dr. Frost has served as a director of Protalix Ltd. since August
  2006 and as our director since December 31, 2006. Dr. Phillip Frost was named
  the Vice Chairman of the Board of Teva in January 2006 when Teva acquired IVAX
  Corporation. Dr. Frost had served as Chairman of the Board of Directors and
  Chief Executive Officer of IVAX Corporation since 1987. Dr. Frost was named
  Chairman of the Board of Ladenburg Thalman & Co., Inc., an

| | 45 | 
| | -- | 

---

American Stock Exchange-listed
  investment banking and securities brokerage firm, in July 2006 and has been
  a director of Ladenburg Thalman since March 2005. He was Chairman of the Department
  of Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach, Florida
  from 1972 to 1986. Dr. Frost was Chairman of the Board of Directors of Key Pharmaceuticals,
  Inc. from 1972 until the acquisition of Key Pharmaceuticals by Schering Plough
  Corporation in 1986. He serves on the Board of Regents of the Smithsonian Institution,
  a member of the Board of Trustees of the University of Miami, a Trustee of each
  of the Scripps Research Institutes, the Miami Jewish Home for the Aged, and
  the Mount Sinai Medical Center and is Vice Chairman of the Board of Governors
  of the American Stock Exchange. Dr. Frost is also a director of Continucare
  Corporation, an American Stock Exchange-listed provider of outpatient healthcare
  and home healthcare services, Northrop Grumman Corp., a New York Stock Exchange-listed
  global defense and aerospace company, Castle Brands, Inc., an American Stock
  Exchange-listed developer and marketer of alcoholic beverages, and Cellular
  Technical Services, Inc., a provider of products and services for the telecommunications
  industry. Dr. Frost received a B.A. in French Literature from the University
  of Pennsylvania and an M.D. from the Albert Einstein College of Medicine.

Jane
  H. Hsiao, Ph.D., MBA. Dr. Hsiao has served as a director of Protalix Ltd.
  since August 2006 and as our director since December 31, 2006. Dr. Hsiao served
  as the Vice Chairman-Technical Affairs of IVAX Corporation from 1995 to January
  2006, when Teva acquired IVAX. Dr. Hsiao served as IVAXs Chief Technical
  Officer since 1996, and as Chairman, Chief Executive Officer and President of
  IVAX Animal Health, IVAXs veterinary products subsidiary, since 1998.
  From 1992 until 1995, Dr. Hsiao served as IVAXs Chief Regulatory Officer
  and Assistant to the Chairman. Dr. Hsiao served as Chairman and President of
  DVM Pharmaceuticals from 1998 through 2006 and is also a director of Cellular
  Technical Services Company, Inc., a provider of products and services for the
  telecommunications industry. Dr. Hsiao received a B.S. in Pharmacy from the
  National Taiwan University and a Ph.D. in Pharmaceutical Chemistry from the
  University of Illinois, Chicago.

Einat
  Brill Almon, Ph.D.Dr. Almon joined Protalix Ltd. in December 2004 as its
  Vice President, Product Development and became our Vice President, Product Development
  on December 31, 2006. Dr. Almon has many years of experience in the management
  of life science projects and companies, including biotechnology and agrobiotech,
  with direct experience in clinical, device and scientific software development,
  as well as a strong background and work experience in Intellectual Property.
  Prior to joining Protalix Ltd., from 2001 to 2004, she served as Director of
  R&D and IP of Biogenics Ltd., a company that developed an autologous platform
  for tissue based protein drug delivery. Biogenics, based in Israel, is a wholly-owned
  subsidiary of Medgenics Inc. Dr. Almon has trained as a biotechnology patent
  agent at leading IP firms in Israel. Dr. Almon holds a Ph.D. and an M.Sc. in
  molecular biology of cancer research from the Weizmann Institute of Science,
  a B.Sc. from the Hebrew University and has carried out Post-Doctoral research
  at the Hebrew University in the area of plant molecular biology.

Yossi
  Maimon, CPA. Mr. Maimon joined Protalix Ltd. on October 15, 2006 as its
  Chief Financial Officer and became our Vice President and Chief Financial Officer
  on December 31, 2006. Prior to joining Protalix, from 2002 to 2006, he served
  as the Chief Financial Officer of Colbar LifeScience Ltd., a biomaterial company
  focusing on aesthetics, where he led all of the corporate finance activities,
  fund raisings, and legal aspects of Colbar including the sale of Colbar to Johnson
  and Johnson. Prior to that, from 2000 to 2002, he served as the Chief Financial
  Officer of Way2Call Communications, Ltd., an Israeli start up company in the
  telecommunications field, where he led the fund raising efforts, accounting
  issues, and business development activities. Prior to that, from 1998 to 2000,
  he served as the controller of PEC, a United States company publicly traded
  on the New York Stock Exchange, where he was responsible for reporting and compliance
  with the SEC and led the process of delisting and merging PEC into Discount
  Investment Bank. Mr. Maimon has a B.A. in accounting from the City University
  of New York and an M.B.A. from Tel Aviv University, and he is a Certified Public
  Accountant in the United States (New York State) and Israel.

Iftah
  Katz.Mr. Katz joined our company on February 28, 2007 as our Vice President
  of Operations. Prior to joining our company, from July 1995 to through February
  2007, Mr. Katz served as the Vice President, Pharmaceutical Technologies of
  Taro Pharmaceutical Industries Ltd., and, most recently, as its Vice President,
  Operational Excellence and Technology. Mr. Katz has over a decade of experience
  in the pharmaceutical industry specializing in the progression of products from
  developments stages to full scale commercial processes, including process development,
  manufacturing and overall validations and has experience across both bulk and
  finished dosage forms facilities. He brings significant experience to the design
  and start-up of cGMP manufacturing facilities and product launch processes.
  Mr. Katz holds an MSc. in Biotechnology and Food Engineering from the Technion-Israel
  Technology Institute and an M.B.A. from the Technion, Haifa as well as a B.A.
  in Biology, also from the Technion.

| | 46 | 
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Section 16(a)
  Beneficial Ownership Reporting Compliance

Section
  16(a) of the Exchange Act requires our directors, executive officers and holders
  of more than 10% of our common stock to file with the SEC reports regarding
  their ownership and changes in ownership of our equity securities. Curtis Lockshin,
  one of our former directors, failed to file a Form 3 upon his appointment
  to our Board of Directors. Otherwise, we believe that all Section 16 filing requirements were met during 2006.
In making this statement, we have relied upon examination
  of the copies of Forms 3, 4 and 5 provided to us and the written representations
  of our former and current directors, officers, and 10% stockholders.

Audit Committee

We
  require that all Audit Committee members possess the required level of financial
  literacy and at least one member of the Committee meet the current standard
  of requisite financial management expertise as required by the American Stock
  Exchange and applicable SEC rules and regulations. Messrs. Toussia-Cohen, Buchris
  and Bar-Shalev have been appointed by the Board of Directors to serve on the
  Audit Committee.

Our
  Audit Committee operates under a formal charter that governs its duties and
  conduct.

All
  members of the Audit Committee are independent from our executive officers and
  management.

Our
  independent registered public accounting firm reports directly to the Audit
  Committee.

Our
  Audit Committee meets with management and representatives of our registered
  public accounting firm prior to the filing of officerscertifications with
  the SEC to receive information concerning, among other things, effectiveness
  of the design or operation of our internal controls over financial reporting,
  as required by section 404 of the Sarbanes-Oxley Act of 2002.

Our
  Audit Committee has adopted a Policy for Reporting Questionable Accounting and
  Auditing Practices and Policy Prohibiting Retaliation against Reporting employees
  to enable confidential and anonymous reporting of improper activities to the
  Audit Committee.

Messrs.
  Toussia-Cohen and Bar-Shalev qualify as audit committee financial experts
  under the applicable rules of the Securities and Exchange Commission. In making
  the determination as to these individuals status as audit committee financial
  experts, our Board of Directors determined they have accounting and related
  financial management expertise within the meaning of the aforementioned rules,
  as well as the listing standards of the American Stock Exchange.

Code of Business
  Conduct and Ethics

We
  have adopted a Code of Business Conduct and Ethics that includes provisions
  ranging from restrictions on gifts to conflicts of interest. All of our employees
  and directors are bound by this Code of Business Conduct and Ethics. Violations
  of our Code of Business Conduct and Ethics may be reported to the Audit Committee.

The
  Code of Business Conduct and Ethics includes provisions applicable to all of
  our employees, including senior financial officers and members of our Board
  of Directors and is posted on our website (http://www.Protalix.com). We intend
  to post amendments to or waivers from any such Code of Business Conduct and
  Ethics.

Item 11. Executive
  Compensation

Compensation
  Discussion and Analysis

The
  primary goals of the Compensation Committee of our Board of Directors with respect
  to executive compensation are to attract and retain the most talented and dedicated
  executives possible, to tie annual and long-term cash and stock incentives to
  achievement of specified performance objectives, and to align executives
  incentives with shareholder value creation. To achieve these goals, the Compensation
  Committee intends to implement and maintain compensation plans that tie a portion
  of executives overall compensation to key strategic goals such as developments
  in our clinical path, the establishment of key strategic collaborations, the
  build-up of our pipeline and the strengthening of our financial position. The
  Compensation Committee evaluates individual executive performance with a goal
  of setting compensation at levels the committee believes are comparable with
  executives in other companies of similar size and stage of development operating
  in the biotechnology industry while taking into account our relative performance
  and our own strategic goals

| | 47 | 
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---

Elements of
  Compensation

Executive
  compensation consists of following elements:

Base
  Salary.Base salaries for our executives are established based on the
  scope of their responsibilities taking into account competitive market compensation
  paid by other companies for similar positions. Generally, we believe that executive
  base salaries should be targeted near the median of the range of salaries for
  executives in similar positions with similar responsibilities at comparable
  companies. Base salaries are reviewed annually, and adjusted from time to time
  to realign salaries with market levels after taking into account individual
  responsibilities, performance and experience. For 2007, this review will take
  place during the second quarter, and the base salaries are set forth above under
  Employment Agreements and Change in Control Arrangements.

Annual
  Bonus.The Compensation Committee has the authority to award
  discretionary annual bonuses to our executive officers. It has not established a formal bonus plan. These awards are intended
  to compensate officers for achieving financial, clinical and operational goals
  and for achieving individual annual performance objectives. These objectives
  vary depending on the individual executive, but relate generally to strategic
  factors such as developments in our clinical path, the establishment of key
  strategic collaborations, the build-up of our pipeline, and to financial factors
  such as raising capital.

For
  each  year, the Compensation Committee will select, in its discretion,
  the executive officers of our company or our subsidiary who are eligible to
  receive bonuses. Any bonus granted by the Compensation Committee will generally
  be paid in the first quarter following completion of a given  year. Similar
  to bonuses paid in the past, the actual amount of discretionary bonus will be
  determined following a review of each executives individual performance
  and contribution to our  goals. The Compensation Committee has not
  fixed a minimum or maximum payout for any officers annual discretionary
  bonus, unless specified in an executives employment agreement.

Pursuant
  to each officer employment agreement, the executive officer is eligible
  for a discretionary annual bonus. The Compensation Committee determines the
  discretionary annual bonus paid to our executive officers, and the discretionary
  bonus awarded to certain officers in 2007 for performance in 2006. The actual
  amount of discretionary bonus is determined following a review of each executives
  individual performance and contribution to our strategic goals conducted during
  the first quarter of each fiscal year. The Compensation Committee has not fixed
  a minimum or a maximum amount for any officers annual discretionary bonus.
  During March 2007, the Compensation Committee awarded a total of approximately
  $219,000 to the Named Executive Officers for their performance during the year
  2006. These bonuses were in recognition of the ongoing efforts of the Named
  Executive Officers in achieving our milestones regarding clinical developments,
  financial developments, and others.

Options.Our 2006 Stock Option Plan authorizes us to grant options to purchase
  shares of common stock to our employees, directors and consultants. Our Compensation
  Committee is the administrator of the stock option plan. Stock option grants
  are generally made at the commencement of employment and following a significant change
  in job responsibilities or to meet other special retention or performance objectives.
  The Compensation Committee reviews and approves stock option awards to executive
  officers based upon a review of competitive compensation data, its assessment
  of individual performance, a review of each executives existing long-term
  incentives, and retention considerations. In 2006, our Named Executive Officers
  were awarded stock options in the amounts indicated under
  Grants of Plan Based Awards. These grants included grants made in
  September and August, 2006, either as the first grant to one named executive
  upon commencement of employment or in recognition of exceptional contributions
  to our company relating to  developments in the clinical path, and in connection
  with a merit-based grant to a large number of employees intended to encourage
  an ownership culture among our employees. The exercise price of stock options
  granted under the 2006 Stock Incentive Plan must be equal to at least 100% of
  the fair market value of our common stock on the date of grant; however, in
  certain circumstances, grants may be made at a lower price to Israeli grantees
  who are residents of the State of Israel.

Severance
  and change in control benefits. Pursuant to the employments agreements
  entered into with each of our executive officers, the executive officer is entitled
  to be insured by Protalix Ltd. under a Managers Policy in lieu of

| | 48 | 
| | -- | 

---

severance. The intention
  of such Managers Policies is to provide the officers with severance protection
  of one months salary for each year of employment. In addition, the stock
  option agreements provide for the acceleration of the vesting periods of options
  in the event of a termination without cause following a change in control of
  our company.

Other
  Compensation. Consistent with our compensation philosophy, we
  intend to continue to maintain our current benefits for our executive officers;
  however, the Compensation Committee in its discretion may revise, amend, or
  add to the officers executive benefits if it deems it advisable. As an
  additional benefit to all of our Named Executive Officers and for most of our
  employees, we contribute to certain funds amounts equaling a total of approximately
  15% of their gross salaries for certain pension and other savings plans. In addition, in accordance with customary practice in Israel, our executives
agreements require us to contribute towards their vocational studies, and to provide annual recreational
allowances, a company car and a company phone. We
  believe these benefits are currently equivalent with median competitive levels for
  comparable companies.

Executive
  Compensation.We refer to the Summary Compensation Table in Section 11 below for information
  regarding the compensation earned during the fiscal year ended December 31,
  2006 by our chief executive officer, our executive vice president research and
  development, our vice president product development and our chief financial
  officer. There are no other executive officers for 2006 whose total compensation
  exceeded $100,000 during that fiscal year other than those set forth below.
  We refer to our chief executive officer, our executive vice president research
  and development, our vice president product development and our chief financial
  officer as our Named Executive Officers.

Compensation
  Committee Report

The
  above report of the Compensation Committee does not constitute soliciting material
  and shall not be deemed filed or incorporated by reference into any other filing
  by us under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The
  Compensation Committee has reviewed and discussed the Compensation Discussion
  and Analysis set forth below with our management. Based on this review and discussion,
  the Compensation Committee has recommended to our Board of Directors that the
  Compensation Discussion and Analysis be included in this Annual Report on Form
  10-K and our annual proxy statement on Schedule 14A.

Respectfully
  submitted on March 28, 2007, by the members of the Compensation Committee of
  the Board of Directors.

Amos
  Bar-Shalev
          Pinhas Barel Buchris
          Jane H. Hsiao, Ph.D.

Summary Compensation
  Table

The
  following table sets forth a summary for the fiscal years ended December 31,
  2006 and 2005, respectively, of the cash and non-cash compensation awarded,
  paid or accrued by Protalix Ltd. to our Named Executive Officers. There were
  no restricted stock awards, long-term incentive plan payouts or other compensation
  paid during fiscal years 2005 and 2004 by Protalix Ltd. to the Named Executive
  Officers, except as set forth below. The Named Executive Officers are employees
  of our subsidiary, Protalix Ltd. As a result of the merger, all of the directors
  and officers at the time resigned and appointed our current directors and officers
  in their stead. All currency amounts are expressed in U.S. dollars.

| | 49 | 
| | -- | 

---



|Name and Principal
      Position | Year | Salary
      ($) | Bonus($) | Stock
      Award(s)($) | Option
      Award(s)($) | Non-Equity
      Incentive Plan 
      Compensation
      ($) | Nonqualified
      Deferred
      Compensation 
      Earnings($) | All Other 
      Compensation
      ($)(1) | Total
      ($)
|--------------------------------- | ---- | ---------------- | -------- | ----------------------- | ------------------------ | ------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------ | ---------------
|                                 
|David Aviezer, Ph.D., MBA         | 2006 |                  | 237,485  |                         | 113,609                  |                                                               |                                                                  |                                            | 717,666        
|President
        and CEO(2)      | 2005 |                  | 198,890  |                         | 75,000                   |                                                               |                                                                  |                                            | 272,879        
|Yoseph Shaaltiel, Ph.D.           | 2006 |                  | 177,658  |                         | 31,953                   |                                                               |                                                                  |                                            | 7,684          
|Executive
        Vice President  | 2005 |                  | 120,855  |                         | 8,022                    |                                                               |                                                                  |                                            | 4,077          
|Einat Brill Almon, Ph.D.          | 2006 |                  | 102,468  |                         | 41,420                   |                                                               |                                                                  |                                            | 107,782        
|VP, Product
        Development   | 2005 |                  | 79,818   |                         | 3,915                    |                                                               |                                                                  |                                            | 67,824         
|Yossi Maimon, CPA (3)             | 2006 |                  | 27,746   |                         | 31,953                   |                                                               |                                                                  |                                            | 96,712         
|Chief Financial
        Officer   | 2005 |                  |         |                         |                         |                                                               |                                                                  |                                            |               



---

|(1) |  | Includes employer contributions
      to pension and/or insurance plans and other miscellaneous payments.
|--- |  | ---------------------------------------------------------------------------------------------------------

|(2) |  | Dr. Aviezer served as Protalix
      Ltd.s Chief Executive Officer on a consultancy basis until September
      2006 pursuant to a Consulting Services Agreement between Protalix Ltd. and
      Agenda Biotechnology Ltd., a company wholly-owned by Dr. Aviezer.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Includes payments from
      October 15, 2006 only.
|--- |  | ---------------------------------------------------

Iftah
  Katz joined our company as our Vice President, Operations, on February 28, 2007.
  Although Mr. Katz is not included in the Summary Compensation Table because
  he was not an executive officer of our company during fiscal year 2006, information
  about his employment agreement is included under Employment Agreements
  and Change in Control Arrangements.

Prior
  to the merger, Glenn L. Halpryn served as the Companys Chief Executive
  Officer and Alan J. Weisberg served as the Companys Chief Financial Officer
  and Treasurer. Messrs. Halpryn and Weisberg received no salary in 2006 and are
  not included in the above table. Mr. Weisberg is a shareholder of Weisberg Brause,
  which firm was paid $11,600 and $5,800 for accounting services during the years
  ended December 31, 2006 and 2005, respectively.

The
  following table summarizes the grant of awards made to Named Executive Officers
  during 2006 as of December 31, 2006.

GRANTS OF
  PLAN-BASED AWARDS

|                 
|-----------------
|Name             
|                 
|                 
|(a)              
|                 
|David Aviezer    
|                 
|Yossi Maimon     
|                 
|Yoseph Shaaltiel 
|                 
|Einat Brill Almon



|(1) |  | Represents bonuses to be
      paid according to Dr. Aviezers employment agreement upon achieving
      certain clinical milestones. In addition, non-defined bonuses may be granted
      to all of the above officers at the discretion of the Board of Directors.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents outstanding
      options at December 31, 2006.
|--- |  | ----------------------------------------------------------

|(3) |  | Represents the range of
      the exercise price of the stock options.
|--- |  | ----------------------------------------------------------------------

|(4) |  | Represents the fair value
      as recorded on the grant date of the stock options.
|--- |  | -----------------------------------------------------------------------------------

|(5) |  | Represents specific bonuses
      to be paid to  Dr. Brill Almon upon the achievement of certain clinical milestones.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

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| | -- | 

---

Mr. Halpryn and Mr. Weisberg
  received no awards in 2006 and are not included in the above table.

