| o | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THESECURITIES EXCHANGE ACT OF 1934 |
|---|-----------------------------------------------------------------------------------------------|

| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 |
|--------|-------------------------------------------------------------------------------------|

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

| o | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|---|---------------------------------------------------------------------------------------------|

----

|   | o Yes   þ No |
|--------|-----------------------------|

|   | o Yes   þ No |
|--------|-----------------------------|

|   | o Yes   þ No |
|--------|-----------------------------|

|   | o Yes   þ No |
|--------|-----------------------------|

|   | o Large Accelerated Filer     þ Accelerated Filer     oNon-Accelerated Filer |
|--------|---------------------------------------------------------------------------------------------------------------------------|

| U.S. GAAP þ | International Financial Reporting Standards as issued by theInternational Accounting Standards Board  o | Other   ̈ |
|-----------------------|-------------------------------------------------------------------------------------------------------------------|-------------------------|

----

|   | o Item 17   oItem 18 |
|--------|--------------------------------|

|   | o Yes   þ No |
|--------|-----------------------------|

----

| Item                                     | Page |
|------------------------------------------|------|
| EXPLANATORY NOTE                         | 1    |
| PART III                                 | 1    |
| ITEM 18.  FINANCIAL STATEMENTS | 1    |
| ITEM 19.  EXHIBITS             | 1    |

| Exhibit No. |   | Description                                                                                                                                                                                                                       |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 12.1        |   | Certification of the Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                    |
|        |   |                                                                                                                                                                                                                              |
| 12.2        |   | Certification of the Group Vice President, Interim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                              |
|        |   |                                                                                                                                                                                                                              |
| 13          |   | Certification of the Interim Chief Executive Officer and Group Vice President, Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

----

|                    | TARO PHARMACEUTICAL INDUSTRIES LTD.  |
|-------------------------|-------------------------------------------|
|                    | By:                                       | /s/ Michael Kalb                                                          |
|                    |                                      | Michael Kalb |
| Dated: January 10, 2012 |                                      | Group Vice President, Interim Chief Financial Officer |

----

|                                                    |                           |  Page        |
|---------------------------------------------------------|--------------------------------|-------------------|
| Report of Independent Registered Public Accounting Firm |                           | F-2               |
|                                                    |                           |              |
| Consolidated Balance Sheets                             |       | F-5 – F-6   |
|                                                    |                           |              |
| Consolidated Statements of Operations                   |                           | F-7               |
|                                                    |                           |              |
| Statements of Changes in Shareholders’ Equity     |                           | F-8               |
|                                                    |                           |              |
| Consolidated Statements of Cash Flows                   |                           | F-9 – F-10  |
|                                                    |                           |              |
| Notes to Consolidated Financial Statements              |                           | F-11 – F-53 |

----

----

| Tel Aviv, Israel | /s/ Ziv Haft                       |
|------------------|------------------------------------|
|             | Ziv Haft                           |
| June 29, 2011    | Certified Public Accountants (Isr) |
|             | BDO Member Firm                    |

----

|   | ● |   | Control Activities Associated with Financial Statement Closing Processes. The Company identified material weaknesses in its financial statement closing  processes arising from the potential for a material error in the financial statements from consideration of the following deficiencies: |
|--------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | estimating certain accounts receivable reserves and sales deductions including rebates and other sales deductions.                                                                                                                                                                                                                                                                                                   |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | ● | significant, complex and non-routine transactions, including the area of taxation and certain other accounting items.                                                                                                                                                                                                                                                                                                |
|   | ● | ensuring adequate preparation, timely review and documented approval of account reconciliations, journal entries, both recurring and non-recurring and certain information primarily in the form of spreadsheets that supports our financial reporting process, and consistent communication among the various finance and non-finance organizations across the Company on the terms of our commercial arrangements. |

----

|   | ● |   | Revenue. The Company lacks the proper procedures and controls in estimating its rebate and other deductions reserves, including indirect and Medicaid rebates.  Specifically, the Company is dependent on manual processes and experienced turnover in the roles responsible for certain estimates and lacked sufficient time and resources to properly and fully estimate these reserves.  As a result, the Company did not consistently and accurately record the provision at the time of the sale. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● |   | Inventory. The Company found that adjustments of inventory and cost of goods sold were necessary and mainly relate to errors in the assessment of inventory valuation.  Inventory valuation adjustments primarily resulted due to the errors identified in the accounts receivable reserves, which impacted the computation of the Company’s net selling prices which resulted in changes to inventory valuation.Income Taxes. The Company did not maintain adequate policies and procedures and related internal controls or employ adequate resources with sufficient technical expertise, on a global basis, in the area of accounting for income taxes to ensure the completeness, accuracy, and timely preparation and review of our consolidated income tax provision, related account balances and disclosures sufficient to prevent a material misstatement of related account balances.  In addition, the Company was unable to finalize its tax provision due to the lack of audited financial statements for prior years. |
|--------|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Tel Aviv, Israel | /s/ Ziv Haft                       |
|------------------|------------------------------------|
|             | Ziv Haft                           |
| June 29, 2011    | Certified Public Accountants (Isr) |
|             | BDO Member Firm                    |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD. |
|--------------------------------------------------|
|                                             |
| CONSOLIDATED BALANCE SHEETS                 |

