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Taro Pharmaceuticals 1999 Annual Report

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• Company History

• Letter toShareholders

• Financial Review

• Research andDevelopment

• Manufacturing

• Sales andMarketing

• Product ListingU.S.A.

PrescriptionU.S.A. OTC

CanadaPrescription

Canada OTCIsrael Prescription

Israel OTC

• FinancialStatement (PDF)

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• CorporateInformation

Taro 1999 Annual Report


Taro Pharmaceutical Industries Ltd. was founded in Tel Hanan, Israel in 1950. In 1952 a group ofAmerican physicians, pharmacists and businessmen, led by Jacob Levitt, M.D., invested in the smallcompany. Funded by the U.S. investment, in 1954 Taro transferred its operations to a new, customizedpharmaceutical facility in Haifa Bay, Israel that remains an integral part of the Taro Group today.

Taro was founded with a clear mission - to build a pharmaceutical company in Israel that would providehigh quality pharmaceutical products for the local population while investing in research to develop aninternational presence. Dr. Jacob Levitt pursued a policy of investing in new products and modernfacilities. His business development efforts led to a number of licensing agreements with largemultinational pharmaceutical companies as part of a program to utilize modern technology in the Israelipharmaceutical market.

Although Taro commenced operations as a manufacturer of solid dosage form products, an agreementwith American Home Products Corporation in 1954 allowed the Company to expand operations toinclude sterile products. The Company entered the steroid market following an agreement with theSchering Corporation in 1955. In 1957, an agreement with Endo Laboratories provided Taro withproducts such as Percodan® and Coumadin®, products which Taro continues to manufacture and sellin Israel today.

The political environment of the Middle East in the1950’s and 60’s made it difficult to acquire manyactive pharmaceutical ingredients. In the early1960’s, Taro established a chemicalmanufacturing unit and began the synthesis of avariety of bulk active pharmaceutical ingredientsfor use in its own brands and for export.

Vertical integration (synthesizing chemicals intoactive pharmaceutical ingredients and laterfinished drug products) has become one of Taro’sstrengths. Vertical integration assures theCompany of the availability of low cost, highquality raw materials and a continuing securesource of supply. Today, Taro’s vertical integrationprogram includes chemical products such asCarbamazepine, Warfarin Sodium andClorazepate Dipotassium.

Taro 1999 Annual Report - Company History


Taro Israel

Taro’s first area of technological expertise in Israel was oral dosage form manufacturing. The Companyhas manufactured and sold Coumadin®* Tablets (warfarin sodium) in Israel for over 40 years,Uramox® Tablets (acetazolamide) for over 35 years, and Teril® Tablets (carbamazepine) for over 25years.

In 1954 Taro added a sterile facility for ophthalmicand injectable products. The Company has sincedeveloped a broad line of over-the-counter andprescription pharmaceutical products, from nasalsprays and antacids to narcotic pain relievers andinjectable anti-psychotic drugs.

Several of the brands Taro marketed to the Israelipublic in the 1950’s continue as market leaderstoday, including the Rokal® analgesic line andAlnase® Nasal Spray.



Record of Solid Dosage Experience in Israel

Taro entered the U.S. generic market with decades of experience earned in Israel.

Over 40 years experience manufacturing Coumadin®* Tablets (warfarin sodium)●

Over 35 years experience manufacturing Uramox® Tablets (acetazolamide)●

Over 25 years experience manufacturing Teril® Tablets (carbamazepin●

Taro continues to invest in its Israeli operations with major expansion underway at our Haifa facility,and a continued emphasis on supporting our Israeli brands.

Taro Canada

In the mid-1980’s, Taro set its sights on the North American market with the acquisition of a smallCanadian semi-solid manufacturer, now Taro Pharmaceuticals Inc. in Toronto, Ontario.

Taro Pharmaceuticals Inc. invested extensively in research and new state-of-the-art facilities to expandits broad range of creams and ointments from the Canadian market to the U.S. generic market. Thishas resulted in Taro being the first to market for many U.S. generic products, including FluocinonideCream, Desoximetasone Cream and Clotrimazole Cream.

Taro Canada continues its pursuit of sophisticated research, product development, manufacturingexcellence and the expansion of the Canadian facilities to meet customer requirements.

Taro U.S.A.

In 1988, Taro Pharmaceuticals U.S.A., Inc. began operations to support the expanding business ofTaro in North America. In the 1990’s, Taro secured its position in the U.S. generic market as a leader insemi-solid dermatological preparations.



With a record of being the first to market withgeneric creams and ointments, Taro built areputation for excellence in product quality,achieving impressive market share and providingoutstanding customer service for the full range ofits products. In the mid-1990’s, Taro introducedtablet and capsule products into the U.S. market.The 50 years of experience in Israelmanufacturing solid dosage form pharmaceuticalscould now be used to pursue the internationalexpansion contemplated by Taro’s founders.

Taro International

Taro International Ltd. was established in 1992 to support the Company’s exploration of internationalbusiness opportunities. Taro International initially sold active pharmaceutical ingredients synthesized byTaro to pharmaceutical companies around the world. As this business grew, so did new opportunitiesfor finished dosage form products.



In 1998, Taro and its facilities in Israel wereapproved by the UK Medicines Control Agency tomarket Teril® CR Tablets (carbamazepinecontrolled release) in the UK. Since then, thefocus of Taro International has been thedevelopment of a UK infrastructure that will serveas Taro’s European headquarters. Today, TaroPharmaceuticals (UK) Ltd. is fully operational andis positioning Taro’s products in the UK marketand preparing for European expansion.

Commitment to research and development is the common element in Taro’s growth throughout theyears, and will be the foundation for continued expansion in the future. Whether it is the sophisticationand creativity needed to develop proprietary products, or the precision and high standards necessary tomanufacture quality generic pharmaceuticals, Taro believes that strong science and technology are thebasis of its past and future achievements.

Today, Taro’s senior executives share the samecommitment and entrepreneurial spirit thatmotivated the founding generation. Pride in ourbeginnings and our accomplishments duringTaro’s first half century provides the infrastructureand products necessary for success in the next 50years. We look forward to carrying out the vision ofTaro’s founders with a new generation ofexecutives dedicated to a vision of integrity,quality, and innovative research.



* In Israel, Coumadin is a registered trademark of Taro Pharmaceuticals U.S.A., Inc. Elsewhere in the world, Coumadin is a registeredtrademark of The DuPont Merck Pharmaceutical Company.

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Barrie Levitt, M.D.Chairman of the Board

Aaron LevittPresident

Taro has continued the research effort withrespect to its patented NonSpil" spill-resistantliquid delivery system. The Companybelieves that NonSpil’s" spill-resistantproperties will be of value in both pediatricand geriatric medicine. The vehicle shouldminimize messy spills and permit accuracyand certainty of dosage. While there can beno assurance of commercial success, Tarohopes to see NonSpil" formulations incommercial markets where it can contributeto both pediatric and geriatric healthcare.

Taro’s UK SubsidiaryDuring 1999, Taro established operations inthe UK. Already in the UK market with Teril®CR Tablets (carbamazepine controlledrelease), the UK subsidiary will be Taro’sEuropean headquarters. The Companyintends to build a market in the UK and otherEuropean countries for a broad range ofTaro’s current and pipeline products, and willpursue business development opportunitiesfor both branded and generic productsworldwide.

Future GrowthOur core growth strategy remains investing inR&D to produce quality pharmaceuticalproducts, along with skilled global marketingto maximize commercial success.

Dear Fellow Shareholders,

We are proud to report Taro’s results for 1999.We ended the century with a year of impressivegrowth for Taro during which we achieved bothrecord sales and record earnings.

1999 ResultsNet sales for the year ended December 31,1999 increased 26% to $83,785,000, comparedwith $66,725,000 for the prior year. R&Dexpenditures were $11,728,000, or 14% ofsales, compared with $9,180,000, or 14% ofsales in 1998. Net income for 1999 was$5,539,000, or $0.51 per diluted share,compared with $2,302,000, or $0.23 per dilutedshare, in 1998, an increase of 141%.

Gross profit for the year ended December 31,1999 was $48,471,000, or 58% of sales, upfrom $36,366,000, or 55% of sales in 1998.Taro’s focus on cost reduction, manufacturingefficiencies, and the introduction of newproducts in 1999 contributed to the continuedhigh profit margins of the Company.

1999 ANDA ApprovalsTaro has maintained its position as a leadingsupplier of topical products in the U.S. genericpharmaceutical market, while expanding its lineto include solid dosage form products in recentyears. Taro’s five ANDA approvals in 1999reflect this mix with three semi-solid approvalsand two solid dosage form approvals.

ANDA approvals in 1999 for high-potencytopical corticosteroids include DiflorasoneDiacetate Ointment, 0.05% (bioequivalent to

Taro 1999 Annual Report - Letter to Shareholders


Taro’s senior management team iscommitted to the implementation of theCompany’s strategic plan. In recent years wehave built an international team ofsophisticated and experiencedpharmaceutical executives who arespearheading our efforts to combinemarketing and research initiatives to increaseshareholder value. Most importantly, themanagement team shares the belief thatquality and integrity are the most importantelements of Taro and we incorporate thesebeliefs into all aspects of our business.

Taro’s growing success is due to thededication, determination and commitment ofour 550 employees who work diligently toachieve Taro’s strategic goals.

We would like to thank our employees, aswell as our shareholders, customers andother stakeholders for their long-termcommitment to Taro. Their contribution at alllevels of the Company has been anindispensable part of Taro’s growth in its firstfifty years and will carry us successfully intothe future.

Dermik Laboratories’ Psorcon®), ClobetasolPropionate Gel, 0.05% (bioequivalent to GlaxoWellcome’s Temovate®), and FluocinonideOintment 0.05% (bioequivalent to Medicis’Lidex®). These topical corticosteroids are allindicated for the treatment of moderate tosevere dermatologic conditions. Taro remainscommitted to the semi-solid generic market inthe U.S. and continues investing in itssemi-solid R&D program.

Taro broadened its presence in the soliddosage form market in 1999 with theintroduction of Ketoconazole Tablets, 200 mg(bioequivalent to Janssen Pharmaceutica’sNizoral®). Ketoconazole Tablets are used totreat both systemic and topical fungalinfections, combining Taro’s expertise inantifungals with its fifty years of solid dosageform manufacturing experience.

The most notable addition in 1999 was that ofWarfarin Sodium Tablets in all nine strengths.Warfarin is an anticoagulant used in thetreatment of heart disease and strokeprevention. Taro has manufactured andmarketed this product under its Israelitrademark Coumadin®* in Israel for over 40years. While Taro markets Warfarin SodiumTablets as a generic product in the U.S.,doctors and pharmacists can feel comfortableprescribing and dispensing Taro’s WarfarinSodium Tablets because of our four decadetrack record with the drug.

Proprietary Research1999 was a milestone year for Taro inproprietary research. Taro received approvalfor an Investigational New Drug Application(IND) for its novel anticonvulsant drug, T2000.A long-acting, non-sedating barbiturate, thisanticonvulsant is currently intended for thetreatment of epilepsy and, if successful, couldhelp many who suffer from the disease bypreventing seizures without causingdrowsiness.

Phase I clinical testing has begun in Canada forT2000. Of course, T2000 must pass rigorousPhase II and Phase III studies and obtainregulatory approval in order to reach the marketand success cannot be assured.



Barrie Levitt, M.D.Chairman of the Board of Directors

Aaron LevittPresident

May 2000

* In Israel, Coumadin is a registered trademark of Taro Pharmaceuticals U.S.A., Inc. Elsewhere in the world, Coumadin is a registeredtrademark of The DuPont Merck Pharmaceutical Company.



Although this is Taro s fiftieth anniversary year, the Company s major growth initiative startedapproximately 10 years ago shortly after Taro s entry into the North American market. A review of theten-year period from 1990 to 1999 underscores Taro s continuing growth and is an indicator of theCompany s potential for continued success.

Taro s trend of steadily increasing sales and gross profit continued in 1999. Sales increased from$12,748,000 in 1990 to $83,785,000 in 1999, an average annual growth rate of 23%. In 1999 Taroachieved the highest gross profit in the Company s history, reaching $48,471,000. This is an increasefrom just $5,957,000 in 1990, an annual growth rate of 26% (see Figure 1, Sales and Gross Profit).

Sales and Gross Profit (Figure 1)

While Net Income has increased impressively over the past decade (see Figure 2, Net Income), evenmore revealing is a review of Operating Income Before Research and Development Expenditures (seeFigure 3, Operating Income Before Research and Development Expenditures). Although Taro sinvestments in research sometimes impacted short-term results, they have ultimately produced aconsistently improving yearly performance.