Outstanding
  Equity Awards at Fiscal Year-End

The following table sets
  forth information with respect to the Named Executive Officers concerning equity
  awards assumed by us as of December 31, 2006, in connection with the merger
  of Protalix Ltd. with our subsidiary. Mr. Halpryn and Mr. Weisberg received
  no awards or options and are not included in the below table.



|                  | Option
      Awards                                                                                 | Stock
      Awards                                                                                 
|----------------- | --------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------
|                 
|Name              | Number of 
      Securities 
      Underlying
      Unexercised
      Options(#) 
      Exercisable | Number
      of Securities 
      Underlying
      Unexercised
      Options(#)
      Unexercisable
|                 
|David Aviezer     | 991,101                                                                                             | 794,053                                                                                            
|Yoseph Shaaltiel  | 244,324                                                                                             |                                                                                                   
|Einat Brill Almon | 125,827                                                                                             | 357,874                                                                                            
|Yossi Maimon      |                                                                                                    | 619,972                                                                                            
|                  |                                                                                                     |                                                                                                    



Mr. Halpryn and Mr. Weisberg
  received no awards in 2006 and are not included in the below table. Option exercises
  during 2006 and vested stock awards for Named Executive Officers as of December
  31, 2006 were as follows:

OPTION EXERCISES
  AND STOCK VESTED



|                  | Option Awards                                             | Stock Awards                                  
|----------------- | --------------------------------------------------------- | ----------------------------------------------
|                 
|Name              | Number of Shares
        Acquired
        on Exercise (#) | Value Received on
        Exercise
        ($)
|                  |                                                           |                                               
|(a)               | (b)                                                       | (c)                                           
|                 
|David Aviezer     | 794,054 (1)                                               | 95,550                                        
|Yossi Maimon      |                                                          |                                              
|Yoseph Shaaltiel  |                                                          |                                              
|Einat Brill Almon |                                                          |                                              



---

|(1) |  | Represents exercise of
      stock options for ordinary shares of Protalix Ltd. during 2006.
|--- |  | --------------------------------------------------------------------------------------------

Employment
  Agreements and Change in Control Arrangements

David
  Aviezer, Ph.D., MBA.Dr. Aviezer originally served as Protalix Ltd.s
  Chief Executive Officer on a consultancy basis pursuant to a Consulting Services
  Agreement between Protalix Ltd. and Agenda Biotechnology Ltd., a company wholly-owned
  by Dr. Aviezer. On September 11, 2006, Protalix Ltd. entered into an employment
  agreement with Dr. Aviezer pursuant to which he agreed to be employed as Protalix
  Ltd.s President and Chief Executive Officer, which agreement supersedes
  the Consultancy Services Agreement. Dr. Aviezer currently serves as our President
  and Chief Executive Officer. Protalix Ltd. agreed to pay Dr. Aviezer a monthly
  base salary equal to NIS 80,000 (approximately

| | 51 | 
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---

$19,000) and an annual bonus
  at the Boards discretion. The monthly salary is subject to cost of living
  adjustments from time to time. Dr. Aviezer is eligible to receive a substantial
  bonus in the event of certain public offerings or acquisition transactions,
  which bonus shall be at the discretion of the Board, and certain specified bonuses
  in the event Protalix achieves certain specified milestones. In connection with
  the employment agreement, in addition to other options already held by Dr. Aviezer,
  Protalix Ltd. granted to Dr. Aviezer options to purchase 16,000 ordinary shares
  of Protalix Ltd. at an exercise price equal to $59.40 per share, which we assumed
  as options to purchase 977,297 shares of our common stock at $0.97 per share.
  Such options vest quarterly retroactively from June 1, 2006, over a four year
  period. The employment agreement is terminable by either party on 90 days
  written notice for any reason and we may terminate the agreement for cause without
  notice. Dr. Aviezer is entitled to be insured by Protalix Ltd. under a Managers
  Policy in lieu of severance, company contributions towards vocational studies,
  annual recreational allowances, a company car, and a company phone. Dr. Aviezer
  is entitled to 24 working days of vacation. All stock options that have not
  vested as of the date of termination shall be deemed to have expired.

Yoseph
  Shaaltiel, Ph.D.Dr. Shaaltiel founded Protalix Ltd. in 1993 and currently
  serves as our Executive Vice President, Research and Development. Dr. Shaaltiel
  entered into an employment agreement with Protalix Ltd. on September 1, 2001.
  Pursuant to the employment agreement, Protalix Ltd. agreed to pay Dr. Shaaltiel
  a monthly base salary equal to $7,000, subject to annual cost of living adjustments.
  His current salary is $10,600 per month. The employment agreement is terminable
  by Protalix Ltd. on 90 dayswritten notice for any reason and we may terminate
  the agreement for cause without notice. Dr. Shaaltiel is entitled to be insured
  by Protalix Ltd. under a Managers Policy in lieu of severance, company
  contributions towards vocational studies, annual recreational allowances, a
  company car, and a company phone. Dr. Shaaltiel is entitled to 24 working days
  of vacation.

Einat
  Brill Almon, Ph.D. Dr. Brill Almon joined Protalix Ltd. on December 19,
  2004 as its Vice President, Product Development, pursuant to an employment agreement
  effective on December 19, 2004 by and between Protalix Ltd. and Dr. Brill Almon,
  and currently serves as our Vice President, Product Development. Pursuant to
  the employment agreement, Protalix Ltd. agreed to pay Dr. Brill Almon a monthly
  base salary equal to NIS 28,000 (approximately $6,575). Her current salary is
  NIS 35,000 per month (approximately $8,235). The monthly salary is subject to
  cost of living adjustments from time to time. She is also entitled to certain
  specified bonuses in the event that Protalix achieves certain specified clinical
  development milestones within specified timelines. In connection with the employment
  agreement, Protalix agreed to grant to Dr. Brill Almon options to purchase 7,919
  ordinary shares of Protalix Ltd. at exercise prices equal to $24.36 and $59.40
  per share, which we assumed as options to purchase 483,701 shares of our common
  stock at $0.40 and $0.97 per share. The options vest over four years. The employment
  agreement is terminable by either party on 60 days written notice for
  any reason and we may terminate the agreement for cause without notice. Dr.
  Brill Almon is entitled to be insured by Protalix Ltd. under a Managers
  Policy in lieu of severance, company contributions towards vocational studies,
  annual recreational allowances, a company car, and a company phone at up to
  NIS 1,000 per month. Dr. Brill Almon is entitled to 22 working days of vacation.
  All stock options that have not vested as of the date of termination shall be
  deemed to have expired.

Yossi
  Maimon, CPA.Mr. Maimon joined Protalix Ltd. as its Chief Financial Officer
  pursuant to an employment agreement effective as of October 15, 2006 by and
  between Protalix Ltd. and Mr. Maimon and currently serves as our Chief Financial
  Officer. Pursuant to the employment agreement, Protalix Ltd. agreed to pay Mr.
  Maimon a monthly base salary equal to NIS 45,000 (approximately $10,600) and
  an annual discretionary bonus and additional discretionary bonuses in the event
  Protalix achieves significant financial milestones, subject to the Boards
  sole discretion. The monthly salary is subject to cost of living adjustments
  from time to time. In connection with the employment agreement, Protalix agreed
  to grant to Mr. Maimon options to purchase 10,150 ordinary shares of Protalix
  Ltd. at an exercise price equal to $59.40 per share, which we assumed as options
  to purchase 619,972 shares of our common stock at $0.97 per share. The first
  25% of such options shall vest on the first anniversary of the grant date and
  the remainder shall vest quarterly in twelve equal increments. The employment
  agreement is terminable by either party on 60 days written notice for
  any reason and we may terminate the agreement for cause without notice. Mr.
  Maimon is entitled to be insured by Protalix Ltd. under a Managers Policy
  in lieu of severance, company contributions towards vocational studies, annual
  recreational allowances, a company car, and a company phone. Mr. Maimon is entitled
  to 24 working days of vacation. All stock options that have not vested as of
  the date of termination shall be deemed to have expired.

Iftah
  Katz. Mr. Katz joined Protalix Ltd. as its Vice President of Operations
  pursuant to an employment agreement effective as of February 28, 2007 by and
  between Protalix Ltd. and Mr. Katz and currently serves as our Vice President
  of Operations. Pursuant to the employment agreement, Protalix Ltd. agreed to
  pay Mr. Katz a monthly base salary equal to NIS 45,000 (approximately $10,600)
  and an annual discretionary bonus and additional discretionary bonuses in the
  event Protalix achieves significant milestones, subject to the Boards
  sole discretion. The monthly salary is subject to cost of living adjustments
  from time to time. In connection with the employment agreement, subject to the
  approval of our Board of Directors, Mr. Katz is entitled to an option to purchase
  204,351 shares of common stock at a purchase price to be determined

| | 52 | 
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---

by the Companys Compensation
  Committee or the Board of Directors. The option shall vest over a period of
  four years as follows: one fourth of the options will vest on the first anniversary
  of the grant date and, thereafter, the remainder shall vest on a quarterly basis
  in 12 equal installments. The employment agreement is terminable by either party
  on 60 days written notice for any reason. Mr. Katz is entitled to be insured
  by Protalix Ltd. under a Managers Policy in lieu of severance, company
  contributions towards vocational studies, annual recreational allowances, a
  company car, and a company phone. Mr. Katz is entitled to 24 working days of
  vacation.

We
do not provide any change in control benefits to our executive officers except that their
stock option agreements provide for the acceleration of the vesting periods of options in
the event of a termination without cause following a change in control of our company.

2006 Stock
  Incentive Plan

Our
  Board of Directors and a majority of our stockholders approved our 2006 Stock
  Incentive Plan on December 14, 2006 and cancelled our 1998 stock option plan
  (no options were outstanding under the 1998 plan at that time). We have reserved
  9,741,655 shares of our common stock for issuance, in the aggregate, under the
  2006 Stock Incentive Plan, subject to adjustment for a stock split or any future
  stock dividend or other similar change in our common stock or our capital structure.
  Immediately prior to the closing of the merger, Protalix Ltd. had outstanding
  options to purchase 88,001 ordinary shares under its employee stock option plan.
  Pursuant to the terms of the merger agreement, we assumed all of the outstanding
  obligations under such plan and, accordingly, approximately 5,375,174 shares
  of our common stock under our 2006 Stock Incentive Plan. As of March 15, 2007,
  options to acquire 4,366,481 shares of common stock remain available to be granted
  under our 2006 Stock Incentive Plan.

Our
  2006 Stock Incentive Plan provides for the grant of stock options, restricted
  stock, restricted stock units, stock appreciation rights and dividend equivalent
  rights, collectively referred to as awards. Stock options granted
  under the 2006 Stock Incentive Plan may be either incentive stock options under
  the provisions of Section 422 of the Internal Revenue Code, or non-qualified
  stock options. Incentive stock options may be granted only to employees. Awards
  other than incentive stock options may be granted to employees, directors and
  consultants. The 2006 Stock Incentive Plan is also in compliance with the provisions
  of the Israeli Income Tax Ordinance New Version, 1961 (including as amended
  pursuant to Amendment 132 thereto) and is intended to enable us to grant awards
  to grantees who are Israeli residents as follows: (i) awards to employees pursuant
  to Section 102 of the Tax Ordinance (definition refers only to employees, office
  holders and directors of our company or a related entity excluding those who
  are considered Controlling Shareholders pursuant to the Tax Ordinance);
  and (ii) awards to non-employees pursuant to Section 3(I) of the Tax Ordinance.
  In accordance with the terms and conditions imposed by the Tax Ordinance, grantees
  who receive awards under the 2006 Stock Incentive Plan may be afforded certain
  tax benefits in Israel as described below.

Our
  Board of Directors or the Compensation Committee, referred to as the plan
  administrator, will administer our 2006 Stock Incentive Plan, including
  selecting the grantees, determining the number of shares to be subject to each
  award, determining the exercise or purchase price of each award, and determining
  the vesting and exercise periods of each award.

The
  exercise price of stock options granted under the 2006 Stock Incentive Plan
  must be equal to at least 100% of the fair market value of our common stock
  on the date of grant; however, in certain circumstances, grants may be made
  at a lower price to Israeli grantees who are residents of the State of Israel.
  If, however, incentive stock options are granted to an employee who owns stock
  possessing more than 10% of the voting power of all classes of our stock or
  the stock of any parent or subsidiary of our company, the exercise price of
  any incentive stock option granted must equal at least 110% of the fair market
  value on the grant date and the maximum term of these incentive stock options
  must not exceed five years. The maximum term of all other awards must not exceed
  ten years. The plan administrator will determine the exercise or purchase price
  (if any) of all other awards granted under the 2006 Stock Incentive Plan.

Under
  the 2006 Stock Incentive Plan, incentive stock options and options to Israeli
  grantees may not be sold, pledged, assigned, hypothecated, transferred or disposed
  of in any manner other than by will or by the laws of descent or distribution
  and may be exercised during the lifetime of the participant only by the participant.
  Other awards shall be transferable by will or by the laws of descent or distribution
  and to the extent and in the manner authorized by the plan administrator by
  gift or pursuant to a domestic relations order to members of the participants
  immediate family. The 2006 Stock Incentive Plan permits the designation of beneficiaries
  by holders of awards, including incentive stock options.

In
  the event the service of a participant in the 2006 Stock Incentive Plan is terminated
  for any reason other than cause, disability or death, the participant may exercise
  awards that were vested as of the termination date for a period ending upon
  the earlier of twelve months or the expiration date of the awards unless otherwise
  determined by the plan administrator.

In
  the event of a corporate transaction or a change of control, all awards will
  terminate unless assumed by the successor corporation. Unless otherwise provided
  in a participants award agreement, in the event of a corporate transaction
  for the portion of each award that is assumed or replaced, then such award will
  automatically become fully vested and

| | 53 | 
| | -- | 

---

exercisable immediately upon
  termination of a participants service if the participant is terminated
  by the successor company or us without cause within twelve months after the
  corporate transaction. For the portion of each award that is not assumed or
  replaced, such portion of the award will automatically become fully vested and
  exercisable immediately prior to the effective date of the corporate transaction
  so long as the participants service has not been terminated prior to such
  date.

In
  the event of a change in control, except as otherwise provided in a participants
  award agreement, following a change in control (other than a change in control
  that also is a corporate transaction) and upon the termination of a participants
  service without cause within twelve months after a change in control, each award
  of such participant that is outstanding at such time will automatically become
  fully vested and exercisable immediately upon the participants termination.

Under
  our 2006 Stock Incentive Plan, a corporate transaction is generally defined
  as:

| |  |  | a merger or consolidation in which we are not the
      surviving entity, except for the principal purpose of changing our companys
      state of incorporation;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the sale, transfer or other disposition of all
      or substantially all of our assets;
| | - |  | ----------------------------------------------------------------------------------------

| |  |  | the complete liquidation or dissolution of our
      company;
| | - |  | -------------------------------------------------------------

| |  |  | any reverse merger in which we are the surviving
      entity but our shares of common stock outstanding immediately prior to such
      merger are converted or exchanged by virtue of the merger into other property,
      whether in the form of securities, cash or otherwise, or in which securities
      possessing more than forty percent (40%) of the total combined voting power
      of our outstanding securities are transferred to a person or persons different
      from those who held such securities immediately prior to such merger; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | acquisition in a single or series of related transactions
      by any person or related group of persons of beneficial ownership of securities
      possessing more than fifty percent (50%) of the total combined voting power
      of our outstanding securities but excluding any such transaction or series
      of related transactions that the plan administrator determines not to be
      a corporate transaction (provided however that the plan administrator shall
      have no discretion in connection with a corporate transaction for the purchase
      of all or substantially all of our shares unless the principal purpose of
      such transaction is changing our companys state of incorporation).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
  our 2006 Stock Incentive Plan, a change of control is defined as:

| |  |  | the direct or indirect acquisition by any person
      or related group of persons of beneficial ownership of securities possessing
      more than fifty percent (50%) of the total combined voting power of our
      outstanding securities pursuant to a tender or exchange offer made directly
      to our shareholders and which a majority of the members of our board (who
      have generally been on our board for at least twelve months) who are not
      affiliates or associates of the offeror do not recommend shareholders accept
      the offer; or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | a change in the composition of our board over a
      period of twelve months or less, such that a majority of our board members
      ceases, by reason of one or more contested elections for board membership,
      to be comprised of individuals who were previously directors of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Unless
  terminated sooner, the 2006 Stock Incentive Plan will automatically terminate
  in 2016. Our Board of Directors has the authority to amend, suspend or terminate
  our 2006 Stock Incentive Plan. No amendment, suspension or termination of the
  2006 Stock Incentive Plan shall adversely affect any rights under awards already
  granted to a participant. To the extent necessary to comply with applicable
  provisions of federal securities laws, state corporate and securities laws,
  the Internal Revenue Code, the rules of any applicable stock exchange or national
  market system, and the rules of any non-U.S. jurisdiction applicable to awards
  granted to residents therein (including the Tax Ordinance), we shall obtain
  shareholder approval of any such amendment to the 2006 Stock Incentive Plan
  in such a manner and to such a degree as required.

| | 54 | 
| | -- | 

---

Impact of
  Israeli Tax Law

The
  awards granted to employees pursuant to Section 102 of the Tax Ordinance under
  the 2006 Stock Incentive Plan may be designated by us as approved options under
  the capital gains alternative, or as approved options under the ordinary income
  tax alternative.

To
  qualify for these benefits, certain requirements must be met, including registration
  of the options in the name of a trustee. Each option, and any shares of common
  stock acquired upon the exercise of the option, must be held by the trustee
  for a period commencing on the date of grant and deposit into trust with the
  trustee and ending 24 months thereafter.

Under
  the terms of the capital gains alternative, we may not deduct expenses pertaining
  to the options for tax purposes.

Under
  the 2006 Stock Incentive Plan, we may also grant to employees options pursuant
  to Section 102(c) of the Tax Ordinance that are not required to be held in trust
  by a trustee. This alternative, while facilitating immediate exercise of vested
  options and sale of the underlying shares, will subject the optionee to the
  marginal income tax rate of up to 50% as well as payments to the National Insurance
  Institute and health tax on the date of the sale of the shares or options. Under
  the 2006 Stock Incentive Plan, we may also grant to non-employees options pursuant
  to Section 3(I) of the Tax Ordinance. Under that section, the income tax on
  the benefit arising to the optionee upon the exercise of options and the issuance
  of common stock is generally due at the time of exercise of the options.

These
  options shall be further subject to the terms of the tax ruling that has been
  obtained by Protalix Ltd. from the Israeli tax authorities in connection with
  the merger. Under the tax ruling, the options issued by us in connection with
  the assumption of Section 102 options previously issued by Protalix Ltd. under
  the capital gains alternative shall be issued to a trustee, shall be designated
  under the capital gains alternative and the issuance date of the original options
  shall be deemed the issuance date for the assumed options for the calculation
  of the respective holding period.