|                                                                                               |   | December31, |    |
|----------------------------------------------------------------------------------------------------|--------|-------------|---------|
|                                                                                               |   | 2010        |    |   | 2009 |   |
| ASSETS                                                                                             |   |        |    |   |   |   |
| CURRENT ASSETS:                                                                                    |   |        |    |   |   |   |
|      Cash and cash equivalents                                            |   | $           | 54,144  |   |   | $ | 93,307 |   |
|      Short-term bank deposits                                             |   |        | 31,000  |   |   |   | 20,974 |   |
|      Marketable securities                                                |   |        | 3,693   |   |   |   | - |   |
|      Accounts receivable and other:                                       |   |        |    |   |   |   |   |   |
|           Trade, net                             |   |        | 73,406  |   |   |   | 61,643 |   |
|           Other receivables and prepaid expenses |   |        | 49,251  |   |   |   | 45,603 |   |
|      Inventories                                                          |   |        | 83,709  |   |   |   | 67,977 |   |
|      Long-term assets held for sale, net                                  |   |        | 434     |   |   |   | - |   |
| TOTAL CURRENT ASSETS                                                                               |   |        | 295,637 |   |   |   | 289,504 |   |
| LONG-TERM RECEIVABLES AND OTHER ASSETS                                                             |   |        | 30,663  |   |   |   | 31,549 |   |
| PROPERTY, PLANT AND EQUIPMENT, NET                                                                 |   |        | 163,596 |   |   |   | 176,168 |   |
| GOODWILL                                                                                           |   |        | 7,285   |   |   |   | 7,265 |   |
| INTANGIBLE ASSETS AND DEFERRED COSTS, NET                                                          |   |        | 22,771  |   |   |   | 20,883 |   |
| DEFERRED INCOME TAXES                                                                              |   |        | 36,490  |   |   |   | 50,520 |   |
| TOTAL ASSETS                                                                                       |   | $           | 556,442 |   |   | $ | 575,889 |   |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD. |
|--------------------------------------------------|
|                                             |
| CONSOLIDATED BALANCE SHEETS                 |
| U.S. dollars and shares in thousands        |

|                                                                                                                                |   | December31, |    |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|---------|
|                                                                                                                                |   | 2010        |    |   | 2009 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                          |   |        |    |   |
| CURRENT LIABILITIES:                                                                                                                |   |        |    |   |   |   |
|      Short-term bank credit and short-term loans                                                           |   | $           | 14,885  |   |   | $ | 96,090 |   |
|      Current maturities of long-term debt                                                                  |   |        | 13,310  |   |   |   | 29,277 |   |
|      Accounts payable:                                                                                     |   |        |    |   |   |   |   |   |
|           Trade payables                                                          |   |        | 21,905  |   |   |   | 27,979 |   |
|           Other current liabilities                                               |   |        | 79,686  |   |   |   | 77,063 |   |
| TOTAL CURRENT LIABILITIES                                                                                                           |   |        | 129,786 |   |   |   | 230,409 |   |
| LONG-TERM LIABILITIES:                                                                                                              |   |        |    |   |   |   |   |   |
|      Long-term debt, net of current maturities                                                             |   |        | 31,225  |   |   |   | 38,380 |   |
|      Deferred income taxes                                                                                 |   |        | 2,342   |   |   |   | 3,813 |   |
|      Other long-term liabilities                                                                           |   |        | 8,576   |   |   |   | 7,591 |   |
| TOTAL LONG-TERM LIABILITIES                                                                                                         |   |        | 42,143  |   |   |   | 49,784 |   |
| COMMITMENTS AND CONTINGENT LIABILITIES                                                                                              |   |        |    |   |   |
| TOTAL LIABILITIES                                                                                                                   |   |        | 171,929 |   |   |   | 280,193 |   |
| SHAREHOLDERS’ EQUITY:                                                                                                         |   |        |    |   |   |   |   |   |
|      Taro shareholders' equity:                                                                            |   |        |    |   |   |   |   |   |
|           Ordinary shares of NIS 0.0001 par value:                                |   |        |    |   |   |   |   |   |
| Authorized at December 31, 2010 and 2009: 200,000,000 shares; Issued                                                      |   |
| at December 31, 2010 and 2009: 43,340,632 and 39,509,257 shares, respectively.                                                      |   |
|             Outstanding at December 31, 2010 and 2009:                       |   |        |    |   |   |   |   |   |
|               43,080,457 and 39,249,082 shares, respectively. |   |        | 679     |   |   |   | 679 |   |
|          Founders’ shares of NIS 0.00001 par value:                              |   |        |    |   |   |   |   |   |
| Authorized, issued and outstanding at December 31, 2010 and 2009:                                                                   |   |
|               2,600 shares                                    |   |        | 1       |   |   |   | 1 |   |
|         Additional paid-in capital                                                          |   |        | 244,668 |   |   |   | 222,608 |   |
|         Accumulated other comprehensive income                                              |   |        | 24,186  |   |   |   | 21,980 |   |
|        Treasury stock: 260,175 shares at December 31, 2010 and 2009                              |   |        | (1,329  | ) |   |   | (1,329 | ) |
|        Accumulated earnings                                                                      |   |        | 113,107 |   |   |   | 49,029 |   |
|      Taro shareholders' equity                                                                             |   |        | 381,312 |   |   |   | 292,968 |   |
|     Non-controlling interest                                                                                    |   |        | 3,201   |   |   |   | 2,728 |   |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                    |   |        | 384,513 |   |   |   | 295,696 |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                    |   | $           | 556,442 |   |   | $ | 575,889 |   |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD.            |
|-------------------------------------------------------------|
|                                                        |
| CONSOLIDATED STATEMENTS OF OPERATIONS                  |
| U.S. dollars and shares in thousands(except per share data) |

