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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 
 FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    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)
 PROTALIX BIOTHERAPEUTICS, INC.
 (Exact name of registrant as specified in its charter)
 
 Florida
    
    65-0643773State or other jurisdiction 
of incorporation or organization
    
    (I.R.S. Employer
Identification No.)2 Snunit StreetScience ParkPOB 455Carmiel, Israel
    
    20100(Address of principal executive offices)
    
    (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
NYSE Alternext US
 Securities registered pursuant to Section 12(g) of the Act:
 None
 
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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FORM 10-K
TABLE OF CONTENTS
 PagePART ICautionary Statement Regarding Forward-Looking Statements
    
    
    1Item 1. Business
    
    
    2Item 1A. Risk Factors
    
    
    25Item 1B. Unresolved Staff Comments
    
    
    42Item 2. Properties
    
    
    43Item 3. Legal Proceedings
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    44Item 6. Selected Financial Data
    
    
    46Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    47Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    57Item 8. Financial Statements and Supplementary Data
    
    
    58Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    58Item 9A. Controls and Procedures
    
    
    58Item 9B. Other Information
    
    
    59PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    60Item 11. Executive Compensation
    
    
    63Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    71Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    73Item 14. Principal Accountant Fees and Services
    
    
    75PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    76Signatures
    
    
    79EX-23.1: CONSENT OF KESSELMAN & KESSELMANEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




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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 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
United States Food and Drug Administration, or the FDA, or other regulatory
authorities;
    
    any lack of progress of our research and development (including the results of
clinical trials we are conducting);
    
    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 financing 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 any of our
drug products, if approved;
    
    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 our intellectual property rights against third parties;
    
    the possible disruption of our operations due to terrorist activities and armed
conflict, including as a result of the disruption of the operations of regulatory
authorities, our subsidiary, our manufacturing facilities and our customers, suppliers,
distributors, collaborative partners, licensees and clinical trial sites; and
    
    other risks and uncertainties detailed in Section 1A of this Annual Report on Form
10-K.




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Item 1. Business
 tm
     2




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Industry Overview
    3




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® ® ® ® ® ®
    ProCellEx: Our Proprietary Protein Expression System
   4




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Competitive Advantages of Our ProCellEx Protein Expression System
  Ability to Penetrate Certain Patent-Protected Markets.
 Significantly Lower Capital and Production Costs.
 More Effective and Potent End Product Relative to Mammalian Based Systems.
 Elimination of the Risk of Viral Transmission or Infection by Mammalian Components.
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Broad Range of Expression Capabilities.
 Our Strategy
  Obtain Regulatory Approval for prGCD for the Treatment of Gaucher Disease.
 Develop a Pipeline of Innovative or Biosimilar Versions of Recombinant Therapeutic Proteins.
 Build a Targeted Sales and Marketing Infrastructure.
 Establish Development and Commercialization Alliances with Corporate Partners.
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Acquire or In-License New Technologies, Products or Companies.
 Leverage Strength and Experience of Our Management Team and Board of Directors.
 Our Pipeline Drug Candidates
 Our Lead Product Candidate, prGCD
  Increased Glycan Efficacy and Consistency.
 Longer Half-Life .
 Cost-Effective.
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Gaucher Disease Background
  Current Treatments for Gaucher Disease
   8




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prGCD Development Program
  Laboratory Testing and Preclinical Studies of prGCD
   
    
    an equivalent to superior level of enzymatic activity (see Figure 1);
    
    enhanced uptake based on observed GlcCer substrate degradation (see Figure 2); and
    
    a prolonged half-life (see Figure 3).
  Figure 1: prGCD and Cerezyme Enzymatic Activity
 
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Figure 2: prGCD and Cerezyme Cellular Uptake
 
  Figure 3: prGCD and Cerezyme Half-Life Data
 prGCD
    
    CerezymePrimates
    
    ~13.0-20.0 minutes
    
    ~ 6.8-8.0 minutes (1)Humans
    
    ~10.5-14.5 minutes
    
    ~3.6-10.4 minutes (2)
 (1)
    
    Source: Cerezyme NDA  PharmTox review(2)
    
    Source: Cerezyme labeling approved by FDA
for package insert  Phase I Clinical Trial
  10




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Figure 4: Adverse Events presented by: Dose Group, Severity and Relation to Study
Treatment (Incidents; Subjects (% of Subjects))
 Relation between Event to Drug
    
    15 U/kg
    
    30 U/kg
    
    60 U/kg
    
    Placebo
    
    Events Severity
    
    TotalUnrelated to drug (1)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    2; 1 (17
    %)
    
    
    0; 0 (0
    %)
    
    Moderate
    
    
    2Remotely related to drug (2)
    
    
    4; 2 (33
    %)
    
    
    1; 1 (17
    %)
    
    
    2; 1 (17
    %)
    
    
    1; 1 (17
    %)
    
    Mild
    
    
    8Possibly related to drug (3)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    
    
    
    
    0Probably related to drug (4)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    
    
    
    
    0Related to drug (5)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    0; 0 (0
    %)
    
    
    
    
    
    
    0
 
 (1)
    
    The event is clearly related to other factors, such as a subjects clinical state,
therapeutic interventions or concomitant medications.(2)
    
    The event was most likely produced by other factors, such as a subjects clinical
state, therapeutic interventions or concomitant medications, and does not follow a known
response pattern to the study drug.(3)
    
    The event has a reasonable temporal relationship to the study drug administration and
follows a known response pattern to the study drug. However, a potential alternate etiology
may be responsible for the event. The effect of drug withdrawal is unclear. Rechallenge
information is unclear or lacking.(4)
    
    The event follows a reasonable temporal sequence from the time of drug administration,
and follows a known response pattern to the study drug and cannot be reasonably explained by
other factors. There is a reasonable response to withdrawal of the drug. Rechallenge
information is not available or advisable.(5)
    
    The event follows a temporal sequence from the time of drug administration and follows
a known response pattern to the study drug. The event either occurs immediately following
the study drug administration, improves on stopping the drug or reappears on repeated
exposure.     Phase III Clinical Trial
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Other Drug Candidates in Our Pipeline
  PRX-102
   Acetylcholinesterase
  12




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PRX-111
  Strategic Collaborations
 Teva Pharmaceutical Industries
  Weizmann Institute of Science
  13




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Intellectual Property
     Manufacturing
  14




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Raw Materials and Suppliers
   Competition
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Scientific Advisory Board
  Name
    
    AffiliationProfessor Aaron Ciechanover, M.D., D.Sc.
    
    Laureate of the Nobel Prize in ChemistryDistinguished research Professor at the
Cancer and Vascular Biology Research Center
of the Rappaport Research Institute and
Faculty of Medicine at the TechnionAmerican Academy of Arts and Sciences, MemberProfessor Gad Galili, Ph.D.
    
    Chairman of the Department of Plant
Sciences, The Weizmann Institute of Science,
Rehovot, IsraelProfessor Ari Zimran, M.D.
    
    Director of the Gaucher Clinic, Shaare Zedek
Medical Center, Jerusalem, IsraelAssociate Professor of Medicine, Hebrew
University-Hadassah Medical School,
Jerusalem, Israel
  Government Regulation
  16




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International Regulation
    Israeli Government Programs
  General Corporate Tax Structure in Israel
  18




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Law for the Encouragement of Capital Investments, 1959
       Percent of Foreign
    
    Rate of ReducedOwnership
    
    Tax0-49%
    
    
    25
    %49-74%
    
    
    20
    %74-90%
    
    
    15
    %90-100%
    
    
    10
    %
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
    
    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.
   Encouragement of Industrial Research and Development Law, 1984
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
    
    in the event of a sale of the know-how itself to a non affiliated third party, provided
that upon such sale the owner of the know-how pays to the OCS an amount, in cash, as set
forth in the Research Law. In addition, the amendment provides that if the purchaser of
the know-how gives the selling Israeli company the right to exploit the know-how by way of
an exclusive, irrevocable and unlimited license, the research committee may approve such
transfer in special cases without requiring a cash payment.
    
    in the event of a sale of the company which is the owner of know-how, pursuant to which
the company ceases to be an Israeli company, provided that upon such sale, the owner of the
know-how makes a cash payment to the OCS as set forth in the Research Law.
    
    in the event of an exchange of know-how such that in exchange for the transfer of
know-how outside of Israel, the recipient of the know-how transfers other know-how to the
company in Israel in a manner in which the OCS is convinced that the Israeli economy
realizes a greater, overall benefit from the exchange of know-how.
   Special Provisions Relating to Taxation under Inflationary Conditions
  
    
    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. The unused
portion linked to the Israeli consumer price index, may be carried forward.
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
    
    Where a companys depreciated cost of fixed assets exceeds its equity, 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.
  Law for the Encouragement of Industry (Taxes), 1969
   
    
    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 other
related Israeli Industrial Companies; and
    
    expenses related to a public offering are deductible in equal amounts over three years.
  Tax Benefits for Research and Development
  Tax Ruling and Lock-up Agreements Related to the Merger
   22




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
    
    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. We are allowed to use the cash held by us as of the
closing of the merger, 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
  Company Background
   23




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tm
 Available Information
   
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Item 1A. Risk Factors
 You 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 of our common stock could decline.
 Risks Related to Our Business
 We currently have no product revenues and will need to raise additional capital to operate our
business, which may not be available on favorable terms, or at all, and which will have a dilutive
effect on our shareholders.
  We are not currently profitable and may never become profitable which would have a material adverse
effect on our business and results of operations and could negatively impact the value of our
common stock.
  
    
    continue to undertake preclinical 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.
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We have a limited operating history which may limit the ability of investors to make an informed
investment decision.
  
    
    continuing to undertake preclinical development and clinical trials;
    
    participating in regulatory approval processes;
    
    formulating and manufacturing products; and
    
    conducting sales and marketing activities.
  Our ProCellEx protein expression system is based on our proprietary plant cell-based expression
technology which has a limited history and any material problems with the system, which may be
unforeseen, may have a material adverse effect on our business and results of operations.
  We currently depend heavily on the success of prGCD, our lead product candidate which is in
clinical development. Any failure to commercialize prGCD, or the experience of significant delays
in doing so, will have a material adverse effect on our business, results of operations and
financial condition.
  
    
    successful completion of our clinical trials for prGCD;
    
    obtaining marketing approvals from the FDA and other foreign regulatory authorities;
    
    maintaining the cGMP compliance of our manufacturing facility or establishing
manufacturing arrangements with third parties;
    
    the successful audit of our facilities by the FDA and other foreign regulatory
authorities;
    
    the development of a successful sales and marketing organization;
    
    the availability of reimbursement to patients from healthcare payors for our drug
products, if approved;
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
    
    a continued acceptable safety and efficacy profile of our product candidates
following approval; and
    
    other risks described in these Risk Factors.
  All of our product candidates other than prGCD are in research stages. If we are unable to develop
and commercialize our other product candidates, our business will be adversely affected.
  
    
    the research methodology used may not be successful in identifying potential product
candidates;
    
    competitors may develop alternatives that render our product candidates obsolete;
    
    a product candidate may on further study be shown to have harmful side effects or
other characteristics that indicate it is unlikely to be effective or otherwise does not
meet applicable regulatory approval;
    
    a product candidate is not capable of being produced in commercial quantities at an
acceptable cost, or at all; or
    
    a product candidate may not be accepted by patients, the medical community or
third-party payors.
 We may not obtain the necessary U.S. or worldwide regulatory approvals to commercialize our drug
candidates in a timely manner, if at all, which would have a material adverse effect on our
business and results of operations.
   
    
    delay commercialization of, and our ability to derive product revenues from, such
drug candidate;
    
    require us to perform costly procedures with respect to such drug candidate; or
    
    otherwise diminish any competitive advantages that we may have with respect to such
drug candidate.
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Clinical trials are very expensive, time-consuming and difficult to design and implement and may
result in unforeseen costs which may have a material adverse effect on our business and results of
operations.
  
    
    unforeseen safety issues;
    
    determination of dosing issues;
    
    lack of effectiveness during clinical trials;
    
    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.
  If the results of our clinical trials do not support our claims relating to any drug candidate or
if serious side effects are identified, 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.
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We may find it difficult to enroll patients in our clinical trials, which could cause significant
delays in the completion of such trials or may cause us to abandon one or more clinical trials.
  If physicians, patients, third party payors and others in the medical community do not accept and
use our drugs, our ability to generate revenue from sales of our products under development will be
materially impaired.
  
    
    perceptions by physicians, patients, third party payors and others in the medical
community, about the safety and effectiveness of our drug candidates;
    
    the willingness of the target patient population to try new therapies and of
physicians to prescribe these therapies;
    
    the prevalence and severity of any side effects, including any limitations or
warnings contained in our products approved labeling;
    
    pharmacological benefit of our products relative to competing products and products
under development;
    
    the efficacy and potential advantages relative to competing products and products
under development;
    
    relative convenience and ease of administration;
    
    effectiveness of education, marketing and distribution efforts by us and our
licensees and distributors, if any;
    
    publicity concerning our products or competing products and treatments;
    
    reimbursement of our products by third party payors; and
    
    the price for our products and competing products.
  Because our clinical trials depend upon third-party researchers, the results of our clinical trials
and such research activities are subject to delays and other risks which are, to a certain extent,
beyond our control, which could impair our clinical development programs and our competitive
position.
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Our strategy, in many cases, is to enter into collaboration agreements with third parties to
leverage our ProCellEx system to develop product candidates. If we fail to enter into these
agreements or if we or the third parties do not perform under such agreements or terminate or elect
to discontinue the collaboration, it could have a material adverse affect on our revenues.
  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, it will have a material adverse
effect on our business and results of operations.
  We rely on third parties for final processing of prGCD, which exposes us to a number of risks that
may delay development, regulatory approval and commercialization of our product candidates or
result in higher product costs.
  We have no experience selling, marketing or distributing products and no internal capability to do
so.
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
    
    our inability to recruit and retain adequate numbers of effective sales and marketing
personnel;
    
    the inability of sales personnel to obtain access to or persuade adequate numbers of
physicians to prescribe our products;
    
    the lack of complementary products to be offered by sales personnel, which may put us
at a competitive disadvantage relative to companies with more extensive product lines;
and
    
    unforeseen costs and expenses associated with creating and sustaining an independent
sales and marketing organization.
  If the market opportunities for our current product candidates are smaller than we believe they
are, then our revenues may be adversely affected and our business may suffer.
  We may enter into distribution arrangements and marketing alliances for certain products and any
failure to successfully identify and implement these arrangements on favorable terms, if at all,
may impair our ability to commercialize our product candidates.
  