Compensation
  of Directors

The
  following table sets forth information with respect to compensation of our directors
  during fiscal year 2006. The fees to our current directors were paid by Protalix
  Ltd. Prior to the merger, Protalix Ltd. compensated only certain of its directors,
  which compensation was limited to the granting of options under its employee
  stock option plan. The former directors were our directors prior
  to the consummation of the merger.



|Name                          | Fees Earned
      or Paid 
      in Cash
      ($) | Stock
      Award
      ($) | Option
      Awards
      ($) | Non-Equity
      Incentive Plan
      Compensation
      ($) | Nonqualified
      Deferred
      Compensation 
      Earnings
      ($) | All Other
      Compensation
      ($) | Total
      ($)
|----------------------------- | -------------------------------------------------- | --------------------------- | ----------------------------- | ------------------------------------------------------------ | ------------------------------------------------------------------------ | -------------------------------------- | ---------------
|                             
|Current Directors             |                                                    |                             |                               |                                                              |                                                                          |                                        |                
|Eli Hurvitz (1)               | 36,000                                             |                             |                              |                                                              | 2,124,087                                                                |                                        |               
|Zeev Bronfeld                 |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Amos Bar-Shalev               |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Sharon Toussia-Cohen          |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Eyal Sheratzki                |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Pinhas Barel Buchris          |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Phillip Frost, M.D. (2)       |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Jane H. Hsiao, Ph.D., MBA (2) |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Former Directors              |                                                   |                             |                              |                                                              |                                                                         |                                        |               
|Glenn L. Halpryn              | 3,600                                              |                             |                              |                                                              |                                                                         |                                        |               
|Curtis Lockshin               | 2,400                                              |                             |                              |                                                              |                                                                         |                                        |               
|Alan J. Weisberg              | 3,600                                              |                             |                              |                                                              |                                                                         |                                        |               
|Noah M. Silver                | 3,600                                              |                             |                              |                                                              |                                                                         |                                        |               



---

|(1) |  | Represents amounts paid
      to Pontifax Management Company, Ltd. pursuant to a management consulting
      agreement.
|--- |  | -----------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes options granted
      on December 31, 2006 with no benefit at the date of the grant because the
      options were not yet vested.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

Our
  Board of Directors will review director compensation annually and adjust it
  according to then current market conditions and corporate governance guidelines.

| | 55 | 
| | -- | 

---

Compensation
  Committee Interlocks and Insider Participation

Prior
  to the merger on December 31, 2006, we did not have a Compensation Committee.
  All of our directors and officers during 2006 resigned in connection with the
  closing of the merger on December 31, 2006. The current members of our Compensation
  Committee are Mr. Bar-Shalev, Mr. Buchris and Dr. Hsiao, who were appointed
  to the Committee as of December 31, 2006. No member of our Compensation Committee
  or any executive officer of our company or of Protalix Ltd. has a relationship
  that would constitute an interlocking relationship with executive officers or
  directors of another entity. No Compensation Committee member is or was an officer
  or employee of ours or of Protalix Ltd. Further, none of our executive officers
  serves on the board of directors or compensation committee of any entity that
  has one or more executive officers serving as a member of our Board of Directors
  or Compensation Committee.

Item 12. Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters

Security Ownership
  of Certain Beneficial Owners and Management

The
  following table sets forth information, as of March 15, 2007, regarding beneficial
  ownership of our common stock:

| |  |  | each person who is known by us to own beneficially
      more than 5% of our common stock;
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | each director;
| | - |  | --------------

| |  |  | the Named Executive Officers; and
| | - |  | ---------------------------------

| |  |  | all of our directors and executive officers collectively.
| | - |  | ---------------------------------------------------------

Unless otherwise noted, we
  believe that all persons named in the table have sole voting and investment
  power with respect to all shares of our common stock beneficially owned by them.
  For purposes of these tables, a person is deemed to be the beneficial owner
  of securities that can be acquired by such person within 60 days from March
  15, 2007 upon exercise of options, warrants and convertible securities. Each
  beneficial owners percentage ownership is determined by assuming that
  options, warrants and convertible securities that are held by such person (but
  not those held by any other person) and that are exercisable within such 60
  days from such date have been exercised.

The
  address for all directors and officers is c/o Protalix BioTherapeutics, Inc.,
  2 Snunit Street, Science Park, POB 455, Carmiel, Israel, 21000.



|Name and Address of Beneficial Owner                                | Amount and Nature of
      Beneficial Ownership | Percentage ofClass
|------------------------------------------------------------------- | ----------------------------------------------- | ------------------
|Board of Directors and Executive Officers                           |                                                 |                   
|Eli Hurvitz                                                         | 5,569,739                                       | (1)               
|Yoseph Shaaltiel, Ph.D.                                             | 3,188,431                                       | (2)               
|Phillip Frost, M.D.                                                 | 9,766,273                                       | (3)               
|Jane H. Hsiao, Ph.D., MBA                                           | 1,134,060                                       |                   
|David Aviezer, Ph.D., MBA                                           | 1,052,182                                       | (4)               
|Zeev Bronfeld                                                       | 14,466,319                                      | (5)               
|Amos Bar-Shalev                                                     | 6,186,046                                       | (6)               
|Sharon Toussia-Cohen                                                | 6,556,381                                       | (7)               
|Eyal Sheratzki                                                      | 14,466,319                                      | (8)               
|Pinhas Barel Buchris                                                |                                                |                   
|Einat Brill Almon, Ph.D.                                            | 199,979                                         | (9)               
|Yossi Maimon                                                        |                                                |                   
|All executive officers and directors as a 
      group (12 persons) | 48,119,410                                      | (10)              
|                                                                    |                                                 |                   
|5% Holders                                                          |                                                 |                   
|Biocell Ltd.                                                        | 14,466,319                                      | (11)              
|Pontifax G.P. Ltd.                                                  | 5,569,739                                       | (12)              
|Techno-Rov Holdings (1993) Ltd.                                     | 6,186,046                                       | (13)              
|Marathon Investments Ltd.                                           | 6,556,381                                       | (14)              
|Frost Gamma Investment Trust                                        | 9,766,273                                       | (15)              
|                                                                    |                                                 |                   



---

|* |  | less than 1%.
|- |  | -------------

| | 56 | 
| | -- | 

---

|(1) |  | Consists of 2,659,550 shares
      of our common stock held by Pontifax (Cayman) L.P., 1,378,278 of which shares
      are owned of record and 1,281,272 of which shares are issuable upon exercise
      of options that are exercisable within 60 days of March 15, 2007, and 2,910,188
      shares of our common stock held by Pontifax (Israel) L.P., 1,508,169 of
      which shares are owned of record and 1,402,019 of which shares are issuable
      upon exercise of options that are exercisable within 60 days of March 15,
      2007. Mr. Hurvitz is the chairman of Pontifax G.P. Ltd.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 244,324 shares
      of our common stock issuable upon exercise of outstanding options within
      60 days of March 15, 2007.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The shares are owned by
      Frost Gamma Investments Trust of which Frost Gamma, L.P. is the sole and
      exclusive beneficiary. Dr. Phillip Frost is the sole limited partner of
      Frost Gamma, L.P. The general partner of Frost Gamma, L.P. is Frost Gamma,
      Inc. and the sole shareholder of Frost Gamma, Inc., is Frost-Nevada Corporation.
      Dr. Frost is also the sole shareholder of Frost-Nevada Corporation.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes 1,052,182 shares
      of common stock issuable upon exercise of outstanding options within 60
      days of March 15, 2007.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Consists of 14,466,319
      shares of our common stock held by Biocell Ltd. Mr. Bronfeld is a director
      and Chief Executive Officer of Biocell. Mr. Bronfeld disclaims beneficial
      ownership of these shares.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Consists of 6,186,046 shares
      of our common stock held by Techno-Rov Holdings (1993) Ltd. Mr. Bar-Shalev
      is the manager of Techno-Rov Holdings and has the power to control its investment
      decisions. Mr. Bar-Shalev disclaims beneficial ownership of these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Consists of 6,556,381 shares
      of our common stock held by Marathon Investments Ltd. Mr. Toussia-Cohen
      is a director and Chief Executive Officer of Marathon Investments Ltd. Mr.
      Toussia-Cohen disclaims beneficial ownership of these shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Consists of 14,466,319
      shares of our common stock held by Biocell Ltd. Mr. Sheratzki is the Chairman
      of the Board of Biocell. Mr. Sheratzki disclaims beneficial ownership of
      these shares.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Consists of 199,979 shares
      of our common stock issuable upon exercise of outstanding options within
      60 days of March 15, 2007.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Includes of 4,179,777 shares
      of our common stock issuable upon exercise of warrants or options, as applicable,
      within 60 days of March 15, 2007.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | The address is Moshe Aviv
      Tower, 7 Jabotinsky Street, Ramat Gan, Israel. Biocell Ltd.s investment
      and voting decisions are made collectively by its Board of Directors.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | The address of Pontifax
      (Israel) L.P. and Pontifax (Cayman) L.P. is 8 Hamanofim St. Herzliya 46725,
      Israel. Consists of 2,659,550 shares of our common stock held by Pontifax
      (Cayman) L.P., 1,378,278 of which shares are owned of record and 1,281,272
      of which shares are issuable upon exercise of options that are exercisable
      within 60 days of March 15, 2007, and 2,910,188 shares of our common stock
      held by Pontifax (Israel) L.P., 1,508,169 of which shares are owned of record
      and 1,402,019 of which shares are issuable upon exercise of options that
      are exercisable within 60 days of March 15, 2007. Pontifax (Cayman) L.P.
      and Pontifax (Israel) L.P. are governed by Pontifax Management L.P. Pontifax
      G.P. Ltd. is the general partner of Pontifax Management L.P. Pontifax G.P.
      Ltd.s investment and voting decisions are made collectively by its
      Board of Directors.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | The address is Alrov Tower,
      46 Rothschild Blvd., Tel Aviv. Mr. Amos Bar-Shalev is the manager of Techno-Rov
      Holdings (1993) Ltd. and has the power to control its investment decisions.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) |  | The address is 7 Hanagar
      Street, Holon, Israel. Marathon Investments Ltd.s investment and voting
      decisions are made collectively by its Board of Directors.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | The address is 4400 Biscayne
      Blvd., Miami, Florida 33137. Frost Gamma, L.P. is the sole and exclusive
      beneficiary of Frost Gamma Investments Trust. Dr. Phillip Frost is the sole
      limited partner of Frost Gamma, L.P. The general partner of Frost Gamma,
      L.P. is Frost Gamma, Inc. and the sole shareholder of Frost Gamma, Inc.
      is Frost-Nevada Corporation. Dr. Frost is also the sole shareholder of Frost-Nevada
      Corporation.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 57 | 
| | -- | 

---

Item 13. Certain
  Relationships and Related Transactions, and Director Independence

On
  March 17, 2005, Protalix Ltd. entered into a Management Services Agreement with
  Pontifax Management Company, Ltd. in connection with the purchase of Protalixs
  Series B Preferred Shares by the Pontifax Funds. Pursuant to the Management
  Services Agreement, Mr. Hurvitz serves as a member of the Board of Directors.
  Further, Protalix agreed not to designate a permanent chairman of the Board
  of Directors until Pontifax Management Company chose to nominate Mr. Hurvitz
  as the Chairman of the Board in 2006. In consideration for Mr. Hurvitzs
  services, Protalix is required to pay Pontifax Management Company a fee equal
  to $3,000 per month plus required taxes on such payment. In addition, in connection
  with the execution of the Management Services Agreement, Protalix issued to
  Pontifax options to purchase a number of its Series B Preferred Shares equal
  to 3.5% of the then outstanding share capital with an exercise price equal to
  the par value of the shares. Lastly, upon the appointment of Mr. Hurvitz as
  Chairman of the Board of Directors, Protalix issued to Pontifax additional warrants
  for Series B Preferred Shares equal to 3.76% of the then outstanding share capital
  of Protalix. In connection with the merger, we assumed the Management Services
  Agreement and all options granted under the Management Services Agreement have
  been converted into options to purchase 3,384,502 shares of our common stock.
  Under the terms of the assumed Management Services Agreement, we are obligated
  only to use our best efforts to nominate Mr. Hurvitz for election to our Board
  of Directors, which remains subject to the review and approval of the Nominating
  Committee of the Board of Directors and the entire Board of Directors, as applicable.

On
  September 14, 2006, Protalix Ltd. entered into a collaboration and licensing
  agreement with Teva Pharmaceutical Industries Ltd. for the development and manufacturing
  of two proteins, using its plant cell system. Mr. Hurvitz, the Chairman of Protalixs
  Board of Directors is the Chairman of Tevas Board of Directors; and Dr.
  Frost, one of our directors, is the Vice Chairman of Tevas Board of Directors.
  Pursuant to the agreement, we will collaborate on the research and development
  of the two proteins utilizing our plant cell expression system. We will grant
  to Teva an exclusive license to commercialize the developed products in return
  for royalty and milestone payments payable upon the achievement of certain pre-defined
  goals. We will retain certain exclusive manufacturing rights with respect to
  the active pharmaceutical ingredient of the proteins following the first commercial
  sale of a licensed product under the agreement and other rights thereafter.

Corporate Governance
  and Independent Directors

Our
  common stock began trading on the American Stock Exchange under the ticker symbol
  PLX on March 12, 2007. In compliance with the listing requirements
  of the American Stock Exchange, we have begun operating with a comprehensive
  plan of corporate governance for the purpose of defining responsibilities, setting
  high standards of professional and personal conduct and assuring compliance
  with such responsibilities and standards. We currently regularly monitor developments
  in the area of corporate governance to ensure we are be in compliance with the
  standards and regulations required by the American Stock Exchange. A summary
  of our corporate governance measures follows.

Independent
  Directors

We
  believe a majority of the members of our Board of Directors are independent
  from management. When making determinations from time to time regarding independence,
  the Board of Directors will reference the listing standards adopted by the American
  Stock Exchange as well as the independence standards set forth in the Sarbanes-Oxley
  Act of 2002 and the rules and regulations promulgated by the SEC under that
  Act. In particular, our Audit Committee periodically evaluates and reports to
  the Board of Directors on the independence of each member of the Board. We anticipate
  our audit committee will analyze whether a director is independent by evaluating,
  among other factors, the following:

| |  |  | Whether the member of the Board of Directors has
      any material relationship with us, either directly, or as a partner, shareholder
      or officer of an organization that has a relationship with us;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether the member of the Board of Directors is
      a current employee of our company or our subsidiaries or was an employee
      of our company or our subsidiaries within three years preceding the date
      of determination;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether the member of the Board of Directors is,
      or in the three years preceding the date of determination has been, affiliated
      with or employed by (i) a present internal or external auditor of our company
      or any affiliate of such auditor, or (ii) any former internal or external
      auditor of our company or any affiliate of such auditor, which performed
      services for us within three years preceding the date of determination;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 58 | 
| | -- | 

---

| |  |  | Whether the member of the Board of Directors is,
      or in the three years preceding the date of determination has been, part
      of an interlocking directorate, in which any of our executive officers serve
      on the Compensation Committee of another company that concurrently employs
      the member as an executive officer;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether the member of the Board of Directors receives
      any compensation from us, other than fees or compensation for service as
      a member of the Board of Directors and any committee of the Board of Directors
      and reimbursement for reasonable expenses incurred in connection with such
      service and for reasonable educational expenses associated with Board of
      Directors or committee membership matters;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether an immediate family member of the member
      of the Board of Directors is a current executive officer of our company
      or was an executive officer of our company within three years preceding
      the date of determination;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether an immediate family member of the member
      of the Board of Directors is, or in the three years preceding the date of
      determination has been, affiliated with or employed in a professional capacity
      by (i) a present internal or external auditor of ours or any of our affiliates,
      or (ii) any former internal or external auditor of our company or any affiliate
      of ours which performed services for us within three years preceding the
      date of determination; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Whether an immediate family member of the member
      of the Board of Directors is, or in the three years preceding the date of
      determination has been, part of an interlocking directorate, in which any
      of our executive officers serve on the Compensation Committee of another
      company that concurrently employs the immediate family member of the member
      of the Board of Directors as an executive officer.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The above list is not exhaustive
  and we anticipate that the Audit Committee will consider all other factors which
  could assist it in its determination that a director will have no material relationship
  with us that could compromise that directors independence.

Under
  these standards, our Board of Directors has determined that Dr. Hsiao and Messrs.
  Bar-Shalev, Toussia-Cohen and Buchris are considered independent
  pursuant to the rules of the American Stock Exchange and Section 10A(m)(3) of
  the Securities Exchange Act of 1934, as amended. In addition, our Board has
  determined that at least two of these members of the Board of Directors are
  able to read and understand fundamental financial statements and have substantial
  business experience that results in their financial sophistication, qualifying
  them for membership on any audit committee we form. Our Board of Directors has
  also determined that Dr. Hsiao and Messrs. Bronfeld, Bar-Shalev, Toussia-Cohen,
  Sheratzki and Buchris are independent pursuant to the rules of the
  American Stock Exchange.

Our
  non-management directors hold formal meetings, separate from management, at
  least twice per year. We have no formal policy regarding attendance by our directors
  at annual shareholders meetings, although we encourage such attendance and anticipate
  most of our directors will attend these meetings. We did not hold an annual
  stockholders meeting in 2006.

Item 14. Principal
  Accountant Fees and Services

The
  following table sets forth fees billed to us by our independent registered public
  accounting firm during the fiscal years ended December 31, 2006 and 2005 for:
  (i) services rendered for the audit of our annual financial statements and the
  review of our quarterly financial statements; (ii) services by our independent
  registered public accounting firm that are reasonably related to the performance
  of the audit or review of our financial statements and that are not reported
  as Audit Fees; (iii) services rendered in connection with tax compliance, tax
  advice and tax planning; and (iv) all other fees for services rendered.



|                   |  | Year ended December
      31,
|------------------ |  | -----------------------------
|                   |  | 2006                         
|Audit Fees         |  | $                            
|Audit Related Fees |  | $                            
|Tax Fees           |  | $                            
|All  Other Fees    |  | $                            



| | 59 | 
| | -- | 

---

Policy on Audit
  Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
  Auditors

Prior
  to entering into the engagement letter with our independent publicly registered
  accounts, our Audit Committee approved 2006 audit fees. For fiscal year 2007,
  our Audit Committee has not yet approved fees for any services to be rendered
  by the independent publicly registered accountant.