Net Income (Figure 2)

Taro 1999 Annual Report - Financial Review


Operating Income Before R&D (Figure 3)

Total Assets (Figure 4)



In parallel with Taro s growth over the past ten years, total Company assets have increased year on year,reflecting the Company s consistently improving overall performance and investment strategies (seeFigure 4, Total Assets). Cumulative investment in research during the decade amounted to over$65,000,000 (see Figure 5, Cumulative R&D Investment), of which $52,000,000 was invested over thepast five years.

Taro s commitment to research resulted in 44 ANDA approvals in the United States over that period oftime (see Figure 6, Cumulative ANDA Approvals), in addition to numerous approvals in Canada, Israel andthe rest of the world. Taro has consistently invested between 13-16% of sales on R&D in the past fiveyears (see Figure 7, Percentage of Sales Invested in R&D).

Growth in Shareholders Equity from 1990-1999 largely reflects the improving after-tax performance ofthe Company (see Figure 8, Shareholders Equity). Book value per share follows the same trend,consistent with management s determination to increase shareholder value (see Figure 9, Book Valueper Share).

Cumulative R&D Investment (Figure 5)



Cumulative ANDA Approvals (Figure 6)

Percentage of Sales Invested in R&D (Figure 7)



By the end of 1999, Taro s asset value was $90,957,000 and its net sales were $83,785,000 (see Figure10, Financial Indicators 1990 vs. 1999). The indicators reflect management s determination to minimizeoperating expenses, maximize revenues and reinvest in prudent, productive research. At Taro, research isthe engine that management believes will propel the Company to increasing shareholder value in thedecades to come.

Shareholders Equity (Figure 8)



Book Value per Share (Figure 9)

Financial Indicators 1990 vs 1999 (Figure 10)



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Taro was founded on the principal that research and development would be the cornerstone of its growthstrategy. Providing quality products through scientific innovation, diligence and precision is the goal of all ofTaro’s research programs.

Twenty percent of Taro’s over 500 employees work in Research and Development worldwide. Over 25 ofTaro’s scientists hold a degree of either M.D. or Ph.D. Over the past five years, Taro’s investment inResearch and Development has been between 13-16% of sales.

Generic Drug DevelopmentThe Company’s Generic Drug Development Program includes a broad range of products intended for manycountries around the world. Currently, Taro develops high-quality, off-patent pharmaceuticals for markets inNorth America, Israel, the UK, and other countries around the world. This program includes semi-solid,solid dose, liquid and injectable products.

The 1999 highlight of Taro’s generic drug development efforts was the approval for the U.S. market ofWarfarin Sodium Tablets in nine strengths, containing the active pharmaceutical ingredient synthesized byTaro. Taro transferred its more than 40 years of experience with the drug in Israel to the U.S. market. Thesolid dosage form research that takes place in Israel continues to expand and Taro looks forward to theintroduction of many more tablet and capsule products in the U.S. and in other markets around the world.

Semi-solid research in Canada is also accelerating with the addition of new laboratories and personnelrequired to maintain a leadership position in topical dermatological products. With eight ANDAs currentlysubmitted to the FDA, and multiple international filings, Taro’s pipeline remains extensive.

Taro 1999 Annual Report - Research and Development


Proprietary Drugs and Delivery SystemsThe two major projects in Taro’s Proprietary Drug and Delivery Systems Program are T2000, a novel,patented anticonvulsant, and NonSpil™, a spill-resistant liquid delivery system. 1999 was a year ofprogress on both of these important projects.

T2000In late 1999, Taro reached a major milestone with its patented novel anticonvulsant. The InvestigationalNew Drug Application for T2000 was approved by the Canadian government and Phase I testing of thedrug began in humans in early 2000.

T2000 is a long-acting, non-sedating barbiturate with anticonvulsant properties, one of a class of suchdrugs developed and patented by Taro. This drug has the potential to improve seizure control for epilepsypatients without causing sleepiness and would be a candidate for once-a-day dosing that could helpimprove patient compliance.

NonSpil™

In 1999, Taro increased the resources dedicated to the patented NonSpil™ spill-resistant liquid deliverysystem. A task force of formulators and chemists have been dedicated to the development of this productwhich has the potential for many over-the-counter and prescription uses.

This delivery system has its most obvious uses in pediatric medicine, where accuracy and ease of dosageof liquid medicines is difficult in young children. Another use is in geriatric medicine where older people mayhave difficulty swallowing pills or in holding a spoon steadily. NonSpil™ allows a liquid medication to pouronto a spoon without spilling so that the medicine can be administered accurately.



T2000 marks the first time Taro has conducted Phase I studies on a new drug developed by the Company’sown research program. In Phase I testing, studies are conducted to determine the safest dose of the newdrug candidate through analysis of the pharmacokinetic data. In addition, Taro will have to successfullyconduct Phase II and III testing in order to file a New Drug Application with the FDA.

While there can be no assurance that T2000 will pass studies conducted in Phases I, II or III, or that thedrug will ever reach the market, the Company is committed to this proprietary research initiative.



Organic and Steroid ChemistryTaro’s chemical business and vertical integration strategy are the result of its Organic and SteroidChemistry Program. By synthesizing the active pharmaceutical ingredient used to manufacture keyproducts, Taro reduces costs and ensures a steady source of supply of high quality active pharmaceuticalingredients.

Warfarin Sodium Tablets and Carbamazepine Tablets are two examples of vertically integrated products forwhich Taro synthesizes the active pharmaceutical ingredient. These are products for which quality iscrucial, and applying our scientific expertise and experience from the first chemical reaction through thefinished dosage form is part of Taro’s pursuit of quality.

In 1999, Taro continued to submit Drug Master Files for various active pharmaceutical ingredients both inthe U.S. and around the world. The Company will continue to actively support this program because of itscost reduction element and source of supply efficiency.

Clinical ResearchIn the United States, Canada and Israel, Taro has a staff of clinicians who plan and implement clinicalstudies on Taro products in the areas of women’s health, topical dermatologics, cardiology and neurology.

Taro’s Clinical Research Program prepares studies for new drugs as well as generic products, and iscurrently focused on the T2000 Phase I studies. As Taro’s proprietary programs grow, its clinical researchteam will receive the resources necessary to meet the increased workload.



New Product Gross Sales Contribution - Cumulative

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Operational Achievements

Canadian FacilitiesIn 1999, Taro’s Canadian facilities were expandedand updated to accommodate increased R&Drequirements, increased compounding andpackaging capacity, including new state-of-the-artequipment, to support the Company’s brandedinitiatives and increased volume in its core genericbusiness.

Taro plans major expansion of its research labs in2000-01. This will allow the Company toaccommodate additional scientific staff, whilemaintaining a strong focus on manufacturingsemi-solid generic and branded products. The newfacilities, which include expanded QC labs, willaccommodate increasing demand frominternational markets which have varied regulatoryrequirements for testing of active ingredients andfinished product.

The compounding capacity at Taro’s Canadianfacilities has been expanded through theinstallation of large computer-controlledequipment. In addition, in 1999 the installation ofthis equipment contributed to a reduction inmanufacturing costs for high volume semi-solidproducts.

Israeli FacilitiesIn 1999, Taro’s Israeli facilities were successfullyinspected by regulatory authorities from the U.S.,the UK, South America and South Africa. Taroprides itself on achieving international regulatoryexcellence.

Taro’s Haifa campus is also undergoing major expansionin R&D, production and sterile facilities. In 1999, Taropurchased land adjacent to its existing facilities which willpermit construction of a multi-story R&D building to beused for both chemical and pharmaceutical research.Like the expansion in Canada, this project will supportTaro’s branded initiatives.

Taro’s capacity for solid dosage manufacturing wasincreased with the installation of sophisticatedgranulation equipment during 1999. In addition to soliddosage form products, Israel is the site of Taro’s sterilemanufacturing, which is being upgraded with theconstruction of a new sterile facility for the compounding,filling and packaging of sterile liquid products.

Taro will continue to invest in the expansion andefficiency of its facilities to ensure that the quality of ourproducts continues to meet our standards of excellence.

Taro 1999 Annual Report - Manufacturing


In 1999, Taro continued to strengthen its team ofexperienced pharmaceutical sales and marketingexecutives in the U.S., Canada and Israel, and beganbuilding a marketing infrastructure in the UK. The diversityand breadth of experience of Taro’s global sales andmarketing team enhances the implementation of ourstrategic plan for both branded and genericpharmaceuticals worldwide.

North American Sales

85% of Taro’s overall sales are generated in NorthAmerica. Over the past ten years, sales in North Americahave increased from $5,993,000 to $70,890,000, a 1083%increase. In North America, Taro markets broad lines ofboth prescription and over-the-counter products, with anemphasis on generic dermatologics in the U.S. andCanada, and an increasing line of tablets and capsules.

By continuing to strengthen relationships with ourcustomers and consistently adding new products to ourline, Taro has almost doubled its North American marketshare over the past three years.

U.S. Sales & Marketing

Taro has one of the most extensive lines of generic topicalcorticosteroid, antifungal and antibacterial product linesavailable in the United States.

Since 1997, the Company has introduced FDA approvedANDAs for solid dosage form products in the U.S. such asCarbamazepine Tablets, Acetazolamide Tablets andKetoconazole Tablets. The most recent and noteworthyaddition to Taro’s solid dosage form line is WarfarinSodium Tablets, which the Company has manufacturedand marketed in Israel for over forty years.

In 2000, Taro expects to introduce new medicationsinto the Canadian marketplace, in both the solid andsemi-solid form. While Taro Canada will continue todemonstrate excellence in its core business ofdermatology, the future holds great promise for othertherapies to improve patient outcomes in the areas ofheart disease, epilepsy and skin disease.

1999 Approvals Canada

• Ammonium Lactate Cream 12%• Dextromethorphan Nonspil™ Gel• Acetaminophen Nonspil™ Gel

Israeli Sales & Marketing

Brand Building

In Israel, Taro has been primarily a brandedpharmaceutical company for fifty years, marketing abroad range of prescription and over-the-counterproducts.

Taro’s experience with Coumadin®* in Israel (whereTaro owns the Coumadin trademark) led to thesuccessful launch of Warfarin Sodium Tablets in theU.S. during 1999. Taro continues to support its brandof Coumadin® in Israel and sales of this productcontinued to grow in 1999.

Coumadin®* in Israel

Taro has been manufacturing and marketingCoumadin® (Taro’s trademark for Warfarin SodiumTablets in Israel) for over forty years.

Taro 1999 Annual Report - Sales & Marketing


In 1999, Taro increased its U.S. prescription drug salesover 40% to $48,000,000. Receiving five ANDA approvalsduring a three month period, the U.S. Sales and Marketingteam launched all five products in the second half of 1999.

Coumadin® is a mainstayin the fight against strokeand heart disease.

An overwhelming body of scientific data hasdemonstrated the effectiveness of Coumadin® in theprevention of stroke in patients with atrial fibrillation, acommon rhythm disorder of the heart. Its use isassociated with a reduction in the incidence ofdisabling strokes. Coumadin® is also first line therapyin the management of patients with certain artificialheart valves and blood clot disorders.

Taro successfully launched Warfarin Sodium Tabletsas a generic product (under its generic name) in theU.S. in 1999. The Company is now bringing itsexpertise to the U.S. market to offer a high-qualitygeneric alternative with decades of experience behindit. Taro will continue to develop its share of the U.S.Warfarin Sodium market in 2000.

1999 Approvals USA

• Diflorasone Diacetate Ointment USP, 0.05%• Clobetasol Propionate Gel, 0.05%• Fluocinonide Ointment, 0.05%• Ketoconazole Tablets USP, 200 mg• Warfarin Sodium Tablets, USP, 1 mg, 2 mg, 2.5 mg, 3mg, 4 mg, 5 mg, 6 mg, 7.5 mg and 10 mg

Etopan® Tablets (etodolac) have become a majorfactor in Israel’s cox-2 inhibitor market segment sinceTaro launched the product in 1998. Althoughcompetition in this category increased in 1999, Tarowill continue to support Etopan® which is animportant product for the Company in Israel.

Taro remains dedicated to maintaining its leadershipposition in topical dermatologic products in the U.S. and in1999 successfully launched Diflorasone DiacetateOintment, a high potency corticosteroid. The Companyalso continues to support major semi-solid products suchas Clotrimazole Cream and Hydrocortisone ValerateCream and Ointment which were launched in 1998, inaddition to the launch of several important line extensionsin 1999 such as Clobetasol Propionate Gel andFluocinonide Ointment.