    
    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; 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.
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Developments by competitors may render our products or technologies obsolete or non-competitive
which would have a material adverse effect on our business and results of operations.
      
    
    developing drugs;
    
    undertaking preclinical testing and human clinical trials;
    
    obtaining FDA and other regulatory approvals of drugs;
    
    formulating and manufacturing drugs; and
    
    launching, marketing and selling drugs.
  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,
competitive position and results of operations would suffer.
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
    
    the degree and range of protection any patents will afford us against competitors and
those who infringe upon our patents, 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, and whether we win or lose.
   We rely on confidentiality agreements that could be breached and may be difficult to enforce which
could have a material adverse effect on our business and competitive position.
  
    
    these agreements may be breached;
    
    these agreements may not provide adequate remedies for the applicable type of breach;
or
    
    our trade secrets or proprietary know-how will otherwise become known.
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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 which could result in substantial costs and
may have a material adverse effect on our business and results of operations.
  
    
    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.
  If we cannot meet requirements under our license agreements, we could lose the rights to our
products, which could have a material adverse effect on our business.
   If we in-license drug candidates, we may delay or otherwise adversely affect the development of our
existing drug candidates, which may negatively impact our business, results of operations and
financial condition.
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If we are unable to successfully manage our growth, there could be a material adverse impact on our
business, results of operations and financial condition.
  If we acquire companies, products or technologies, we may face integration risks and costs
associated with those acquisitions that could negatively impact our business, results from
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.
   Our collaborations with outside scientists and consultants may be subject to restriction and
change.
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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.
  If product liability claims are brought against us, it may result in reduced demands for our
products or damages that exceed our insurance coverage.
  Reimbursement may not be available for our product candidates, which could diminish our sales or
affect our ability to sell our products profitably.
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Reforms in the healthcare industry and the uncertainty associated with pharmaceutical pricing,
reimbursement and related matters could adversely affect the marketing, pricing and demand for our
products, if approved.
  Governments outside the United States tend to impose strict price controls and reimbursement
approval policies, which may adversely affect our prospects for generating revenue.
  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.
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Our operations may be disrupted by the obligations of our personnel to perform military service
which could have a material adverse effect on 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 and inflation.
  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 and would have a material adverse effect on
our business and results of operations.
  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 which could have
a material adverse effect on our business and results of operations.
   
    
    we may be required to pay the OCS a portion of the consideration we receive upon any
sale of such technology to 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
 38




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##### Table of Contents




    
    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).
  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
most of our directors or asserting U.S. securities laws claims in Israel.
   
    
    the judgment was rendered by a court which 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
    
    the judgment is executory in the state in which it was given.
  
    
    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.
 39




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##### Table of Contents



Risks Related to Investing in Our Common Stock
 The market price of our common stock may fluctuate significantly.
  
    
    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;
    
    results of our ongoing phase III clinical trial for our lead product candidate prGCD;
    
    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.
  All liabilities of our company have survived the merger and there may be undisclosed liabilities
that could harm our revenues, business, prospects, financial condition and results of operations.
  Trading of our common stock is limited.
    40




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##### Table of Contents



Future sales of our common stock could reduce our stock price.
  Directors, executive officers, principal shareholders 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 shareholders.
  Failure to 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 shareholders could lose confidence in our financial reporting,
which could have a material adverse effect on the price of our common stock.
    41




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##### Table of Contents



Compliance with changing regulation of corporate governance and public disclosure may result in
additional expenses, divert managements attention from operating our business which could have a
material adverse effect on our business.
  We are a holding company with no operations of our own.
  The issuance of preferred stock or additional shares of common stock could adversely affect the
rights of the holders of shares of our common stock.
   
 Item 1B. Unresolved Staff Comments
 Form 10-K
  
 Item 2. Properties
  42




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##### Table of Contents



Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldEli Hurvitz
    
    
    58,516,636
    
    
    
    64,789David Aviezer, Ph.D., MBA
    
    
    58,535,944
    
    
    
    45,481Yoseph Shaaltiel, Ph.D.
    
    
    58,534,944
    
    
    
    46,481Alfred Akirov
    
    
    58,535,984
    
    
    
    45,441Amos Bar-Shalev
    
    
    58,500,857
    
    
    
    80,568Zeev Bronfeld
    
    
    57,762,672
    
    
    
    818,753Yodfat Harel Gross
    
    
    58,499,857
    
    
    
    81,568Roger D. Kornberg, Ph.D.
    
    
    58,535,944
    
    
    
    45,481Eyal Sheratzky
    
    
    58,500,857
    
    
    
    80,568Sharon Toussia-Cohen
    
    
    58,453,709
    
    
    
    127,716
  For
    
    Against
    
    Abstain58,522,738
    
    58,587
    
    100
 43




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##### Table of Contents



PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 ®
 2008
    
    2007Quarter Ended
    
    High
    
    Low
    
    High
    
    LowMarch 31
    
    $
    3.59
    
    
    $
    2.60
    
    
    $
    35.00
    
    
    $
    15.75June 30
    
    $
    3.70
    
    
    $
    2.56
    
    
    $
    31.40
    
    
    $
    19.50September 30
    
    $
    3.06
    
    
    $
    2.08
    
    
    $
    45.72
    
    
    $
    13.46December 31
    
    $
    2.17
    
    
    $
    0.96
    
    
    $
    37.95
    
    
    $
    3.20
   Equity Compensation Plan Information
  A
    
    
    B
    
    
    CNumber of Securities RemainingNumber of Securities to
    
    
    
    
    
    Available for Future Issuancebe Issued
    
    
    Weighted Average
    
    
    Under Equity Compensation PlansUpon Exercise of
    
    
    Exercise Price of
    
    
    (Excluding Securities Reflected inPlan Category
    
    Outstanding Options
    
    
    Outstanding Options
    
    
    Column A)Equity Compensation
Plans Approved by
Shareholders
    
    
    7,179,058
    
    
    $
    1.79
    
    
    
    2,056,623Equity Compensation
Plans Not Approved
by Shareholders
    
    
    4,016,368
    
    
    $
    1.61
    
    
    
    Total
    
    
    11,195,426
    
    
    $
    1.72
    
    
    
    2,056,623
 STOCK PERFORMANCE GRAPH
  The stock price performance shown on the graph below represents historical price performance and is
not necessarily indicative of any future stock price performance. Specifically, during the period
of December 31, 2003 through December 31, 2006, our company did not have any operations and our
common stock was quoted on the OTC ® Bulletin Board. The historical performance of our
common stock prior to January 2, 2007, represents the performance of our company prior to the
merger on December 31, 2006, and, therefore, is not indicative of the performance of our common
stock after the merger or the performance of our common stock after it was listed for trade on the
NYSE Alternext US (then, the American Stock Exchange) on March 12, 2007.
 44




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##### Table of Contents



COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    $100 invested on December 31, 2003 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31. Notwithstanding anything to the contrary set forth in any of our previous filings under the
Securities Act of 1933, as amended, or the Exchange Act, which might incorporate future filings
made by us under those statutes, this Stock Performance Graph will not be incorporated by reference
into any of those prior filings, nor will such report or graph be incorporated by reference into
any future filings made by us under those Acts.
 Use of Proceeds
    45




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##### Table of Contents



Item 6. Selected Financial Data
  Year Ended December 31,Period fromDec. 27, 1993through2004
    
    
    2005
    
    
    2006
    
    
    2007(1)
    
    
    2008
    
    
    Dec. 31, 2008(restated)(in thousands, except share and per share amounts)Consolidated Statement of Operations Data:Revenues
    
    $
    430
    
    
    $
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    830Cost of revenues
    
    
    120
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206Gross profit
    
    
    310
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624Research and development expenses, net
    
    
    1,920
    
    
    
    3,773
    
    
    $
    5,246
    
    
    $
    13,570
    
    
    $
    17,401
    
    
    
    43,516General and administrative expenses
    
    
    807
    
    
    
    2,131
    
    
    
    4,525
    
    
    
    20,594
    
    
    
    6,770
    
    
    
    36,660Finance expense (income)
    
    
    4
    
    
    
    (43
    )
    
    
    (344
    )
    
    
    (2,080
    )
    
    
    (1,757
    )
    
    
    (4,205
    )Net loss before change in accounting principle
    
    $
    2,421
    
    
    $
    5,746
    
    
    $
    9,427
    
    
    $
    32,084
    
    
    $
    22,414
    
    
    $
    75,047Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    (37
    )Net loss
    
    $
    2,421
    
    
    $
    5,746
    
    
    $
    9,390
    
    
    $
    32,084
    
    
    $
    22,414
    
    
    $
    75,010Net loss per share of common stock, basic and
diluted (2)
    
    $
    0.13
    
    
    $
    0.31
    
    
    $
    0.32
    
    
    $
    0.48
    
    
    $
    0.30Weighted average number of shares of 
common
stock used in computing 
net loss per share of
common stock (3)
    
    
    18,801,527
    
    
    
    18,801,527
    
    
    
    29,300,987
    
    
    
    67,187,329
    
    
    
    75,892,344Consolidated Balance Sheet Data:Cash and cash equivalents
    
    $
    1,477
    
    
    $
    4,741
    
    
    $
    15,378
    
    
    $
    61,813
    
    
    $
    42,596Other assets
    
    
    2,478
    
    
    
    2,484
    
    
    
    11,610
    
    
    
    6,324
    
    
    
    8,215Total assets
    
    
    3,955
    
    
    
    7,225
    
    
    
    26,988
    
    
    
    68,137
    
    
    
    50,811Current liabilities
    
    
    1,246
    
    
    
    845
    
    
    
    2,268
    
    
    
    3,762
    
    
    
    5,527Liabilities
    
    
    2,480
    
    
    
    1,130
    
    
    
    2,704
    
    
    
    4,452
    
    
    
    6,464Shareholders equity
    
    
    1,475
    
    
    
    6,095
    
    
    
    24,284
    
    
    
    63,685
    
    
    
    44,347
 
 *
    
    Represents less than $1.(1)
    
    We have restated our consolidated balance sheet at December 31, 2007, statements of
operations, changes in shareholders equity and cash flows for the year ended December 31,
2007 to change the accounting treatment of certain stock-based compensation of non-employees
required by SFAS 123(R), Share-Based Payment, for certain transactions with nonemployees. See
Note 2 to the consolidated financial statements for further information.(2)
    
    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.(3)
    
    In connection with the merger, we completed 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. 46




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##### Table of Contents



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.
 Restatement
 Share-Based Payment
     Overview
 tm
 47




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##### Table of Contents



48




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##### Table of Contents



Critical Accounting Policies
   Functional Currency
  Research and Development Expense
  
    
    internal costs associated with research and development activities;
    
    payments made to third party contract research organizations, 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.
  Project
    
    Status
    
    Expected Near Term MilestoneprGCD for the treatment of Gaucher disease
    
    Phase III
    
    Results of Phase III in second half of 2009PRX 102  alpha Galactosidase enzyme
    
    Research
    
    Pre Clinical during 2009Acetylcholinesterase
    
    Research
    
    IND application during 2009
    49




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##### Table of Contents



General and Administrative Expense
  Financial Expense and Income
  
    
    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
    50




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##### Table of Contents




    
    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.
    
    
    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.
  51




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##### Table of Contents



Results of Operations
 Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
 Revenues
  Research and Development Expenses
   General and Administrative Expenses
  Financial Expenses and Income
  Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
 Revenues
  52




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##### Table of Contents



Research and Development Expenses
   General and Administrative Expenses
  Financial Expenses and Income
  Liquidity and Capital Resources
 Sources of Liquidity
   Security
    
    Year
    
    Number of Shares
    
    Amount(1)Ordinary Shares
    
    
    1996-2000
    
    
    
    18,801,527
    (2)
    
    $
    1,100,000Series A Convertible Preferred Shares
    
    
    2001
    
    
    
    11,635,090
    
    
    $
    2,000,000Series B Convertible Preferred Shares(3)
    
    
    2004-2005
    
    
    
    7,225,357
    
    
    $
    4,500,000Series C Convertible Preferred Shares(4)
    
    
    2005
    
    
    
    5,513,422
    
    
    $
    7,700,000Ordinary Shares(5)
    
    
    2006
    
    
    
    10,637,686
    
    
    $
    16,000,000Common Stock
    
    
    2007
    
    
    
    10,000,000
    
    
    $
    50,000,000
 
 (1)
    
    Gross proceeds; does not include proceeds from warrant exercises.(2)
    
    Includes the issuance of ordinary shares to founders.(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 an aggregate exercise price of $100,000. As of the closing date of the 53




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##### Table of Contents



merger, 168,034 of such warrants were exercised for net proceeds equal to approximately
$96,000 and 13,194 of such warrants were 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 an aggregate exercise price equal to $5.3 million. These
warrants were exercised in full on January 31, 2007. Cash Flows
   Future Funding Requirements
     54




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Effects of Inflation and Currency Fluctuations
   Off-Balance Sheet Arrangements
  Recently Issued Accounting Pronouncements
      55




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##### Table of Contents



Contractual Obligations
  Total
    
    
    Less than 1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    More than 5 yearsOperating lease obligations
    
    $
    4,308
    
    
    $
    923
    
    
    $
    1,850
    
    
    $
    1,535
    
    
    
    Purchase obligations (1)
    
    $
    5,830
    
    
    $
    5,830
    
    
    
    
    
    
    
    
    
    
    
    Certain Clinical contract obligations
    
    $
    2,556
    
    
    $
    2,045
    
    
    
    511
    
    
    
    
    
    
    
    Other long term liabilities reflected
on the balance sheet under GAAP
    
    $
    937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    937Total
    
    $
    13,631
    
    
    $
    8,798
    
    
    $
    2,361
    
    
    $
    1,535
    
    
    $
    937
 
 (1)
    
    Represents open purchase orders issued to certain suppliers and other vendors mainly in
connection with certain improvements to our manufacturing facility, that were outstanding as of
December 31, 2008. Selected Quarterly Financial Data (unaudited)
 Three Months Ended On2007
(1)
    