| | 60 | 
| | -- | 

---

PART IV

Item 15. Exhibits
  and Financial Statement Schedules

The following documents are filed as part of the Annual Report on Form 10-K:

| | 1.
Financial Statements.The following Consolidated Financial Statements of
Protalix BioTherapeutics, Inc. are included in Item 8 of this Annual Report
on Form 10-K:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                                                                                                                        | Page
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting
      Firm                                                                                                                                                                           | F-2 
|                                                                                                                                                                                                                                        |     
|Consolidated Balance Sheets as of December
      31, 2005, and 2006                                                                                                                                                                     | F-3 
|                                                                                                                                                                                                                                        |     
|Consolidated Statements of Operations for the years ended
      December 31, 2004, 2005, and 2006, 
          
      and for the period from December 27, 1993 (Incorporation) through December 31, 2006                                | F-4 
|                                                                                                                                                                                                                                        |     
|Consolidated Statements of Changes in Shareholders
      Equity for the years ended
           December 31, 2004, 2005, and 2006, and for the
      period from December 27, 1993
           (Incorporation) through December 31, 2006 | F-5 
|                                                                                                                                                                                                                                        |     
|Consolidated Statements of Cash
      Flows for the years ended December 31, 2004, 2005,
            and 2006, and for the period from December
      27, 1993 (Incorporation) through December 31, 2006                                | F-6 
|                                                                                                                                                                                                                                        |     
|Notes to Consolidated Financial Statements                                                                                                                                                                                              | F-8 



| | 2.
Financial Statement Schedule.Financial statement schedules have been omitted
since they are either not required, are not applicable or the required information
is shown in the consolidated financial statements or related notes.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.
Exhibits.
| | ------------



|Exhibit Number | Exhibit Description                                                             |  | Method of Filing                                                                                                                         
|-------------- | ------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|3.1            | Amended and Restated Articles of
      Incorporation of the Company             |  | Incorporated by reference to the
      Company's Registration Statement on Form S-4 filed on March 26, 1998, SEC
      File No. 333-48677
|               |                                                                                 |  |                                                                                                                                          
|3.2            | Article of Amendment to Articles
      of Incorporation dated June 9, 2006      |  | Incorporated by reference to the
      Company's Registration Statement on Form 8-A filed on March 9, 2007, SEC
      File No. 001-33357 
|               |                                                                                 |  |                                                                                                                                          
|3.3            | Article of Amendment to Articles
      of Incorporation dated December 13, 2006 |  | Incorporated by reference to the
      Company's Registration Statement on Form 8-A filed on March 9, 2007, SEC
      File No. 001-33357 
|               |                                                                                 |  |                                                                                                                                          
|3.4            | Article of Amendment to Articles
      of Incorporation dated December 26, 2006 |  | Incorporated by reference to the
      Company's Registration Statement on Form 8-A filed on March 9, 2007, SEC
      File No. 001-33357 
|               |                                                                                 |  |                                                                                                                                          
|3.5            | Article of Amendment to Articles
      of Incorporation dated February 26, 2007 |  | Incorporated by reference to the
      Company's Registration Statement on Form 8-A filed on March 9, 2007, SEC
      File No. 001-33357 
|               |                                                                                 |  |                                                                                                                                          
|3.6            | Bylaws of the Company, as amended                                               |  | Incorporated by reference to the
      Company's Registration Statement on Form S-4 filed on March 26, 1998, SEC
      File No. 333-48677



| | 61 | 
| | -- | 

---



|4.1   | Form of Warrant                                                                                                                                                                    |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.1  | 2006 Stock Incentive Plan                                                                                                                                                          |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.2  | Employment Agreement between Protalix
      Ltd. and Yoseph Shaaltiel, dated as of September 1, 2004                                                                               |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.3  | Employment Agreement between Protalix
      Ltd. and Einat Almon, dated as of December 19, 2004                                                                                    |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.4  | Employment Agreement between Protalix
      Ltd. and David Aviezer, dated as of September 11, 2006                                                                                 |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.5  | Employment Agreement between Protalix
      Ltd. and Yossi Maimon, dated as of October 15, 2006                                                                                    |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.6 | License Agreement entered into as
      of April 12, 2005, by and between Icon Genetics AG and Protalix Ltd.                                                                       |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.7 | Research and License Agreement between
      Yeda Research and Development Company Limited and Protalix Ltd. dated as
      of March 15, 2006                                      |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.8 | Agreement between Teva Pharmaceutical
      Industries Ltd. and Protalix Ltd., dated September 14, 2006                                                                            |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.9  | Lease Agreement between Protalix
      Ltd. and Angel Science Park (99) Ltd., dated as of October 28, 2003 as amended
      on April 18, 2005                                      |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.10 | Merger Agreement and Plan of Reorganization
      made and entered into as of August 21, 2006, by and among the Registrant,
      Protalix Acquisition Co., Ltd. and Protalix Ltd. |  | Incorporated by reference to the
      Company's Current Report on Form 8-K filed on January 8, 2007, SEC File
      No. 000-27836
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.11 | Stock Option Award Agreement by and
      between the Registrant and Phillip Frost, dated as of December 31, 2006                                                                  |  | Filed herewith                                                                                                                    
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.12 | Stock Option Award Agreement by and
      between the Registrant and Jane Hsiao, dated as of December 31, 2006                                                                     |  | Filed herewith                                                                                                                    
|      |                                                                                                                                                                                    |  |                                                                                                                                   
|10.13 | Stock Option Award Agreement grant
      by and between the Registrant and Steven Rubin, dated as of December 31,
      2006                                                       |  | Filed herewith                                                                                                                    





| | 62 | 
| | -- | 

---



|10.14 | First Amendment to the December 31,
      2006 Stock Option Award Agreement by and between the Registrant and Phillip
      Frost, effective as of February 28, 2007 |  | Filed herewith
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|      |                                                                                                                                                                      |  |               
|10.15 | First Amendment to the December 31,
      2006 Stock Option Award Agreement by and between the Registrant and Jane
      Hsiao, effective as of February 28, 2007    |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|10.16 | First Amendment to the December 31,
      2006 Stock Option Award Agreement by and between the Registrant and Steven
      Rubin, effective as of February 28, 2007  |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|10.17 | Employment Agreement between Protalix
      Ltd. and Iftah Katz, effective as of February 28, 2007                                                                   |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|21.1  | Subsidiaries                                                                                                                                                         |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|31.1  | Certification of Chief Executive
      Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002                 |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|31.2  | Certification of Chief Financial
      Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002                 |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|32.1  | 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Certification
      of Chief Executive Officer                   |  | Filed herewith
|      |                                                                                                                                                                      |  |               
|32.2  | 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Certification
      of Chief Financial Officer                   |  | Filed herewith





---

| |  | Portions of this exhibit
      were omitted and have been filed separately with the Secretary of the Securities
      and Exchange Commission pursuant to the Registrants application requesting
      confidential treatment under Rule 406 of the Securities Act.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 63 | 
| | -- | 

---

SIGNATURES

Pursuant
  to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
  1934, as amended, the registrant has duly caused this report to be signed on
  its behalf by the undersigned, thereunto duly authorized, as of March 28, 2007.

| | PROTALIX BIOTHERAPEUTICS, INC.
| | ------------------------------
| |                               
| | By: /s/ David Aviezer         
| | David Aviezer, Ph.D.          



POWER OF
  ATTORNEY

KNOW
  ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below
  constitutes and appoints David Aviezer, Ph.D. and Yossi Maimon, and each of
  them, as his true and lawful attorneys-in-fact and agents, with full power of
  substitution and re-substitution, for him and in his name, place and stead,
  in any and all capacities, to sign any and all amendments to this Report on
  Form 10-K, and to file the same, with all exhibits thereto, and other documents
  in connection therewith, with the Securities and Exchange Commission, granting
  unto said attorneys-in-fact and agents, and each of them, full power and authority
  to do and perform each and every act and thing requisite and necessary to be
  done in connection therewith, as fully to all intents and purposes as he might
  or could do in person, hereby ratifying and confirming that said attorneys-in-fact
  and agents, or any of them, or their or his substitute or substitutes, may lawfully
  do or cause to be done by virtue hereof.

Pursuant
  to the requirements of the Securities Exchange Act of 1934, this report has
  been signed below by the following persons on behalf of the Registrant and in
  the capacities and on the dates indicated.



|                                                          |                                                                                                             |               
|--------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | --------------
|Signature                                                 | Title                                                                                                       | Date          
|/s/ David Aviezer
      David Aviezer, Ph.D.              | President, Chief Executive
      Officer (Principal Executive Officer) and Director                         | March 28, 2007
|                                                          |                                                                                                             |               
|/s/ Yossi Maimon
      
      Yossi Maimon                | Chief Financial Officer, 
      Treasurer and Secretary 
      (Principal Financial and Accounting Officer) | March 28, 2007
|                                                          |                                                                                                             |               
|/s/ Eli Hurvitz
      
      Eli Hurvitz                  | Chairman of the Board                                                                                       | March 28, 2007
|                                                          |                                                                                                             |               
|/s/ Yoseph Shaaltiel
      
      Yoseph Shaaltiel, Ph.D. | Executive VP, Research
      and Development 
      and Director                                            | March 28, 2007
|                                                          |                                                                                                             |               
|/s/ Zeev Bronfeld
      
      Zeev Bronfeld              | Director                                                                                                    | March 28, 2007
|                                                          |                                                                                                             |               
|/s/ Amos Bar-Shalev
      
      Amos Bar-Shalev          | Director                                                                                                    | March 28, 2007
|                                                          |                                                                                                             |               







| | 64 | 
| | -- | 

---



|/s/ Sharon Toussia-Cohen
      Sharon Toussia-Cohen | Director | March 28, 2007
|--------------------------------------------------- | -------- | --------------
|                                                    |          |               
|/s/ Eyal Sheratzki
      Eyal Sheratzki             | Director | March 28, 2007
|                                                    |          |               
|/s/ Pinhas Barel Buchris
      Pinhas Barel Buchris | Director | March 28, 2007
|                                                    |          |               
|/s/ Phillip Frost
      Phillip Frost, M.D.         | Director | March 28, 2007
|                                                    |          |               
|/s/ Jane H. Hsiao 

      Jane H. Hsiao, Ph.D.      | Director | March 28, 2007
|                                                    |          |               





| | 65 | 
| | -- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(Formerly Orthodontix,
Inc.)
   (A development stage company)CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                                                                                                                                                             | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|REPORT OF INDEPENDENT REGISTERED PUBLIC                                                                                                                                                      | F-2 
|ACCOUNTING FIRM                                                                                                                                                                              |     
|                                                                                                                                                                                             |     
|FINANCIAL STATEMENTS                                                                                                                                                                        
|                                                                                                                                                                                             |     
|Consolidated Balance Sheets as of December 31, 2005, and 2006                                                                                                                                | F-3 
|                                                                                                                                                                                             |     
|Consolidated Statements of Operations for the years ended December 31, 2004, 2005, and 2006,
           and for the period from December 27, 1993 (Incorporation), through December 31, 2006 | F-4 
|                                                                                                                                                                                             |     
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31,                                                                                                  | F-5 
|2004, 2005, and 2006, and for the period from December 27, 1993 (Incorporation),                                                                                                             |     
|through December 31, 2006                                                                                                                                                                    |     
|                                                                                                                                                                                             |     
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2005, and                                                                                                       | F-6 
|2006, and for the period from December 27, 1993 (Incorporation), through December 31, 2006                                                                                                   |     
|                                                                                                                                                                                             |     
|Notes to Consolidated Financial Statements                                                                                                                                                   | F-8 

The dollar amounts are
stated in U.S. dollars ($)

| | F-1 | 
| | --- | 

---

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders ofPROTALIX
BIOTHERAPEUTICS, INC. (Formerly Orthodontix, Inc.) 
  (A Development stage company)

We have  audited the  consolidated
 balance  sheets of  Protalix  BioTherapeutics,  Inc.  (the  Company)  and
its subsidiary  as of  December  31,  2006  and  2005  and  the  consolidated  statements
 of  operations,  changes  in shareholders  equity and cash flows for each of the
three years in the period ended December 31,  2006 and for the period from  December 27,
1993 (date of  Companys  incorporation)  through  December  31,  2006.  These
 financial statements are the  responsibility  of the Companys Board of Directors
and 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.  An audit  includes  examining,  on a test  basis, evidence supporting the
amounts and disclosures in the financial  statements.  An audit also includes assessing
the accounting  principles used and significant  estimates made by the Companys
Board of Directors and management,  as well as evaluating the overall financial statement
 presentation.  We believe that our audits provide  a reasonable basis for our opinion.

In our opinion,  based on our
audits, the consolidated  financial  statements referred to above, present fairly, in all
material  respects,  the consolidated  financial  position of the Company and its
subsidiary as of December 31, 2006 and 2005,  and the  consolidated  results of their
 operations,  and cash flows for each of the three years in the period ended  December
31,  2006,  and for the period from December 27, 1993 (date of Companys
 incorporation) through  December 31, 2006, in conformity with  accounting  principles
 generally  accepted in the United States of America.

As discussed in Note 1l to the
 consolidated  financial  statements,  the Company  changed its method of accounting for
 Share-Based  Payments in  accordance  with  Statement  of  Financial  Accounting
 Standards  No. 123  (revised 2004) effective January 1, 2006.

|Tel-Aviv, Israel      
        March 28, 2007 | /s/ Kesselman & Kesselman
                                                            
        Kesselman & Kesselman
                                                            
        Certified Public Accountant
(Isr.)                                                                               
        A
member of PricewaterhouseCoopers
                                                                                     
        International
Limited
|--------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-2 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)CONSOLIDATED BALANCE SHEETS(U.S. dollars in thousands, except shares and per share amounts)

|                                                  | December 31,
|------------------------------------------------- | ------------
|
|ASSETS                                            |             
|CURRENT ASSETS:                                   |             
|Cash and cash equivalents                         |             
|Deposit                                           |             
|Accounts receivable                               |             
|                                                  |             
|                                                  |             
|Total current assets                              |             
|                                                  |             
|FUNDS IN RESPECT OF EMPLOYEE                      |             
|RIGHTS UPON RETIREMENT                            |             
|                                                  |             
|PROPERTY AND EQUIPMENT, NET                       |             
|                                                  |             
|Total assets                                      |             
|                                                  |             
|LIABILITIES AND SHAREHOLDERS EQUITY              |             
|CURRENT LIABILITIES:                              |             
|Accounts payable and accruals:                    |             
|Trade                                             |             
|Other                                             |             
|                                                  |             
|Total current liabilities                         |             
|                                                  |             
|LONG-TERM LIABILITY:                              |             
|Liability for employee rights upon retirement     |             
|                                                  |             
|Total long-term liabilities                       |             
|                                                  |             
|Total liabilities                                 |             
|                                                  |             
|COMMITMENTS                                       |             
|                                                  |             
|SHAREHOLDERS EQUITY *:                           |             
|Convertible preferred shares, 0.01 NIS par value: |             
|Authorized  as of December 31, 2005 -            |             
|773,532 and no shares as of December 31, 2006;    |             
|Issued and outstanding  as of December 31, 2005  |             
|398,227, and no shares as of December 31, 2006    |             
|Common Stock, $0.001 par value:                   |             
|Authorized  as of the December 31, 2005 and 2006 |             
|100,000,000 and 150,000,000 shares, respectively; |             
|Issued and outstanding  as of December 31, 2005  |             
|and 2006 18,801,527 and 61,781,765 shares,        |             
|respectively                                      |             
|Additional paid-in capital                        |             
|Warrants                                          |             
|Deficit accumulated during the development stage  |             
|                                                  |             
|Total shareholders equity                        |             
|                                                  |             
|Total liabilities and shareholders equity        |             
|                                                  |             
|                                                  |             

---

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

| | F-3 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)CONSOLIDATED STATEMENTS OF OPERATIONS(U.S. dollars in thousands, except shares and per share amounts)

|                                                                                                        | Year ended December 31, | Period from
December 27, 1993*
through
December 31, 2006
|------------------------------------------------------------------------------------------------------- | ----------------------- | --------------------------------------------------------
|
|REVENUES                                                                                                |                         | $             430                                       
|COST OF REVENUES                                                                                        |                         | 120                                                     
|                                                                                                        |                         |                                                         
|GROSS PROFIT                                                                                            |                         | 310                                                     
|                                                                                                        |                         |                                                         
|RESEARCH AND DEVELOPMENT EXPENSES                                                                       |                         | 2,493                                                   
|Less - grants                                                                                           |                         | (573                                                    
|                                                                                                        |                         |                                                         
|                                                                                                        |                         | 1,920                                                   
|                                                                                                        |                         |                                                         
|GENERAL AND ADMINISTRATIVE EXPENSES                                                                     |                         | 807                                                     
|                                                                                                        |                         |                                                         
|OPERATING LOSS                                                                                          |                         | 2,417                                                   
|FINANCIAL EXPENSES                                                                                      |                        
|(INCOME)  NET                                                                                          |                         | 4                                                       
|                                                                                                        |                         |                                                         
|NET LOSS BEFORE CHANGE IN                                                                               |                        
|ACCOUNTING PRINCIPLE                                                                                    |                         | 2,421                                                   
|CUMULATIVE EFFECT OF                                                                                    |                        
|CHANGE IN ACCOUNTING                                                                                    |                        
|PRINCIPLE                                                                                               |                         |                                                         
|                                                                                                        |                         |                                                         
|NET LOSS FOR THE PERIOD                                                                                 |                         | $          2,421                                        
|                                                                                                        |                         |                                                         
|NET LOSS PER SHARE OF COMMON STOCK - BASIC:                                                             |                        
|Prior to cumulative effect of change in accounting  principle                                           |                         | $             0.13                                      
|Cumulative effect of change in accounting principle                                                     |                         |                                                         
|                                                                                                        |                         | $             0.13                                      
|                                                                                                        |                         |                                                         
|NET LOSS PER SHARE OF COMMON STOCK - DILUTED:                                                           |                        
|Prior to cumulative effect of change in accounting principle                                            |                         | $             0.13                                      
|Cumulative effect of change in accounting principle                                                     |                         |                                                         
|                                                                                                        |                         |                                                         
|                                                                                                        |                         | $             0.13                                      
|                                                                                                        |                         |                                                         
|WEIGHTED AVERAGE NUMBER OF SHARES OF 
      COMMON STOCK USEDIN COMPUTING LOSS PER 
      COMMON STOCK: |                        
|                                                                                                       
|Basic                                                                                                   |                         | 18,801,527                                              
|                                                                                                        |                         |                                                         
|Diluted                                                                                                 |                         | 18,801,527                                              
|                                                                                                        |                         |                                                         

---

|* |  | Incorporation
date, see Note 1a.
|- |  | --------------------------------

|** |  | Represents
an amount less than $0.01.
|-- |  | -------------------------------------

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

| | F-4 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)                              CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
                                            
  (U.S. dollars in thousands, except share data)

|                                        | Common
Stock | Convertible
preferred
shares | Common
Stock | Convertible
preferred
Shares | Warrants | Additional
paid-in
Capital | Deficit
accumulated
during
development
stage | Total
|--------------------------------------- | ------------ | ---------------------------- | ------------ | ---------------------------- | -------- | -------------------------- | -------------------------------------------- | -----
|
|Beginning balance -December 27, 1993(1) |              |                              |              |                              |          |                            |                                              |      
|Changes during the period from          |             
|December 27, 1993 through               |             
|December 31, 2003:                      |             
|Ordinary and convertible                |             
|preferred A shares issued               |             
|for cash (net of issuance               |             
|costs of $124)                          |              | 18,801,527                   |              | 190,486                      |          | 19                         |                                              | *    
|Share-based compensation                |              | -                            |              | -                            |          | -                          |                                              | -    
|Net Loss                                |              | -                            |              | -                            |          | -                          |                                              | -    
|                                        |              |                              |              |                              |          |                            |                                              |      
|Balance at December 31, 2003            |              | 18,801,527                   |              | 190,486                      |          | 19                         |                                              | *    
|Changes during 2004:                    |             
|Convertible preferred B shares          |             
|issued for cash (net of                 |             
|issuance costs of $216)                 |              | -                            |              | 100,523                      |          | -                          |                                              | 1    
|Share-based compensation                |              | -                            |              | -                            |          | -                          |                                              | -    
|Net Loss                                |              | -                            |              | -                            |          | -                          |                                              | -    
|                                        |              |                              |              |                              |          |                            |                                              |      
|Balance at December 31, 2004            |              | 18,801,527                   |              | 291,009                      |          | 19                         |                                              | 1    
|Changes during 2005:                    |             
|Convertible preferred B and C           |             
|shares and warrants issued              |             
|for cash (net of issuance               |             
|costs of $192)                          |              | -                            |              | 107,218                      |          | -                          |                                              | *    
|Share-based compensation                |              | -                            |              | -                            |          | -                          |                                              | -    
|Net Loss                                |              | -                            |              | -                            |          | -                          |                                              | -    
|                                        |              |                              |              |                              |          |                            |                                              |      
|Balance at December 31, 2005            |              | 18,801,527                   |              | 398,227                      |          | 19                         |                                              | 1    
|Changes during 2006:                    |             
|Common Stock and warrants               |             
|issued for cash (net of                 |             
|issuance costs of $236) (see            |             
|Note 6i)                                |              | 10,054,600                   |              | -                            |          | 10                         |                                              | -    
|Merger with a wholly owned              |             
|subsidiary of Orthodontix,              |             
|Inc. (net of issuance cost              |             
|of $642) (2)                            |              | 583,086                      |              | -                            |          | 1                          |                                              | -    
|Exercise of options granted to          |             
|employees and non-employees             |              | 2,670,403                    |              | 847                          |          | 3                          |                                              |      
|Share-based compensation                |              | -                            |              |                              |          |                            |                                              |      
|Conversion of convertible               |             
|preferred shares into Common            |             
|Stock (see Note 6b) (3)                 |              | 24,375,870                   |              | (399,074                     | )        | 24                         |                                              | (1   
|Change in accounting principle          |              | -                            |              | -                            |          | -                          |                                              | -    
|Expiration of warrants (4)              |              | -                            |              | -                            |          | -                          |                                              | -    
|Exercise of warrants (5)                |              | 5,296,279                    |              | -                            |          | 5                          |                                              | -    
|Net Loss                                |              | -                            |              | -                            |          | -                          |                                              | -    
|                                        |              |                              |              |                              |          |                            |                                              |      
|Balance at December 31, 2006            |              | 61,781,765                   |              | -                            |          | 62                         |                                              | -    
|                                        |              |                              |              |                              |          |                            |                                              |      

---

|(1) |  | Incorporation
date, see Note 1a.
|--- |  | --------------------------------

|(2) |  | Upon
the Merger consummated in December 2006, which has been accounted for as a reverse
acquisition, the holders of capital stock of the Company prior to the Merger retained
583,086 shares of Common Stock (out of 150,000,000 authorized shares).  See Note 6.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Conversion
of 399,074 convertible preferred shares prior to the Merger, and exchange of resulting
399,074 shares for Common Stock at an exchange rate of approximately 61.08 for 1. See
Note 6c.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Expiration
of 2,977 warrants (without giving effect to the exchange) immediately prior to the Merger.
|--- |  | -----------------------------------------------------------------------------------------------------

|(5) |  | Exercise
of warrants prior to the Merger, and exchange of resulting 86,709 shares for Common Stock
at an exchange rate of approximately 61.08 for 1.  See Note 6j.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Represents an amount less than $1.