Taro’s OTC business grew 30% in 1999, growth that wasachieved mainly through increasing distribution andpartnering programs with our key accounts. The Companycurrently plans to broaden its OTC product offerings in

1999 Approvals Israel• Atracurium Besylate Ampoules, 2.5ml & 5ml• Propofol Ampoules & Vials• Budesonide Inhaler, 50 mcg and 200mcg• Etodolac Tablets, 500mg• Midazolam Ampoules, 1ml, 2ml, 3ml, 5ml and 10ml• Amiodarone Tablets, 200 mg, Blisters & HDPEBottles • Morphine Hydrochloride S.R. Tablets, 30mg,60 mg, 100 mg and 200 mg• Clozapine Tablets, 25mg and 100 mg• Propafenone Tablets, 150mg and 300mg



2000.

Canadian Sales & Marketing

In Canada, Taro added significant pharmaceuticalexpertise to its sales and marketing team. Seniorexecutives with extensive backgrounds in retailing, sales,marketing, business development and customer relationswill add the necessary leadership to increase Taro’spresence in Canada and grow the Canadian business.

Taro will work on expanding customer relations in majorretail accounts and improving its market share for bothprescription and over-the-counter medications. Buildingpartnerships with customers in all provinces for bothexisting and new products will provide a solid foundationfor the expanding Canadian product line.

Taro’s Sales and Marketing Team in Israel continuesto explore innovative ways to approach the marketingof our products, to solidify our already strongrelationships with the trade, and to increase consumerawareness of Taro brands. In addition, Taro Israelhas an in-licensing program which maintains the flowof new products into this competitive pharmaceuticalmarket.

Taro UK Initiates Operations

Entry into Europe

Taro UK currently sells Teril® CR Tablets(carbamazepine controlled release tablets) in the UK.Teril® is becoming a global brand for Taro, and hasbeen approved by regulatory authorities in Canada,Israel, the UK, Germany and Italy.

Over the past several years, Taro has been preparingto enter the European market. In 1999, theCompany’s UK subsidiary hired experiencedpharmaceutical executives with sales, marketing,financial and regulatory backgrounds.

Taro is currently preparing files for a broad range ofproducts for introduction in the UK and Europe in thecoming months and years. In addition, Taro UK andTaro International are pursuing alliances with otherpharmaceutical companies that will serve to broadenTaro’s line of products in Europe at a faster pace.

* In Israel, Coumadin is a registered trademark of Taro Pharmaceuticals U.S.A., Inc. Elsewhere in the world, Coumadin is a registered trademark of TheDuPont Merck Pharmaceutical Company.

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Generic Name Innovator Name*

Creams, Ointments, Gels and Solutions

Betamethasone Dipropionate Cream Diprosone®

Betamethasone Valerate Cream Valisone®

Clobetasol Propionate Cream, Ointment, Gel andTopical Solution

Temovate ®

Clobetasol Propionate Emollient Cream Temovate®

Clotrimazole Cream and Topical Solution Lotrimin ®

Desonide Cream and Ointment Tridesilon® and DesOwen®

Desoximetasone Cream and Gel (0.05%) Topicort®

Desoximetasone Cream and Ointment (0.25%) Topicort®

Diflorasone Diacetate Cream and Ointment Psorcon®

Fluocinonide Cream, Ointment, Gel and TopicalSolution

Lidex®

Taro U.S.A. Prescription Products


Fluocinonide Emollient Cream Lidex® E

Hydrocortisone Valerate Cream and Ointment Westcort®

Nystatin and Triamcinolone Acetonide Cream andOintment

Mycolog® II

Nystatin Cream Mycostatin®

Triamcinolone Acetonide Dental Paste Kenalog® in Orabase

Tablets and Capsules

Acetazolamide Tablets (125 mg and 250 mg) Diamox®

Carbamazepine Tablets 200 mg Tegretol®

Clomipramine Hydrochloride Capsules(25 mg, 50 mg and 75mg)

Anafranil®

Clorazepate Dipotassium Tablets (3.75 mg,7.5 mg and 15 mg)

Tranxene®

Etodolac Capsules (200 mg and 300 mg) Lodine®

Etodolac Tablets (400 mg and 500 mg) Lodine®

Ketoconazole Tablets 200 mg Nizoral®

Nortriptyline Hydrochloride Capsules (10 mg (base),25 mg (base) and 75 mg (base))

Pamelor®



Warfarin Sodium Tablets (1, 2, 2.5, 3, 4, 5 6, 7.5and 10 mg)

Coumadin®

*Brand names are the registered trademarks of the products’ manufacturers.

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Generic Name Innovator Name*

Antifungal Creams and Solutions

Clotrimazole Cream Lotrimin® AF

Clotrimazole Topical Solution Lotrimin®

Miconazole Nitrate Cream Micatin®

Tolnaftate Cream Tinactin®

Feminine Care

Clotrimazole 3 Day Vaginal Cream Gyne-Lotrimin 3®

Clotrimazole 3 Day Vaginal Inserts Gyne-Lotrimin 3®

Clotrimazole 3 Day Vaginal Combo Packs Gyne-Lotrimin 3® Combo Pack

Clotrimazole 7 Day Vaginal Cream Gyne-Lotrimin® and Mycelex®

Lubricating Jelly K-Y® Jelly

Miconazole Nitrate 7 Day Vaginal Cream Monistat-7®

First Aid Creams and Ointments

Taro U.S.A. OTC Products


Bacitracin Ointment Baciquent®

Hydrocortisone Cream and Ointment (0.5%) Cortaid® and Cortizone-5®

Hydrocortisone Cream and Ointment (1%) Cortaid® Maximum Strength and Cortizone-10®

Triple Antibiotic Ointment Neosporin®

Triple Antibiotic Ointment Plus Pramoxine Neosporin® Plus

Nasal Sprays

Oxymetazoline Hydrochloride Nasal Spray Afrin®

Skin Care

Diaper Rash Ointment Desitin®

Hemorrhoid Treatments

Hemorrhoidal Suppositories Preparation H®


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Taro U.S.A. OTC Products


Taro Brand Name Generic Name Innovator Name*

Creams, Ointments, Gels and Lotions

Betaderm Cream and Ointment(0.1% and 0.05%)

Betamethasone Valerate Creamand Ointment

Betnovate® and Celestoderm®-Vand V/2

Betaderm Scalp Lotion Betamethasone Valerate Lotion Valisone®

Cortoderm Ointment Hydrocortisone Ointment Cortate®

Fluoderm Cream (0.025% and0.01%)

Fluocinolone Acetonide Cream Synalar®

Fluoderm Ointment (0.025%) Fluocinonide Acetonide Ointment Synalar®

Hyderm Cream Hydrocortisone Acetate Cream Cortacet®

Lyderm Cream, Ointment andGel

Fluocinonide Cream, Ointmentand Gel

Lidex® and Topsyn®

Nyaderm Vaginal Cream Nystatin Vaginal Cream Mycostatin®

Oracort Dental Paste Triamcinolone Acetonide DentalPaste

Kenalog® in Orabase

Taro-Desoximetasone Cream(0.05% and 0.25%)

Desoximetasone Cream Topicort®

Taro Canada Prescription Products


Taro-Desoximetasone Gel(0.05%)

Desoximetasone Gel Topicort®

Taro-Sone Cream, Ointment andLotion

Betamethasone DipropionateCream, Ointment and Lotion

Diprosone®

Triaderm Cream (0.1% and0.025%)

Triamcinolone Acetonide Cream Kenalog®

Triaderm Ointment (0.1%) Triamcinolone AcetonideOintment

Kenalog®

Viaderm K.C. Cream andOintment

Nystatin, Neomycin Sulfate,Gramicidin and TriamcinoloneAcetonide Cream and Ointment

Kenacomb®

Injectables

Vitamin B12 Injection Cyanocobalamin Injection Rubramin®

Oral Liquid Preparations

Nyaderm Oral Suspension Nystatin Oral Suspension Mycostatin®

Tablets

Taro-Carbamazepine CR Tablets(200 mg and 400 mg)

Carbamazepine ControlledRelease Tablets Tegretol® CR


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Taro Canada Prescription Products


Taro Brand Name Generic Name Innovator Name*

Creams, Ointments and Gels

Clotrimaderm Cream Clotrimazole Cream Canesten®

Clotrimaderm Vaginal Cream(1% and 2%)

Clotrimazole Vaginal Cream Canesten®

Cortoderm Ointment Hydrocortisone Ointment Cortate®

Hyderm Cream Hydrocortisone Acetate Cream Cortacet®

Micozole Vaginal Cream Miconazole Nitrate Cream 2% Monistat®

Nyaderm Cream and Ointment Nystatin Cream and Ointment Mycostatin®

Pitrex Cream Tolnaftate Cream Tinactin®

Polyderm Ointment Bacitracin Zinc, Polymyxin BSulfate Ointment

Polysporin®

Taro Base Cream -------------------- Glaxal® Base

Taro Gel Personal Lubricant Lubricating Jelly K-Y® Jelly

Taro Canada OTC Products


Taro Gel Sterile Lubricant Sterile Lubricating Jelly ----------

Taro-Bacitracin Ointment Bacitracin Ointment Baciquent®

Zincoderm Ointment Zinc Oxide Ointment Zincofax®

Capsules

Docusate Calcium Capsules Docusate CalciumSulfosuccinate Capsules

Surfax®

Docusate Sodium Capsules Docusate Sodium SulfosuccinateCapsules

Colace®

Oral Liquid Preparations

Docusate Sodium Syrup Docusate Sodium Syrup Colace®


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Taro Canada OTC Products


Taro Brand Name Active Ingredient

Analgesics

Etopan® Capsules (200 mg and 300 mg) Etodolac

Etopan® Tablets Etodolac

Morphex CR Tablets Morphine HCl Controlled Release

Percocet®* Tablets Oxycodone Hydrochloride, Acetaminophen

Percodan®* Tablets Oxycodone Hydrochloride, Oxycodone,Terephthalate, Acetyl Salicylic Acid

Tanyl Injection Fentanyl (as citrate)

Anesthetics

Curarine Injection Turbocurarine Chloride

Diprofol Injection (Ampoules and Vials For I.V. Use) Propofol

Midazol Injection Midazolam

Mycurium Injection (Ampoules and Vials) Atracurium Besylate

Taro Israel Prescription Products


Succinyl Forte Ampoules Succinylcholine Chloride

Antiasthmatics

Pulmotide Inhaler (50 mcg and 200 mcg) Budesonide

Antibiotics

Eryc‚** Enteric Coated Granules in Capsules Erythromycin

Anticancer

Cytophosphan Tablets and Injection(200 mg, 500 mg and 1g)

Cyclophosphamide

Cardiovascular

Butamine Injection Dobutamine Hydrochloride

Coumadin®* Tablets (1, 2, 2.5, 3, 4, 5, 6, 7.5 and10mg)

Warfarin Sodium Clathrate

Nitroglycerin Alcohol Free Injection (Ampoules andVials)

Nitroglycerin

Profex Tablets (150 mg and 300 mg) Propafenone

Central Nervous System



Diaz Tablets (2 mg, 5 mg and 10 mg) Diazepam

Flexin Injection Orphenadrine Citrate

Lozapine (25 mg and 100 mg) Clozapine

Methozane Tablets (25 mg and 100 mg) Levomepromazine (U.S. Name Methotrimeprazine)

Oprimol Tablets Opipramol Hydrochloride

Partane Tablets (2 mg and 5 mg) Trihexyphenidyl Hydrochloride

Perphenan Tablets (4 mg and 8 mg) and Injection(Ampoules)

Perphenazine

Ridazin Tablets (10 mg, 25 mg and 100 mg) Thioridazine Hydrochloride

Sediten Tablets (1 mg and 5 mg) Fluphenazine Hydrochloride

Taroctyl Tablets (25mg and 100mg) and Injection(Ampoules For I.V. and I.M. Use)

Chlorpromazine Hydrochloride

Teril® CR Tablets (200mg and 400mg) Carbamazepine

Teril® Tablets Carbamazepine

Uramox® Tablets Acetazolamide



Dermatologicals

Dermacombin Cream and Ointment Nystatin, Neomycin Sulfate, Gramicidin,Triamcinolone Acetonide

Nystatin Ointment Nystatin

Nystatin Tablets, Dragees and Pastilles Nystatin

Nystatin Vaginal Tablets Nystatin

Tarocyn Ointment Oxytetracycline Hydrochloride, Polymyxin B Sulfate

Desicort Cream (0.05% and 0.25%) Desoximetasone

Endocrine

Deca-Noralone Injection (25mg and 50mgAmpoules)

Nandrolone Decanoate

Depolut Injection (250mg and 500mg Ampoules) Hydroxyprogesterone Caproate

Mercaptizol Tablets Methimazole

Noralone Injection Nandrolone Phenylpropionate

Sterocort Tablets Triamcinolone



Expectorants/Antitussives

Oxacatin Syrup Oxomemazine, Potassium Guaiacolsulfonate

Gastro-Intestinal

Meroken Powder Polyethylene Glycol, Sodium Bicarbonate, SodiumChloride, Potassium Chloride

Nutritional Supplements

Avipur Tablets Vitamin A (as palmitate)

Ophthalmic Preparations

Glaucocarpine Eye Drops (1%, 2%, 3% and 4%) Pilocarpine Hydrochloride

Tarocidin D Eye Drops Chloramphenicol, Polymyxin B Sulfate,Dexamethasone Sodium Phosphate, Borax, BoricAcid

Tarocidin Eye Drops Chloramphenicol, Polymyxin B Sulfate, Borax, BoricAcid

Tarocyn Eye Ointment Oxytetracycline

Tarophenicol Eye Drops Chloramphenicol

Oral Preparations



Nystatin Ready Mix (oral suspension) Nystatin

Oracort E Paste Triamcinolone Acetonide, Lidocaine

Oracort Paste Triamcinolone Acetonide

Otic Preparations

Otomycin Ear Drops Neomycin Sulfate, Phenylephrine Hydrochloride,Sodium Propionate, Benzocaine

*In Israel, Coumadin, Percocet and Percodan are registered trademarks of Taro Pharmaceuticals U.S.A., Inc. Elsewhere in the world, Coumadin,Percocet and Percodan are registered trademarks of The DuPont Merck Pharmaceutical Company**Eryc is a registered trademark of Faulding Pharmaceuticals Plc.