    2008(restated)March 31
    
    June 30
    
    Sept. 30
    
    Dec. 31
    
    March 31
    
    June 30
    
    Sept. 30
    
    Dec. 31Net loss
    
    $
    8,549
    
    
    $
    9,014
    
    
    $
    11,820
    
    
    $
    2,701
    
    
    $
    5,113
    
    
    $
    4,229
    
    
    $
    6,496
    
    
    $
    6,576Net loss per share
of common stock,
basic and diluted
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.18
    
    
    $
    0.04
    
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.09
    
    
    $
    0.09
 
 (1)
    
    Our selected quarterly data includes restated financial data that was restated to change the
accounting treatment of certain stock-based compensation of non-employees required by SFAS 123(R),
Share-Based Payment, for certain transactions with nonemployees. 56




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##### Table of Contents



Quarterly Effects of the Restatement
 Three Months Ended OnMarch 31, 2007
    
    June 30, 2007
    
    Sept. 30, 2007
    
    Dec. 31, 2007As
    
    
    
    
    
    As
    
    
    
    
    
    As
    
    
    
    
    
    Aspreviously
    
    As
    
    previously
    
    As
    
    previously
    
    As
    
    previously
    
    Asreported
    
    restated
    
    reported
    
    restated
    
    reported
    
    restated
    
    reported
    
    restatedResearch and development
    
    
    1,794
    
    
    
    2,488
    
    
    
    
    
    
    
    
    
    
    
    3,445
    
    
    
    3,460General and administrative
    
    
    1,987
    
    
    
    6,392
    
    
    
    6,503
    
    
    
    6,363
    
    
    
    1,986
    
    
    
    9,045
    
    
    
    1,224
    
    
    
    (1,206
    )Net loss
    
    
    3,450
    
    
    
    8,549
    
    
    
    9,154
    
    
    
    9,014
    
    
    
    4,746
    
    
    
    11,820
    
    
    
    5,131
    
    
    
    2,701Net loss per share of common
stock, basic and diluted
    
    
    0.05
    
    
    
    0.13
    
    
    
    0.14
    
    
    
    0.14
    
    
    
    0.07
    
    
    
    0.18
    
    
    
    0.07
    
    
    
    0.04
 Share-Based Payment
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Currency Exchange Risk
   Year Ended December 31,2006
    
    2007
    
    2008Average rate for period
    
    
    4.4565
    
    
    
    4.1081
    
    
    
    3.5878Rate at year-end
    
    
    4.2250
    
    
    
    3.8460
    
    
    
    3.8020
  Interest Rate Risk
  57




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Item 8. Financial Statements and Supplementary Data
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
     58




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##### Table of Contents



Management Report on Internal Control over Financial Reporting
     Inherent Limitations on Effectiveness of Controls
  Changes
in Internal Controls
  Management Consideration of Restatement
   
 Item 9B. Other Information
  59




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PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
 
 Name
    
    Age
    
    PositionDirectorsEli Hurvitz
    
    
    76
    
    
    Chairman of the BoardDavid Aviezer, Ph.D., MBA
    
    
    44
    
    
    Director, President and Chief Executive OfficerYoseph Shaaltiel, Ph.D.
    
    
    55
    
    
    Director and Executive VP, Research and DevelopmentAlfred Akirov
    
    
    65
    
    
    DirectorAmos Bar-Shalev (1)(2)(3)
    
    
    56
    
    
    DirectorZeev Bronfeld
    
    
    57
    
    
    DirectorYodfat Harel Gross (2)(3)
    
    
    36
    
    
    DirectorRoger D. Kornberg, Ph.D.
    
    
    61
    
    
    DirectorEyal Sheratzky (1)(3)
    
    
    40
    
    
    DirectorSharon Toussia-Cohen (1)(2)
    
    
    49
    
    
    DirectorExecutive OfficersEinat Brill Almon, Ph.D.
    
    
    49
    
    
    Vice President, Product DevelopmentYossi Maimon, CPA
    
    
    38
    
    
    Vice President, Chief Financial Officer, Treasurer and Secretary
 
 (1)
    
    Member of Nominating Committee(2)
    
    Member of Audit Committee(3)
    
    Member of Compensation Committee Eli Hurvitz .
 David Aviezer, Ph.D., MBA.
 Yoseph Shaaltiel, Ph.D.
 60




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##### Table of Contents



Alfred Akirov.
 Amos Bar-Shalev.
 Zeev Bronfeld.
 Yodfat Harel Gross.
 Roger D. Kornberg, Ph.D.
 61




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##### Table of Contents



Eyal Sheratzky.
 Sharon Toussia-Cohen.
 Einat Brill Almon, Ph.D.
 Yossi Maimon, CPA.
 Section 16(a) Beneficial Ownership Reporting Compliance
  Audit Committee
   62




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##### Table of Contents



Code of Business Conduct and Ethics
   
 Item 11. Executive Compensation
 Compensation Discussion and Analysis
  Elements of Compensation
  Base Salary.
  63




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##### Table of Contents



Annual Bonus.
    Options.
  Severance and Change in Control Benefits.
 Other Compensation.
 64




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##### Table of Contents



Executive Compensation.
 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.
  .
 Yodfat Harel Gross
Eyal Sherazky
Amos Bar Shalev
 Summary Compensation Table
  Non-Equity
    
    Nonqualified
    
    All OtherStock
    
    Option
    
    Incentive Plan
    
    Deferred
    
    Compen-Salary
    
    Bonus
    
    Award(s)
    
    Award(s)
    
    Compensation
    
    Compensation
    
    sation
    
    TotalName and Principal Position
    
    Year
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    ($)
    
    Earnings($)
    
    ($)(1)
    
    ($)David Aviezer, Ph.D., MBA
    
    
    2008
    
    
    
    486,305
    
    
    
    
    
    
    
    
    
    
    
    565,394
    
    
    
    
    
    
    
    
    
    
    
    93,224
    
    
    
    1,144,923President and CEO
    
    
    2007
    
    
    
    341,074
    
    
    
    239,210
    
    
    
    
    
    
    
    351,343
    
    
    
    
    
    
    
    
    
    
    
    67,990
    
    
    
    999,617Yoseph Shaaltiel, Ph.D.
    
    
    2008
    
    
    
    226,652
    
    
    
    
    
    
    
    
    
    
    
    163,328
    
    
    
    
    
    
    
    
    
    
    
    54,704
    
    
    
    444,684Executive Vice President
    
    
    2007
    
    
    
    177,297
    
    
    
    50,000
    
    
    
    
    
    
    
    2,420
    
    
    
    
    
    
    
    
    
    
    
    47,339
    
    
    
    277,056Einat Brill Almon, Ph.D.
    
    
    2008
    
    
    
    195,559
    
    
    
    28,932
    
    
    
    
    
    
    
    253,862
    
    
    
    
    
    
    
    
    
    
    
    51,223
    
    
    
    529,576VP, Product Development
    
    
    2007
    
    
    
    153,254
    
    
    
    65,171
    
    
    
    
    
    
    
    94,482
    
    
    
    
    
    
    
    
    
    
    
    42,282
    
    
    
    355,189Yossi Maimon, CPA
    
    
    2008
    
    
    
    203,097
    
    
    
    30,659
    
    
    
    
    
    
    
    238,194
    
    
    
    
    
    
    
    
    
    
    
    83,808
    
    
    
    555,758Chief Financial Officer
    
    
    2007
    
    
    
    156,444
    
    
    
    77,223
    
    
    
    
    
    
    
    247,815
    
    
    
    
    
    
    
    
    
    
    
    41,975
    
    
    
    523,457Iftah Katz(2)
    
    
    2008
    
    
    
    131,524
    
    
    
    
    
    
    
    
    
    
    
    1,323,587
    
    
    
    
    
    
    
    
    
    
    
    35,215
    
    
    
    1,490,326Vice President of Operations
    
    
    2007
    
    
    
    114,087
    
    
    
    
    
    
    
    
    
    
    
    2,254,567
    
    
    
    
    
    
    
    
    
    
    
    36,117
    
    
    
    2,404,771
 
 (1)
    
    Includes employer contributions to pension and/or insurance plans and other miscellaneous
payments.(2)
    
    Iftah Katz joined our company as our Vice President of Operations on February 28, 2007 and
terminated on May 6, 2008. 
 65




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##### Table of Contents



GRANTS OF PLAN-BASED AWARDS
 All
    
    
    
    
    
    
    
    
    
    GrantOther
    
    
    
    
    
    
    
    
    
    DateStock
    
    All other
    
    
    
    
    
    fairAwards:
    
    Option
    
    Exercise
    
    ValueNumber
    
    Awards:
    
    or Base
    
    ofof
    
    Number of
    
    Price of
    
    StockShares
    
    Securities
    
    Option
    
    andEstimated Future Payouts Under
    
    Estimated Future Payouts Under Equity
    
    of Stock
    
    Underlying
    
    Awards
    
    OptionGrant
    
    Non-Equity Incentive Plan Awards
    
    Incentive Plan Awards
    
    or Units
    
    Options
    
    ($/Sh)
    
    AwardsName
    
    Date
    
    Threshold($)
    
    Target($)
    
    Maximum($)
    
    Threshold($)
    
    Target($)
    
    Maximum($)
    
    (#)
    
    (#) (1)
    
    (2)
    
    ($)(3)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)
    
    (f)
    
    (g)
    
    (h)
    
    (i)
    
    (j)
    
    (k)
    
    (l)David AviezerYoseph Shaaltiel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Einat Brill AlmonYossi MaimonIftah Katz
 
 (1)
    
    Represents outstanding options at December 31, 2008.(2)
    
    Represents the range of the exercise price of the stock options.(3)
    
    Represents the fair value as recorded on the grant date of the stock options. Outstanding Equity Awards at Fiscal Year-End
  66




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Option Awards
    Stock AwardsEquityEquity
    
    IncentiveIncentive
    
    PlanPlan
    
    Awards:Awards:
    
    Market orNumber
    
    PayoutEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    of
    
    ValueIncentive
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    Unearned
    
    ofPlan
    
    
    
    
    
    
    
    
    
    Number
    
    Value of
    
    Shares,
    
    UnearnedNumber
    
    Awards:
    
    
    
    
    
    
    
    
    
    of Shares
    
    Shares or
    
    Units or
    
    Shares,Number
    
    of Securities
    
    Number
    
    
    
    
    
    
    
    
    
    or Units
    
    Units of
    
    Other
    
    Units orof Securities
    
    Underlying
    
    of Securities
    
    
    
    
    
    
    
    
    
    of Stock
    
    Stock
    
    Rights
    
    OtherUnderlying
    
    Unexercised
    
    Underlying
    
    Option
    
    
    
    
    
    That
    
    That
    
    That
    
    RightsUnexercised
    
    Options
    
    Unexercised
    
    Exercise
    
    Option
    
    Have Not
    
    Have Not
    
    Have Not
    
    ThatOptions
    
    Unexercisable
    
    Unearned
    
    Price
    
    Expiration
    
    Vested
    
    Vested
    
    Vested
    
    Have NotName
    
    Exercisable (#)
    
    (#)
    
    Options (#)
    
    ($)
    
    Date
    
    (#)
    
    ($)
    
    (#)
    
    Vested ($)David Aviezer
    
    
    807,858
    
    
    
    
    
    
    
    
    
    
    
    0.120
    
    
    
    8/1/2013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610,810
    
    
    
    366,486
    
    
    
    
    
    
    
    0.972
    
    
    
    9/10/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,668
    
    
    
    533,332
    
    
    
    
    
    
    
    5.00
    
    
    
    2/7/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Yoseph Shaaltiel
    
    
    244,324
    
    
    
    
    
    
    
    
    
    
    
    0.001
    
    
    
    6/30/2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,304
    
    
    
    234,424
    
    
    
    
    
    
    
    5.00
    
    
    
    2/7/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Einat Brill Almon
    
    
    251,593
    
    
    
    
    
    
    
    
    
    
    
    0.399
    
    
    
    5/23/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,514
    
    
    
    146,594
    
    
    
    
    
    
    
    0.972
    
    
    
    8/13/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,584
    
    
    
    276,688
    
    
    
    
    
    
    
    5.00
    
    
    
    2/7/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Yossi Maimon
    
    
    262,558
    
    
    
    271,238
    
    
    
    
    
    
    
    0.972
    
    
    
    9/19/2016
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,444
    
    
    
    155,556
    
    
    
    
    
    
    
    5.00
    
    
    
    2/7/2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Iftah Katz
    
    
    76,631
    
    
    
    127,720
    
    
    
    
    
    
    
    4.33
    
    
    
    5/30/2017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  OPTION EXERCISES AND STOCK VESTED
 Option Awards
    
    Stock AwardsNumber of Shares Acquired
    
    Value Received on
    
    Number of Shares Acquired
    
    Value Received onName
    
    on Exercise (#)
    
    Exercise($)
    
    on Vesting (#)
    
    Vesting($)(a)
    
    (b)
    
    (c)
    
    (d)
    
    (e)David Aviezer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Yossi Maimon(1)
    
    
    86,176
    
    
    
    
    
    
    
    
    
    
    
    Yoseph Shaaltiel
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Einat Brill Almon
    
    
    48,370
    
    
    
    
    
    
    
    
    
    
    
    Iftah Katz
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Options were exercised through net exercise with no value received by our company in
connection with the exercise. Potential Payments upon Termination or Change-in-Control
  Employment Arrangements
 David Aviezer, Ph.D., MBA.
 67




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##### Table of Contents



Yoseph Shaaltiel, Ph.D.
 Einat Brill Almon, Ph.D.
 Yossi Maimon, CPA.
 2006 Stock Incentive Plan
  68




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
 
 69




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##### Table of Contents




 
 
  
 
  Impact of Israeli Tax Law
      70




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Compensation of Directors
  FeesEarned or
    
    
    
    
    
    
    
    
    
    
    
    
    
    NonqualifiedPaid in
    
    Stock
    
    
    
    
    
    Non-Equity Incentive
    
    Deferred Compensation
    
    All OtherName
    
    Cash($)
    
    Award($)
    
    Option Awards($)
    
    Plan Compensation($)
    
    Earnings($)
    
    Compensation($)
    
    Total($)Current DirectorsEli Hurvitz(1)
    
    
    33,000
    
    
    
    
    
    
    
    936,116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    969,116Alfred Akirov
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000Amos Bar-Shalev
    
    
    15,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,125Zeev Bronfeld
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000Yodfat Harel Gross
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000Roger D. Kornberg
    
    
    29,590
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,590Eyal Sheratzky
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000Sharon Toussia-Cohen
    
    
    33,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,000
 
 (1)
    
    Represents amounts paid to Pontifax Management Company, Ltd. pursuant to a management
consulting agreement.  Compensation Committee Interlocks and Insider Participation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 Security Ownership of Certain Beneficial Owners and Management
  
    
    each person who is known by us to own beneficially more than 5% of our common stock;
    
    each director;
    
    each of our executive officers; and
 71




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##### Table of Contents




    
    all of our directors and executive officers collectively.
   Amount and Nature of
    
    PercentageName and Address of Beneficial Owner
    
    Beneficial Ownership
    
    of ClassBoard of Directors and Executive OfficersEli Hurvitz
    
    
    6,270,949
    (1)
    
    
    8.1
    %David Aviezer, Ph.D., MBA
    
    
    1,579,752
    (2)
    
    
    2.0Yoseph Shaaltiel, Ph.D.
    