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

| | F-5 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)CONSOLIDATED STATEMENTS OF CASH FLOWS(U.S. dollars in thousands)

|                                                           | Year ended December 31, | Period from
December 27, 1993*
through
December 31, 2006
|---------------------------------------------------------- | ----------------------- | --------------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                      |                         |                                                         
|Net Loss                                                   |                         | $(2,421                                                 
|Adjustments required to reconcile net loss to net cash     |                        
|used in operating activities:                              |                        
|Cumulative effect of change in accounting principle        |                         |                                                        
|Share based compensation                                   |                         | 297                                                     
|Depreciation and impairment of fixed assets                |                         | 123                                                     
|Interest expense (income), net                             |                         | 26                                                      
|Changes in accrued liability for employee rights           |                        
|upon retirement                                            |                         | 67                                                      
|Loss (gain) on amounts funded in respect of employee       |                        
|rights upon retirement                                     |                         | 2                                                       
|Changes in operating assets and liabilities:               |                        
|Decrease (increase) in accounts receivable                 |                         | (534                                                    
|Increase (decrease) in accounts payable  and accruals      |                         | 691                                                     
|                                                           |                         |                                                         
|Net cash used in operating activities                      |                         | $(1,749                                                 
|                                                           |                         |                                                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                      |                        
|Purchase of property and equipment                         |                         | $(1,291                                                 
|Investment grant received in respect of fixed assets       |                         |                                                        
|Investment in restricted cash deposit                      |                         |                                                        
|Amounts funded in respect of employee rights               |                        
|upon retirement                                            |                         | (48                                                     
|Amounts paid in respect of employee rights                 |                        
|upon retirement                                            |                         | 3                                                       
|                                                           |                         |                                                         
|Net cash used in investing activities                      |                         | $(1,336                                                 
|                                                           |                         |                                                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |                        
|Loan and convertible bridge loan received                  |                         | $    800                                                
|Repayment of loan                                          |                         |                                                        
|Issuance of shares and warrants                            |                         | 2,546                                                   
|Exercise of options                                        |                         |                                                         
|Merger with a wholly owned subsidiary of Orthodontix, Inc. |                         |                                                         
|Net increase (decrease) in short-term bank credit          |                         | (45                                                     
|                                                           |                         |                                                         
|Net cash provided by financing activities                  |                         | $ 3,301                                                 
|                                                           |                         |                                                         
|NET INCREASE IN CASH AND CASH                              |                        
|EQUIVALENTS                                                |                         | 216                                                     
|BALANCE OF CASH AND CASH                                   |                        
|EQUIVALENTS AT BEGINNING OF PERIOD                         |                         | 1,261                                                   
|                                                           |                         |                                                         
|BALANCE OF CASH AND CASH                                   |                        
|EQUIVALENTS AT END OF PERIOD                               |                         | $ 1,477                                                 
|                                                           |                         |                                                         

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

| | F-6 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)CONSOLIDATED STATEMENTS OF CASH FLOWS(U.S. dollars in thousands)

(CONTINUED)

|                                                  | Year ended December 31, | Period from
December 27,
1993*
through
December 31,
2006
|------------------------------------------------- | ----------------------- | --------------------------------------------------------
|
|SUPPLEMENTARY DISCLOSURE OF                       |                         |                                                         
|CASH FLOW INFORMATION:                            |                        
|Cash paid during the year for interest            |                         | $    2                                                  
|                                                  |                         |                                                         
|SUPPLEMENTARY INFORMATION ON                      |                        
|INVESTING AND FINANCING ACTIVITIES                |                        
|NOT INVOLVING CASH FLOWS                          |                        
|                                                  |                         |                                                         
|Conversion of convertible bridge loan into shares |                         | $800                                                    
|                                                  |                         |                                                         
|Purchase of property and equipment                |                         | $284                                                    
|                                                  |                         |                                                         
|Issuance cost not yet paid                        |                        
|and accruals  other                              |                         | $121                                                    
|                                                  |                         |                                                         
|Exercise of warrants (see Note 6j)                |                         |                                                         
|                                                  |                         |                                                         
|Consultants and director credit balance          |                        
|converted into shares                             |                         | $  80                                                   
|                                                  |                         |                                                         
|Issuance cost not yet paid                        |                         | $  21                                                   
|                                                  |                         |                                                         
|Merger with a wholly owned subsidiary of          |                        
|Orthodontix Inc.:                                 |                        
|Prepaid expenses                                  |                         |                                                         
|                                                  |                         |                                                         
|Issuance cost setoff against accounts payable     |                         |                                                         
|                                                  |                         |                                                         

---

|* |  | Incorporation
date, see Note 1a.
|- |  | --------------------------------

|** |  | Represents
an amount less than $1.
|-- |  | ----------------------------------

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

| | F-7 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES

| | a. |  | Operation
| | -- |  | ---------

| | On
December 31, 2006, Protalix BioTherapeutics, Inc. (formerly Orthodontix, Inc.)
(hereinafter,                 the Company) consummated the acquisition of
Protalix Ltd., a privately-held Israeli                 biotechnology company
incorporated on December 27, 2003, by the merger (the Merger) of its
                wholly owned subsidiary, Protalix Acquisition Co., Ltd., with Protalix
Ltd. (the Subsidiary).                 As a result, Protalix Ltd. is now the
Companys wholly-owned subsidiary, with the former                 shareholders of
Protalix Ltd. acquiring in excess of 99% of the Companys outstanding shares of
                common stock, par value $.001 per share (the Common Stock).
 For accounting purposes, the                 Merger was accounted for as a
recapitalization of Protalix Ltd.  Accordingly, the historical                 financial
statements of the Company reflect the historical operations and financial statements of
                Protalix Ltd. before the Merger.  See Note 6 for more detailed discussion
of the Merger.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
share and per share data provided in these Notes to the financial statements has been
                retroactively restated to reflect the conversion ratio related to the
exchange of shares in the                 Merger (and giving effect to the one-for-ten
reverse stock split), unless otherwise stated                 herein.  All convertible
preferred share data is provided on a pre-exchange basis as all of the
                preferred shares were converted prior to the Merger.  See Note 6c.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
its inception, Protalix Ltd. has been engaged in the biotechnology field.  More recently,
                Protalix Ltd. has been engaged in the research and development of
plant-derived human proteins,                 with its main product under development,
prGCD, being a plant-derived protein being developed as                 a treatment for
Gaucher Disease.  The Company has completed a Phase I clinical trial on prGCD, is
                exempt from Phase II, and expects to initiate a pivotal Phase III
clinical trial in 2007.  The                 Companys business is located in
Carmiel, Israel.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the period from 2003 to 2005, Protalix Ltd. was a party to a research and development
                services contract with a pharmaceutical company pursuant to which the
Company agreed to provide                 certain research and development services.  The
Company earned total revenues of $830 throughout                 the duration of the
contract in consideration for the performance of such services.  The contract
                expired in the first quarter of 2005, and since that time, The Company
has not focused efforts on                 providing any further research and development
services for third parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has been in the development stage since inception.  Successful completion of the
                Companys development program and its transition to normal
operations is dependent upon obtaining                 necessary regulatory approvals
from the United States Food and Drug Administration (FDA) prior
                to selling its products within the United States, and foreign regulatory
approvals must be                 obtained to sell its products internationally.  There
can be no assurance that the Companys                 products will receive
regulatory approvals, and a substantial amount of time may pass before the
                Company achieves a level of sales adequate to support the Company
operations, if at all. The                 Company will also incur substantial
expenditures in connection with the regulatory approval                 process and it
will need to raise additional capital during the developmental period.  Obtaining
                marketing approval will be directly dependent on the Companys
ability to implement the necessary                 regulatory steps required to obtain
marketing approval in the United States and other countries                 and the
success of the Companys clinical trials.  The Company cannot predict the outcome of
                these activities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-8 | 
| | --- | 

---



PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES(Continued):

| | The
Company currently does not have sufficient resources to complete the commercialization of
any                 of its proposed products. Based on its current cash resources and
commitments, the Company                 believes it should be able to maintain its
current planned development activities and the                 corresponding level of
expenditures for at least the next 18 months, although no assurance can be
                given that it will not need additional cash prior to such time.
Unexpected increases in general                 and administrative expenses and research
and development expenses may cause the Company to need                 additional
financing during the next 18 months.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Basis
of presentation
| | -- |  | ---------------------

| | The
Companys financial statements have been prepared in accordance with generally
accepted                 accounting principles in the United States (U.S. GAAP)
and Statement of Financial Accounting                 Standards (SFAS) No. 7,
Accounting and Reporting by Development Stage Enterprises.  The
                preparation of financial statements in conformity with U.S. GAAP requires
management to make                 estimates and assumptions that affect the reported
amounts of assets and liabilities, the                 disclosure 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consolidated financial statements and these Notes to the consolidated financial
statements                 are expressed in U.S. dollars ($ or dollar),
in thousands, except for the shares and per                 share amounts.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Functional
currency
| | -- |  | -------------------

| | The
currency of the primary economic environment in which the operations of the Company are
                conducted is the dollar. The Company is currently in the development
stage with no significant                 source of revenues; therefore, the Company
considered the currency of the primary economic                 environment to be the
currency in which the Company expends cash.  Most of the Companys expenses
                and capital expenditures are incurred in dollars, and a significant
source of the Companys                 financing has been provided in dollars.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the dollar is the functional currency, monetary items maintained in currencies other than
                the dollar are remeasured using the rate of exchange in effect at the
balance sheets dates and                 non-monetary items are remeasured at historical
exchange rates.  Revenue and expense items are                 recorded at the rate of
exchange in effect at the time the expense is incurred.  Foreign currency
                translation gains or losses are recognized in the statement of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. |  | Cash
equivalents
| | -- |  | ----------------

| | The
Company considers all short-term, highly liquid investments, which include short-term
                deposits with original maturities of three months or less from the date
of purchase, that are not                 restricted as to withdrawal or use and are
readily convertible to known amounts of cash, to be                 cash equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. |  | Property
and equipment
| | -- |  | ----------------------

| | 1) |  | Property
and equipment are stated at cost, net of accumulated depreciation and amortization.
| | -- |  | --------------------------------------------------------------------------------------------

| | F-9 | 
| | --- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES(Continued):

| | 2) |  | The
Companys assets are depreciated by the straight-line method on the basis of their
estimated                 useful lives at the following annual rates:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | %   
|-------------------- | ----
|Laboratory equipment | 20  
|Furniture            | 7-10
|Computer equipment   | 33  

| | Leasehold
improvements are amortized by the straight-line method over the lease term, which is
                generally shorter than the estimated useful life of the improvements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. |  | Impairment
of Long-Lived Assets
| | -- |  | -------------------------------

| | SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144),                 requires that long-lived assets, including definite life
intangible assets to be held and used or                 disposed of by an entity, be
reviewed for impairment whenever events or changes in circumstances
                indicate that the carrying amount of the assets may not be recoverable.
Under SFAS 144, if the                 sum of the expected future cash flows
(undiscounted and without interest charges) of the                 long-lived assets is
less than the carrying amount, the Company must recognize an impairment loss
                and write down the assets to their estimated fair values. See also Note 2c.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. |  | Deferred
income taxes
| | -- |  | ---------------------

| | Deferred
taxes are determined utilizing the assets and liabilities method based on the estimated
                future tax effects of differences between the financial accounting and
tax bases of assets and                 liabilities under the applicable tax laws.
Deferred tax balances are computed using the tax rates                 expected to be in
effect when those differences reverse. A valuation allowance in respect of
                deferred tax assets is provided if, based upon the weight of available
evidence, it is more                 likely than not that some or all of the deferred tax
assets will not be realized. The Company has                 provided a full valuation
allowance with respect to its deferred tax assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Paragraph
9(f) of SFAS 109, Accounting for Income Taxes, prohibits the recognition of
deferred                 tax liabilities or assets that arise from differences between
the financial reporting and tax                 bases of assets and liabilities that are
measured from the local currency into dollars using                 historical exchange
rates, and that result from changes in exchange rates or indexing for tax
                purposes.  Consequently, the abovementioned differences with respect to
Protalix Ltd. were not                 reflected in the computation of deferred tax
assets and liabilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. |  | Revenue
Recognition
| | -- |  | -------------------

| | Revenue
generated from research and development services is recognized upon performance of such
                services and when persuasive evidence of an arrangement exists, the price
is fixed or                 determinable, and collection is reasonably assured.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from the performance milestone payments in connection with research and development
                agreements is recognized upon achievement of the milestones as specified
in the agreement,                 provided payment is proportionate to the effort
expended as measured by the ratio of costs                 expended to the total
estimated development costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-10 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES(Continued):

| | i. |  | Research
and development costs
| | -- |  | ------------------------------

| | Research
and development costs are expensed as incurred and consist primarily of personnel,
                facilities, equipment, and supplies for research and development
activities. Grants received from                 the Office of the Chief Scientist of the
Ministry of Industry and Trade of Israel (the OCS) and                 other
research foundations are recognized when the grant becomes receivable, provided there is
                reasonable assurance that the Company will comply with the conditions
attached to the grant and                 there is reasonable assurance the grant will be
received.  The grant is deducted from the related                 research and
development expenses as the costs are incurred.  See also Note 5(a).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with purchases of assets, amounts assigned to intangible assets to be used in
a                 particular research and development project that has not reached
technological feasibility and                 has no alternative future use, are charged
to in-process research and development costs at the                 purchase date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. |  | Comprehensive loss
| | -- |  | ------------------

| | The
Company has no other comprehensive loss components other than net loss for the reported
                periods.
| | --------------------------------------------------------------------------------------------------------------------

| | k. |  | Concentration of credit risks
| | -- |  | -----------------------------

| | Financial
instruments that subject the Company to credit risk consist primarily of cash and cash
                equivalents and deposit, which are deposited in major financial
institutions primarily in Israel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. |  | Share-based
compensation
| | -- |  | ------------------------

| | Prior
to January 1, 2006, the Company accounted for employee share-based compensation under the
                intrinsic value model in accordance with Accounting Principles Board
Opinion No. 25, Accounting                 for Stock Issued to Employees (APB
25) and related interpretations. Under APB 25, compensation                 expense
is based on the difference, if any, on the date of the grant of a stock option, between
                the fair value of the shares underlying the option and the exercise price
of the option.  In                 addition, in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS                 123), which was
issued by the Financial Accounting Standards Board (FASB), the Company
                disclosed pro forma data assuming it had accounted for employee share
option grants using the                 fair value-based method defined in SFAS 123.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company adopted SFAS No. 123 (Revised 2004), Shared-Based Payment (SFAS
123R) as of                 January 1, 2006, using the modified prospective
application transition method, as permitted by                 SFAS 123R. Under such
transition method, the Companys financial statements for periods prior to
                the effective date of SFAS 123R have not been restated. Under this
transition method, stock-based                 compensation expense for the first quarter
of 2006 includes compensation expense for all                 share-based compensation
awards granted prior to, but not yet vested as of, December 31, 2005,
                based on the grant date fair value estimated in accordance with the
original provisions of SFAS                 123.  Share based compensation for all
share-based awards granted after December 31, 2005 are                 based on the grant
date fair value estimated in accordance with SFAS 123R.  The Company
                recognizes compensation costs on an accelerated basis over the requisite
service period of the                 grant which is generally the option vesting term of
four years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-11 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES (Continued):

| | SFAS
123R requires forfeitures to be estimated at the time of grant and be revised, if
necessary,                 in subsequent periods if actual forfeitures differ from
initial estimates.  Share-based                 compensation expense was recorded net of
estimated forfeitures for the year ended December 31,                 2006, such that
expense was recorded only for those share-based awards that were expected to
                vest.  Under APB 25, to the extent awards were forfeited prior to
vesting, the corresponding                 previously recognized expense was reversed in
the period of forfeiture.  Upon adoption of SFAS                 123R, for the year ended
December 31, 2006, the Company recorded a cumulative adjustment to
                account for the expected forfeitures of stock-based awards granted prior
to January 1, 2006, for                 which the Company previously recorded an expense.
The adoption of SFAS 123R resulted in a                 cumulative benefit from
accounting change in the amount of $37 for the year ended December 31,
                2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of stock options granted  was determined using the Black-Scholes
options-pricing                 model, which is consistent with the valuation techniques
previously utilized by the Company for                 options in footnote disclosures
required under SFAS 123, as amended by SFAS No. 148, Accounting                 for
Stock-Based Compensation - Transition and Disclosure. Such value is recognized as
an expense                 over the service period, net of estimated forfeitures, using
the graded vesting method under SFAS                 123R.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the pro forma effect on net loss and net loss per share of
Common                 Stock assuming the Company had applied the fair value recognition
provisions of SFAS 123R to its                 share-based employee compensation:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           | Year ended December 31, | Period from
December 27,
1993
through
December 31,
2006
|------------------------------------------ | ----------------------- | -------------------------------------------------------
|
|
|Net loss as reported                       |                         | ($ 2,421                                               
|Add: share-based employee                  |                         |                                                        
|compensation expense included in the       |                         |                                                        
|reported net loss using the intrinsic      |                         |                                                        
|value method outlined in APB 25            |                         | 149                                                    
|Deduct: share-based employee compensation  |                        
|expense determined under fair value method |                         | (170                                                   
|                                           |                         |                                                        
|Pro forma net loss                         |                         | ($ 2,442                                               
|                                           |                         |                                                        
|Net loss per share of Common Stock:        |                        
|Basic   as reported                       |                         | ($0.13                                                 
|Basic  pro forma                          |                         | ($0.13                                                 
|Diluted  as reported                      |                         | ($0.13                                                 
|Diluted  pro forma                        |                         | ($0.13                                                 

| | When
stock options are granted as consideration for services provided by consultants and other
non-employees, the transaction is accounted for based on the fair value of the
consideration received or the fair value of the stock options issued, whichever is more
reliably measurable, pursuant to the
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-12 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES(Continued):

| | guidance
in Emerging Issues Task Force (EITF) 96-18, Accounting for Equity
Instruments That                 Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or                 Services. The fair value of the
options granted is recalculated over the related service period                 and is
recognized over the respective service period using the straight-line method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. |  | Net
Loss per share (LPS)
| | -- |  | --------------------------

| | Basic
and diluted LPS is computed by dividing net loss by the weighted average number of shares
                of Common Stock outstanding for each period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Convertible
preferred shares were not taken into account in the computation of the LPS since the
                holders of the convertible preferred shares did not have a contractual
obligation to share the                 losses of the Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Convertible
preferred shares, options, and warrants were not included in the computation of
                diluted LPS because the effect would be anti-dilutive.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total weighted average (on pre-exchange basis) number of shares of Common Stock related
to                 the convertible preferred shares has been excluded from the
calculations of diluted loss per                 share were 209,214, 338,045 and 278,805
for the years 2004, 2005, and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
diluted loss per share does also not include options and warrants of the Company in the
                amount of 4,648,978, 9,383,978, and 14,403,386 for the years 2004, 2005,
and 2006, respectively                 (of which 39,225, 3,846,068, and 9,957,800,
respectively, are included on a post exchange basis).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | n. |  | Newly
issued and recently adopted Accounting Pronouncements
| | -- |  | -----------------------------------------------------------