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Taro Brand Name Active Ingredient

Analgesics

Rokacet Plus Tablets Acetaminophen, Codeine, Caffeine

Rokacet Tablets and Caplets Acetaminophen, Codeine, Caffeine

Rokal Plus Tablets Acetyl Salicylic Acid, Codeine, Caffeine

Rokal Tablets and Caplets Acetyl Salicylic Acid, Codeine, Caffeine

Rokamol Adult and Pediatric Syrup Acetaminophen

Rokamol Caplets Acetaminophen

Rokamol Drops Acetaminophen

Rokamol Plus Codeine Tablets Acetaminophen, Codeine

Rokanite Tablet Acetyl Salicylic Acid, Codeine

Antidiarrheals

Taro Israel OTC Products


Kapectin Forte Suspension Kaolin, Pectin

Antifungals

Clotrimaderm Cream Clotrimazole

Cough/Cold

Tarodex Adult and Pediatric Syrup Dextromethorphan Hydrobromide

Tarophed Syrup Pseudoephedrine Hydrochloride

Feminine Care

Tarogel Plus Lubricating Jelly Plus Nonoxynol-9

Tarogel Sterile Gel Sterile Lubricating Jelly

Laxatives

Docusoft Capsules and Syrup Dioctyl Sodium Sulfosuccinate

Jungborn Granules Senna Extract

Jungborn Tea Folia Sennae, Herbal Ingredients



Medicated Shampoo

Sebosel Suspension Selenium Sulfide

Nasal Preparations

Alnase Nasal Drops and Spray Naphazoline Hydrochloride, PhenylephrineHydrochloride, Mepyramine Maleate

Sinaf Nasal Drops and Spray Oxymetazoline Hydrochloride, PhenylephrineHydrochloride

Taro Naphazoline Drops Naphazoline Hydrochloride

Taro Oxymetazoline Nasal Spray Oxymetazoline Hydrochloride

Nutritional Supplements

Calcimore Tablets Calcium Carbonate

Ce De Calcium Tablets (veterinary) Ascorbic Acid, Vitamin D, Calcium Phosphate

Polyvit 30 Plus Capsules Multivitamin and Minerals

Polyvit Tablets and Drops Multivitamin and Minerals

Oral Preparations



Anadent Gel Benzocaine 7.5%

Anadent Solution Benzocaine and Phenylephrine Hydrochloride

Tarodent Mouthwash Chlorhexidine Gluconate

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Report of Independent Auditors

e have audited the accompanying consolidated balancesheets of Taro Pharmaceutical Industries Ltd. ("theCompany") and its subsidiaries as of December 31, 1999 and1998 and the related consolidated statements of income,

changes in shareholders' equity, and cash flows for each of the three yearsin the period ended December 31, 1999. These financial statements arethe responsibility of the Company's management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditingstandards in the United States.Those standards require that we plan andperform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclo-sures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above,present fairly, in all material respects, the consolidated financial position ofthe Company and its subsidiaries as of December 31, 1999 and 1998 andthe consolidated results of their operations and cash flows for each of thethree years in the period ended December 31, 1999 in conformity withgenerally accepted accounting principles in the United States.

Tel-Aviv, IsraelFebruary 22, 2000

W

KOST, FORER & GABBAYCertified Public Accountants (Israel)

a Member of Ernst & Young International

To the shareholders of

Taro Pharmaceutical Industries Ltd.

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Consolidated Balance Sheets

Assets

Current Assets

Cash and cash equivalents

Restricted short-term bank deposits (Note 3a)

Accounts receivable:

Trade (Note 3b)

Other and prepaid expenses (Note 3c)

Inventories (Note 3d)

Total Current Assets

Long-Term Investments

Severance pay fund (Note 6)

Property, Plant and Equipment, net (Note 4)

Other Assets and Deferred Charges, net (Note 5)

Total Assets

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

December 31,

U.S. dollars in thousands

1998

$ 1,106

2,006

20,329

1,581

14,682

39,704

513

29,612

4,737

$ 74,566

1999

$ 3,003

2,109

25,151

2,254

18,208

50,725

696

34,624

4,912

$ 90,957

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Consolidated Balance Sheets

Liabilities and Shareholders’ Equity

Current Liabilities Short-term bank credit and loans (Notes 7a and 9)Current maturities of long-term debt (Note 8)Accounts payable and accruals:

TradeOther and accrued expenses (Note 7b)

Income taxes payable

Total Current Liabilities

Long-Term LiabilitiesLong-Term debt, net of current maturities (Note 8)Deferred Taxes on Income (Note 12h)Accrued Severance Pay (Note 6)

Total Long-Term Liabilities

Commitments and Contingencies (Note 10)

Minority Interest

Shareholders’ Equity (Note 11)Share capital:

Ordinary Shares of NIS 0.0001 nominal value: authorized at December 31, 1999 and 1998 - 50,000,000 shares; issued and outstanding at December 31, 1999:10,794,729 shares; December 31, 1998: 10,048,821 shares

Founders' shares of NIS 0.00001 nominal value: authorized, issued and outstanding at December 31, 1999 and 1998: 2,600 shares

Additional paid-in capitalAccumulated other comprehensive lossRetained earnings

Total Shareholders’ Equity

Total Liabilities and Shareholders’ Equity


December 31,


1998

$ 13,6472,919

5,5104,4931,256

27,825

16,303850626

17,779

122

679

117,438

12,404

28,840

$ 74,566

1999

$ 6,2045,192

5,3766,5091,480

24,761

23,3281,310

858

25,496

148

679

122,797

17,943

40,552

$ 90,957

(868) (1,682)

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Consolidated Statements of Income

Sales (Note 13a)Cost of Sales (Note 13b)

Gross Profit

Operating Expenses:Research and Development - net (Note 13c)Selling, General and Administrative (Note 13d)

Operating IncomeFinancial Expenses - net (Note 13e)

Other Income - net (Note 13f)

Income Before Taxes on Income

Taxes on Income (Note 12)

Minority Interest in Earnings of Subsidiary

Net Income

Basic Net Income Per Ordinary Share (Note 11e)Diluted Net Income Per Ordinary Share (Note 11e)


Year Ended December 31,

U.S. dollars in thousands(except per share data)

1997

$ 60,97129,275

31,696

9,69518,00227,697

3,9992,1731,826

201

2,027

5961,431

$ 1,413

$ 0.14$ 0.14

1998

$ 66,72530,359

36,366

9,18020,66229,842

6,5242,8933,631

51

3,682

1,3582,324

$ 2,302

$ 0.23$ 0.23

1999

$ 83,78535,314

48,471

11,72825,93337,661

10,8103,8696,941

94

7,035

1,4715,564

$ 5,539

$ 0.55$ 0.51

(25) (22) (18)

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Statements of Changes in Shareholders’ Equity

Balance at January 1, 1997

Net income Comprehensive loss: foreign currency translation adjustmentsTotal comprehensive income

Exercise of optionsAmortization of deferred stock compensation

Balance at December 31, 1997

Net incomeComprehensive loss: foreign currency translation adjustmentsTotal comprehensive income

Exercise of optionsAmortization of deferred stock compensation


Net incomeComprehensive income: foreign currency translation adjustmentsTotal comprehensive income

Exchange of exchangeable notes, netExercise of optionsAmortization of deferred stock compensationTreasury stock


*) Represents an amount less than $1.The accompanying notes are an integral part of the consolidated financial statements.

Additionalpaid-incapital

$ 17,333

---

3110

17,374

---

5311

17,438

---

5,73735730

$ 22,797

Retainedearnings

$ 8,689

1,413--

--

10,102

2,302--

--

12,404

5,539--

----

$ 17,943

Accumulatedother

comprehensiveloss

$ (384)

-(464)

-

--

(848)

-(834)

-

--

(1,682)

-814

-

----

$ (868)

Share capital

$ 680

---

*-

680

---

*-

680

---

**-*

$ 680


(765)

Totalshareholders’

equity

$ 26,318

1,413(464)949

3110

27,308

2,302(834)1,468

5311

28,840

5,539814

6,353

5,73735730

(765)

$ 40,552

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Consolidated Statements of Cash Flows

Cash Flow From Operating Activities:Net income Adjustments required to reconcile net income to net cash provided by operating activities:

Minority share in income of subsidiaryDepreciation and amortizationAmortization of deferred stock compensationAccrued severance pay, net of portion fundedGain on sale of property, plant and equipmentForeign currency differences on principal of long-term liabilitiesDeferred taxes on income, net

Increase in accounts receivable and prepaid expensesIncrease in inventoriesIncrease (decrease) in accounts payable and accrued expensesIncrease (decrease) in income taxes payable

Net cash provided by operating activities

Cash Flow From Investing Activities:Purchase of property, plant and equipmentInvestments in other assetsInvestment in restricted short-term bank depositsProceeds from sale of property, plant and equipment

Net cash used in investing activities

Cash Flow From Financing Activities:Proceeds from exercise of options and warrantsRepayment of exchangeable convertible notesProceeds from long-term liabilitiesInvestment in treasury stock Repayment of long-term liabilitiesShort-term bank credit and loans, net

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Increase in Cash and Cash Equivalents

Cash and Cash Equivalents at the Beginning of the Year

Cash and Cash Equivalents at the End of the Year




1997

$ 1,413

183,347

1032

(30)(40)

(221)(3,071)(2,007)3,578

(86)

2,943

(9,054)-

(100)164

(8,990)

31-

4,064-

(1,169)3,372

6,298

(67)

184

622

$ 806

1998

$ 2,302

224,074

116

(14)(65)312

(1,831)(442)

(2,098)471

2,748

(6,055)-

(106)237

(5,924)

53(200)

3,333-

(2,381)2,697

3,502

(26)

300

806

$ 1,106

1999

$ 5,539

254,381

3049 (6)

214 265

(5(5,120)(2,974)1,209

180

3,792

(8,302)(572)(98)112

(8,860)

357-

17,821(765)

(2,982)(7,486)

6,945

20

1,897

1,106

$ 3,003

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Consolidated Statements of Cash Flows

Supplemental Disclosure of Cash Flow Activities

Cash paid during the year for:

Interest

Income taxes

Non-Cash Investing and Financing Information:

Fixed assets

Other accounts payable

Exchange of exchangeable notes

Amortization of deferred charges

Additional paid in capital




1997

$ 2,906

$ 683

$ 853

(853)

-

-

-

-

1998

$ 3,878

$ 623

$ 583

(583)

-

-

-

-

1999

$ 3,628

$ 1,062

$ 1,056

(1,056)

6,000

(263)

(5,737)

-

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Notes to Consolidated Financial Statements

Note 1: General

The Company is an Israeli corporation which operates in Israel and through Israeli,American and Canadian subsidiaries (“ the Group” ).The princi-pal business activities of the Group are the production, research and development and marketing of pharmaceutical products. The Company'sOrdinary Shares are traded on the over-the-counter market in the United States.

All of the pharmaceutical industrial activities of the Group in Israel are performed by the Company.The activities of the Group in North Americaare performed by Taro Pharmaceuticals Inc.,Taro Pharmaceuticals North America, Inc. and Taro Pharmaceuticals U.S.A., Inc.Taro Research InstituteLtd. provides research and development services to the Group.Taro International Ltd. is engaged in the trading activities of the Group outside theU.S. and Canada.