    
    1,668,172
    (3)
    
    
    2.2Alfred Akirov
    
    
    6,186,046
    (4)
    
    
    8.2Amos Bar-Shalev
    
    
    
    
    
    
    Zeev Bronfeld
    
    
    14,466,319
    (5)
    
    
    19.1Yodfat Harel Gross
    
    
    
    
    
    
    Roger D. Kornberg. Ph.D.
    
    
    15,625
    (6)
    
    
    *Eyal Sheratzky
    
    
    
    
    
    
    Sharon Toussia-Cohen
    
    
    6,556,381
    (7)
    
    
    8.6Einat Brill Almon, Ph.D.
    
    
    388,983
    (8)
    
    
    *Yossi Maimon
    
    
    357,153
    (9)
    
    
    *All executive officers and directors as
a group (12 persons)
    
    
    37,489,400
    (10)
    
    
    45.85% HoldersBiocell Ltd.
    
    
    14,466,319
    (11)
    
    
    19.1Pontifax G.P. Ltd.
    
    
    6,270,949
    (12)
    
    
    8.1Techno-Rov Holdings (1993) Ltd.
    
    
    6,186,046
    (13)
    
    
    8.2Marathon Investments Ltd.
    
    
    6,556,381
    (14)
    
    
    8.6Frost Gamma Investment Trust
    
    
    9,781,273
    (15)
    
    
    12.9
 
 *
    
    less than 1%.(1)
    
    Consists of 2,994,378 shares of our common stock held by Pontifax (Cayman) L.P., 1,378,278 of
which shares are owned of record and 1,616,100 of which shares are issuable upon exercise of
options that are exercisable within 60 days of March 1, 2009, and 3,276,571 shares of our
common stock held by Pontifax (Israel) L.P., 1,508,169 of which shares are owned of record and
1,768,402 of which shares are issuable upon exercise of options that are exercisable within
60 days of March 1, 2009. Mr. Hurvitz is the chairman of Pontifax G.P. Ltd.(2)
    
    Consists of 1,579,752 shares of our common stock issuable upon exercise of outstanding
options within 60 days of March 1, 2009. Does not include 705,401 shares of common stock
issuable upon exercise of outstanding options that are not exercisable within 60 days of March
1, 2009.(3)
    
    Consists of 1,502,054 shares of our common stock held by Dr. Shaaltiel and 166,118 shares of
our common stock issuable upon exercise of outstanding options within 60 days of March 1,
2009. Does not include 219,772 shares of common stock issuable upon exercise of outstanding
options that are not exercisable within 60 days of March 1, 2009.(4)
    
    Consists of 6,186,046 shares of our common stock held by Techno-Rov Holdings (1993) Ltd. Mr.
Akirov is the Chief Executive Officer of Techno-Rov Holdings and has the power to control its
investment decisions.(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. 72




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##### Table of Contents



(6)
    
    Consists of 15,625 shares of our common stock issuable upon exercise of outstanding options
within 60 days of March 1, 2009. Does not include 34,375 shares of common stock issuable upon
exercise of outstanding options that are not exercisable within 60 days of March 1, 2009.(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 388,983 shares of our common stock issuable upon exercise of outstanding options
within 60 days of March 1, 2009. Does not include 354,114 shares of common stock issuable
upon exercise of outstanding options that are not exercisable within 60 days of March 1, 2009.(9)
    
    Consists of 26,700 outstanding shares of our common stock and 330,473 shares of our common
stock issuable upon exercise of outstanding options within 60 days of March 1, 2009. Does not
include 349,158 shares of common stock issuable upon exercise of outstanding options that are
not exercisable within 60 days of March 1, 2009.(10)
    
    Consists of 31,623,947 shares of our common stock and 5,865,453 shares of our common stock
issuable upon exercise of options within 60 days of March 1, 2009. Does not include 1,662,819
shares of common stock issuable upon exercise of outstanding options that are not exercisable
within 60 days of March 1, 2009.(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 Hamenofim Street,
Herzliya Pituach 46725, Israel. Consists of 2,994,378 shares of our common stock held by
Pontifax (Cayman) L.P., 1,378,278 of which shares are owned of record and 1,616,100 of which
shares are issuable upon exercise of options that are exercisable within 60 days of March 1,
2009, and 3,276,571 shares of our common stock held by Pontifax (Israel) L.P., 1,508,169 of
which shares are owned of record and 1,768,402 of which shares are issuable upon exercise of
options that are exercisable within 60 days of March 1, 2009. 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, Israel. Mr. Akirov is the Chief
Executive Officer 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. 
 Item 13. Certain Relationships and Related Transactions, and Director Independence
  73




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Corporate Governance and Independent Directors
  Independent Directors
  
    
    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;
    
    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
 74




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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.
    
 Item 14. Principal Accountant Fees and Services
  Year ended December 31,2008
    
    2007Audit Fees
    
    $
    249,000
    
    
    $
    393,000Audit Related Fees
    
    $
    49,000
    
    
    $
    77,000Tax Fees
    
    $
    76,000
    
    
    $
    76,000All Other Fees
    
    $
    
    
    
    $
    70,000
 Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
  75




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2007, and 2008
    
    
    F-4Consolidated Statements of Operations for the years ended
December 31, 2006, 2007, and 2008, and for the period from December
27, 1993 (Incorporation) through December 31, 2008
    
    
    F-5Consolidated Statements of Changes in Shareholders Equity for the
years ended December 31, 2006, 2007, and 2008, and for the period
from December 27, 1993 (Incorporation) through December 31, 2008
    
    
    F-6Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2007, and 2008, and for the period from December 27, 1993
(Incorporation) through December 31, 2008
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-9
 Financial Statement Schedule.
 Exhibits.
 ExhibitNumber
    
    Exhibit Description
    
    Method of Filing3.1
    
    Amended and Restated Articles of
Incorporation of the Company
    
    Incorporated by
reference to our
Registration
Statement on Form
S-4 filed on March
26, 1998, SEC File
No. 333-486773.2
    
    Article of Amendment to Articles of
Incorporation dated June 9, 2006
    
    Incorporated by
reference to our
Registration
Statement on Form
8-A filed on March
9, 20073.3
    
    Article of Amendment to Articles of
Incorporation dated December 13, 2006
    
    Incorporated by
reference to our
Registration
Statement on Form
8-A filed on March
9, 20073.4
    
    Article of Amendment to Articles of
Incorporation dated December 26, 2006
    
    Incorporated by
reference to our
Registration
Statement on Form
8-A filed on March
9, 20073.5
    
    Article of Amendment to Articles of
Incorporation dated February 26, 2007
    
    Incorporated by
reference to our
Registration
Statement on Form
8-A filed on March
9, 20073.6
    
    Amended and Restated Bylaws of the Company
    
    Incorporated by
reference to our
Quarterly Report on
Form 10-Q for the
quarter ended June
30, 2008, filed on
August 8, 200810.1
    
    2006 Stock Incentive Plan
    
    Incorporated by
reference to our
Amended Annual
Report on Form
10-K/A for the year
ended December 31,
2006, filed on
July 13, 2007
 76




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Method of Filing10.2
    
    Employment Agreement between Protalix
Ltd. and Yoseph Shaaltiel, dated as of
September 1, 2004
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
January 8, 200710.3
    
    Employment Agreement between Protalix
Ltd. and Einat Almon, dated as of
December 19, 2004
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
January 8, 200710.4
    
    Employment Agreement between Protalix
Ltd. and David Aviezer, dated as of
September 11, 2006
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
January 8, 200710.5
    
    Employment Agreement between Protalix
Ltd. and Yossi Maimon, dated as of
October 15, 2006
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
January 8, 200710.6
    
    License Agreement entered into as of
April 12, 2005, by and between Icon
Genetics AG and Protalix Ltd.
    
    Incorporated by
reference to our
Amended Current
Report on Form
8-K/A filed on
September 20, 200710.7
    
    Research and License Agreement between
Yeda Research and Development Company
Limited and Protalix Ltd. dated as of
March 15, 2006
    
    Incorporated by
reference to our
Amended Current
Report on Form
8-K/A filed on
September 20, 200710.8
    
    Agreement between Teva Pharmaceutical
Industries Ltd. and Protalix Ltd., dated
September 14, 2006
    
    Incorporated by
reference to our
Amended Current
Report on Form
8-K/A filed on
September 20, 200710.9
    
    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 our
Current Report on
Form 8-K filed on
January 8, 200710.10
    
    Merger Agreement and Plan of
Reorganization made and entered into as
of August 21, 2006, by and among the
Company, Protalix Acquisition Co., Ltd.
and Protalix Ltd.
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
January 8, 200710.11
    
    Stock Option Award Agreement grant by and
between the Company and Steven Rubin,
dated as of December 31, 2006
    
    Incorporated by
reference to our
Annual Report on
Form 10-K for the
year ended December
31, 2007, filed on
March 30, 200710.12
    
    First Amendment to the December 31, 2006
Stock Option Award Agreement by and
between the Company and Steven Rubin,
effective as of February 28, 2007
    
    Incorporated by
reference to our
Annual Report on
Form 10-K for the
year ended December
31, 2008 filed on
March 30, 200710.13
    
    Scientific Advisory Board Agreement dated
August 5, 2007 by and between the Company
and Aaron Ciechanover, M.D.
    
    Incorporated by
reference to our
Current Report on
Form 8-K filed on
August 6, 200710.14
    
    Research and License Agreement made on
August 8, 2007, by and between Yissum
Research Development Company of
Jerusalem, the Boyce Thompson Institute
and Protalix Ltd.
    
    Incorporated by
reference to our
Quarterly Report on
Form 10-Q for the
quarter ended
September 30, 2007,
filed on November
14, 200710.15
    
    Unprotected Lease Agreement
    
    Incorporated by
reference to our
Annual Report on
Form 10-K for the
year ended December
31, 2007, filed on
March 17, 2008.21.1
    
    Subsidiaries
    
    Incorporated by
reference to our
Annual Report on
Form 10-K for the
year ended December
31, 2006, filed on
March 30, 200723.1
    
    Consent of Kesselman & Kesselman,
Certified Public Accountant (Isr.), A
member of PricewaterhouseCoopers
International Limited, independent
registered public accounting firm for the
Registrant
    
    Filed herewith
 77




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##### Table of Contents



ExhibitNumber
    
    Exhibit Description
    
    Method of Filing31.1
    
    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 herewith31.2
    
    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 herewith32.1
    
    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 herewith32.2
    
    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 24b-2 of the Exchange Act. 78




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##### Table of Contents



SIGNATURES
  PROTALIX BIOTHERAPEUTICS, INC.By:
    /s/ David AviezerDavid Aviezer, Ph.D. POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ David Aviezer
    
    President, Chief Executive Officer (Principal
    
    March 6, 2009David Aviezer, Ph.D.
    
    Executive Officer) and Director/s/ Yossi Maimon
    
    Chief
Financial Officer, Treasurer and Secretary
    
    March 6, 2009Yossi Maimon
    
    (Principal Financial and Accounting Officer)/s/ Yoseph Shaaltiel
    
    Executive VP, Research and Development and
    
    March 6, 2009Yoseph Shaaltiel, Ph.D.
    
    Director/s/ Eli Hurvitz
    
    Chairman of the Board
    
    March 6, 2009Eli Hurvitz/s/ Alfred Akirov
    
    Director
    
    March 6, 2009Alfred Akirov/s/ Amos Bar-Shalev
    
    Director
    
    March 6, 2009Amos Bar-Shalev/s/ Zeev Bronfeld
    
    Director
    
    March 6, 2009Zeev Bronfeld/s/ Yodfat Harel Gross
    
    Director
    
    March 6, 2009Yodfat Harel Gross
 79




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Eyal Sheratzky
    
    Director
    
    March 6, 2009Eyal Sheratzky/s/ Roger D. Kornberg
    
    Director
    
    March 6, 2009Roger D. Kornberg, Ph.D./s/ Sharon Toussia-Cohen
    
    Director
    
    March 6, 2009Sharon Toussia-Cohen
 80




---



##### 



PROTALIX BIOTHERAPEUTICS, INC.   CONSOLIDATED FINANCIAL STATEMENTS
  PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheets as of December 31, 2007, and 2008
    
    
    F-3Consolidated Statements of Operations for the years ended December
31, 2006, 2007, and 2008 and for the period from December 27, 1993
(Incorporation), through December 31, 2008
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the
years ended December 31, 2006, 2007, and 2008, and for the period
from December 27, 1993 (Incorporation), through December 31, 2008
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December
31, 2006, 2007, and 2008, and for the period from December 27, 1993
(Incorporation), through December 31, 2008
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
   F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  PROTALIX BIOTHERAPEUTICS, INC.
 (A Development stage company)
     Tel-Aviv, Israel
    
    /s/ Kesselman & KesselmanMarch 6, 2009
    
    Kesselman & KesselmanCertified Public Accountant (Isr.)A member of PricewaterhouseCoopersInternational Limited
 F-2




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.
 