| | 1) |  | In
June 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting
for                       Uncertainty in Income Taxes (FIN 48), an
interpretation of SFAS 109, Accounting For                       Income Taxes.  FIN
48 prescribes a comprehensive model for recognizing, measuring,
                      presenting, and disclosing in the financial statements tax
positions taken or expected to be                       taken on a tax return, including
a decision whether to file or not to file in a particular
                      jurisdiction. FIN 48 is effective for fiscal years beginning after
December 15, 2006                       (January 1, 2007 for the Company). If there are
changes in net assets as a result of the                       application of FIN 48,
such changes will be accounted for as an adjustment to retained
                      earnings.  The Company believes that the application of FIN 48 will
not have a material                       adverse effect on its financial position and
results of operations.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) |  | In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
157).                       SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance                       with generally accepted
accounting principles, and expands disclosures about fair value
                      measurements. The provisions of SFAS 157 are effective for the
fiscal year beginning after                       September 1, 2008. The Company is
currently evaluating the impact of the provisions of SFAS                       157 on
its financial position and results of operations.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) |  | In
September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
                      No. 108, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements                       in Current Year Financial Statements (SAB
108), which provides interpretive guidance on                       the
consideration of the effects of prior year misstatements in
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-13 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 1 - SIGNIFICANT
ACCOUNTING POLICIES (Continued):

| | quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108
                      is effective for fiscal years ending after November 15, 2006.  The
Company adopted SAB 108                       in these financial statements and
accordingly, follows the SAB 108 requirements when                       quantifying
financial statement misstatements.  The adoption of SAB 108 did not result in
                      any correction of the Companys financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) |  | On
February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial                       Assets and Financial Liabilities (SFAS 159).
 Under SFAS 159, the Company may elect to                       report financial
instruments and certain other items at fair value on a contract-by-contract
                      basis with changes in value reported in earnings. This election is
irrevocable. SFAS 159                       provides an opportunity to mitigate
volatility in reported earnings that is caused by                       measuring hedged
assets and liabilities that were previously required to use a different
                      accounting method than the related hedging contracts when the
complex provisions of SFAS 133                       hedge accounting are not met.  SFAS
159 is effective for years beginning after November 15,                       2007. Early
adoption within 120 days of the beginning of a companys 2007 fiscal year is
                      permissible, provided the company has not yet issued interim
financial statements for 2007                       and has adopted SFAS 157. The Company
does not intend to adopt SFAS 159 early, and the                       Company is
currently evaluating the impact of adopting SFAS 159 on its financial position,
                      cash flows, and results of operations.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. |  | Reclassifications
| | -- |  | -----------------

| | Certain
figures in respect of prior years have been reclassified to conform with the current year
                presentation.
| | -------------------------------------------------------------------------------------------------------------------------------

NOTE 2  PROPERTY
AND EQUIPMENT

| | a. |  | Composition
of property and equipment grouped by major classifications, and changes, is as
                follows:
| | -- |  | -------------------------------------------------------------------------------------------------------------------

|                                 | December 31,
|-------------------------------- | ------------
|
|Laboratory equipment             |             
|Furniture and computer equipment |             
|Leasehold improvements           |             
|Equipment under construction     |             
|                                 |             
|                                 |             
|Less  accumulated depreciation  |             
|and amortization                 |             
|                                 |             
|                                 |             
|                                 |             

| | b. |  | Depreciation
and amortization in respect of property and equipment totaled $123, $311, and
                $435 for the years ended December 31, 2004, 2005, and 2006, respectively.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-14 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 2  PROPERTY AND EQUIPMENT (Continued):

| | c. |  | During
2006, the Company tested the carrying value of certain long lived assets as the Company
                decided to dispose of such assets.  As a result, the Company recorded a
total impairment of                 $67, which is included among research and development
expenses.  See also Note 8c.  The long                 lived assets which were impaired
were mainly laboratory equipment.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 3  LOANS

| | a. |  | Debenture
| | -- |  | ---------

| | In
connection with a research and development services contract entered into with a third
party,                 as discussed in Note 1a, the Company issued a debenture to the
same third party with a face                 amount equal to $1,000. The debenture bore
interest at the annual rate equal to EURIBOR plus                 0.75%, and matured on
March 31, 2004.  In the event of default upon the maturity of the loan, the
                debenture was convertible into 127,690 convertible preferred A shares of
the Company.  However,                 the debenture was not convertible at the third
partys option at any time prior to an event of                 default.  The
maturity date of the debenture was March 31, 2004, which was subsequently extended
                to December 31, 2004, and later to January 2006. In December 2005, the
Company paid the loan in                 full.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Bridge
loan
| | -- |  | -----------

| | In
2004, the Company signed a convertible bridge loan agreement with a shareholder of the
                Company, with a principal amount of $800. The loan bore interest at an
annual rate equal to                 LIBOR plus 1%. The loan was convertible into
convertible preferred A shares of the Company                 until December 31, 2004 at
the same terms and conditions of the first investment transaction by                 new
investors after the date of the loan. In the event that the Company. did not close any
new                 investment transaction prior to December 31, 2004, the convertible
bridge loan was convertible                 into convertible preferred A shares upon
terms and conditions that were to be settled on that                 date. In October
2004, the Company entered into a share purchase agreement with new investors
                and the convertible bridge loan was converted into convertible preferred
B shares of the                 Company.  See Note 6N.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 4  LIABILITY
FOR EMPLOYEE RIGHTS UPON RETIREMENT

| | Protalix
Ltd. is required to make a severance payment upon dismissal of an employee or upon
                termination of employment in certain other circumstances.  The Companys
severance pay liability                 to its employees is mainly based upon length of
service and the latest monthly salary (one                 months salary for each
year worked) is reflected by a balance sheet accrual under Liability for
                employee rights upon retirement. The liability is recorded as if it
were payable at each balance                 sheet date on an undiscounted basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liability is funded in part by the purchase of insurance policies or pension funds and by
                deposit of funds in dedicated deposits. The amounts funded are included
in the balance sheets                 under Funds in respect of employee rights
upon retirement. The policies are the Companys                 assets.
 However, under labor agreements and subject to certain limitations, the policies may be
                transferred to the ownership of the individual employees for whose
benefit the funds were                 deposited.  In the years 2004, 2005, and 2006, the
Company deposited with the insurance companies                 $48, $83, and $108,
respectively, in connection with its severance obligations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-15 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 4  LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT (Continued):

| | In
accordance with  the Companys current employment agreements with certain employees,
the Company                 makes regular deposits with the insurance companies for
accounts controlled by the individual                 employees in order to secure the
employees rights upon retirement.  The Company is fully                 relieved
from any severance pay liability with respect to such employees after it makes the
                payments on behalf of each such employee.  The liability accrued in
respect of these employees and                 the amounts funded, as of the respective
agreement dates, are not reflected in the balance                 sheets, since the
amounts funded are not under the control and management of the Company and the
                pension and severance pay risks have been irrevocably transferred to
the insurance companies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for the severance pay liability as contemplated by EITF 88-1 Determination
                of Vested Benefit Obligation for a Defined Benefit Pension Plan and,
accordingly, records the                 obligation on an undiscounted basis as if it was
payable at each balance sheet date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts of severance pay expenses were $72, $104, and $189 for the years ended December
31,                 2004, 2005, and 2006, respectively, of which $0, $0, and $19 in 2004,
2005, and 2006,                 respectively, were in respect of the insurance policies
that were expensed but not reflected in                 the balance sheet as assets as
described above.  Loss (gain) on employee severance pay funds in                 respect
of employee severance obligations totaled $2, $(4), and $(7) for the years ended December
                31, 2004, 2005, and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects to contribute approximately $182 in 2007 to the insurance companies, in
                connection with its severance liabilities for its 2007 operations.  Of
such contribution, the                 Company expects to deposit $73 in accounts owned
by the beneficiary employees thereby relieving                 the Company from any
further severance liabilities with respect to such employees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the 10-year period following December 31, 2006, the Company expects to pay future
benefits                 to two employees upon their normal retirement age, which is
anticipated to amount to $44 and $20                 during the years 2010 and 2012,
respectively. These amounts were determined based on each such                 employees
current salary rates and the number of service years that will be accumulated upon the
                retirement date of each such employee.  This expectation does not include
additional amounts that                 might be paid to employees that will cease
working for the Company before their normal retirement                 age.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 5  COMMITMENTS

| | a. |  | Royalty
commitments
| | -- |  | -------------------

| | 1) |  | The
Company is obligated to pay royalties to the OCS on proceeds from the sale of products
                      developed from research and development activities that the OCS
partially funded by way of                       grants.  At the time the grants were
received, successful development of the related                       projects was not
assured.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the case of failure of a project that was partly financed as described above, the
                      Company is not obligated to pay any such royalties or repay funding
from the OCS.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the funding arrangements with the OCS, royalties of 3% to 6% are payable
                      on the sale of products developed from projects funded by the OCS,
which payments shall not                       exceed, in the aggregate, 100% of the
amount of the grant received (dollar linked), since                       January 1,
2001, with the addition of an annual interest rate based on LIBOR.  In addition,
                      if the Company receives approval to manufacture the products
developed with government
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-16 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 5  COMMITMENTS(Continued):

| | grants
outside of Israel, it will be required to pay an increased total amount of royalties
                      (possibly up to 300% of the grant amounts plus interest), depending
on the manufacturing                       volume that is performed outside of Israel, as
well as a possible increased royalty rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2006, the maximum royalty amount payable by the Company under these funding
                      arrangements is approximately $4,200 (without interest, assuming
100% of the funds are                       payable).  However, as of December 31, 2006,
no royalty payments are accrued as the Company                       has not earned any
revenues from the sale of products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) |  | The
Company is obligated under several research and license agreements to pay royalties at
                      variable rates from its future revenues and obligated to pay fees
under certain milestone                       agreements.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | The
Company has entered into sub-contracting agreements with several clinical and
pre-clinical                 service providers, both in Israel and in the United States
in connection with its primary product                 development process. As of
December 31, 2006, total liabilities under said agreements amount to
                approximately $1,443. See Note 10c for information regarding a new
service agreement which the                 Company entered into after December 31, 2006.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | The
Company is a party to operating lease agreement for its facilities, effective until 2010.
The                 Company has the option to extend the agreement for another five-year
period. Under this lease,                 the monthly rental payment is approximately $9.
 The monthly rental payment in the option period                 is approximately $9.
 During 2006, the Company provided a bank guarantee, in an amount equal to
                six months rent, to secure the fulfillment of its obligations under the
lease agreement.  See                 also Note 8N. The future minimum lease payments
required in each of the next five years under the                 operating lease for
such premises are as follows: 2007 - $107, 2008 - $107, 2009 - $107, and 2010
                - $38.  Lease expenses totaled $103, $101, and $109 for the years ended
December 31, 2004, 2005,                 and 2006, respectively.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. |  | In
July 2004, the Company entered into three-year lease and maintenance agreements for
vehicles.                 The monthly lease fees aggregate approximately $9. The expected
lease payments for 2007, 2008, and                 2009 are $105, $102, and $30,
respectively.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. |  | In
March 2005, the Company entered into an agreement with a consultant pursuant to which
Protalix                 Ltd. pays the consultant a monthly consulting fee of $10, which
will be increased to $20 upon the                 initiation of a Phase III clinical
trial of the Companys lead product candidate, prGCD. To date,                 the
Company has completed Phase I clinical trial of prGCD. The term of the agreement ends
nine                 months after the consummation of the study.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. |  | On
September 14, 2006, the company entered into a collaboration and licensing agreement with
Teva                 Pharmaceutical Industries Ltd. (Teva) for the
development and manufacturing of two proteins                 using its plant cell
system.  Mr. Hurvitz, the Chairman of the Companys Board of Directors, is
                the Chairman of Tevas Board of Directors, and Dr. Phillip Frost
M.D., one of the Companys                 directors, is the Vice Chairman of Tevas
Board of Directors.  Pursuant to the agreement, the                 company will
collaborate on the research and development of two proteins utilizing its plant cell
                expression system.  Protalix Ltd. has granted to Teva an exclusive
license to commercialize the                 developed products in return for royalty and
milestone payments payable upon the achievement of                 certain pre-defined
goals.  The company will retain certain exclusive manufacturing rights with
                respect to the active pharmaceutical ingredient of the proteins following
the first commercial                 sale of a licensed product under the agreement and
other rights thereafter.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-17 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL:

| | On
August 21,  2006,  the Company and its  wholly-owned  subsidiary,  Protalix  Acquisition
 Co.,  Ltd.,            entered into a Merger  Agreement and Plan of  Reorganization
 with  Protalix  Ltd.  which was amended on            October  31,  2006,  and  November
 28,  2006.  In  accordance  with the  Merger  Agreement,  all of the
           outstanding  shares of Protalix Ltd., a privately-held  Israeli  biotechnology
 company,  were exchanged            for shares of Common Stock.  As a result,  Protalix
Ltd. is now the Companys  wholly-owned  subsidiary,            with the former
 shareholders of Protalix Ltd.  acquiring in excess of 99% of the Companys
 outstanding            shares of Common Stock. All
figures in this Note 6 are in U.S. dollars except share and per share amounts.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the closing of the Merger, the former shareholders of Protalix Ltd. (except the investors
           referenced in Note 6i) received shares of Common Stock in exchange for all of
their shares of Protalix            Ltd. in a proportion equal to approximately 61 shares
of Common Stock for each ordinary share of            Protalix Ltd.  Immediately prior to
the consummation of the Merger, the Company effected a 1-for-10            reverse split
of the Common Stock.  As a result, at the closing of the Merger, the Company issued an
           aggregate of 61,198,679 shares of Common Stock to the former shareholders of
Protalix Ltd., 12,243,130            of which, or approximately 15.82% of the outstanding
shares of Common Stock on a fully diluted basis            at the closing of the Merger,
were issued to a trust controlled by Dr. Frost, Glenn L. Halpryn, a            former
director of the Company, and certain other recent investors in Protalix Ltd.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Merger Agreement, all of the outstanding options and warrants of Protalix Ltd. at
the            Closing Date (except the warrants granted to the investors referenced in
Note 6i) were exchanged for            options and warrants of the Company. In the
aggregate, options and warrants to purchase 9,004,000            shares of Common Stock
were assumed by the Company. The exercise prices of such options and warrants
           have been adjusted to reflect such exchange.  The exchange of the outstanding
options to employees and            service providers has been treated as a modification
of award. Modifications to the terms of an award            are treated as an exchange of
the original award for a new award, and result in the incurrence of            additional
compensation costs for that incremental value. The incremental value is measured by the
           difference between (a) the fair value of the modified option and (b) the value
of the old option            immediately before its terms are modified. The modification
had no effect on the accounting records of            the Company.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
accounting purposes, the Merger was treated as a recapitalization of the Company (except
with            respect to the warrants granted to the investors referenced in Note 6i).
 Accordingly, the historical            financial statements of the Company reflect the
historical financial statements of Protalix Ltd.  All            share and per share data
set forth in this Note 6 has been retroactively restated to reflect the
           implicit conversion ratio related to the exchange of ordinary shares of
Protalix Ltd. for shares of            Common Stock in the Merger.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-18 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL(Continued):

| | To determine the fair value of the
options granted to consultants and non-employees, the Company reviewed all transactions
involving the sale of shares of Protalix Ltd. during the last half of 2006 that were
negotiated on an arms length basis between independent and willing buyers and sellers,
which the Company believes is a reliable indicator of fair value.  The Company determined
that the relevant share transaction was the Merger itself, which was effected pursuant to
a Merger Agreement executed in August 2006 and negotiated on an arms length basis with
the Companys then existing management.  Concurrent with the execution of the Merger
Agreement, certain investors, none of which were shareholders of Protalix Ltd. and one of
which was the controlling shareholder of our company at that time, negotiated, on an arms
length basis, with Protalix Ltd. to purchase ordinary shares of Protalix Ltd. for
$15,000,000 in cash.  See Note 6i.  The terms of the share purchase agreement provided
the investors with the right to exchange their ordinary shares of Protalix Ltd. at an
exchange ratio that would entitle them to 15% of the outstanding share capital of the
Company, subsequent to the Merger.  In connection with this exchange, the investors would
pay an additional $123 in cash.  The proceeds from the purchase of the ordinary shares of
Protalix Ltd., when added to the net assets of the Company that existed at the date of
the closing of the Merger, which was $877, resulted in a total investment of $16,000 in
exchange for a 15% interest in the Company subsequent to the reverse Merger with Protalix
Ltd.  In both the share issuance for $15,000 and the subsequent Merger transaction, the
implied aggregate fair value of Protalix Ltd. after giving effect to the Merger was
approximately $1.50 per share.  The Company believes the per share value determined in
August is the reliable indicator of the fair value of the ordinary shares of Protalix
Ltd., as well as the Common Stock as of December 31, 2006, subsequent to the Merger,
because there were no other material transactions or developments affecting Protalix Ltd.
between August and December 2006. Therefore, based on the foregoing, the Company has
determined that the basis for determining the fair value of the Common Stock underlying
the options granted to consultants and non-employees was $1.50 per share as of December
31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | Common
Stock
| | -- |  | ------------

| | Each
share of Common Stock is entitled to one vote.  The holders of shares of Common Stock are
                also entitled to receive dividends whenever funds are legally available
and when and if declared                 by the Board of Directors. Since inception, no
dividends have been declared.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Preferred
Shares
| | -- |  | ----------------

| | The
preferred shares were authorized in the Companys Restated Articles of Incorporation
on April                 16, 1998.  The rights and privileges of the preferred stock may
be established by the Board of                 Directors.  The directors have not
designated any class of preferred stock and no shares of                 preferred stock
have ever issued.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Convertible
Preferred Shares
| | -- |  | ----------------------------

| | The
convertible preferred shares were issued by Protalix Ltd. and conferred the following
rights                 upon their holders:
| | ------------------------------------------------------------------------------------------------------------------------------------

| | 1) |  | The
holders of the convertible preferred shares have the right to convert the convertible
                      preferred shares into Common Stock on a 1:1 basis.  The conversion
price for the preferred                       C shares is $85, which approximated fair
value at the date of issuance and is subject to                       adjustment.  The
conversion price for the preferred C shares was subject to adjustment.  In
                      certain events, if Protalix Ltd. issued shares at a price per share
less than the                       conversion price established per share of the
convertible preferred stock, the conversion                       price would be reduced
accordingly.  In any event, the conversion ratio will not be reduced
                      below the par value of the shares, NIS 0.01.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-19 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL(Continued):

| | 2) |  | The
holders of convertible preferred shares are entitled to one vote per share in
                      shareholders meetings.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------

| | 3) |  | In
the event of any liquidation of Protalix Ltd. or in the event of a deemed liquidation
                      (as defined in the applicable share purchase agreement), all assets
and/or surplus funds of                       Protalix Ltd. legally available for
distribution to the shareholders by reason of their                       ownership of
shares would have been distributed among the shareholders in accordance with
                      the terms and conditions set forth in Protalix Ltd.s articles
of association.  In such                       event, the convertible preferred
shareholders are entitled to receive in preference to the                       Common
Stockholders, a return of their investment plus a 6% interest rate per annum, and
                      certain other adjustments.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) |  | The
convertible preferred shares were entitled to receive dividends, on a pro rata, pari
                      passu, as converted basis, from any assets legally
available, as and when declared by the                       Board of Directors.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 11, 2006, all of the convertible preferred shareholders converted their
                      preferred shares into Common Stock on a 1:1 basis, thereby waiving
any and all rights and                       privileges associated with the convertible
preferred shares.  In addition, as of that date,                       all outstanding
warrants and options to purchase convertible preferred shares of Protalix
                      Ltd. are exercisable or convertible into shares of Common Stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. |  | The
number of shares, options and warrants as of December 31, 2005 and 2006 is comprised as
                follows:
| | -- |  | --------------------------------------------------------------------------------------------------------------------

|                                                    | Number of shares | Number of warrants and
options
|--------------------------------------------------- | ---------------- | ------------------------------
|
|
|
|Common Stock, $0.001 par value                      | 100,000,000      | 150,000,000                   
|                                                    |                  |                               
|Total Common Stock, $0.001 par value*               | 100,000,000      | 150,000,000                   
|                                                    |                  |                               
|Preferred shares of $0.0001 par value (see b above) | 100,000,000      | 100,000,000                   
|                                                    |                  |                               
|Total Preferred stock of $0.0001 par value*         | 100,000,000      | 100,000,000                   
|                                                    |                  |                               
|Preferred A shares of NIS 0.01 par value**          | 190,486          |                               
|Preferred B shares of NIS 0.01 par value **         | 183,046          |                               
|Preferred C shares of NIS 0.01 par value**          | 400,000          |                               
|                                                    |                  |                               
|Total Preferred shares NIS 0.01 par value**         | 773,532          |                               
|                                                    |                  |                               