The Company manufactures generic drug products and bulk active pharmaceutical ingredients in its manufacturing facilities located in Canada andIsrael. Most of the Company’s products are marketed in North America.

In North America, the Company sells and distributes its products principally to drug industry wholesalers, drug store chains and mass merchandis-ers. In Israel the Company sells and distributes its products principally to health care institutions and private pharmacies.

Sales of five product lines contributed approximately 54% of the Company’s consolidated sales. In the generic pharmaceutical industry, selling pricesand related profit margins tend to decrease as a product matures due to increased competition from other generic pharmaceutical manufacturersas they gain approval from the U.S. Food & Drug Administration, the Canadian Health Protection Branch and the Israel Ministry of Health(Government Agencies) to manufacture equivalent products. The Company’s future operating results are dependent on, among other things, its abil-ity to introduce new products and maintain its approval to market existing drugs.

While non-compliance with Government Agencies’ regulations can result in refusal to allow entry, seizure, fines or injunctive actions to preventthe sale of products, no such actions against the Company or its products have ever occurred.The Company believes that it is in material compli-ance with all Government Agencies’ regulations.

Note 2: Significant Accounting Policies

The consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States.

a. Use of Estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

b. Financial Statements in U.S. dollars:

The Company has elected to report in U.S. dollars (dollars), the currency of its primary economic environment.

The Company’s transactions and balances denominated in U.S. dollars are presented in their original amounts. Non-dollar transactions and

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balances have been remeasured to U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52 “ Foreign Currency Translation” . All transaction gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statements of operations as financial income or expenses, as appropriate. The U.S. dollar has been determined to be thefunctional currency for the Company and all subsidiaries except the Canadian subsidiary, for which the Canadian dollar is the functionalcurrency.The financial statements of the Canadian subsidiary have been translated in accordance with the principles set forth in SFAS No. 52.All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year.The gains and losses resulting from the change in exchange rates from year to year have been reported separately as a component of accumulated other comprehensive income (loss) in Shareholders’ Equity.

c. Principles of Consolidation:

(1) The consolidated financial statements include the accounts of the Company and its subsidiaries. As to the subsidiaries included in theconsolidation, see (3) below.

(2) Material inter-company transactions and balances have been eliminated in consolidation. Material profits from inter-company sales not yet realized outside the Group have been eliminated in consolidation.

(3) Subsidiaries included in consolidation:

Taro Pharmaceuticals North America, Inc. incorporated under the laws of The Cayman Islands - and its wholly-owned Ontario registered subsidiary in Canada (the Canadian subsidiary) - Taro Pharmaceuticals, Inc.

Taro Pharmaceuticals U.S.A., Inc. - registered in the U.S. (the U.S. subsidiary) (a)Taro Research Institute Ltd. (b)Taro International Ltd. (b)

(a) 50% of the shares conferring voting rights and 12.5% of the shares conferring rights to profits are held by the Company; 84.4% of the shares conferring rights to profits are held by Taro Pharmaceuticals North America, Inc.

The remaining shares conferring 50% of the voting rights and 3.1% of the rights to profits are held by Taro Development Corporation(shareholder). According to an agreement between the shareholder and the Company, the shareholder will appoint directors of the U.S.subsidiary as instructed by the Company.

(b) Registered in Israel.

d. Cash Equivalents:

The Company considers any liquid unrestricted investments with a maturity of three months or less at the original time of purchase to be cash equivalents.

e. Short-term Bank Deposits:

The Company classifies deposits with maturities of more than three months and less than one year as short-term deposits. The short-term

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December 31, 1999Shares conferring

Voting rights %

10050

100100

Rights to profits %

10096.9

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deposits are presented at their cost, including accrued interest.

f. Trade Receivables:

Trade receivables include amounts billed to customers and various amounts due from transactions arising in the ordinary course of business.Management periodically evaluates the collectibility of these receivables and adjusts the allowance for doubtful accounts to reflect the amounts estimated to be uncollectible.

g. Inventories:

Inventories are stated at the lower of cost or market value. Cost is determined as follows:

Raw and packaging material on an average cost basis.Finished goods and work in process - average production costs including materials, labor, direct and indirect manufacturing expenses.Commercial activities - at cost.

h. Property, Plant and Equipment:

(1) These assets are stated at cost less accumulated depreciation.

(2) Interest expenses incurred during the construction period of fixed assets are capitalized to the cost of such assets.

(3) Depreciation is provided by the straight-line method on the basis of the estimated useful life of the assets, at the following annual rates:

%Buildings 2.5-4

Installations, machinery and equipment 5-10 (mainly 10)

Motor vehicles 15

Furniture, office equipment and computer 6-30 (mainly 20)

Leasehold improvements are amortized by the straight-line method over the term of the lease (5-6 years), which is shorter than the estimated useful life of the improvements.

i. Other Assets and Deferred Charges:

(1) Goodwill

The excess of cost of the investment in shares of subsidiaries over the fair value of the liabilities and assets at the time of acquisitionrepresents amounts not attributed to specific assets (goodwill).

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Goodwill is amortized by the straight-line method, principally over a period of 40 years.

The carrying value of goodwill is reviewed to determine if the facts and circumstances suggest that it may be impaired. If this reviewindicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over theremaining amortization period, the Company’s carrying value of the goodwill is reduced by the estimated shortfall of cash flows.

(2) Other

Product rights and costs associated with the issuance of long-term exchangeable notes are amortized by the straight-line method, over a period of 8 and 7 years, respectively.

j. Revenue Recognition:

Revenue from sale of products is recognized upon shipment.

k. Research and Development:

Research and development expenses, net of related grants, are charged to expenses as incurred.

Royalty-Bearing Grants: royalty-bearing grants from the Government of Israel for funding certain approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the related costs incurred.

l. Advertising Expenses:

The Company expenses the cost of advertising as incurred.

m. Income Taxes:

The Company accounts for income taxed in accordance with SFAS No. 109 "Accounting for Income Taxes".This statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

n. Basic and Diluted Net Income per Share:

Basic net income per share is computed based on the weighted average number of ordinary shares outstanding during each year. Dilutednet income per share is computed based on the weighted average number of ordinary shares outstanding during each year, plus dilutive potential ordinary shares considered outstanding during the year, in accordance with SFAS No. 128, “ Earnings Per Share” .

o. Stock Based Compensation:

The Company has elected to follow APB No. 25,“ Accounting for Stock Issued to Employees” , in accounting for its employee stock option plans because the alternative fair value accounting provided for under SFAS No. 123, “ Accounting for Stock-Based Compensation” ,

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requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, when theexercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company applies SFAS No. 123 with respect to options issued to non-employees. SFAS No. 123 requires use ofoption valuation models to measure the fair value of the options at the grant date.

p. Concentrations of Credit Risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,restricted short-term bank deposits and trade receivables. Management believes that the financial institutions that hold the Company’sinvestments are financially sound, and accordingly, minimal credit risk exists with respect to these investments. The Company’s tradereceivables are mainly derived from sales to customers in the United States, Canada, Europe and Israel. The Company has adopted creditpolicies and standards intended to accommodate industry growth and inherent risk. Management believes that credit risks are moderated by obtaining credit insurance, the diversity of its customers and geographic sales areas. The Company performs ongoing credit evaluations of its customers’ financial condition and requires collateral when deemed necessary.

q. Fair Value of Financial Instruments:

SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", requires disclosures about the fair value of financial instruments.The fair market value of the Company’s financial instruments, which are cash and cash equivalents, restricted short-term bank deposits, accountsreceivable, and payable and short and long-term debt approximate its carrying value as of December 31, 1998 and 1999.The carrying amounts of cash and cash equivalents, restricted short-term bank deposits and accounts receivable and payable approximate their fair value due to the short-term maturities of these instruments.The carrying amounts of the Company’s borrowing under its short and long-term loan agreements,except exchangeable notes, approximate their fair value, since they bear interest that changes according to the prime rate and Libor rate.The fair value of the exchangeable notes was determined by discounting future cash flows, applying rates currently available for debt instruments of similar terms and maturities.

The carrying amounts and fair values of the Company’s financial instruments are as follows:

Cash and cash equivalentsAccounts receivableRestricted short-term bank deposits Short-term bank credit and loansAccounts payableLong-term debtExchangeable notes

r. Impact of Recently Issued Accounting Standards:

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “ Accounting for Derivative Instruments and Hedging Activities” .The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative

32

December 31, 1999


$ 3,003$ 27,405$ 2,109$ 6,204

$ 11,885$ 23,328

-

$ 3,003$ 27,405$ 2,109$ 6,204

$ 11,885$ 23,328

-

Carrying Amounts Fair Value

$ 1,106$ 21,869$ 2,006

$ 13,647$ 10,003$ 13,222$ 6,000

$ 1,106$ 21,869$ 2,006

$ 13,647$ 10,003$ 13,222$ 6,120

Carrying Amounts Fair ValueDecember 31, 1998

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instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No.133 requires that changes in the derivative’s fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000, and must be applied to instruments issued, acquired, orsubstantively modified after December 31, 1997. The Company does not expect the adoption of the accounting pronouncement to have amaterial effect on its financial position or results of operations.

s. Exchange Rate and Linkage Basis:

(1) Balances which are linked to the Israeli Consumer Price Index (CPI) are remeasured into dollars after adjustment on the basis of the latest index published as of the balance sheet date. Balances denominated in, or linked to, currencies other than the dollar are remeasured in dollars using the exchange rates prevailing at the balance sheet date.

(2) The following are details of the rate of exchange of the U.S. dollar and the Israeli CPI:

(1) According to the Israeli CPI published for the month ended at the balance sheet date on an average basis 1993=100

Note 3: Supplementary Information on Certain Asset Items

a. Restricted short-term bank deposits:

Restricted bank deposits are maintained with banks as compensating balances for certain revolving short-term bank loans of $2,109. The Company is restricted from withdrawing any portion of the compensating balances at any time, until repayment of the loans.

b. Trade receivables:

Open accountsNotes and checks receivable

Less: allowance for doubtful accounts

33

Rate of exchangeof U.S. $

NIS 4.153NIS 4.160NIS 3.536

-0.17%17.65%8.77%

IsraeliCPI(1)

106.6 Points105.2 Points96.8 Points

1.33%8.62%6.99%

At the end of the year:199919981997

Increase during the year:199919981997

1998

$ 19,576763

20,33910

$ 20,329

1999

$ 24,0711,090

25,16110

$ 25,151

December 31,


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c. Accounts Receivable and Prepaid Expenses - Other:

EmployeesOffice of the Chief Scientist of IsraelGovernment authoritiesDeferred taxes on incomePrepaid expensesOther

d. Inventories:

For industrial activities:Raw and packaging materialsFinished goodsWork in processFor commercial activities - purchased products

Note 4: Property, Plant and Equipment

a. Composition of assets grouped by major classifications are as follows:

Cost:LandLeasehold land (1)Buildings (1)Leasehold improvementsInstallation, machinery and equipmentEDP equipmentMotor vehiclesFurniture, fixtures and office equipmentAdvances for fixed assets

Accumulated depreciation:Leasehold land (1)Buildings (1)Leasehold improvementsInstallation, machinery and equipmentEDP equipmentMotor vehiclesFurniture, fixtures and office equipment

Depreciated cost

34

1998

$ 162 36925

382423220

$ 1,581

$ 5,9067,4861,268

22$ 14,682

1999

$ 144225334511607433

$ 2,254

$ 7,7358,9921,413

68$ 18,208

December 31,


1998

$ 561 675

9,115743

25,1326,012

2742,170

25944,941

731,707

5958,7512,809

1971,197

15,329$ 29,612

1999

$ 597 2,619

10,231823

29,0238,316

2682,368

13554,380

1062,003

68711,4183,941

1871,414

19,756$ 34,624

December 31,


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Depreciation expense for the year ended December 31, 1999, 1998 and 1997 is $4,270, $3,889 and $3,084, respectively.

(1) Certain buildings (depreciated balance of which at December 31, 1999 was $3,433) were constructed on land leased from the Israeli Lands Administration (pursuant to four leases which expire in 2000, 2009, 2010 and 2044, with an option to renew each one for an additional period of 49 years).

b. Cost of property, plant and equipment includes - at December 31, 1999 and 1998 - financing expenses and payroll and related expenses in the amount of $1,905 and $1,777, respectively.

c. As of December 31, 1999, the Company was committed to expenditures for building and equipment in the amount of $2,500.

d. As to pledges of assets, see Note 9.