 CONSOLIDATED BALANCE SHEETS
  December 31,2007
    
    
    2008(restated)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    61,813
    
    
    $
    42,596Accounts receivable
    
    
    1,354
    
    
    
    793Total current assets
    
    
    63,167
    
    
    
    43,389FUNDS IN RESPECT OF EMPLOYEE
RIGHTS UPON RETIREMENT
    
    
    464
    
    
    
    581PROPERTY AND EQUIPMENT, NET
    
    
    4,506
    
    
    
    6,841Total assets
    
    $
    68,137
    
    
    $
    50,811LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and accruals:Trade
    
    $
    899
    
    
    $
    2,235Other
    
    
    2,863
    
    
    
    3,292Total current liabilities
    
    
    3,762
    
    
    
    5,527LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT
    
    
    690
    
    
    
    937Total liabilities
    
    
    4,452
    
    
    
    6,464COMMITMENTSSHAREHOLDERS EQUITY:Common Stock, $0.001 par value:Authorized  as of December 31, 2007 and 2008,
150,000,000 shares; Issued and outstanding 
as of December 31, 2007 and 2008, 75,775,439
and 75,938,059 shares, respectively
    
    
    76
    
    
    
    76Additional paid-in capital
    
    
    116,205
    
    
    
    119,281Deficit accumulated during the development stage
    
    
    (52,596
    )
    
    
    (75,010
    )Total shareholders equity
    
    
    63,685
    
    
    
    44,347Total liabilities and shareholders equity
    
    $
    68,137
    
    
    $
    50,811
 The accompanying notes are an integral part of the consolidated financial statements.
 F-3




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Period fromDecember 27, 1993*Year ended December 31,
    
    
    through2006
    
    
    2007
    
    
    2008
    
    
    December 31, 2008(restated)REVENUES
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    830COST OF REVENUES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    206GROSS PROFIT
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    624RESEARCH AND DEVELOPMENT EXPENSES
    
    $
    6,997
    
    
    $
    14,641
    
    
    $
    22,115
    
    
    
    54,417Less  grants
    
    
    (1,751
    )
    
    
    (1,071
    )
    
    
    (4,714
    )
    
    
    (10,901
    )5,246
    
    
    
    13,570
    
    
    
    17,401
    
    
    
    43,516GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    4,525
    
    
    
    20,594
    
    
    
    6,770
    
    
    
    36,360OPERATING LOSS
    
    
    9,771
    
    
    
    34,164
    
    
    
    24,171
    
    
    
    79,252FINANCIAL INCOME  NET
    
    
    (344
    )
    
    
    (2,080
    )
    
    
    (1,757
    )
    
    
    (4,205
    )NET LOSS BEFORE CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    9,427
    
    
    
    32,084
    
    
    
    22,414
    
    
    
    75,047CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    (37
    )NET LOSS FOR THE PERIOD
    
    $
    9,390
    
    
    $
    32,084
    
    
    $
    22,414
    
    
    $
    75,010NET LOSS PER SHARE OF COMMON STOCK  BASIC:Prior to cumulative effect of change in accounting
principle
    
    $
    0.32
    
    
    $
    0.48
    
    
    $
    0.30Cumulative effect of change in accounting principle
    
    
    **
    
    
    
    
    
    
    
    $
    0.32
    
    
    $
    0.48
    
    
    $
    0.30NET LOSS PER SHARE OF COMMON STOCK  DILUTED:Prior to cumulative effect of change in accounting
principle
    
    $
    0.32
    
    
    $
    0.48
    
    
    $
    0.30Cumulative effect of change in accounting principle
    
    
    **
    
    
    
    
    
    
    
    $
    0.32
    
    
    $
    0.48
    
    
    $
    0.30WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON STOCK USED
IN COMPUTING LOSS PER SHARE OF COMMON STOCK:Basic
    
    
    29,300,987
    
    
    
    67,187,329
    
    
    
    75,890,633Diluted
    
    
    29,300,987
    
    
    
    67,187,329
    
    
    
    75,890,633
 
 *
    
    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




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.
 
 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
  DeficitaccumulatedConvertible
    
    
    
    
    
    
    Convertible
    
    
    
    
    
    
    Additional
    
    
    duringCommon
    
    
    preferred
    
    
    Common
    
    
    preferred
    
    
    
    
    
    
    paid-in
    
    
    developmentStock
    
    
    shares
    
    
    Stock
    
    
    Shares
    
    
    Warrants
    
    
    Capital
    
    
    stage
    
    
    TotalNumber of shares
    
    
    AmountAs of  December 27, 1993 (1)Changes during the period from December 27,
1993 through December 31, 2005:Ordinary and convertible preferred A
and B shares issued for cash (net of
issuance costs of $532)
    
    
    18,801,527
    
    
    
    398,227
    
    
    
    19
    
    
    
    1
    
    
    
    1,027
    
    
    
    13,634
    
    
    
    
    
    
    
    14,681Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,536
    
    
    
    
    
    
    
    2,536Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,122
    )
    
    
    (11,122
    )Balance at December 31, 2005
    
    
    18,801,527
    
    
    
    398,227
    
    
    
    19
    
    
    
    1
    
    
    
    1,027
    
    
    
    16,170
    
    
    
    (11,122
    )
    
    
    6,095Changes during 2006:Common Stock and warrants issued for
cash (net of issuance costs of $236)
(see Note 6c)
    
    
    10,054,600
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    355
    
    
    
    14,522
    
    
    
    
    
    
    
    14,887Merger with a wholly-owned subsidiary
of Orthodontix, Inc. (net of issuance
cost of $642) (2)
    
    
    583,280
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    241Exercise of options granted to
employees and non-employees
    
    
    2,670,403
    
    
    
    847
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    394
    
    
    
    
    
    
    
    397Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,421
    
    
    
    
    
    
    
    3,421Conversion of convertible preferred
shares into Common Stock (see Note 6a)
(3)
    
    
    24,375,870
    
    
    
    (399,074
    )
    
    
    24
    
    
    
    (1
    )
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    Change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    37
    
    
    
    Expiration of warrants (4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    34
    
    
    
    
    
    
    
    Exercise of warrants (5)
    
    
    5,296,279
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    (993
    )
    
    
    9,658
    
    
    
    
    
    
    
    8,670Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,427
    )
    
    
    (9,427
    )Balance at December 31, 2006
    
    
    61,781,959
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    355
    
    
    
    44,379
    
    
    
    (20,512
    )
    
    
    24,284Changes during 2007 (restated):Common Stock issued for cash (net of
issuance costs of $4,310) (see Note 6e)
    
    
    10,000,000
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    45,680
    
    
    
    
    
    
    
    45,690Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,437
    
    
    
    
    
    
    
    20,437Exercise of options granted to employees
    
    
    110,064
    
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Exercise of warrants
    
    
    3,875,416
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    (355
    )
    
    
    5,684
    
    
    
    
    
    
    
    5,333Restricted Common Stock issued for
future services (6)
    
    
    8,000
    
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,084
    )
    
    
    (32,084
    )Balance at December 31, 2007 (restated)
    
    
    75,775,439
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    116,205
    
    
    
    (52,596
    )
    
    
    63,685Changes during 2008:Restricted Common Stock issued for
future services (6)
    
    
    (5,333
    )
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,074
    
    
    
    
    
    
    
    3,074Exercise of options granted to
employees (includes net exercise)
    
    
    167,953
    
    
    
    
    
    
    
    *
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,414
    )
    
    
    (22,414
    )Balance at December 31, 2008
    
    
    75,938,059
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    119,281
    
    
    
    (75,010
    )
    
    
    44,347
 
 *
    
    Represents an amount less than $1.(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 583,280
shares of Common Stock. See Note 6b.(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 6b.(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 6d.(6)
    
    The Company issued a total of 8,000 shares of restricted Common Stock in consideration for
services provided by, and to be provided by, a member of the Companys Scientific Advisory
Board. Such services were terminated in October 2008 while the forfeiture provisions of the
restricted stock were still in effect. Accordingly, 5,333 shares of the restricted Common
Stock were forfeited. See Note 6f(2)(a)(3). The accompanying notes are an integral part of the consolidated financial statements.
 F-5




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Period fromDecember 27, 1993*Year ended December 31,
    
    
    through2006
    
    
    2007
    
    
    2008
    
    
    December 31, 2008(restated)CASH FLOWS FROM OPERATING
ACTIVITIES:Net Loss
    
    $
    (9,390
    )
    
    $
    (32,084
    )
    
    $
    (22,414
    )
    
    $
    (75,010
    )Adjustments required to reconcile net loss to net cash
used in operating activities:
    
    
    
    
    
    
    
    
    
    
    Cumulative effect of change in accounting principle
    
    
    (37
    )
    
    
    
    
    
    
    
    
    
    
    (37
    )Share based compensation
    
    
    3,421
    
    
    
    20,448
    
    
    
    3,071
    
    
    
    29,455Depreciation and impairment of fixed assets
    
    
    502
    
    
    
    759
    
    
    
    1,301
    
    
    
    3,240Financial income net (mainly exchange differences)
    
    
    
    
    
    
    (806
    )
    
    
    (270
    )
    
    
    (1,076
    )Changes in accrued liability for employee rights
upon retirement
    
    
    151
    
    
    
    254
    
    
    
    247
    
    
    
    937Loss (Gain) on amounts funded in respect of employee
rights upon retirement
    
    
    (7
    )
    
    
    (57
    )
    
    
    39
    
    
    
    (65
    )Gain on sale of fixed assets
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Changes in operating assets and liabilities:Decrease (increase) in accounts receivable
    
    
    (1,031
    )
    
    
    140
    
    
    
    636
    
    
    
    (509
    )Increase in accounts payable and accruals
    
    
    1,300
    
    
    
    903
    
    
    
    1,375
    
    
    
    4,382Net cash used in operating activities
    
    $
    (5,091
    )
    
    $
    (10,449
    )
    
    $
    (16,015
    )
    
    $
    (38,689
    )CASH FLOWS FROM INVESTING
ACTIVITIES:Purchase of property and equipment
    
    $
    (842
    )
    
    $
    (2,335
    )
    
    $
    (3,371
    )
    
    $
    (9,193
    )Investment grant received in respect of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38Investment in restricted deposit
    
    
    (47
    )
    
    
    
    
    
    
    (175
    )
    
    
    (222
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    11
    
    
    
    1
    
    
    
    12Amounts funded in respect of employee rights
upon retirement, net
    
    
    (91
    )
    
    
    (114
    )
    
    
    (156
    )
    
    
    (516
    )Net cash used in investing activities
    
    $
    (980
    )
    
    $
    (2,438
    )
    
    $
    (3,701
    )
    
    $
    (9,881
    )CASH FLOWS FROM FINANCING
ACTIVITIES:Loan and convertible bridge loan received
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,145Repayment of loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )Issuance of shares and warrants, net of issuance cost
    
    
    14,877
    
    
    
    45,746
    
    
    
    (56
    )
    
    
    74,059Exercise of options and warrants
    
    
    1,490
    
    
    
    12,924
    
    
    
    5
    
    
    
    14,419Merger with a wholly-owned subsidiary of the
Company, net of issuance cost
    
    
    341
    
    
    
    (104
    )
    
    
    
    
    
    
    237Net cash provided by (used in) financing activities
    
    $
    16,708
    
    
    $
    58,566
    
    
    $
    (51
    )
    
    $
    89,860EFFECT OF EXCHANGE RATE CHANGES ON
CASH
    
    
    
    
    
    
    756
    
    
    
    550
    
    
    
    1,306NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    10,637
    
    
    
    46,435
    
    
    
    (19,217
    )
    
    
    42,596BALANCE OF CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    4,741
    
    
    
    15,378
    
    
    
    61,813
    
    
    
    BALANCE OF CASH AND CASH
EQUIVALENTS AT END OF PERIOD
    
    $
    15,378
    
    
    $
    61,813
    
    
    $
    42,596
    
    
    $
    42,596
 
 *
    
    Incorporation date, see Note 1a. The accompanying notes are an integral part of the consolidated financial statements.
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PROTALIX BIOTHERAPEUTICS, INC.   CONSOLIDATED STATEMENTS OF CASH FLOWS
  Period fromDecember 27, 1993*Year ended December 31,
    
    
    through2006
    
    
    2007
    
    
    2008
    
    
    December 31, 2008(restated)SUPPLEMENTARY DISCLOSURE OF
CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    **
    
    
    
    
    
    
    
    
    
    
    $
    80SUPPLEMENTARY INFORMATION ON
INVESTING AND FINANCING ACTIVITIES
NOT INVOLVING CASH FLOWS:Conversion of convertible bridge loan into shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,145Purchase of property and equipment
    
    $
    135
    
    
    $
    666
    
    
    $
    932
    
    
    $
    932Issuance cost not yet paid and accruals  other
    
    $
    5
    
    
    $
    61
    
    
    $
    5
    
    
    $
    5Exercise of warrants (see Note 6d)
    
    $
    7,577Issuance cost paid by a grant of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    21Consultants and director credit balance
converted into shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    80Merger with a wholly-owned subsidiary of
Orthodontix, Inc:Prepaid expenses
    
    $
    4Issuance cost setoff against accounts payable
    
    $
    104
 
 *
    
    Incorporation date. See Note 1a.**
    
    Represents an amount less than $1. The accompanying notes are an integral part of the consolidated financial statements.
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PROTALIX BIOTHERAPEUTICS, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 1  SIGNIFICANT ACCOUNTING POLICIES
 a.
    
    General
 1.
    
    OperationProtalix BioTherapeutics, Inc. (the Company) and its wholly-owned subsidiary,
Protalix Ltd. (the Subsidiary or Protalix Ltd.), are biopharmaceutical companies
focused on the development and commercialization of recombinant therapeutic proteins
based on the Companys proprietary ProCellExtm protein expression system
(ProCellEx). The Companys lead product development candidate is prGCD for the
treatment of Gaucher disease, which the Company is developing using its ProCellEx
protein expression system. The Company is currently treating patients in a phase
III clinical trial of prGCD.The Company has been in the development stage since its inception (see 2 below).
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 (the 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
will receive regulatory approval of any of its product candidates, and a substantial
amount of time may pass before the Company achieves a level of sales adequate to
support the Companys operations, if at all. The Company will also incur
substantial expenditures in connection with the regulatory approval process and may
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 in other countries, and on the success of the Companys clinical trials.
The Company cannot predict the outcome of these activities.2.
    