---

|* |  | The
number of authorized Common Stock and Preferred Stock are the authorized stock of the
Company.
|- |  | --------------------------------------------------------------------------------------------------

|** |  | The
number of authorized Preferred Shares are the authorized shares of the Subsidiary on a
pre-exchange basis.
|-- |  | --------------------------------------------------------------------------------------------------------------

| | e. |  | In
October 2004, the Company entered into a share purchase agreement with certain
shareholders of                 the Company and other third parties pursuant to which the
investors purchased 100,523 convertible                 preferred B shares of the Company
for total consideration of $3,300 (net of issuance costs of                 $216).
 Pursuant to the agreement, the investors paid $2,700 in exchange for convertible
preferred                 B shares of the Company. In addition, a convertible bridge loan
in the amount of $800 from a                 shareholder of the Company was converted
into convertible preferred B shares under the same terms                 and conditions
as the other investors.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-20 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL(Continued):

| | f. |  | In
February 2005, the Company entered into a share purchase agreement with an investor
pursuant                 to which the investor purchased 16,954 convertible preferred B
shares of the Company for                 consideration of $900 (net of issuance costs of
$71). In addition to the convertible preferred B                 shares, the Company also
granted to the investor fully detachable warrants, which vested
                immediately and were exercisable for a 24 month-period. The warrants
entitled the investor to                 purchase an additional 13,563 convertible
preferred B shares at a purchase price per share of                 $95.85.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the warrants using a Black-Scholes option-pricing
model                 to be $82.85. The fair value of the warrants was based on the
following assumptions: dividend                 yield of 0% for all years; expected
volatility of 48%; risk-free interest rates of 3.4%; and                 expected life of
two years. For accounting purposes, the proceeds from the sale of the
                convertible preferred B shares were allocated to the convertible
preferred B shares and the                 warrants on a pro rata basis, based on the
relative fair values of the convertible preferred B                 shares and the
warrants.  The portion of the proceeds allocated to the warrants has been
                reflected as warrants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
convertible preferred B shares and warrants were converted into convertible preferred C
                shares and warrants on a 1:1 basis in July 2005 in connection with a
subsequent financing in                 accordance with the terms and conditions of the
July 2005 share purchase agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. |  | In
July 2005, the Company entered into a share purchase agreement with certain shareholders
of                 the Company and other third parties, pursuant to which the investors
purchased 62,486 convertible                 preferred C shares of the Company for
consideration of $5,200 (net of issuance costs of $109).
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, each investor received warrants to purchase a number of convertible preferred C
                shares equal to up to 50% of such investors original investment
amount, with an exercise price                 of $100.76 per share (representing 26,349
warrants in the aggregate). The first warrant is                 exercisable from the
closing date until 14 business days after the date of commencement of the
                Companys Phase III clinical trial. In the event an investor
exercises more than 50% of its first                 warrant, such investor shall be
granted an option to purchase a number of convertible preferred C                 shares,
with an aggregate exercise price equal to the amount of exercise of such investors
first                 warrant, at a price of $100.76 per share. The second warrant shall
be exercisable from the date                 of the exercise of the first warrant for a
four-year period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the warrants using the Black-Scholes option-pricing
model                 to be approximately $686. The fair value of the warrants was based
on the following weighted                 average assumptions: dividend yield of 0% for
all years; expected volatility of 45%; risk-free                 interest rates of 3.6%;
and expected life of 1.75 to 2.47 years. For accounting purposes, the
                proceeds from the sale of the convertible preferred C shares were
allocated to the convertible                 preferred C shares and the warrants on a pro
rata basis, based on the relative fair values of the                 convertible
preferred C shares and the warrants.  The portion of the proceeds allocated to the
                warrants has been reflected as warrants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. |  | In
December 2005, the Company entered into a share purchase agreement with certain
shareholders                 of the Company and other third parties, pursuant to which
the investors purchased 27,778                 convertible preferred C shares of the
Company for consideration of $2,300 (net of issuance costs                 of $12).
 Pursuant to the share purchase agreement, the investors were entitled to all of the
                rights and preferences included in the July 2005 share purchase
agreement. See g above.  On the                 closing date of the transaction, the
Company granted to the investors warrants, on the same terms                 and
conditions as mentioned in f above.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the warrants using the Black-Scholes option-pricing
model                 to be approximately $279. The fair value of the warrants was based
on the following assumptions:                 dividend yield of 0% for all years;
expected volatility of 48%; risk-free interest rates of 4.4%;                 and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-21 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL(Continued):

| | expected
life of 0.48-1.97 years. For accounting purposes, the proceeds from the sale of the
                convertible preferred C shares were allocated to the convertible
preferred C shares and the                 warrants on a pro rata basis, based on the
relative fair values of the convertible preferred C                 shares and the
warrants.  The portion of the proceeds allocated to the warrants has been
                reflected as warrants.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | i. |  | In
August 2006, the Company entered into a share purchase agreement with third-party
investors,                 pursuant to which the investors purchased 10,637,686 shares of
Common Stock in the aggregate.                 Such shares, when added to the number of
outstanding shares of the Company prior to the Merger,                 represented 15% of
the outstanding capital stock of the Company, calculated on a fully-diluted
                basis, immediately after the closing of the Merger.  The investors paid
an amount in cash equal                 to $14,764 (net of issuance costs of $236) in
September 2006 and an additional $123 in December                 2006, immediately prior
to the closing of the Merger. The amounts paid by such investors, when
                added to the net assets of the Company equal to $877 as of the closing of
the Merger, were                 $16,000.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company issued to the same investors warrants to purchase additional shares
of                 Common Stock, at an exercise price of $1.37 per share. The Company
estimated the fair value of the                 warrants using the Black-Scholes
option-pricing model to be $355. The fair value of the warrants                 was based
on the following assumptions: dividend yield of 0% for all years; expected volatility
                of 37%; risk-free interest rates of 5%; and expected life of 0.25 years.
For accounting purposes,                 the proceeds from the sale of the Common Stock
were allocated to the Common Stock and warrants on                 a pro rata basis,
based on the relative fair values of the Common Stock and the warrants.  The
                portion of the proceeds allocated to the warrants has been reflected as
warrants. As of the                 closing date of the Merger, the warrants issued were
convertible into 3,875,416 shares of Common                 Stock.  See Note 10b for
information regarding the exercise of the warrants after December 31,
                2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | j. |  | Immediately
prior to the closing of the Merger, holders of outstanding warrants to acquire shares
                of Common Stock of Protalix Ltd. were exercised for 5,296,279 shares. The
total aggregate                 exercise price for such warrants was $8,670. Out of this
amount, a total cash amount of $7,577                 was held in trust for the Company
and is shown as a  deposit in the balance sheets.                 This amount
was released to the Company on January 3, 2007.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. |  | Options
to employees and consultants
| | -- |  | ------------------------------------

| | On
December 14, 2006, the Board of Directors terminated the Companys 1998 Stock Option
Plan,                 under which no stock options were outstanding at that time, and
adopted the 2006 Stock Incentive                 Plan, which was also approved by the
Companys shareholders on December 14, 2006. The terms of the                 2006
Stock Incentive Plan are similar to the terms of the August 2003 stock option plan of
                Protalix Ltd. Immediately prior to the closing of the Merger, options to
purchase 5,375,174 shares                 of Common Stock were outstanding under such
plan. Pursuant to the terms of the Merger Agreement,                 the Company assumed
all of the outstanding obligations under such plan and, accordingly, the
                Company anticipates issuing 5,375,174 shares of Common Stock upon the
exercise of such options in                 lieu of shares of Protalix Ltd. and has
reserved an additional 4,366,481 shares of Common Stock                 under the 2006
Stock Incentive Plan for future allocation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2003, the Companys Board of Directors approved a share option plan pursuant
to which up                 to 3,683,616 shares of Common Stock are available for options
to be granted to the Companys                 employees, consultants, directors,
and service providers. With regard to employees, office                 holders, and
directors of Protalix Ltd., the share option plan is subject to the terms stipulated
                by Section 102 of the Israeli Income Tax Ordinance. For non-employees,
the share option plan is                 subject to Section
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-22 | 
| | ---- | 

---

PROTALIX
BIOTHERAPEUTICS, INC.(A development stage
company)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(U.S. dollars in thousands)

NOTE 6 - SHARE CAPITAL(Continued):

| | 3(i)
of the Israeli Income Tax Ordinance.  In May 2005, the Companys Board of Directors
approved                 the allotment of an additional 3,646,113 shares of Common Stock
under the share option plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
grant of options to Israeli employees under the Companys plan is subject to the
terms                 stipulated by Section 102 and 102A of the Israeli Income Tax
Ordinance. The grant of options is                 subject to the track chosen by the
Company and pursuant to the terms thereof, the Company is not                 allowed to
claim, as an expense for tax purposes, the amounts credited to employees as a benefit,
                including amounts recorded as salary benefits in the Companys
accounts, in respect of options                 granted to employees under the plan -
with the exception of the work-income benefit component, if                 any,
determined on the grant date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, options to purchase 4,366,481 shares of Common Stock remain
available for                 grant under the 2006 Stock Incentive Plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years 2001 through 2006, the Company granted options to certain employees and
                non-employees as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------

| | 1. |  | Options
granted to employees:
| | -- |  | -----------------------------

| | a) |  | In
July 2001, the Companys Board of Directors approved the grant of options to
purchase                          244,324 shares of Common Stock to an employee, who was
also a related party of the                          Company.  The exercise price of the
options is the par value of the shares.  The options                          vested
immediately on the date of grant and expire on June 30, 2011.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The Company
estimated the fair value of the options on the date of grant using the
                         Black-Scholes option-pricing model to be approximately $42 based
on the following                          assumptions: dividend yield of 0%; expected
volatility of 50%; risk-free interest rates                          of 5%; and expected
lives of eight years.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) |  | Under
the August 2003 share option plan, options were granted as follows:
| | -- |  | -------------------------------------------------------------------------

| | 1. |  | On
December 8, 2003, the Company issued options to purchase 1,243,977 shares of
                             Common Stock to employees of the Company at an exercise
price equal to $0.12 per                              share; 610,017 of the options
vested immediately and 633,960 options vest in four                              equal
yearly tranches commencing in December 2004.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
option is exercisable over a 10-year period commencing on the vesting date.
| | --------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $389
based on the following                              weighted average assumptions:
dividend yield of 0%; expected volatility of 59%;                              risk-free
interest rates of 3.28%; and expected lives of six years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | In
June 2005, the Company issued options to purchase 860,510 and 322,081 shares of
                             Common Stock to employees, at an exercise price of $0.12 and
$0.40 per share,                              respectively. The options are each divided
into 13 batches, with the first batch                              constituting 25% of
the options and the balance of the options being divided equally
                             over the remaining 12 batches. The vesting period differs
for each employee and some                              of the batches vested on the
grant date.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-23 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | The
options are exercisable over a 10-year period commencing on the date of grant.
| | ----------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $718
and $221, respectively,                              based on the following weighted
average assumptions: dividend yield of 0% for all                              years;
expected volatility of 54%; risk-free interest rates of 3.83%; and expected
                             life of 5.7 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | In
September 2006, the Companys shareholders approved the grant of options to purchase
977,297 shares                              of Common Stock to the Chief Executive
Officer of the Company, at an exercise price                              of $0.97 per
share.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest in 16 equal installments on a quarterly basis over a four-year
                             period, commencing on June 1, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $856,
based on the following                              assumptions: dividend yield of 0%;
expected volatility of 43%; risk-free interest                              rates of
4.6%; and expected lives of 5.8 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the Company entered into an employment agreement with the Chief
                             Executive Officer.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | In
August 2006, the Company issued options to purchase 604,703 shares of Common Stock to its
employees                              with an exercise price of $0.97 per share.  The
options vest in 16 equal quarterly                              tranches over a four-year
period.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options are exercisable over a 10-year period commencing on the date of grant.
                             The Company estimated the fair value of the options on the
date of grant using the                              Black-Scholes option-pricing model
to be approximately $547, based on the following                              weighted
average assumptions: dividend yield of 0% for all years; expected volatility
                             of 45%; risk-free interest rates of 4.91%; and expected life
of six years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | In
September 2006, the Company issued to its Chief Financial Officer options to purchase
619,973 shares                              of Common Stock with an exercise price of
$0.97 per share. The options vest over a                              four-year period
and are exercisable for a seven-year period commencing on the date
                             of grant.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options, estimated using the
                             Black-Scholes option-pricing model to be approximately $560,
based on the following                              assumptions: dividend yield of 0% for
all years; expected volatility of 45%;                              risk-free interest
rates of 4.91%; and expected life of six years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. |  | The
fair value of options granted during the years 2004, 2005, and 2006 was $936, $0,
                             and $1,796, respectively.  The Company did not grant any
options to its employees                              during 2004.  The fair value of
each option granted is estimated on the date of grant                              using
the Black-Scholes option-pricing model, with the following weighted average
                             assumptions:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-24 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL (Continued):

|                         |  | 2006 |   | 2005
|------------------------ |  | ---- | - | ----
|                         |  |      |   |     
|Dividend yield           |  | 0    | % |     
|                         |  |      |   |     
|                         |  |     
|Expected volatility (*)  |  | 44   | % |     
|                         |  |      |   |     
|Risk-free interest rate  |  | 4.77 | % |     
|                         |  |      |   |     
|Expected life  in years |  | 5.9  |   |     
|                         |  |      |   |     

|(*) |  | Based
on the historical volatility
|--- |  | ----------------------------------

| | The
total unrecognized compensation cost of employee stock options at December 31,
                             2006 is $1,425 (net of forfeiture rate), and it is expected
to be recognized over a                              weighted average period of three
years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total cash received from employees as a result of employee stock option exercises
                             for the years ended December 31, 2004, 2005, and 2006 was
$0, $0, and $23,                              respectively. In connection with these
exercises, no tax benefits were realized by                              the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | Options
granted to consultants, directors, and other service providers:
| | -- |  | -----------------------------------------------------------------------

| | a) |  | In
June 2000, the Companys Board of Directors approved the grant of options to
purchase                          349,017 shares of Common Stock to a consultant in
return for consulting services                          provided. The exercise price is
the par value of the shares. In accordance with the                          option
agreement as amended, the options vested immediately and were exercisable from the
                         grant date until the end of 2005.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                         Black-Scholes option-pricing model to be approximately $35,
based on the following                          assumptions: dividend yield of 0%;
expected volatility of 50%; risk-free interest rates                          of 7%; and
expected lives of four years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2005, the Companys Board of Directors modified the terms of the options by
                         extending the life of the options, until the earlier of an IPO
or the end of 2008. At the                          date of modification, all of the
options were fully vested.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Modifications
to the terms of an award are treated as an exchange of the original award
                         for a new award, and result in the incurrence of additional
compensation cost for that                          incremental value. The incremental
value is measured by the difference between (a) the                          fair value
of the modified option and (b) the value of the old option immediately before
                         its terms are modified. The modification had no effect on the
accounting records of the                          Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b) |  | In
January 1999, the Companys Board of Directors approved the grant of options to
                         purchase 384,811 shares of Common Stock to the former chairman
of the Board of Directors                          with an exercise price of $0.10 per
share.  The options are fully vested and exercisable                          in three
equal parts at the end of 2006, 2007, and 2008.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-25 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | The
Company estimated the fair value of the options on the date of grant using a
                         Black-Scholes option-pricing model to be approximately $27 based
on the following                          assumptions: dividend yield of 0%; expected
volatility of 50%; risk-free interest rates                          of 3.5%; and
expected lives of six years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Companys Board of Directors modified the terms of the options by
                         extending the life of the options, until the earlier of an IPO
or the end of 2008. At the                          date of modification, all of the
options were fully vested.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Modification
of the terms of an award is treated as an exchange of the original award
                         for a new award, resulting in the incurrence of additional
compensation cost for that                          incremental value. The incremental
value is measured by the difference between (a) the                          fair value
of the modified option and (b) the value of the old option immediately before
                         its terms are modified. The modification had no effect on the
accounting records of the                          Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c) |  | Under
Protalix Ltd.s share option plan, options were granted as follows:
| | -- |  | -------------------------------------------------------------------------

| | 1. |  | In
November 2001, options to purchase 837,727 shares of Common Stock were granted to the
former chairman                              of Protalix Ltd.s Board of Directors
with an exercise price of $0.17 per share. The                              options vest
as follows:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 698,035
options vest over 24 months in equal tranches from the date of grant.
| | -----------------------------------------------------------------------------

| | 139,692
options vested according to specified performance milestones that were
                             achieved in September 2003.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Each
option is exercisable over a three-year period commencing on the applicable
                             vesting date.
| | ---------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $51
based on the following                              assumptions: dividend yield of 0%;
expected volatility of 50%; risk-free interest                              rates of 2%;
and expected lives of three years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Companys Board of Directors modified the terms of the options
                             by extending the life of the options, until the earlier of
an IPO or the end of                              2008. At the date of modification all
of such options were fully vested.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Modifications
of the terms of an award are treated as an exchange of the original
                             award for a new award, resulting in the incurrence of
additional compensation cost                              for that incremental value. The
incremental value amounting to $24 is measured by                              the
difference between (a) the fair value of the modified option and (b) the value
                             of the old option immediately before its terms are modified.
 The modification has                              no effect on accounting records of the
Company.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. |  | In
December 2003, the Company issued options to purchase 1,601,851 shares of Common Stock to
its Chief                              Executive Officer with an exercise price of $0.12
per share. The options vest as                              follows: 25% within one year
from the date of grant, with the remainder vesting in 12
                             equal quarterly tranches over 36 months.  Each option is
exercisable over a 10-year                              period commencing on the vesting
date.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-26 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $498,
based on the following                              assumptions: dividend yield of 0%;
expected volatility of 59.35%; risk-free                              interest rates of
3.28%; and expected lives of 5.6 years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. |  | On
March 27, 2005, the Company issued options to purchase 503,186 shares of Common Stock to
a consultant                              as consideration for consulting services
provided, with an exercise price of $0.001.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate number of options granted to the consultant is equal to a number of
                             shares of Common Stock equal to 1% of the lower of (i) the
issued and outstanding                              share capital of the Company, on an
as-converted, fully-diluted basis, on the date of                              the full
exercise of the options or (ii) the issued and outstanding share capital of
                             the Company, on an as-converted, fully-diluted
basis, on such date that the Company                              value equals $100,000.
 As a consequence of the anti-dilution effect of up to 1%, the
                             Company has reserved an additional 163,697 options to
purchase shares of Common Stock                              at the same terms and
conditions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
options vest in 16 equal installments on a quarterly basis, over a period of 45
                             months, with the first installment vesting on the date of
grant.  The options are                              exercisable over a 10-year period
commencing on the date of grant.  The estimated                              fair value
of the options, estimated by the services to be rendered, is approximately
                             $1,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. |  | In
January 2005, the Company issued to service providers options to purchase 1,063 and 1,904
convertible                              preferred B shares exercisable from the closing
date of the transaction set forth in                              the share purchase
agreement entered into at such time with certain investors (see
                             Note 6e) for periods of 18 and 30 months, respectively.  The
options are exercisable                              for $34.8 per share.  During 2006,
2,751 options were exercised into shares and the                              remaining
options expired.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of the grant using
                             the BlackScholes option pricing model to be
approximately $5 and $16 for the 1,063                              and 1,904 options
respectively, based on the following assumptions: dividend yield
                             0%, expected volatility 29% and 37% respectively, risk free
interest 2.90% and 3.27%                              respectively and expected lives of
1.17 and 2.17 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the options were charged against additional paid-in capital as
                             issuance expenses.
| | --------------------------------------------------------------------------------------------------------------------------------