Note 5: Other Assets and Deferred Charges

Original amount:GoodwillProduct rightsDeferred charges

Accumulated amortization:GoodwillProduct rightsDeferred charges

Amortized cost:

Changes during 1999 result from translation adjustments related to goodwill recorded in the Canadian subsidiary.

Amortization expenses for the years 1999, 1998 and 1997 were $249, $245 and $246 respectively.

Note 6:Accrued Severance Pay

Under Israeli law, the Company and its Israeli subsidiaries are required to make severance or pension payments to dismissed employees and toemployees terminating employment under certain other circumstances. Deposits are made with a pension fund to secure pension and severancerights for the majority of the employees in Israel who have joined the pension fund. The deposits, together with a one-time payment made to thatfund, relieve the Company and its Israeli subsidiaries of their severance pay liability to those employees whose employment started after June 1, 1979.As of December 31, 1999, the Company has no related severance pay liability for such employees. The severance pay liability for several senioremployees is covered by insurance policies.

35

1998

$ 5,024250687

5,961

746226252

1,224

$ 4,737

1999

$ 5,050250718

6,018

856250

-1,106

$ 4,912

December 31,


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The severance pay liability for the period through May 31, 1979 is covered by the balance sheet accrual. The balance sheet accrual also covers theseverance pay liability to employees of the Company who have not joined the pension fund. The Company has made deposits with recognized sev-erance pay funds with respect to this accrual.

The amounts accrued and funded, in Israel, at balance sheet dates, are as follows:

Amounts accruedLess - amounts fundedExcess of accrual over amounts funded

The Company may only withdraw the amounts funded for the purpose of disbursement of severance pay.

The U.S. and Canadian subsidiaries sponsor a retirement savings plan covering substantially all of their employees.The Company’s matching contribution to the plan was approximately $270, $219 and $139 for the years 1999, 1998 and 1997, respectively.

Pension, retirement savings and severance expenses:

Note 7: Supplementary Information on Certain Liability Items

a. Short-term bank credit and loans:

(1) Classified by currency, linkage terms and interest rates the credit and loans are as follows:

Short-term bank loans:In, or linked to, U.S. dollarsIn Israeli currency - unlinked

Short-term bank credit:In, or linked to, U.S. dollarsIn Canadian dollars

Unutilized credit lines approximate

(2) Weighted average of interest rates at the end of the year.

36

1998

$ 626513

$ 113

1999

$ 858696

$ 162

December 31,


1999

$ 1,239

1998

$ 1,114

1997

$ 897U.S. dollars in thousands


1999

$ 6,00014

$ 6,014

$ 190-

$ 6,204

$ 14,118

10.01%

1998

$ 7,9183,269

$ 11,187

-$ 2,460

$ 13,647

$8,691

10.12%

1999

10.0015.70

10.00-

1998

8.4316.20

-7.50

December 31,

AmountU.S. dollars in thousands

Weighted average interest rate %

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(3) The Company has undertaken to maintain certain financial ratios in respect of its short-term bank credit and loans (at December 31, 1999 $6,204) and part of its long-term debt (as stated in Note 8a). As of December 31, 1999 the Company was in compliance with theseratios. Under the most restrictive debt covenants, only 50% of the Company’s retained earnings are available for dividend distributions and any dividend distribution requires prior approval of certain banks.

b. Accounts payable and accrued expenses - other:

Employees and payroll accruals (including provision for vacation pay)Customer allowancesSuppliers, fixed assetsAccrued and other expenses

Note 8: Long-Term Debt

a. Composed as follows:

Exchangeable notes (1) (2)Bond (3)Banks (2)Mortgage payable (4)Capital lease obligation (5)

Less - current maturities

(1) The notes consist primarily of 10% Subordinated Exchangeable Guaranteed Notes, with seven year average maturity, issued by the U.S.subsidiary and guaranteed by the Company.The notes were exchanged in 1999 for Ordinary Shares of the Company at an exchange priceof $8.97 per share.

(2) As long as part of the liabilities (at December 31, 1999 and 1998, $23,328 and $16,639, respectively) are outstanding, the Company must maintain certain financial ratios, see Note 7a(3).The weighted average interest rate on the bank loans is 7.65%.The loans are linked to the USD and Canadian dollar.The loan repayments will be carried out over the next six years.

(3) The bonds consist primarily of 8.25% and linked to the Israeli CPI (at December 31, 1999, $10,500) and Libor plus 3% and linked to the USD (at December 31, 1999, $1,872) and mature until 2009.

(4) The mortgage payable consists of a first mortgage on a subsidiary's facility in Canada.The mortgage bears interest at 7.81% per annum and is repayable in Canadian dollars in monthly installments of interest plus principal. A final payment of $932 is due on December 15, 2002.

1998

$ 2,148319583

1,443$ 4,493

1999

$ 3,369-

1,0562,084

$ 6,509

December 31,


37

1998

$ 6,000-

10,6391,0281,555

19,2222,919

$ 16,303

1999

------- -$ 12,372

13,2841,0511,813

28,5205,192

$ 23,328

December 31,


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(5) At December 31, 1999, the minimum lease payments under non-cancelable capital leases are as follows:

2000200120022003Total minimum lease paymentsLess amounts representing interestPresent value of net minimum capital lease payments ($787 classified as current portion)

The leases have a maturity of four years and weighted average interest rate of 8.64%.

Leased property under capital leases entered into in 1999 and 1998 are included in property, plant and equipment as follows:

EDP equipmentFurniture and fixtures

Less accumulated depreciation

Depreciation of assets recorded under capital leases is included in depreciation expense.

b. Classified by currency, linkage terms and interest rates, the total amount of the liabilities (before deduction of current maturities) is as follows:

In, or linked to, the U.S. dollarIn Canadian dollarsIn Israeli currency - linked to CPI

c. The liabilities mature as follows:

d. As to liabilities collateralized by pledges of assets, see Note 9.

Capital Leases

$ 911615311191

2,028215

$ 1,813


1998

$ 2,051128

2,179624

$ 1,555

1999

$ 2,889151

3,0401,227

$ 1,813

December 31,


38

1999

$ 14,3423,658

10,520 $ 28,520

1998

$ 16,8042,418

-$ 19,222

1998

8.608.30

-

1999

7.798.188.25

December 31,

AmountU.S. dollars in thousands

2000 (current maturity) 2001200220032004thereafter

$ 5,1924,7334,7903,3992,6917,715

$ 28,520

December 31, 1999U.S. dollars in thousands

Weighted average interest rate %

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Note 9: Liabilities Collateralized by Pledges

a. Balance of liabilities collateralized by pledges at December 31, 1999 is as follows:

Short-term bank credit and loans*Long-term debt (including current maturities)

*) Including a short-term loan of $2,109 received by the U.S. subsidiary, collateralized by a short-term bank deposit of the Canadian subsidiary in an equal amount.

b. The above-mentioned liabilities are collateralized by:

(1) A debenture which includes a first charge on all fixed assets of the Canadian subsidiary, specifically including land, building, production machinery, furniture and fixtures, and a floating charge covering all assets of the subsidiary as collateral for this debenture.

(2) Pledges of assets of the Company and its Israeli subsidiaries, including a first degree mortgage of the Company’s rights in land andbuildings, a first degree pledge of all fixed assets and a first degree floating charge on all assets.

(3) First-degree charges placed by the U.S. subsidiary in favor of its bank on all of its receivables and inventories.

Note 10: Commitments and Contingencies

a. Companies in the Group have leased offices, warehousing space, production facilities and equipment under operating leases for periods through 2003. Minimum annual rentals payable, under noncancelable lease agreements, at rates in effect at December 31, 1999, are as follows:

As for commitments related to fixed assets, see Note 4c.

Rent expenses were $1,198, $1,259 and $1,366 for the years 1999, 1998 and 1997, respectively.

b. Royalty commitments:

(1) One of the subsidiaries is committed to pay royalties at the rate of 3-5% to the Government of Israel on proceeds from sales of products in which the Government participates in the research and development by way of grants. The commitment is on a product by productbasis and is in an amount not exceeding the total of the grants received by the subsidiary and is linked to the U.S. dollar. Grants received through December 31, 1999 amounted to $7,544. Grants subject to royalty repayments total $6,856.


$ 6,204$ 28,520

39

U.S. dollars in thousands$ 1,440

1,12135590

$ 3,006

Year2000200120022003

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(2) Another subsidiary is paying a Canadian company royalties of 10% on proceeds from sales of a certain product, according to anagreement which expires on May 1, 2002.

c. A demand for compensation in the approximate amount of $500 was sent by a customer.

Based on legal opinion and its insurance coverage, management believes that ultimate resolution of this matter will not result in a material adverse effect on the accompanying financial statements.

Note 11: Shareholders’ Equity

a. Stock option plans:

(1) The Company's 1984 stock option plan (1984 plan) and 1991 stock option plan (1991 plan), provide for the issuance of incentive stock options, non-qualified stock options, and stock appreciation rights to key employees and associates of the Group.The options granted have four year vesting term and 25% of them become fully exercisable after each year of four consecutive years of employment and expire ten years after the grant date. Each option entitles its holder the right to purchase one Ordinary Share of NIS 0.0001 nominal value (subject to adjustments).The number of Ordinary Shares subject to exercise of options at December 31, 1999, is as follows:

(a) Options issued to related parties.(b) Of which 16,000 options were issued to related parties.

40

Exercise priceper share

$ 2.00 - 2.75 $ 2.88 - 4.38

$6.00

$ 8.00 $ 7.50 - 8.25$ 5.25 - 7.00 $ 6.13 - 7.25$ 5.37 - 8.13$ 4.75 - 7.16$ 4.16 - 5.84$ 4.97 - 12.03

Year ofexpiration

200020012002

200220032004 20052006200720082009

Issue

199019911992

19921993199419951996199719981999

Employees

9,0001,000

10,000 20,000

12,6503,000

28,000 43,65055,47541,475

103,70096,450384,400

Associates

-102,000

- 102,000(a)

2,0003,0006,000 8,500

16,1001,1002,100

36,60075,400(b)

1984 plan

1991 plan

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41

(3) Options were granted, in 1991, by the Company to its U.S. subsidiary, to purchase up to 1,500,000 Ordinary Shares of NIS 0.0001nominal value, which relates to grants of options by the U.S. subsidiary to three of the Company's directors, who are also shareholders.

The Stock Option Agreement stipulates an exercise price of $5.75 per share, and that to finance the exercise of these options and any taxes which may be applicable for exercise, the directors may transfer to the U.S. subsidiary the Company’s shares held by them at the exercise date with a total market value equal to the total of the cost of the shares exercised and the amount of applicable taxes. As of December 31, 1999, 42,600 were exercised and 357,400 of such options were exercisable with the balance becoming exercisable in 2001,subject to potential acceleration in the event that the Company attains certain defined levels of pre-tax income.The options expire in 2003.

(4) In 1999 and 1998, 77,012 and 45,000 options were exercised to purchase 77,012 and 45,000 Ordinary Shares respectively. The amountof consideration received thereof in 1999 and 1998, was $357 and $53, respectively.

1,956,300(29,000)(19,900)73,000

1,980,400(45,000)(38,100)116,750

2,014,050(77,012)(33,838)136,000

2,039,200

$0.75 - $1.81$5.37 - $7.75$4.75 - $7.16

$1.00 - $3.75$4.88 - $7.75$4.16 - $5.84

$1.37 - $8.00$4.75 - $7.75$4.97 - $12.0

$5.51$1.08$7.13$6.60$5.60$1.20$6.34$4.81$5.63$4.70$6.52$6.57$5.71

Outstanding at January 1, 1997:ExercisedCanceledGrantedOutstanding at December 31, 1997:ExercisedCanceledGrantedOutstanding at December 31, 1998:ExercisedCanceledGrantedOutstanding at December 31, 1999:

Options Exercise Price Weighted Average Exercise Price

(2) A summary of the Company’s stock option activity and related information for the years ended December 31, is as follows:

Rangeof Exercise

Price$2.00 - $3.75$4.16 - $5.88$6.00 - $7.00$7.01 - $7.75$8.00 - $12.0

O p t i o n s O u t s t a n d i n g O p t i o n s E x e r c i s a b l e

Weighted Average Exercise

Price$2.86$5.66$6.67$7.47$8.06$5.54

Outstandingat

December 31, 1999111.000

1.686,975128,42570,15042,650

2,039,200

Weighted AverageRemaining

Contractual Life1.014.406.646.336.614.47

Weighted Average

Exercise Price$2.86$5.66$6.68$7.47$9.47$5.71

Exercisable at

December 31, 1999111,000427,82573,24454,90020,650

687,619

The stock options outstanding and exercisable as of December 31, 1999 have been classified into ranges of exercise as follows:

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42

(5) Approximately 687,619, 702,976 and 676,738 of all options outstanding were exercisable at weighted average exercise prices of $5.54,$5.11 and $5.01 as of December 31, 1999, 1998 and 1997, respectively.The weighted average fair value of the options granted in 1999,1998 and 1997 was $4.07, $2.80 and $4.14, respectively. Options to purchase Ordinary Shares are granted at a per share price which is equal to the market price of the Ordinary Share at the date of the grant. In accordance with SFAS No. 123 as it relates to non-employees,the Company expensed the amount of $30, $11 and $10 in 1999, 1998 and 1997, respectively.