    The MergerOn December 31, 2006, the Company (formerly Orthodontix, Inc.) consummated the
acquisition of Protalix Ltd., a privately-held Israeli biotechnology company
incorporated on December 27, 1993, by the merger (the Merger) of its wholly owned
subsidiary, Protalix Acquisition Co., Ltd., with Protalix Ltd. At and as of the
Merger, the former shareholders of Protalix Ltd. received a number of shares of
Common Stock equal to more than 99% of the outstanding shares of Common Stock. As a
result, Protalix Ltd. is now the Companys wholly-owned subsidiary. As of that
date, 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 the Subsidiary before
the Merger. See Note 6b for a 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
effected in connection with the Merger), unless otherwise stated herein. All
convertible preferred share data is provided on a pre-exchange basis as all of the
preferred shares of the Subsidiary were converted in ordinary shares prior to the
Merger. See Note 6b.3.
    
    LiquidityThe 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 will be able to maintain its
current planned development activities and the corresponding level of expenditures
for approximately the next 24 months, although no assurance can be given that the
Company will not need additional cash prior to such time.If there are unexpected increases in general and administrative expenses and
research and development expenses, the Company may need to seek additional financing
during the next 24 months.
 b.
    
    Basis of presentation
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES :
  c.
    
    Functional currencyThe dollar is the currency of the primary economic environment in which the operations
of the Company and the Subsidiary are conducted. 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 the major source of the Companys financing has been provided
in dollars.Transactions and balances originally denominated in dollars are presented at their
original amounts. Balances in non-dollar currencies are translated into dollars using
historical and current exchange rates for non-monetary and monetary balances,
respectively. For non-dollar transactions and other items (stated below) reflected in
the statements of operations, the following exchange rates are used: (i) for
transactions  exchange rates at the transaction dates or average rates; and (ii) for
other items (derived from non-monetary balance sheet items such as depreciation and
amortization, etc.)  historical exchange rates. Currency transaction gains or losses
are carried to financial income or expenses, as appropriate.d.
    
    Cash equivalentsThe Company considers all short-term, highly liquid investments, which include
short-term bank 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.2.
    
    The Companys assets are depreciated by the straight-line method on the
basis of their estimated useful lives as follows:
 yearsLaboratory equipment
    
    
    5Furniture
    
    
    10-15Computer equipment
    
    
    3
  f.
    
    Impairment in value of long-lived assets:The Company tests long-lived assets for impairment if an indication of impairment
exists. If the sum of expected future cash flows of definite life of long lived assets
(undiscounted and without interest charges) is less than the carrying amount of such
assets, the Company recognizes an impairment loss, and writes down the assets to their
estimated fair values, calculated based on expected future discounted cash flows. See
also Note 3c.g.
    
    Income taxes
 1.
    
    Deferred income taxesDeferred taxes are determined utilizing the assets and liabilities method based on
the estimated future tax effects of the 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.
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES :
  2.
    
    Uncertainty in income taxesAs of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 specifies how tax benefits for uncertain tax positions are to be
recognized, measured and derecognized in financial statements; requires certain
disclosures of uncertain tax positions; specifies how reserves for uncertain tax
positions should be classified on the balance sheet; and provides transition and
interim-period guidance, among other provisions. The adoption of FIN 48 did not
result in any adjustment to the Companys consolidated financial statements.
 h.
    
    Research and development costsResearch and development costs are expensed as incurred and consist primarily of
personnel, facilities, equipment and supplies for research and development activities.
Grants received by the Subsidiary from the Office of the Chief Scientist of Israels
Ministry of Industry and Trade (the OCS) and other research foundations are recognized
when the grant becomes receivable, provided there is reasonable assurance that the
Company or the Subsidiary 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 applicable 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 have not reached technological
feasibility and have no alternative future use are charged to research and development
costs at the purchase date.Effective January 1, 2008, the Company adopted Emerging Issues Task Force (EITF) Issue
No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities (EITF 07-3). EITF 07-3
requires that nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities be deferred and amortized over
the period that the goods are delivered or the related services are performed, subject
to an assessment of recoverability. The Companys adoption of EITF 07-3 did not have a
material effect on the Companys consolidated financial statements.i.
    
    Comprehensive lossThe Company has no other comprehensive loss components other than net loss for the
reported periods.j.
    
    Concentration of credit risksFinancial instruments that potentially subject the Company to concentration of credit
risk consist principally of bank deposits. The Company deposits these instruments with
highly rated financial institutions, mainly in Israeli banks, and, as a matter of
policy, limits the amounts of credit exposure to any one financial institution. The
Company has not experienced any credit losses in these accounts and does not believe it
is exposed to any significant credit risk on these instruments.k.
    
    Share-based compensationThe Company accounts for share based payments in accordance with Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-based Payment (SFAS 123R). SFAS
123R requires awards classified as equity awards be accounted for using the grant-date
fair value method. The fair value of share-based payment transactions is recognized as
an expense over the requisite service period, net of estimated forfeitures. The Company
estimated forfeitures based on historical
experience and anticipated future conditions.
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES :
    l.
    
    Net Loss per shareBasic and diluted loss per share (LPS) are 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 in the losses of the Company.Convertible preferred shares, shares of restricted Common Stock and the shares of Common
Stock underlying outstanding options and warrants of the Company were not included in
the computation of diluted LPS because of the anti-dilutive effect of doing so.The total weighted average number of shares of Common Stock underlying the convertible
preferred shares (on a pre-exchange basis), which have been excluded from the
calculations of diluted LPS, were 278,805, 0 and 0 for the years 2006, 2007 and 2008,
respectively.Diluted LPS does not include options, restricted shares of Common Stock and warrants of
the Company in the amount of 14,403,386, 11,959,795 and 11,037,356 shares of Common
Stock for the years 2006, 2007 and 2008, respectively (of which 9,957,800, 0 and 0
shares of Common Stock, respectively, are included on a post-exchange basis).m.
    
    Fair Value MeasurementEffective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(SFAS 157), and the related effective FASB Staff Positions (FSPs). SFAS 157 defines
fair value, establishes a framework for measuring fair value and enhances fair value
measurement disclosure. Under this standard, fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability (i.e., the exit
price) in an orderly transaction between market participants at the measurement date.The adoption of SFAS 157 did not have a material impact on the Companys results of
operations and financial condition as the Company does not have any financial asset or
liability that is measured at fair value on a recurring basis in accordance with the
requirements of SFAS 157.In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement
No. 157. FSP FAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 for
all nonfinancial assets and nonfinancial liabilities, except those that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least
annually).
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES :
 n.
    
    Newly issued Accounting Pronouncements
 1.
    
    In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), Business Combinations (SFAS 141(R)). SFAS
141(R) changes significantly the accounting for business combinations. Among the
more significant changes, it expands the definition of a business and a business
combination, changes the measurement of acquirer shares issued in consideration for
a business combination, the recognition of contingent consideration, the accounting
for contingencies, the recognition of capitalized in-process research and
development, the accounting for acquisition-related restructuring cost accruals,
the treatment of acquisition related transaction costs and the recognition of
changes in the acquirers income tax valuation allowance and income tax
uncertainties.SFAS 141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. Early application is prohibited. The Company is
required to adopt SFAS 141(R) on January 1, 2009. The Company does not expect the
adoption of this statement to have a material effect on its consolidated financial
statements.2.
    
    In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements,
an Amendment of ARB No. 51 (SFAS 160).SFAS 160 amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.
An ownership interest in subsidiaries held by any party other than a parent should
be presented in the consolidated statement of financial position within equity, but
separate from the parents equity. SFAS 160 requires that changes in a parents
ownership interest while the parent retains its controlling financial interest in
its subsidiary should be accounted for similarly as equity transactions. When a
subsidiary is deconsolidated, any retained noncontrolling equity investment in the
former subsidiary should be initially measured at fair value, with any gain or loss
recognized in earnings.SFAS 160 requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income statement, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interests.SFAS 160 is effective for fiscal years (including interim periods within those
fiscal years) beginning on or after December 15, 2008. Earlier adoption is
prohibited. The statement shall be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirement which shall be applied retrospectively for all periods
presented. The Company will be required to adopt SFAS 160 on January 1, 2009. The
Company does not expect the adoption of this statement to have a material effect on
its consolidated financial statements.3.
    
    In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133 (SFAS 161), which requires additional disclosures about the objectives
of using derivative instruments; the method by which the derivative instruments and
related hedged items are accounted for under FASB Statement No. 133 and its related
interpretations; and the effect of derivative instruments and related hedged items
on financial position, financial performance, and cash flows. SFAS 161 also
requires disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008, with
early adoption encouraged. The Company is required to adopt SFAS 161 on January 1,
2009. This statement will not impact the consolidated financial results as it is
disclosure-only in nature.4.
    
    In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting
for Collaborative Arrangements (EITF 07-1). EITF 07-1 defines collaborative
arrangements and establishes reporting requirements for transactions between
participants in a collaborative arrangement and between participants in the
arrangement and third parties. EITF 07-1 also establishes the appropriate income
statement presentation and classification for joint operating activities and
payments between participants, as well as the sufficiency of the disclosures
related to these arrangements. EITF 07-1 is effective for fiscal years beginning
after December 15, 2008.
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SIGNIFICANT ACCOUNTING POLICIES :
  o.
    
    ReclassificationsCertain figures in respect of prior years have been reclassified to conform with the
current year presentation.
 NOTE 2  RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
 Share-Based Payment
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2  RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS :
 CONSOLIDATED BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 2007
 As Reported
    
    Adjustment
    
    As RestatedAdditional Paid In Capital
    
    
    106,602
    
    
    $
    9,603
    
    
    
    116,205Deficit accumulated during development stage
    
    
    (42,993
    )
    
    
    (9,603
    )
    
    
    (52,596
    )Total Shareholders Equity
    
    $
    68,137
    
    
    
    
    
    
    
    68,137
 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2007
 As Reported
    
    Adjustment
    
    As RestatedResearch and Development Expenses, Net
    
    $
    12,861
    
    
    $
    709
    
    
    $
    13,570General and Administrative Expenses
    
    
    11,700
    
    
    
    8,894
    
    
    
    20,594Operating Loss
    
    
    24,561
    
    
    
    9,603
    
    
    
    34,164Net Loss for the Period
    
    
    22,481
    
    
    
    9,603
    
    
    
    32,084Net Loss Per Share of Common Stock Basic and Diluted
    
    
    0.33
    
    
    
    0.15
    
    
    
    0.48
 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2007
 As Reported
    
    Adjustment
    
    As RestatedNet loss for the period
    
    $
    (22,481
    )
    
    $
    (9,603
    )
    
    $
    (32,084
    )Adjustments required to
reconcile net loss to net
cash used in operating
activities:Share based compensation
    
    
    10,845
    
    
    
    9,603
    
    
    
    20,448
  NOTE 3  PROPERTY AND EQUIPMENT
 a.
    
    Composition of property and equipment grouped by major classifications, and
changes, is as follows:
 December 31,2007
    
    
    2008Laboratory equipment
    
    $
    3,580
    
    
    $
    5,898Furniture and computer equipment
    
    
    462
    
    
    
    699Leasehold improvements
    
    
    2,021
    
    
    
    3,058Equipment under construction
    
    
    63
    
    
    
    97$
    6,126
    
    
    $
    9,752Less  accumulated depreciation
and amortization
    
    
    (1,620
    )
    
    
    (2,911
    )$
    4,506
    
    
    $
    6,841
 b.
    
    Depreciation and amortization in respect of property and equipment totaled
$435, $692 and $1,301 for the years ended December 31, 2006, 2007 and 2008,
respectively.c.
    
    During the years ended December 31, 2006 and 2007, the Company tested the
carrying value of certain long lived assets. As a result, the Company recorded a total
impairment of $67 and $67, respectively. See also Note 8c and 8d. The impaired long
lived assets were mainly laboratory equipment and leasehold improvements.
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4  LIABILITY FOR EMPLOYEE RIGHTS UPON RETIREMENT
        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 were
funded, partially, by grants from the OCS. 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 received 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), plus, commencing upon January 1, 2001, interest at annual
rate based on LIBOR. In addition, if the Company receives approval to manufacture
the products developed with government grants outside the State 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 the State of Israel, and, possibly, an increased royalty rate.
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PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5  COMMITMENTS :
 At December 31, 2008, the maximum royalty amount payable by the Company under these
funding arrangements is approximately $10,584 (without interest, assuming 100% of
the funds are payable). However, as of December 31, 2008, the Company has not
earned any revenues from the sale of products and no royalty payments have accrued.2.
    
    The Company is a party to certain research and license agreements.Under the agreements, the Company is obligated to pay royalties at varying rates
from its future revenues. As of December 31, 2008, no royalty payments have become
payable under the agreements.Under each agreement, the Company is also obligated to pay milestone, licensing and
other payments to the counterparties of the agreement. The payments under the
agreements are for varying amounts and are subject to varying conditions. If all of
the contingencies with respect to milestone payments under the research and license
agreements are met, the aggregate milestone payments payable would be approximately
$1.3 million and would be payable, if at all, as the Companys projects progress
over the course of a number of years. No milestone payments have become payable
under the three agreements for the year ended December 31, 2008.None of the agreements has a fixed termination date. Subject to earlier termination
for other reasons, each agreement terminates after a certain number of years
following the first commercial sale of any licensed product under the agreement or
after a certain number of years without the initiation of commercial sales of any
product under the agreement.
 b.
    
    The Company has entered into sub-contracting agreements with several clinical
providers in Israel, the United States and certain other countries in connection with
its primary product development process. As of December 31, 2008, total commitments
under said agreements amounted to approximately $2,556.c.
    
    The Company is a party to a number of lease agreements for its facilities, the
latest of which expires in 2021. The Company has the option to extend certain of such
agreements for one additional five-year period. Under those leases, the total monthly
rental payments are approximately $14. During the years ended December 31, 2006 and
2008 the Company provided bank guarantees equal to six months rent to secure the
fulfillment of its obligations under the lease agreements. The future minimum lease
payments required in each of the next five years under the operating leases for such
premises are approximately as follows: 2009  $603, 2010  $737, 2011- $755,
2012-$755 and 2013-$755. Lease expenses totaled $109, $197 and $220 for the years ended
December 31, 2006, 2007 and 2008, respectively.In January 2008, the Company entered into a lease agreement for the extension of its
current facility. The term of the lease is 7.5 years, commencing upon the date the
newly-leased space is ready for occupancy by the Company, with three options for
additional five-year periods, for a total of 15 additional years. The monthly rental
payment is approximately $27 and is subject to increase based on certain improvements to
be provided by the lessor to the Company, which amounts to approximately $41 monthly
rental payment as of December 31, 2008.d.
    
