NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

General

Operation

Protalix BioTherapeutics, Inc. and its wholly-owned subsidiary, Protalix Ltd. (collectively, the “Company”), are biopharmaceutical companies focused on the development and commercialization of recombinant therapeutic proteins based on the Company’s proprietary ProCellExtm protein expression system (“ProCellEx”). In September 2009, the Company formed another wholly-owned subsidiary under the laws of the Netherlands in connection with the EMEA application process in Europe. The Company’s subsidiaries are referred to collectively herein as the “Subsidiaries.” The Company’s lead product development candidate is taliglucerase alfa for the treatment of Gaucher disease which the Company is developing using ProCellEx. In addition to taliglucerase alfa, the Company is developing other certain products using ProCellEx.

In September 2009, the Company successfully completed its phase III pivotal trial of taliglucerase alfa. In July 2010, the U.S. Food and Drug Administration (“FDA”) notified the Company that it had accepted for review the Company’s new drug application (NDA) for taliglucerase alfa for the treatment of Gaucher disease and that it granted to taliglucerase alfa a Prescription Drug User Fee Act (PDUFA) action date of February 25, 2011. On February 25, 2011, the FDA issued a Complete Response Letter (a “CRL”) indicating that the review is completed and questions remain that preclude the approval of the NDA for taliglucerase alfa in its current form. In August 2011, the Company submitted its reply to the CRL.

In September 2009, the FDA’s Office of Orphan Product Development granted taliglucerase alfa Orphan Drug Status. In addition to its phase III clinical trial, the Company initiated a clinical study in December 2008 to evaluate the safety and efficacy of switching Gaucher disease patients currently treated under the current standard of care to treatment with taliglucerase alfa. In November 2010 the Company successfully completed the nine month switchover trial in adults.

On November 30, 2009, Protalix Ltd. and Pfizer Inc. (“Pfizer”) entered into an Exclusive License and Supply Agreement (the “Pfizer Agreement”) pursuant to which Protalix Ltd. granted Pfizer an exclusive, worldwide license to develop and commercialize taliglucerase alfa, except in Israel. Under the terms and conditions of the Pfizer Agreement, Protalix Ltd. retained the right to commercialize taliglucerase alfa in Israel.

On July 13, 2010, the French regulatory authority granted an Autorisation Temporaire d’Utilisation (“ATU”), or Temporary Authorization for Use, for taliglucerase alfa for the treatment of Gaucher disease. The ATU allows Gaucher disease patients in France to receive treatment with taliglucerase alfa before marketing authorization for the product is granted in the European Union.

On August 10, 2010, Pfizer entered into a $30 million short-term supply agreement with the Ministry of Health of Brazil pursuant to which the Company and Pfizer have provided taliglucerase alfa to the Ministry of Health of Brazil for the treatment of Gaucher disease patients. During the first quarter of 2011, the Company and Pfizer supplied the remaining products deliverable under the short-term supply agreement. During the second quarter of 2011 Pfizer recorded an allowance for sales return in connection with such agreement because the Ministry of Health of Brazil requested that Pfizer consider the replacement of certain vials that might expire during 2012. Revenue, net of allowance for sales return, generated from the Ministry of Health of Brazil was recorded by Pfizer and the Company recorded its share, in accordance with the terms and conditions of the Pfizer Agreement.

Liquidity and Financial Resources

Successful completion of the Company’s development programs and its transition to operations is dependent upon obtaining necessary regulatory approvals from 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 revenues adequate to support its operations, if at all. The Company also expects to incur substantial expenditures in connection with the regulatory approval process for each of its product candidates during the developmental period.

Based on its current balance of cash and cash equivalents the Company believes it should be able to maintain its current planned development activities and the corresponding level of expenditures for approximately the next 15 months, although no assurance can be given that the Company will not need additional funds prior to such time. The Company may need to seek additional financing during the next 15 months if there are unexpected increases expenses or other capital needs.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments (of a normal recurring nature) considered necessary for a fair statement of the results for the interim periods presented have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year.

These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements in the Annual Report on Form 10-K for the year ended December 31, 2010, filed by the Company with the Securities and Exchange Commission. The comparative balance sheet at December 31, 2010 has been derived from the audited financial statements at that date.

Net loss per share

Basic and diluted loss per share (“LPS”) are computed by dividing net loss by the weighted average number of shares of the Company’s common stock, par value $.001 per share (the “Common Stock”) outstanding for each period.

Diluted LPS does not include options of the Company in the amount of 7,604,195 and 7,537,094 shares of Common Stock for the six months ended June 30, 2010 and 2011, respectively, and 7,930,824 and 7,435,271 shares of Common Stock for the three months ended June 30, 2010 and 2011, respectively, because the effect would be anti-dilutive.

Reclassifications

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