(6) The Company has elected to follow APB No. 25 and related interpretations in accounting for its employee stock options. The Company implemented SFAS No. 123 as it relates to its non-employees and adopted the disclosure-only provisions of SFAS No. 123 as it relates to its employees. Pro forma information regarding net income and net income per share is required by SFAS No. 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994under the fair value of that statement. For purposes of SFAS No. 123 pro forma disclosures, the estimated fair value of the options isamortized to expense over the options' vesting period. Had compensation cost for the stock option plans been determined based on the fair value at the grant date for awards under the stock option plans consistent with the methodology prescribed under SFAS No. 123, the Company’s net income would have been decreased by $182, $134 and $128 for the years ended December 31, 1999, 1998 and 1997,respectively.The fair value of each option granted was estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions for the various grants made during 1999, 1998 and 1997: risk-free interest rates 5.75%, 5.5% and 5.2%, respectively;no dividend yield for each year; expected volatility of 54.6%, 49.8% and 46.7%, respectively; 20% forfeiture rate and expected life of seven years.The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, the option valuation models require input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate inmanagement’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.Accordingly, net income would have been reduced to the pro forma amounts indicated below:

Net income - as reported

Net income - pro forma Net income per share - pro forma Basic

Diluted

b. Pertinent rights and privileges of Ordinary Shares:

(1) 100% of the rights to profits are allocated to the Ordinary Shares.(2) Two-thirds of the voting power of the the Company’s shares is allocated to the Ordinary Shares.(3) 100% of the dissolution rights are allocated to the Ordinary Shares.

c. Founders' Shares:

One-third of the voting power of all of the Company's shares is allocated to the Founders' Shares.

d. Dividend

The Company may declare a dividend in U.S. dollars out of its retained earnings (as to restriction on dividend distribution see Note 7a(3)).

1999

$ 5,539

$ 5,357$ 0.53$ 0.50

1998

$ 2,302

$ 2,168$ 0.22$ 0.21

1997

$ 1,413

$ 1,285$ 0.13$ 0.12

Year ended December 31,

U.S. dollars in thousands (except per share data)

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43

e. Net income per share:

Basic net income per share:Income available to holders of ordinary sharesEffect of dilutive securities:Stock optionsDiluted net income per share:Income available to holders of ordinary shares plus assumed exercise

Note 12:Taxes on Income

a. Measurement of Results for Tax Purposes under the Income Tax Law (Adjustments for Inflationary Changes), 1985:

Under this law, results for tax purposes are measured in real terms, in accordance with the changes in the Israeli CPI.The Company and its Israeli subsidiaries are taxed under this law.

b. The Law for the Encouragement of Industry, 1969:

The Company is an “ Industrial Company” as defined by this law and related regulations, therefore is entitled to claim depreciation at accelerated rates.

c. Benefits under the Law for the Encouragement of Capital Investments, 1959 (the law):

The various plant expansions of the Company have been granted the status of “ approved enterprise” under the alternative benefits program of the law. The income deriving from the approved plants during the benefit period is exempt from tax for an initial period of 2-4 years subject to a preferential tax rate of 10%-15% for the balance of the benefit period (the total benefit period is ten years). A dividend distribution frompreviously tax exempt income will subject the Company to income tax at a rate of 10%-15% of the amount of the dividend. The entitlement to the above benefit is conditional upon the Company fulfilling the conditions stipulated by the law, regulations published thereunder and the instrumentof approval for the specific investment in the approved enterprise. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of interest. Management believes that the Company is meeting all the aforementioned conditions.

d. Income before taxes on income consists of the following:

Domestic (Israel)Foreign (North America and The Cayman Islands)

Shares(denominator)

10,075,349

687,074

10,762,423


Per Shareamount

$ 0.14

-

$ 0.14

Income(numerator)

$ 1,413

-

$ 1,413

Shares(denominator)

9,980,470

432,597

10,413,067

Year ended December 31, 1997

Per Shareamount

$ 0.23

-

$ 0.23

Income(numerator)

$ 2,302

-

$ 2,302

Shares(denominator)

10,012,851

97,258

10,110,109


Per Shareamount

$ 0.55

(0.04)

$ 0.51

Income(numerator)

$ 5,539

-

$ 5,539


1997

$ (318)2,345

$ 2,027


1998

$ (618)4,300

$ 3,682

1999

$ (291)7,326

$ 7,035


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44

e. The provision for taxes on income comprises the following:

Current taxesDeferred taxes

Domestic (Israel)Foreign (North America)

f. Reconciliation between theoretical tax expenses:A reconciliation between the theoretical tax income, assuming all income is taxed at the statutory rate applicable to income of the Company and the actual income tax as reported in the statements of income, is as follows:

Income before taxes on income

Statutory tax rateTheoretical tax expensesDeferred tax benefit not yet recorded for lossesEffect of different tax rates in other countriesNon deductible expenses (foreign)Tax benefits - CanadaTax exempt incomeTaxes paid in IsraelOther

Taxes on income in the statements of income

g. Current taxes are calculated at the following rates:

On Israeli operationsOn U.S. operations*On Canadian operations*On The Cayman Islands operations

*) The U.S. and Canadian subsidiaries are taxed on the basis of the tax laws in their countries of residence.The Canadian subsidiary qualifies for R&D tax credits, thereby reducing its effective tax rate.

1997

$ 5879

$ 596

$ 109487

$ 596


1998

$ 1,106252

$ 1,358

$ 371,321

$ 1,358

1999

$ 1,157314

$ 1,471

$ 321,439

$ 1,471


1997

$ 2,027

36%$ 729

11551

159(555)

- 109(12)

$ 596


1998

$ 3,682

36%$ 1,326

22250

128(405)

-37

-

$ 1,358

1999

$ 7,035

36%$ 2,533

10553

152(454)(876)

32(74)

$ 1,471


1998% 364235.6-

1999% 364235.6-

1997% 364235.6-

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45

h. Deferred taxes:

Significant components of the Group’s deferred tax liabilities and assets as of December 31, 1999 and 1998 are as follows:

Deferred tax assets:

Net operating losses carryforward Other - net

Total deferred tax assets

Tax over book depreciation - IsraelValuation allowance for deferred tax assets*Net deferred tax assetsDeferred tax liabilities: Tax over book depreciationNet deferred tax liabilities

*) The allowance results from management’s estimate of no income tax liability during the next three years from the Company’s Israeli operation.

i. Carryforward tax losses:

(1) The Company and its Israeli subsidiaries:

Carryforward tax losses aggregated $8,300 at December 31, 1999.The carryforward tax losses are linked to the Israeli CPI. In Israel, there is no time limit for utilizing carryforward tax losses.

(2) United States and Canadian subsidiaries:

At December 31, 1999 and 1998, these subsidiaries had no carryforward tax losses.

Note 13: Selected Statements of Income Data

a. Sales (1)(2) - by destination:IsraelCanadaU.S.A.Other

(1) Including commercial activities(2) Including sales to a major customer

1998

$ 3,230382

3,612

(1,037)(2,193)

382850

$ (468)

1999

$ 2,988511

3,499

(1,455)(1,533)

5111,310

$ (799)

December 31,


1997

$ 9,9206,096

41,5573,398

$ 60,971

$ 2,053$ 4,684


1998

$ 9,1025,470

48,8133,340

$ 66,725

$ 739$ 6,505

1999

$ 9,8205,892

64,9983,075

$ 83,785

$ 252$ 11,343


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b. Cost of sales - Industrial activities*:

Raw and packaging material consumedWages, salaries and employee benefitsOther manufacturing expensesDepreciation

Decrease (increase) in inventory of:Finished goodsWork in process

Commercial activities - cost of purchased products sold

*) Net of expenses capitalized in cost of fixed assets

c. Research and development expenses - net:Total expensesLess - grants and participations

d. Selling, advertising, general and administrative expenses:SellingAdvertisingGeneral and administrative*

*) Including provision for doubtful accounts

e. Financial expenses - net*:Interest and linkage differences on long-term liabilitiesExpenses with respect to short-term credit - netForeign currency translation (gains) losses

*) Net of interest capitalized in cost of fixed assets

f. Other income - net:Royalties and commissionsGain on sale of property, plant and equipmentOther - net

1997

$ 15,2747,3003,7601,589

27,923

(71)(70)

27,7821,493

$ 29,275

$ 140

$ 11,136 1,441

$ 9,695

$ 6,7711,3129,919

$ 18,002$ 40

$ 1,2281,026

(81)$ 2,173

$ 112

$ 9 30

162$ 201


1998

$ 16,3668,2184,4461,829

30,859

(1,390)203

29,672687

$ 30,359

$ 49

$ 10,593 1,413

$ 9,180

$ 7,3771,183

12,102$ 20,662

(12)

$ 1,3352,081(523)

$ 2,893 $ 72

$ 10 1427

$ 51

1999

$ 21,3888,0904,7512,191

36,420

(1,178)(145)

35,097217

$ 35,314

$ 73

$ 12,925 1,197

$ 11,728

$ 10,6161,436

13,881$ 25,933

-

$ 1,7191,933

217$ 3,869

$ 56

$ 88 6-

$ 94


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Note 15: Related Parties - Transactions and Balances

a. Transactions with related parties:

Compensation to related parties*:Wages and salariesManagement feesDirectors' feesOther

*) Compensation was paid to related parties as follows:Related parties employed by the GroupRelated parties not employed as above - Directors (including companies held by these directors)Number of people to whom the compensation relates (includes all directors)

b. Balances with related parties:

(1) Current assets - accounts receivable:Balance at balance sheet dateHighest balance during the year

(2) As to options issued to related parties, see Note 11a.

Note 14: Segment Information

The Group operates in one industry segment. Information by geographic area is as follows:

Year ended December 31, 1999:Sales to unaffiliated customersInter-area sales to affiliatesLong lived assets



Consolidated

$ 83,785-

38,817

$ 66,725-

33,914

60,971-

33,158

Eliminations

-$ (41,744)

-

-(27,160)

-

-(21,848)

-

U.S.A.

$ 64,998-

3,926

48,813-

2,759

41,557-

3,286

Israel*

$ 12,8958,762

25,216

12,3124,496

22,144

13,3182,607

20,917

Canada

$ 5,89232,9829,675

5,60022,6649,011

6,09619,2418,955


North America

*) Including export sales, primarily active pharmaceutical ingredients, to unaffiliated customers aggregating $2,859, $2,975 and $3,398, in the years ended December 31, 1999, 1998 and 1997, respectively.The above data present sales and operating income according to the geographic location in which the sales and operating income were generated, as opposed to geographic destination sales data which are included in Note 13a.

1997

$ 6084257392

$ 1,198

$ 667$ 531

10


1998

$ 63744779

-$ 1,163

$ 651$ 512

10

1999

$ 98962993

-$ 1,711

$ 1,007$ 704

10


1998

$ 152 $ 163


1999

$ 109 $ 180


End of Consolidated Financial Statements

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Selected Financial Data

Statement of Operations

Net Sales

Gross Profit

Operating Income

Income Before Taxes on Income andMinority Share in Profits of Subsidiaries

Net Income

Net Income Per Ordinary Share:

Basic:Diluted:

Balance Sheet

Working Capital

Property, Plant and Equipment

Total Assets

Long-Term Debt

Shareholders' Equity


In thousands of U.S. dollars, except per Ordinary Share data

1999

$ 83,785

48,471

10,810

7,035

5,539

$ 0.55$ 0.51

1998

$ 66,725

36,366

6,524

3,682

2,302

$ 0.23$ 0.23

1997

$ 60,971

31,696

3,999

2,027

1,413

$ 0.14$ 0.14

1996

$ 56,528

31,383

4,811

3,273

2,196

$ 0.22$ 0.21

1995

$ 49,581

28,707

5,333

3,538

2,025

$ 0.20$ 0.19

1999

$ 25,964

34,624

90,957

23,328

40,552

1998

$ 11,879

29,612

74,566

16,303

28,840

1997

$ 10,420

28,731

71,731

16,115

27,308

1996

$ 12,796

23,672

62,312

14,740

26,318

1995

$ 14,378

16,241

49,532

11,352

24,136

As of December 31,

In thousands of U.S. dollars

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Quarterly Profit and Loss Information (Unaudited)

Net Sales

Gross Profit

Operating Income

Income Before Taxes on Income

Net Income

Net Income Per Diluted Ordinary Share

Price Range of Ordinary Shares

The Company’s Ordinary Shares are traded in the National Market System of the over-the-counter market (NASDAQ symbol:TARO).