    In July 2004, the Company entered into several three-year lease and maintenance
agreements for vehicles which are regularly amended as new vehicles are leased. The
current monthly lease fees aggregate approximately $25. The expected lease payments
for the years ending December 31, 2009, 2010 and 2011 are $321, $264 and $94,
respectively.e.
    
    On September 14, 2006, the Subsidiary entered into the Teva Agreement with Teva
for the development and manufacture of two proteins using ProCellEx. Mr. Hurvitz, the
Chairman of the Companys Board of Directors, is the Chairman of Tevas Board of
Directors, and Phillip Frost M.D., a former director and a major shareholder of the
Company, is the Vice Chairman of Tevas Board of Directors. Pursuant to the Teva
Agreement, the Company will collaborate on the research and development of two proteins
using ProCellEx. The Subsidiary granted to Teva an exclusive license to commercialize
the products developed under the collaboration in return for royalty and milestone
payments payable upon the achievement of certain pre-defined goals. The Subsidiary
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.
    
    On August 8, 2007, the Subsidiary signed an agreement with the Yissum Research
and Development Company, the technology transfer arm of the Hebrew University of
Jerusalem, Israel, and the Boyce Thompson Institute for Plant Research, at Cornell
University, Ithaca, New York, to develop a proprietary plant cell-based
acetylcholinesterase (AChE) and its molecular variants for the use in several
therapeutic and prophylactic
 F-16




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5  COMMITMENTS :
  NOTE 6  SHARE CAPITAL
 a.
    
    Rights of the Companys Stock
 1.
    
    Common StockEach share of Common Stock is entitled to one vote. The holders of Common Stock are
also entitled to receive dividends whenever funds are legally available, when and if
declared by the Board of Directors. Since its inception, the Company has not
declared any dividends.2.
    
    Preferred SharesThe 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 Companys Board of Directors. The directors have not
designated any class of preferred stock and no shares of preferred stock have ever
been issued.3.
    
    Convertible Preferred SharesThe convertible preferred shares were issued by the Subsidiary. As of September 11,
2006, all of the convertible preferred shareholders converted their preferred shares
into ordinary shares of the Subsidiary 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
ordinary shares of the Subsidiary. All such ordinary shares were exchanged for
shares of Common Stock in connection with the Merger.
 b.
    
    The MergerOn 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 (the Merger Agreement).
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 and the
former shareholders of Protalix acquired, at and as of the Closing of the Merger, in
excess of 99% of the Companys outstanding shares of Common Stock. All figures in this
Note 5 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 6c) 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. See Note 6c.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 6d) were exchanged for options and warrants of the Company. In
connection with the exchange, the Company issued options and warrants to purchase
9,004,000 shares of Common Stock. The exercise prices of such options and warrants have
been adjusted to reflect the conversion ratio of the Merger.
 F-17




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 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 no additional
compensation costs.For accounting purposes, the Merger was treated as a recapitalization of the Company
(except with respect to the above mentioned warrants granted to the investors).
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.c.
    
    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 equal to $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.
At the closing of the Merger, the warrants issued were convertible into 3,875,416 shares
of Common Stock. On January 31, 2007, such warrants were exercised for 3,875,416 shares
of Common Stock with an aggregate exercise price equal to $5,333.d.
    
    Immediately prior to the closing of the Merger, outstanding warrants to acquire
ordinary shares of Protalix Ltd. were exercised for 5,296,279 shares of Common Stock on
a post-Merger basis. The aggregate exercise price for the warrants was $8,670 in cash,
$7,577 of which was held in trust for the Company and was shown as a deposit in the
balance sheets. The funds in trust were released to the Company on January 3, 2007.e.
    
    In October 2007, the Company issued and sold 10,000,000 shares of Common Stock
in an underwritten public offering at a price equal to $5.00 per share. The net
proceeds to the Company were $45,690 (net of underwriting commissions and issuance
costs of $4,310).f.
    
    Stock based compensationOn December 14, 2006, the Board of Directors adopted the Protalix BioTherapeutics, Inc.
2006 Stock Incentive Plan (the Plan). The grant of options to Israeli employees under
the Plan is subject to the terms stipulated by Sections 102 and 102A of the Israeli
Income Tax Ordinance. Each option grant is subject to the track chosen by the Company,
either Section 102 or Section 102A of the Israeli Income Tax Ordinance, 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. For Israeli non-employees, the share option plan is subject to Section 3(i)
of the Israeli Income Tax Ordinance.Immediately prior to the closing of the Merger, options to purchase 88,001 ordinary
shares of Protalix Ltd. were outstanding under the Plan. Pursuant to the terms of the
Merger Agreement, the Company assumed all of the outstanding obligations under such plan
and, accordingly, the Company issued options to purchase 5,375,174 shares of Common
Stock, in the aggregate, in lieu of ordinary shares of Protalix Ltd., and has reserved
an additional 4,366,481 shares of Common Stock under the Plan for future allocation
under the Plan. As of December 31, 2008, 2,056,623 shares of Common Stock remain
available for grant under the Plan.
 F-18




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
    1.
    
    Options granted to employees:
 a.
    
    Below is a table summarizing all of the option grants to
employees from inception through December 31, 2008:
 Year of
    
    No. of options
    
    Exercise
    
    
    
    Fair value
    
    ExerciseGrant
    
    granted
    
    price range
    
    Vesting period
    
    at grant
    
    Period2001
    
    
    244,324
    
    
    
    0.001
    
    
    immediate
    
    $
    42
    
    
    10 years2003
    
    
    1,243,977
    
    
    
    0.12
    
    
    Approximately
610,017 immediate
and the rest in 4
years
    
    $
    389
    
    
    10 years2005
    
    
    1,182,591
    
    
    0.12-0.40
    
    4 years
    
    $
    939
    
    
    10 years2006*
    
    
    2,201,972
    
    
    
    0.97
    
    
    4 years
    
    $
    1,963
    
    
    10 years2007
    
    
    204,351
    
    
    
    4.33
    
    
    4 years
    
    $
    5,790
    
    
    10 years2008
    
    
    2,060,000
    
    
    2.35-5.00
    
    4 -5 years
    
    $
    2,914
    
    
    10 years7,137,215
 
 *
    
    Includes options granted outside of an option plan.  1.
    
    In September 2006, the Companys shareholders approved
the grant of options to purchase 977,297 shares of Common Stock to the
Companys Chief Executive Officer, at an exercise price equal to $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, and are exercisable for a
10-year period commencing on the date of grant.2.
    
    In May 2007, the Companys Board of Directors approved
the grant of options to purchase 204,351 shares of Common Stock to a
newly-hired officer of the Company, at an exercise price equal to $4.33 per
share. The options vest over a four-year period and are exercisable for a
10-year period commencing on the date of grant.In May 2008, officers employment by the Company was terminated. As a result,
127,719 of the options granted to the officer were forfeited.3.
    
    In February 2008, the Companys Board of Directors
approved the grant of options to purchase 1,900,000 shares of Common Stock
to certain officers and employees of the Company with an exercise price
equal to $5.00 per share. The options vest variably over a period of up to
five years. The options are exercisable over a 10-year period commencing on
the date of grant.4.
    
    In October 2008, the Companys Board of Directors
approved the grant of options to purchase 160,000 shares of Common Stock to
a new newly-hired officer of the Company of the Company with an exercise
price equal to $2.35 per share. The options vest over a of four-year period.
The options are exercisable over a 10-year period commencing on the date of
grant.
 F-19




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 5.
    
    In February 2008, the Company amended the stock option
agreements of certain executive officers. As amended, such stock option
agreements provide for the full acceleration of the vesting period of
unvested options held by such officers immediately upon a change of control.
The Company concluded that there was no incremental increase in the value
of the awards and therefore no accounting charges need to be recorded in
connection with such modification.
 b.
    
    The fair value of options granted during the years ended
December 31, 2006, 2007 and 2008 were $1,963, $5,790 and $2,914, 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:
 2008
    
    
    2007
    
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    63
    %
    
    
    53
    %
    
    
    44
    %Risk-free interest rate
    
    
    2.99
    %
    
    
    4.62
    %
    
    
    4.77
    %Expected life  in years
    
    
    6.0
    
    
    
    6.0
    
    
    
    5.9
 The expected volatility is based on the historical volatility of the Common
Stock and those of comparable companies. The risk-free interest rate assumption
is based on observed interest rates appropriate for the expected term of the
stock options granted in dollar terms. The Companys management uses the
contractual term of each option as its expected life.Pre-vesting forfeiture rates of approximately 10% is estimated based on
pre-vesting forfeiture experience.The total unrecognized compensation cost of employee stock options at December
31, 2008 is $1,697 (net of forfeiture rate), and it is expected to be recognized
over a weighted average period of 1.1 years.The total cash received from employees as a result of employee stock option
exercises for the years ended December 31, 2006, 2007 and 2008 was $23, $14 and
$5, respectively. In connection with these exercises, the Company did not
realize any tax benefit.During 2008, the Company issued 167,953 shares of Common Stock in connection
with the exercise of 204,808 options by certain officers and employees of the
Company. The Company received cash proceeds equal to $5 in connection with such
exercises as 180,880 of such options were exercised on a net-exercise basis.
 2.
    
    Options and shares of restricted Common Stock granted to consultants,
directors, and other service providers:
 a.
    
    Set forth below is a table summarizing all of the option and
restricted stock grants issued by the Company to consultants, directors and
other service providers from its inception through December 31, 2008:
 Year of
    
    No. of options
    
    Exercise price
    
    
    
    Fair value
    
    ExerciseGrant
    
    granted
    
    range
    
    Vesting period
    
    at grant
    
    Period1999*
    
    
    384,811
    
    
    $
    0.1
    
    
    3 years
    
    
    27
    
    
    10 years2000*
    
    
    349,017
    
    
    $
    0.001
    
    
    immediate
    
    
    35
    
    
    5.5 years2001
    
    
    837,727
    
    
    $
    0.17
    
    
    mainly 2 years
    
    
    51
    
    
    7 years2003
    
    
    1,601,912
    
    
    $
    0.12
    
    
    4 years
    
    
    498
    
    
    10 years2005*
    
    
    2,315,890
    
    
    $0.001-$0.57
    
    2-4 years
    
    
    2,466
    
    
    10 years2006*
    
    
    4,629,516
    
    
    $0.001-$16.7
    
    2.5 years
    
    
    2,237
    
    
    10 years2007
    
    
    16,000
    
    
    $
    0.001
    
    
    4 years
    
    
    246
    
    
    10 years2008
    
    
    50,000
    
    
    $
    3.02
    
    
    4 years
    
    
    109
    
    
    10 years10,184,873
 
 *
    
    Includes options granted outside of an option plan. F-20




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 Set forth below are grants made by the Company during the year ended December
31, 2008 and grants made by the Company prior to 2008 to certain related parties
(such grants appear in the table above):
 1.
    
    In March 2005, in accordance with the terms and conditions
of a management services agreement between Protalix Ltd. and Pontifax
Management Company (Pontifax), an affiliate of one of the Companys
principal shareholders, the Company granted to designees of Pontifax options
to purchase 26,710 convertible preferred C shares of Protalix Ltd. Pontifax
and its affiliates are controlled by Eli Hurvitz, the Chairman of the
Companys Board of Directors. The management services agreement, and the
options granted thereunder, were assumed by the Company in connection with
the Merger. 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 $0.001.The estimated fair value of the options on the date of grant was approximately
$1,445.In January 2006, Mr. Hurvitz was nominated as the Chairman of the Companys
Board of Directors. Accordingly, Protalix Ltd. issued to designees of
Pontifax additional options to purchase 28,710 convertible preferred B shares
in accordance with the terms and conditions of the management services
agreement. The options 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 NIS
0.01.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 provided
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.2.
    
    Immediately after the closing of the Merger and in
accordance with a share purchase agreement entered into in August 2006 (see
Note 6c), the Company issued to Dr. Frost and Jane H. Hsiao, Ph.D., former
directors of the Company, and to one other shareholder of the Company that
provides consulting services to the Company, options that were exercisable
into 1,937,708, 387,542 and 387,542 shares of Common Stock, respectively,
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 $16.70 per share. The modification had no effect on the Companys
accounting records.In February 2007, the Companys Board of Directors approved certain
modifications to the vesting periods of such options. The options vest as
follows: 40% of the options shall vest on March 1, 2008, and an additional 15%
of the options vest in four equal installments on each of the following dates:
June 30, 2008, December 31, 2008, June 30, 2009, and September 30, 2009.In December 2007, Dr. Frost and Dr. Hsiao resigned from the Companys Board of
Directors. As a result, all of the options granted to each of them on
December 31, 2006 were forfeited.3.
    
    In May 2007, the Companys Board of Directors approved the
grant of 8,000 shares of restricted Common Stock to a new member of its
Scientific Advisory Board. The shares vest as follows: 25% vest 12 months
after the grant date and the remaining 75% of the shares vest over three
years in 36 equal monthly installments. In October 2008, such services were
terminated and 5,333 the 8,000 shares of restricted Common Stock were
forfeited.4.
    
    In February 2008, the Companys Board of Directors approved
the grant of options to purchase 50,000 shares of Common Stock to a new
director of the Company with an exercise price equal to $3.02 per share. The
options vest over a four-year period and are exercisable over a 10-year
period commencing on the date of grant.
 F-21




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 b.
    
    The fair value of options and shares of restricted Common Stock
granted to consultants and other non-employees during the years ended December
31, 2006, 2007 and 2008 were $2,237, $246 and $109, 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:
 2008
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    63
    %
    
    
    45
    %Risk-free interest rate
    
    
    2.94
    %
    
    
    4.91
    %Expected life  in years
    
    
    10.0
    
    
    
    6.0
 The expected volatility is based on the historical volatility of the Companys
stock and those of comparable companies. The risk-free interest rate assumption
is based on observed interest rates appropriate for the expected term of the stock
options granted in dollar terms. The Companys management used the contractual
terms as the expected life in 2008.The total unrecognized compensation cost as of December 31, 2008, is $136, and it
is expected to be recognized over a weighted average period of 0.8 years.The total cash received from consultants as a result of consultant stock option
exercises for the years ended December 31, 2006, 2007 and 2008 was $374, $0 and
$0, respectively. In connection with these exercises, no tax benefits were
realized by the Company.
 g.
    