| | 5. |  | In
March 2005, as part of a management services agreement with the investor referenced in
Note 6f, the                              Company granted to the investor options to
purchase 26,710 convertible preferred C                              shares.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest as follows: 12.5% on their grant date and additional 12.5% of the
                             options vest at the end of each three-month period
thereafter.  The exercise price of                              each option is 0.01 NIS.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
estimated fair value of the options on the date of grant was approximately $1,445.
| | --------------------------------------------------------------------------------------

| | F-27 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | In
January 2006, Mr. Eli Hurvitz was nominated as the Chairman of the Companys Board
                             of Directors.  In connection with the management services
agreement described above                              and with this nomination, the
investor was granted additional options to purchase                              28,710
convertible preferred B shares.  The options are exercisable at par value and
                             vest as follows: 10% of the options vest at the date of the
appointment and an                              additional 10% of the options vest at the
end of each three-month period thereafter.                              The exercise
price of each option is 0.01 NIS.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
estimated fair value of the options on the date of grant was approximately
                             $2,124.
| | -------------------------------------------------------------------------------------------------------------------

| | The
options granted in connection with the appointment of Mr. Hurvitz provide for
                             full acceleration of the vesting of the options within 60
days prior to a merger and                              the options expire upon a merger.
On December 12, 2006, The Companys Board of                              Directors
approved the cancellation of the acceleration clause of the options as well
                             as the cancellation of the expiration clause.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6. |  | Immediately
after the closing of the Merger and in accordance with the share
                             purchase agreement dated September 2006 (see Note 6i), the
Company issued to                              Dr. Frost, Dr. Hsiao, Ph.D., a director of
the Company, and one other investor that                              provides consulting
services to the Company, options that are exercisable into 2.5%,
                             0.5%, and 0.5%, respectively, of the Companys issued
and outstanding Common Stock on                              a fully-diluted basis
immediately after the closing of the Merger in consideration
                             for services provided to the Company, including the services
provided by each of                              Dr. Frost and Dr. Hsiao as directors.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
options vest ratably over a period of 2.5 years, 20% for each six months,
                             commencing upon and subject to certain events. The options are
exercisable until the end of 10 years from the date                              of
grant. The exercise price of each option is $16.7.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimated the fair value of the options on the date of grant using the
                             Black-Scholes option-pricing model to be approximately $113
based on the following                              assumptions: dividend yield of 0%;
expected volatility of 45%; risk-free interest                              rates of
4.91%; and expected lives of six years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Note 10a for information regarding the change of certain terms of these options
                             after December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | 7. |  | The
fair value of options granted during the years 2004, 2005, and 2006 was $2,233, $0, and
$2,559,                              respectively. The fair value of each option granted
is estimated on the date of grant                              using the Black-Scholes
option-pricing model, with the following weighted average
                             assumptions:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  | 2006 |   | 2005
|------------------------ |  | ---- | - | ----
|                         |  |      |   |     
|Dividend yield           |  | 0    | % |     
|                         |  |      |   |     
|                         |  |     
|Expected volatility (*)  |  | 45   | % |     
|                         |  |      |   |     
|Risk-free interest rate  |  | 4.91 | % |     
|                         |  |      |   |     
|Expected life  in years |  | 6.0  |   |     
|                         |  |      |   |     

|(*) |  | Based
on the historical volatility
|--- |  | ----------------------------------

| | F-28 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | The
total unrecognized compensation cost as of December 31, 2006, is $2,152 (net of
                          forfeiture rate), and it is expected to be recognized over a
weighted average period of                           6.7 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total cash received from employees as a result of consultant stock option exercises
                          for the years ended December 31, 2004, 2005, and 2006 was $0,
$0, and $374,                           respectively. In connection with these exercises,
no tax benefits were realized by the                           Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|l. |  | A
summary of share option plans, shares of restricted shares and related information, under
all of                 the Companys equity incentive plans for the years ended
December 31, 2004, 2005, and 2006 are as                 follows:
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. |  | Options
granted to employees:
| | -- |  | -----------------------------

|                                     | Year ended December 31,
|------------------------------------ | -----------------------
|
|
|Outstanding at beginning             |                        
|of period                            |                        
|Granted                              |                        
|Forfeited                            |                        
|Expired                              |                        
|Exercised (*)                        |                        
|                                     |                        
|Outstanding at end of
        period |                        
|                                     |                        
|Exercisable at end of                |                        
|period                               |                        
|                                     |                        

|(*) |  | The
total intrinsic value of options exercised during the years ended December 31, 2004,
2005, and               2006, was $254, $0, and $0, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(**) |  | Options
to purchase convertible preferred shares are presented on a post exchange basis.
|---- |  | ----------------------------------------------------------------------------------------

| | F-29 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL (Continued):

| | 2. |  | Options
granted to consultants, directors, and other service providers:
| | -- |  | -----------------------------------------------------------------------

|                             | Year ended December 31,
|---------------------------- | -----------------------
|
|
|Outstanding at beginning of  |                        
|of period                    |                        
|Granted                      |                        
|Forfeited                    |                        
|Expired                      |                        
|Exercised (*)                |                        
|                             |                        
|Outstanding at end of period |                        
|                             |                        
|Exercisable at end of period |                        
|                             |                        

|(*) |  | The
total intrinsic value of options exercised during the years ended December 31, 2004,
2005, and                 2006, was $3,339, $0, and $0, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(**) |  | Options
to convertible preferred shares are presented on a post exchange basis.
|---- |  | -------------------------------------------------------------------------------

| | 3. |  | Options
with exercise price above fair market value:
| | -- |  | ----------------------------------------------------

| | During
2006, options to purchase 2,712,792 shares of Common Stock were issued to Dr. Frost,
                    Dr. Hsiao, and a certain consultant with an exercise price which,
according to managements                     estimate of fair value of the Common
Stock, is above the fair market value.  See Note 6.                     None of such
options were exercisable as of December 31, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-30 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

| | m. |  | The
following tables summarize information concerning outstanding and exercisable options
under                 share option plans as of December 31, 2005 and 2006:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31, 2005  
|-------------------
|                   
|Options outstanding
|                   
|Exerciseprices     
|                   
|$0.001             
|$0.101             
|$0.120             
|$0.172             
|$0.399             
|$0.570             
|                   
|                   
|                   

|(*) |  | Options
to convertible preferred shares are presented on a post exchange basis.
|--- |  | -------------------------------------------------------------------------------

| | The
aggregate intrinsic value of the total outstanding and of total vested and exercisable
                options as of December 31, 2006 is $10,608 and $7,114, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|December 31, 2006  
|-------------------
|                   
|Options outstanding
|                   
|ExercisePrices     
|                   
|$0.001             
|$0.120             
|$0.399             
|$0.972             
|                   
|                   
|                   

| | The
aggregate intrinsic value of the total outstanding and of total vested and exercisable
                options as of December 31, 2006 is $10,733 and $7,047, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, the Company issued options to purchase 2,712,792 shares of Common Stock with an
                exercise price which, according to managements estimate of fair
value of the Common Stock, is                 above the fair market value.  See Note 6.
 The exercise price of each option is $16.7 and the                 remaining contractual
life of each option is 10 years.  None of such options were exercisable as
                of December 31, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-31 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 6  SHARE
CAPITAL(Continued):

|n. |  | The
following table illustrates the effect of share-based compensation on the statement of
                operations:
|-- |  | ----------------------------------------------------------------------------------------------------------------------

|                           | Year ended December 31, | Period from
December 27,
1993
through
December 31,
2006
|-------------------------- | ----------------------- | -------------------------------------------------------
|
|Research and development   |                         |                                                        
|expenses                   |                         | $194                                                   
|General and administrative |                        
|expenses                   |                         | 103                                                    
|                           |                         |                                                        
|                           |                         | $297                                                   
|                           |                         |                                                        

|o. |  | In
connection with a tax ruling agreement granted by the Israeli tax authorities, the
Company and            certain of its shareholders consented to restrictions, over
specified periods after the closing of            the Merger, on the sale of the Common
Stock, the retention of minimum percentages of holdings of the            Companys
capital stock and the retention of minimum percentages of the capital stock of the
           Subsidiary.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company has agreed to limit the extent of issuance of share capital to
third            parties after the closing of the Merger. The Company has also agreed
that, over a two-year period,            most of the Companys activities shall be
directed towards research and development, and most of its            expenses would be
incurred in Israel. Any consideration received and to be received by the Company
           in connection with share issuances shall be invested in the research and
development activities of            the Company.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

NOTE 7 - TAXES ON
INCOME

| | a. |  | The
Company
| | -- |  | -----------

| | The
Company is taxed according to U.S. tax laws.  The income of the Company is taxed in the
                United States at the rate of up to 39.4%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | Protalix
Ltd.
| | -- |  | -------------

| | Protalix
Ltd. is taxed according to Israeli tax laws:
| | -----------------------------------------------------

| | 1) |  | Measurement
of results for tax purposes under the Income Tax (Inflationary Adjustments) Law,
                    1985 (hereafter - the inflationary adjustments law)
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Israeli Inflationary Adjustments Law, 1985, results for tax purposes are measured
                    in real terms, having regard to the changes in the consumer price
index.  Protalix Ltd. is                     taxed under this law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-32 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 7 - TAXES ON
INCOME(Continued):

| | 2) |  | Tax
rates
| | -- |  | ---------

| | The
income of Protalix Ltd. (other than income from approved enterprises (see c
below)) is                     taxed in Israel at the regular rate.  In July 2004,
Amendment No. 140 to the Income Tax                     Ordinance was enacted.  One of
the provisions of this amendment is that the corporate tax rate                     is to
be gradually reduced from 36% to 30%.  In August 2005, a further amendment (No. 147) was
                    published, which makes a further revision to the corporate tax rates
prescribed by Amendment                     No. 140.  As a result of the aforementioned
amendments, the corporate tax rates for 2004 and                     thereafter are as
follows: 2004  35%, 2005  34%, 2006  31%, 2007  29%, 2008  27%,
2009                     26%, and for 2010 and thereafter  25%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) |  | The
Law for the Encouragement of Capital Investments, 1959 (hereinafter, the Law)
| | -- |  | -----------------------------------------------------------------------------------

| | Protalix
Ltd. has been granted Approved Enterprise status under the Law for the
                    Encouragement of Capital Investments, 1959. Income derived from the
Approved Enterprise                     during a period of 10 years from the year in
which the enterprise first realizes taxable                     income is tax exempt,
provided that the maximum period to which it is restricted by the law
                    has not elapsed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Protalix
Ltd. has an Approved Enterprise plan from 2004. The plan expires in 2017.
| | ------------------------------------------------------------------------------------

| | If
Protalix Ltd. subsequently pays a dividend out of income derived from the Approved
                    Enterprise during the tax exemption period, it will be subject
to tax on the amount                     distributed, including any Company tax on these
amounts, at the rate which would have been                     applicable had such income
not been exempted (25%).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon Protalix Ltd. fulfilling the
                    conditions stipulated by the law, rules, and regulations published
thereunder, and the                     instruments of approval for the specific
investment in an approved enterprise. In the event                     of any failure of
Protalix Ltd. to comply with these conditions, the benefits may be
                    cancelled and Protalix Ltd. may be required to refund the amount of
the benefits, in whole                     or in part, with interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Investment Center is currently reviewing Protalix Ltd.s final implementation report
                    and, as a result, the Company has not yet received a final
implementation approval with                     respect to its Approved Enterprise from
the Investment Center. Additionally, given                     Protalix Ltd.s
significant amount of net operating losses and the limitation mentioned
                    above to the benefit period, Protalix Ltd. cannot predict when it
would be able to enjoy the                     tax benefits described above, if at all.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | Tax
losses carried forward to future years
| | -- |  | ------------------------------------------

| | As
of December 31, 2006, the Company had approximately net operating loss (NOL) carry
forwards                 equal to $15,767 that are available to reduce future taxable
income as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1) |  | The
Company
| | -- |  | -----------

| | The
NOL carry forward of the Company equal to approximately $3,000 may be restricted under
                    Section 382 of the Internal Revenue Code (IRC). IRC Section 382
applies whenever a corporation                     with NOL experiences an ownership
change. As a result of Section 382, the taxable income for                     any post
change year that may be offset by a pre-change NOL may not exceed the
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-33 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 7 - TAXES ON
INCOME (Continued):

| | general
Section 382 limitation, which is the fair market value of the pre-change entity
                    multiplied by the long-term tax exempt rate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) |  | Protalix
Ltd.
| | -- |  | -------------

| | At
December 31, 2006, Protalix Ltd. has approximately $12,767 of NOL carry forwards that are
                    available to reduce future taxable income with no limited period of
use.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|d. |  | Deferred
income taxes:
|-- |  | ----------------------

| | The
components of the Companys net deferred tax asset at December 31, 2005 and 2006
were as                   follows:
| | -----------------------------------------------------------------------------------------------------------------------

|                                  | December 31,
|--------------------------------- | ------------
|
|In respect of:                    |             
|R&D expenses                      |             
|Property and equipment            |             
|Holiday and recreation pay        |             
|Severance pay obligation          |             
|Deferred compensation             |             
|Net operating loss carry forwards |             
|Valuation allowance               |             
|                                  |             
|                                  |             
|                                  |             

|e. |  | Reconciliation
of the theoretical tax expense to actual tax expense
|-- |  | -------------------------------------------------------------------

| | The
main reconciling item between the statutory tax rate of the Company and the effective
rate                   is the non-recognition of tax benefits from carry forward tax
losses due to the uncertainty of                   the realization of such tax benefits
(see above).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|f. |  | Tax
assessments
|-- |  | ---------------

| | In
accordance with the Income Tax Ordinance, as of December 31, 2006, all of Protalix Ltd.s
tax                 assessments through tax year 2001 are considered final.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-34 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 8 - SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION:

| | Balance
sheets:
| | ---------------

|                                                 | December 31,
|------------------------------------------------ | ------------
|
|a. Accounts receivable:                          |             
|Institutions                                     |             
|Interest receivable                              |             
|State of Israel (see Notes 5a )                  |             
|Restricted Cash                                  |             
|Prepaid expenses                                 |             
|Sundry                                           |             
|                                                 |             
|                                                 |             
|                                                 |             
|b. Accounts payable and accruals  other:        |             
|                                                 |             
|Payroll and related expenses                     |             
|Provision for vacation and recreation pay        |             
|Accrued expenses                                 |             
|In respect of purchase of property and equipment |             
|Other                                            |             
|                                                 |             
|                                                 |             
|                                                 |             

| | Statement
of operations:
| | ------------------------

|                                       | Year ended December 31, | Period from
December 27,
1993
through
December 31,
2006
|-------------------------------------- | ----------------------- | -------------------------------------------------------
|
|c.  Research and development expenses: |                         |                                                        
|Payroll and related expenses           |                         | $   940                                                
|Subcontractors                         |                         | 714                                                    
|Materials and consumables              |                         | 298                                                    
|Rent, insurance and maintenance        |                         | 188                                                    
|Professional fees                      |                         | 81                                                     
|Patent registration                    |                         | 39                                                     
|Depreciation and impairment            |                         | 99                                                     
|Other                                  |                         | 134                                                    
|                                       |                         |                                                        
|                                       |                         | 2,493                                                  
|Less  grants (see Note 5a)            |                         | 573                                                    
|                                       |                         |                                                        
|                                       |                         | $1,920                                                 
|                                       |                         |                                                        

|d. Administrative and general expenses: |  |         |  |         |  |           |   |          | :
|--------------------------------------- |  | ------- |  | ------- |  | --------- | - | -------- | -
|Payroll and related expenses            |  | $   223 |  | $   380 |  | $     857 | * | $  1,863 |  
|Management and consulting fees          |  | 326     |  | 1,327   |  | 2,432     |   | 4,534    |  
|Rent, insurance and maintenance         |  | 27      |  | 42      |  | 61        |   | 268      |  
|Professional fees                       |  | 98      |  | 147     |  | 688       |   | 1,155    |  
|Depreciation                            |  | 24      |  | 62      |  | 74        |   | 175      |  
|Other                                   |  | 109     |  | 173     |  | 413       |   | 1,001    |  
|                                        |  |         |  |         | 
|                                        |  | $   807 |  | $2,131  |  | $  4,525  |   | $  8,996 |  
|                                        |  |         |  |         | 

|* |  | After
deduction of non-recurring compensation equal to $80 from the State of Israel in respect
of the payroll of certain   employees as determined by the Israeli tax authorities.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|e. |  | Deposit:
|-- |  | --------

| | Deposit reflects amounts held in trust on behalf of the Company in connection with the exercise of certain warrants
immediately prior to the Merger.  The Company had legal title to the funds by the trust on December 31, 2006, despite the fact that they were  not released from the trust until January 3, 2007.  See Note 6j.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-35 | 
| | ---- | 

---

PROTALIX BIOTHERAPEUTICS, INC. 
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (U.S. dollars in thousands)


NOTE 9 - RELATED PARTY
- TRANSACTIONS:

|   | Year ended December 31,                                                                                                                                                                                                                                                                                                                                                                                         | Period from
December 27,
1993*
Through
December 31,
2006
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------
|
|a. | Management and consulting fees to
      the Chairman of the Board                                                                                                                                                                                                                                                                                                                                               |                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|b. | Capital-raising commission to the 
      Chairman of the Board                                                                                                                                                                                                                                                                                                                                                  |                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|c. | With
respect as to options granted to the Chief Executive Officer of the Company and to a
shareholder, see         Notes 6k(1b)(1), 6k(1b)(3)4f and 6k(1a).                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|d. | In
March 2005, in addition to a share purchase agreement (see Note 6f), the Company entered
into a management         services agreement with an investor. The monthly management
fees are $3. The management services agreement         shall be in full force as long as
Mr. Hurvitz serves as a member of the Companys Board of Directors.  As to
        options granted to the investor, see Note 6k(2e).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|e. | In
December 2006, certain board members were granted stock options.  See Notes 6(k)(2f) and
10(a).                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                         

NOTE 10 - SUBSEQUENT
EVENTS:

| | a. |  | In
February 2007, the Board approved certain modifications to the vesting periods of the
options granted                 on December 31, 2006 to each of Dr. Frost and Dr. Hsiao
and a certain consultant. See Note 6i.                 The options vest as follows: 40%
of the options shall vest on March 1, 2008; an additional 15% of                 the
options will vest in four equal installments on each of the following dates: June 30,
2008,                 December 31, 2008, June 30, 2009 and September 30, 2009.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. |  | On
January 31, 2007, certain warrant holders referenced in Note 6i exercised, in the
aggregate, warrants                 for 3,875,416 shares of Common Stock with an
aggregate exercise price of $5,333.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. |  | In
January 2007, the Company entered into a service agreement with a clinical services
provider for a                 total amount of $665 to be paid by the Company.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F-36 | 
| | ---- | 

---