The following table sets forth, for the periods indicated, the high and low sale price, as reported by the National Quotation Bureau, Incorporated.

As of February 29, 2000:Number of record holders: 421 Number of outstanding Ordinary Shares: 10,796,129Dividends:The Company has never paid dividends on its Ordinary Shares.

Fourth Quarter

Third Quarter

Second Quarter

First Quarter

1999$

High Low

19 10 1/2

17 9 3/8

10 13/16 5 3/4

6 1/2 4 7/8

1998$

High Low

5 1/2 4 3/4

5 3/4 3 7/8

7 5 1/4

5 3/4 4 3/8

1997$

High Low

7 4 1/4

7 5/8 5 3/4

8 7/8 5 1/2

12 3/8 6 3/8

1996$

High Low

8 1/8 6 1/8

8 6 1/2

8 3/8 5 7/8

8 5/8 5

1995$

High Low

7 1/2 6

8 1/4 6 3/4

8 1/2 6 5/8

8 1/2 6 1/2

Quarter Ended 1999

In thousands of U.S. dollars, except per Ordinary Share data

Dec 31

$ 22,282

13,199

2,363

1,363

1,714

$ 0.15

June 30

$ 21,003

12,206

2,858

2,021

1,338

$ 0.13

Sep 30

$ 22,068

12,403

3,304

2,314

1,651

$ 0.15

Mar 31

$ 18,432

10,663

2,285

1,337

836

$ 0.08

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The following discussion should be read in conjunction with the Consolidated Financial Statements of Taro Pharmaceutical Industries Ltd. for thethree years ended December 31, 1999 and as of December 31, 1999 and 1998, which may be found starting on page 21.

Results of Operations1999 compared with 1998. The Company's worldwide sales of $83.8 million for the year ended December 31, 1999 increased 26% over salesof $66.7 million in 1998. Sales in the Company's North American markets increased 31% to $71.0 million, and sales in Israel and international mar-kets increased 4% to $12.9 million compared with 1998.The main contributors to the growth in sales were the introduction of new products andthe expansion of the Company's distribution channels for over-the-counter (OTC) topical products and prescription products in the United States.

For the year ended December 31, 1999, net income increased to $5.5 million from $2.3 million in 1998. This increase was the result of marginimprovement. Gross profit margins improved from 55% in 1998 to 58% in 1999, principally due to introduction of new products and improved man-ufacturing efficiency. Diluted earnings per share increased to $0.51 for the year ended December 31, 1999 compared to $0.23 in 1998.

Selling, advertising, general and administrative expenses (SG&A) increased by 26% in 1999 over 1998.The SG&A of the Company as a percentage ofsales remained at 31% in both 1999 and 1998.As sales levels continue their positive growth trend, SG&A is expected to decrease as a percentageof sales in the coming years.

Research and Development (R&D) expenses increased 28% from 1998 to 1999, and comprised 14% of sales in both 1999 and 1998.As part of itsongoing R&D program, the Company plans to complete the development and filing of several Abbreviated New Drug Applications, and their Canadianequivalents, for generic drug products to be marketed in North America.These filings will be in the dermatologic segment as well as in other ther-apeutic areas in which the Company possesses certain competitive advantages principally related to its vertical integration capabilities. The acceler-ation of R&D expenses during the past several years began with the 1990 formation of the Taro Research Institute Ltd. which was organized to con-solidate the Company's R&D efforts, focused primarily on the development of generic versions of branded drug products.The R&D expenses includethe cost of developmental work performed internally by the Company's scientific personnel as well as the cost of clinical studies normally conductedby outside agencies.

Financial expenses increased by 34% principally as a result of additional borrowing, a new capital lease associated with capital improvements and a high-er interest rates environment.The Company incurred a consolidated income tax expense of $1.5 million in 1998 on taxable income of $7.0 million.

1998 compared with 1997: The Company's worldwide sales of $66.7 million for the year ended December 31, 1998 increased 9% over sales of$60.9 million in 1997. Sales in the Company's North American markets increased 14% to $54.4 million, and sales in Israel and international marketsdecreased 7% to $12.4 million compared with 1997 primarily due to the NIS devaluation.

For the year ended December 31, 1998, net income increased to $2.3 million from $1.4 million in 1997. This increase was the result of marginimprovement and a decrease in Research and Development expenses. Diluted earnings per share increased to $0.23 for the year ended December31, 1998 compared to $0.14 in 1997.

Gross profit margins improved from 52% in 1997 to 55% in 1998, principally due to introduction of new products and improved manufacturing efficiency.

Selling, advertising, general and administrative expenses increased by 15% in 1998 over 1997.The SG&A of the Company as a percentage of salesincreased to 31% in 1998 from 30% in 1997.As sales levels continue their positive growth trend, SG&A is expected to decrease as a percentage ofsales in the coming years.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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R&D expenses decreased 5% from 1997 to 1998, and comprised 14% of 1998 sales, compared with 16% of sales for 1997. As part of its ongoingR&D program, the Company plans to complete the development and filing of several Abbreviated New Drug Applications, and their Canadian equiv-alents, for generic drug products to be marketed in North America.These filings will be in the dermatologic segment as well as in other therapeu-tic areas in which the Company possesses certain competitive advantages principally related to its vertical integration capabilities.

Financial expenses increased by 33% principally as a result of additional borrowing and a new capital lease associated with capital improvements.TheCompany incurred a consolidated income tax expense of $1.4 million in 1998 on taxable income of $3.7 million.

Financial ConditionFinancial Position. Cash and short-term bank deposit balances were $5.1 million at December 31, 1999 as compared to $3.1 million at December31, 1998.Trade accounts receivable increased 24% from year-end 1998 to year-end 1999 primarily due to the strong sales during the second part of1999. Inventory levels increased 24% from 1998 to 1999 primarily due to a strong sales performance during the second part of 1999; property, plantand equipment (PP&E) increased 17% as discussed in "Capital Expenditures" below.

Borrowings from banks, both short and long-term combined, increased from December 31, 1998 to December 31, 1999, principally to fund theCompany's capital investments and working capital requirements in 1999. During the fourth quarter of 1999, the Company issued $12 million LIBOR-linked bond.The proceeds of the bond were used to convert some of the company short-term debt into lower-rate long-term debt as well as tosupport the Company capital expansion program and other working capital needs.Also during the fourth quarter of 1999, the Company exchangedits $6 million notes for 668,896 Ordinary Shares of the Company.

Capital Expenditures. The Company incurred approximately $9.0 million of capital expenditures in the year ended December 31, 1999, and $5.6million in the year ended December 31, 1998.These expenditures in 1999 and 1998 principally relate to expanding and upgrading its pharmaceuti-cal manufacturing facilities located in Haifa, Israel, and Brampton, Ontario to maintain compliance with FDA current Good Manufacturing Practiceregulations. In addition to facility-related expenditures, the Company also acquired certain manufacturing and packaging equipment that will serve toincrease production capacity in both the Israel and Canadian facilities.The Company also continued to upgrade its information systems infrastruc-ture during the year, allowing for more efficient production scheduling and enhanced inventory control. (Also see Note 4 of the Company's 1999Consolidated Financial Statements for an analysis of PP&E activity in 1999.)

Liquidity. Overall liquidity increased from 1998 to 1999, principally due to the increase in the level of borrowings from banks and other lendinginstitutions. Net worth increased from $28.8 million at December 31, 1998 to $40.5 million at December 31, 1999, principally due to the net incomecontribution to retained earnings of $5.5 million, the conversion into equity the exchangeable notes, the exercise of options and a positive impactof foreign currency transaction adjustments during 1999. As described in Note 7a(3) of the Company's Consolidated Financial Statements, withrespect to certain amounts due to banks and the issuance of long-term exchangeable notes, the Company has undertaken to maintain certain finan-cial ratios.At December 31, 1999 the Company was in compliance with these ratios.

Due to further improvement in working capital anticipated from increased operating earnings in 2000, subject to the continued availability of bankfacilities, the Company does not foresee any difficulty in maintaining its present financial condition and liquidity.The Company plans to continue its cap-ital investment programs based on the availability and relative cost of prevailing debt and/or equity financing alternatives that may exist going forward.

The Company's long-term debt (including current maturities) outstanding as of December 31, 1999 approximated $28.5 million. The Companyintends to satisfy these obligations in the following manner: (i) an aggregate of approximately $1.0 million representing the Canadian subsidiary'smortgage payable will be retired through normal amortization during the next five years; (ii) an aggregate of $27.5 million due to banks and otherlending institutions, will be retired through normal amortization during the next nine years.

Impact of Year 2000Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year.Any of the Company’scomputer programs that have time sensitive software may recognize a date using "00" as the year l900 rather than the year 2000.This could result

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in system failure or miscalculation causing disruptions of operation, including among other things, a temporary inability to process transactions, sendinvoices, or engage in similar business activities.

The Company has replaced significant portions of its software so that its computer systems will function properly with respect to dates in the year2000 and thereafter. Since beginning the year 2000, the Company has not experienced any major disruptions to our operations.We are not awareof any significant year 2000 disruptions experienced by our customers or suppliers.Although the Company does not anticipate any such disruptionsto its business activities, the Company continues to monitor its critical systems over the next several months.

Impact of Inflation and Devaluation on Results of Operations, Liabilities and Assets For many years prior to 1986, the Israeli economy was characterized by high rates of inflation and devaluation of the Israeli currency against the dol-lar and other currencies. However, since the institution of the Israeli Economic Program in 1985, inflation, while continuing, has been significantlyreduced and the rate of devaluation has been substantially diminished. During 1997, 1998 and 1999, Israel effected devaluations of the New IsraelShekel (NIS) against the dollar of 8.77%, 17.65% and – 0.17%, respectively, while the rate of inflation was 6.99%, 8.62% and 1.33% in these years.Therefore, since over the past few years, (i) the rate of inflation has been relatively low, (ii) differences between the devaluation of the NIS and therate of inflation have not been significant and (iii) the proportion of the Company's business that is conducted in Israel (i.e., denominated in NIS) isapproximately one eighth of its overall revenue base, the impact of the Israeli inflation and devaluation is not material to the overall financial resultsof the Company.

Market RiskThe Company’s exposure to market risk for changes in interest rates and foreign currency rates relates mainly to the Company’s long-term bankloans obtained to purchase fixed assets.The Company’s interest expenses are sensitive to the London Interbank Offered Rate (Libor) as most of itslong-term bank loans bear a Libor based interest rate.The Company does not use derivative financial instruments.As of December 31, 1999, $28.5million of bank loans bear an average interest rate of Libor plus 2.3%. Consequently, a 0.5% adverse change, will reduce pretax income by approxi-mately $150 thousand.

In Addition, the Company has long-term bank loans in Canada, denominated in local currency, in the amount of $2.6 million.A 10% adverse changein the exchange rate will reduce reported pretax income by approximately $25 thousand.The Company does not have foreign exchange forwardcontracts to hedge its exposure to market fluctuation.

Under the current condition, the Company believes that its exposure to market risks will not have material impact on future earnings.

Effective Tax RatesAs of December 31, 1999, the Company, on an unconsolidated basis (i.e.,Taro Pharmaceutical Industries Ltd., as a separate Israel corporation), hadavailable tax loss carryforward of $8.3 million, while its U.S. and Canadian subsidiaries had no tax loss carryforward available. Certain approvals bythe Israeli government of the merger of the Company and its Israeli subsidiary, in 1993, as well as management's earnings projections, suggest thatpart of the tax loss carryforward would not be utilized over a minimum period of two years.

Income earned from operations conducted in the U.S. and Canada is subject to taxes at statutory rates that, in 1997, 1998 and 1999 approximated42% in the U.S. and 35% in Canada.The Canadian subsidiary received research and development tax credits and therefore the effective tax rate onits income was 26% in 1999. In addition the Company realized tax advantages from its commercial operation in the Cayman Islands. In Israel, the1999 corporate tax rate on regular business was 36%. However, the effective tax rate payable by a company which qualifies as an "IndustrialCompany" under Israel law (as the Company does), and which derives income from an "Approved Enterprise", after utilizing all of the tax loss car-ryforward, may be considerably less. The Company currently has Approved Enterprise status and certain of its qualified future income, after fully uti-lizing its tax loss carryforward, will be subject to more favorable income tax rates in Israel. (Also see Note 12 to the Company's ConsolidatedFinancial Statements.)

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