    A summary of share option plans, and related information, under all of the
Companys equity incentive plans for the years ended December 31, 2006, 2007 and 2008
are as follows:
 1.
    
    Options granted to employees:
 Year ended December 31,2006
    
    
    2007
    
    
    2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    average
    
    
    Number
    
    
    average
    
    
    Number
    
    
    averageof
    
    
    exercise
    
    
    of
    
    
    exercise
    
    
    of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    priceOutstanding at beginning
of year
    
    
    2,306,460
    
    
    $
    0.146
    
    
    
    4,144,817
    
    
    $
    0.635
    
    
    
    4,212,686
    
    
    $
    0.830Changes during the year:Granted
    
    
    2,201,973
    
    
    
    0.972
    
    
    
    204,351
    
    
    
    4.330
    
    
    
    2,060,000
    
    
    
    4.794Forfeited
    
    
    142,136
    
    
    
    0.889
    
    
    
    25,197
    
    
    
    0.120
    
    
    
    177,237
    
    
    
    4.405Expired
    
    
    33,045
    
    
    
    0.120
    
    
    
    1,221
    
    
    
    0.970
    
    
    
    
    
    
    
    Exercised (*)
    
    
    188,435
    
    
    
    0.120
    
    
    
    110,064
    
    
    
    0.131
    
    
    
    204,808
    
    
    
    0.565Outstanding at end of period
    
    
    4,144,817
    
    
    $
    0.635
    
    
    
    4,212,686
    
    
    $
    0.830
    
    
    
    5,890,641
    
    
    $
    2.118Exercisable at end of period
    
    
    1,670,132
    
    
    $
    0.179
    
    
    
    2,503,399
    
    
    $
    0.365
    
    
    
    3,267,607
    
    
    $
    0.995
 
 (*)
    
    The total intrinsic value of options exercised during the years
ended December 31, 2006, 2007 and 2008, was $253, $907 and $450, respectively. F-22




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 2.
    
    Options granted to consultants, directors, and other service providers:
 Year
ended December 31,2006
    
    
    2007
    
    
    2008Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    average
    
    
    Number
    
    
    average
    
    
    Number
    
    
    averageof
    
    
    exercise
    
    
    of
    
    
    exercise
    
    
    of
    
    
    exerciseoptions**
    
    
    price
    
    
    options**
    
    
    price
    
    
    options
    
    
    priceOutstanding at beginning of year
    
    
    5,489,356
    
    
    $
    0.087
    
    
    
    7,572,035
    
    
    $
    5.996
    
    
    
    5,254,785
    
    
    $
    1.250Changes during the year:Granted
    
    
    4,629,516
    
    
    
    9.786
    
    
    
    8,000
    
    
    
    0.001
    
    
    
    50,000
    
    
    
    3.020Forfeited
    
    
    
    
    
    
    
    
    
    
    2,325,250
    
    
    
    16.700Expired
    
    
    13,194
    
    
    
    0.570Exercised (*)
    
    
    2,533,643
    
    
    
    0.148Outstanding at end of period
    
    
    7,572,035
    
    
    $
    5.996
    
    
    
    5,254,785
    
    
    $
    1.250
    
    
    
    5,304,785
    
    
    $
    1.285Exercisable at end of period
    
    
    3,377,058
    
    
    $
    0.001
    
    
    
    4,341,917
    
    
    $
    0.023
    
    
    
    5,133,189
    
    
    $
    0.902
 
 (*)
    
    The total intrinsic value of options exercised during the years ended
December 31, 2006, 2007 and 2008, was $3,335, $0 and $0, respectively.(**)
    
    Options to convertible preferred shares are presented on a post-exchange
basis. h.
    
    
    The following tables summarize information concerning outstanding and
exercisable options as of December 31, 2008:
 December 31, 2008Options outstanding
    
    Options exercisableNumber of
    
    Weighted
    
    Number of
    
    Weightedoptions
    
    average
    
    options
    
    averageoutstanding
    
    remaining
    
    exercisable
    
    remainingExercise
    
    at end of
    
    contractual
    
    at end of
    
    contractualprices
    
    year*
    
    life
    
    year
    
    life$
    0.001
    
    
    
    4,303,709
    
    
    
    2.34
    
    
    
    4,298,377
    
    
    
    2.33$
    0.120
    
    
    
    2,128,489
    
    
    
    5.21
    
    
    
    2,128,489
    
    
    
    5.21$
    0.399
    
    
    
    253,552
    
    
    
    6.35
    
    
    
    252,922
    
    
    
    6.35$
    0.972
    
    
    
    1,980,190
    
    
    
    7.54
    
    
    
    1,043,104
    
    
    
    7.52$
    2.350
    
    
    
    160,000
    
    
    
    9.82$
    3.020
    
    
    
    50,000
    
    
    
    9.10$
    4.330
    
    
    
    76,632
    
    
    
    0.67
    
    
    
    76,632
    
    
    
    0.67$
    5.000
    
    
    
    1,855,312
    
    
    
    9.10
    
    
    
    329,993
    
    
    
    9.10$
    16.7000
    
    
    
    387,542
    
    
    
    8.00
    
    
    
    271,279
    
    
    
    8.0011,195,426
    
    
    
    
    
    
    
    8,400,796
 
 (*)
    
    Options to purchase 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, 2008, is $13,662 and $12,838 respectively.
 F-23




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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 6  SHARE CAPITAL :
 i.
    
    The following table illustrates the effect of share-based compensation on the
statement of operations:
 Period fromDecember 27,1993throughYear ended December 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008(restated)Research and development
expenses
    
    $
    765
    
    
    $
    3,587
    
    
    $
    1,226
    
    
    $
    6,610General and administrative
expenses
    
    
    2,656
    
    
    
    16,861
    
    
    
    1,845
    
    
    
    22,845$
    3,421
    
    
    $
    20,448
    
    
    $
    3,071
    
    
    $
    29,455
 NOTE 7  TAXES ON INCOME
 a.
    
    The CompanyThe Company is taxed according to tax laws of the United States. The income of the
Company is taxed in the United States at the rate of up to 39.4%.b.
    
    Protalix Ltd.The Subsidiary 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)Pursuant to the Israel Income Tax Law (Adjustments for Inflation), 1985 (hereinafter
  the Adjustments Law), the results for tax purposes have been measured through 2007
on a real basis, based on changes in the Israel consumer price index. The
Subsidiary is taxed under this law.Under the Israel Income Tax Law (Adjustments for Inflation) (Amendment No. 20), 2008
(the amendment), the provisions of the Adjustments Law will no cease to apply to
the Subsidiary in the 2008 tax year, and, therefore, the results of the Subsidiary
will be measured for tax purposes in nominal terms. The amendment includes a number
of transition provisions regarding the end of application of the Adjustments Law,
which applied to the Subsidiary through the end of the 2007 tax year.2.
    
    Tax ratesThe income of the Subsidiary (other than income from Approved Enterprises (see 3)
below) is taxed in Israel at the regular rate. According to the provisions of the
Law for Amending the Israel Income Tax Ordinance, 2005 (Amendment 147) of August
2005, corporate tax rates will be gradually lowered, resulting in the corporate
following tax rates for 2007 and thereafter: 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)The Subsidiary 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.The Subsidiary has an Approved Enterprise plan since 2004. The Approved
Enterprise plan expires in 2017.
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7  TAXES ON INCOME :
 If the Subsidiary 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 the Subsidiary 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 the Subsidiary to comply with these
conditions, the benefits may be cancelled and the Subsidiary may be required to
refund the amount of the benefits, in whole or in part, with interest.The Investment Center is currently reviewing the Subsidiary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 the Subsidiarys significant amount of net operating losses and
the limitation mentioned above to the benefit period, the Subsidiary cannot predict
when it would be able to enjoy the tax benefits described above, if at all.
 c.
    
    Tax losses carried forward to future yearsAs of December 31, 2008, the Company had approximately net operating loss (NOL)
carry-forwards equal to approximately $44,000 that are available to reduce future
taxable income as follows:
 1.
    
    The CompanyThe NOL carry-forward of the Company equal to approximately $4,000 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 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, 2008, the Subsidiary had approximately $40,000 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, 2007 and 2008
were as follows:
 December 31,2007
    
    
    2008In respect of:R&D expenses
    
    $
    1,761
    
    
    $
    2,728Property and equipment
    
    
    14
    
    
    
    7Holiday and recreation pay
    
    
    94
    
    
    
    162Severance pay obligation
    
    
    56
    
    
    
    89Deferred compensation
    
    
    166
    
    
    
    Net operating loss carry forwards
    
    
    7,093
    
    
    
    11,624Valuation allowance
    
    
    (9,184
    )
    
    
    (14,610
    )
    
    
    
    
 e.
    
    Reconciliation of the theoretical tax expense to actual tax expenseThe main reconciling item between the statutory tax rate of the Company and the
effective rate is the provision for full valuation allowance in respect of tax benefits
from carry forward tax losses due to the uncertainty of the realization of such tax
benefits (see above).
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7  TAXES ON INCOME
 f.
    
    Tax assessmentsIn accordance with the Income Tax Ordinance, as of December 31, 2008, all of the
Subsidiarys tax assessments through tax year 2004 are considered final.A summary of open tax years by major jurisdiction is presented below:
 Jurisdiction:
    
    Years:Israel
    
    
    2005-2008United States (*)
    
    
    2002-2008
 
 (*)
    
    Includes federal, state and local (or similar provincial jurisdictions) tax
positions. NOTE 8  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
 Balance sheets:
 December 31,2007
    
    
    2008(restated)a. Accounts receivable:Institutions
    
    $
    306
    
    
    $
    223State of Israel (see Note 5a )
    
    
    666
    
    
    
    166Restricted deposit
    
    
    50
    
    
    
    211Prepaid expenses
    
    
    235
    
    
    
    176Sundry
    
    
    97
    
    
    
    17$
    1,354
    
    
    $
    793b. Accounts payable and accruals  other:Payroll and related expenses
    
    $
    1,098
    
    
    $
    766Provision for vacation and recreation pay
    
    
    348
    
    
    
    624Accrued expenses
    
    
    751
    
    
    
    970In respect of purchase of property and equipment
    
    
    666
    
    
    
    932$
    2,863
    
    
    $
    3,292
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION
 Statement of operations:
 Period fromDecember 27, 1993Year ended December 31,
    
    
    through2006
    
    
    2007
    
    
    2008
    
    
    December 31, 2008(restated)c. Research and development expenses  net:Payroll and related expenses
    
    $
    *2,796
    
    
    $
    7,510
    
    
    $
    9.296
    
    
    $
    23,980Subcontractors and consultants
    
    
    1,794
    
    
    
    3,141
    
    
    
    5,289
    
    
    
    12,807Materials and consumables
    
    
    1,044
    
    
    
    1,875
    
    
    
    3,799
    
    
    
    8,331Rent, insurance and maintenance
    
    
    425
    
    
    
    905
    
    
    
    1,592
    
    
    
    3,597Patent registration
    
    
    186
    
    
    
    331
    
    
    
    182
    
    
    
    1,087Depreciation and impairment
    
    
    428
    
    
    
    689
    
    
    
    1,171
    
    
    
    2,865Other
    
    
    324
    
    
    
    190
    
    
    
    786
    
    
    
    1,7506,997
    
    
    
    14,641
    
    
    
    22,115
    
    
    
    54,417Less  grants (see Note 4a)
    
    
    1,751
    
    
    
    1,071
    
    
    
    4,714
    
    
    
    10,901$
    5,246
    
    
    $
    13,570
    
    
    $
    17,401
    
    
    $
    43,516d. General and administrative expense:Payroll and related expenses
    
    $
    * 907
    
    
    $
    1,562
    
    
    $
    2,261
    
    
    $
    5,736Management and consulting fees
    
    
    2,432
    
    
    
    16,407
    
    
    
    1,335
    
    
    
    22,276Rent, insurance and maintenance
    
    
    61
    
    
    
    112
    
    
    
    191
    
    
    
    571Professional fees
    
    
    688
    
    
    
    1,702
    
    
    
    1,362
    
    
    
    4,219Travel
    
    
    175
    
    
    
    400
    
    
    
    472
    
    
    
    1,232Depreciation
    
    
    74
    
    
    
    69
    
    
    
    130
    
    
    
    374Other
    
    
    188
    
    
    
    342
    
    
    
    1,019
    
    
    
    1,952$
    4,525
    
    
    $
    20,594
    
    
    $
    6,770
    
    
    $
    36,360
 
 *
    
    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. Financial income:
 During the years 2006, 2007 and 2008 financial income includes transaction gain/(loss) rate
in the amount of $0, $50 and ($280), respectively.
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##### Table of Contents



PROTALIX BIOTHERAPEUTICS, INC.   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9  RELATED PARTY TRANSACTIONS
 Period fromDecember 27,1993*throughYear ended December 31,
    
    
    December 31,2006
    
    
    2007
    
    
    2008
    
    
    2008a.Management and consulting fees to the
Chairman of the Board
    
    $
    36
    
    
    $
    36
    
    
    $
    33
    
    
    $
    420b.Rent payments to a shareholder
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    10c.Capital-raising commission to the
Chairman of the Board
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    33d.Compensation to the non-exhaustive
directors (except the Chairman of the
Board)
    
    
    
    
    
    
    
    
    
    $
    210
    
    
    $
    210
 e.
    
    With respect to options granted to the Companys Chief
Executive Officer and to a shareholder, see Notes 6(f)(1) and (2).f.
    
    In March 2005, Protalix Ltd. entered into a management services agreement with Pontifax in connection with an investment in
Protalix Ltd. by affiliates of Pontifax. The monthly management fees under the management services agreement 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. For a
description of the options granted to Pontifax, see Note 6f(2)(a)(1). In 2008, the amount was set to $33.g.
    
    In December 2006, certain board members were granted stock options. See Note 6f(2)(a)(2).
 NOTE 10  SUBSEQUENT EVENTS
 In February 2009, the Company granted options to purchase 600,000 shares of Common Stock to its
employees and officers with an exercise price equal to $2.65 per share. A majority of the
options (550,000) are vested immediately upon the achievement of certain milestones. 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 $1,023, based on the following weighted average
assumptions: dividend yield of 0% for all years; expected volatility of 75.3%; risk-free
interest rates of 1.84%; and expected life of 5.5 years.
 F-28