|                                                                             |   | Year ended December31, |
|----------------------------------------------------------------------------------|--------|------------------------|
|                                                                             |   | 2010                   |   |   |   | 2009(*) |   |   | 2008(*) |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |
| Sales, net                                                                       |   | $                      | 392,535 |   |   | $ | 355,936 |   |   | $ | 327,351 |   |
| Cost of sales                                                                    |   |                   | 159,045 |   |   |   | 146,920 |   |   |   | 139,483 |   |
| Impairment                                                                       |   |                   | 113 |   |   |   | 171 |   |   |   | 27 |   |
| Gross profit                                                                     |   |                   | 233,377 |   |   |   | 208,845 |   |   |   | 187,841 |   |
| Operating expenses:                                                              |   |                   |   |   |   |   |   |   |   |   |   |   |
|      Research and development, net                      |   |                   | 36,393 |   |   |   | 33,303 |   |   |   | 33,681 |   |
|      Selling, marketing, general and administrative     |   |                   | 107,902 |   |   |   | 100,344 |   |   |   | 97,125 |   |
|      Impairment                                         |   |                   | 2,617 |   |   |   | 3,363 |   |   |   | 2,820 |   |
|                                                                             |   |                   | 146,912 |   |   |   | 137,010 |   |   |   | 133,626 |   |
| Operating income                                                                 |   |                   | 86,465 |   |   |   | 71,835 |   |   |   | 54,215 |   |
| Financial expenses, net                                                          |   |                   | 11,840 |   |   |   | 13,575 |   |   |   | (1,754 | ) |
| Other gain, net                                                                  |   |                   | 755 |   |   |   | 548 |   |   |   | 469 |   |
| Income before income taxes                                                       |   |                   | 75,380 |   |   |   | 58,808 |   |   |   | 56,438 |   |
| Tax expense (benefit)                                                            |   |                   | 10,477 |   |   |   | (69,657 | ) |   |   | 13,541 |   |
| Income from continuing operations                                                |   |                   | 64,903 |   |   |   | 128,465 |   |   |   | 42,897 |   |
| Net loss from discontinued operations                                            |   |                   | (352 | ) |   |   | (11,714 | ) |   |   | (12,376 | ) |
| Net income                                                                       |   |                   | 64,551 |   |   |   | 116,751 |   |   |   | 30,521 |   |
| Net income attributable to non-controlling interest                              |   |                   | 473 |   |   |   | 2,728 |   |   |   | - |   |
| Net income attributable to Taro                                                  |   | $                      | 64,078 |   |   | $ | 114,023 |   |   | $ | 30,521 |   |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net income from continuing operations attributable to Taro                       |   |                   | 64,430 |   |   |   | 125,737 |   |   |   | 42,897 |   |
| Net loss from discontinued operations attributable to Taro                       |   |                   | (352 | ) |   |   | (11,714 | ) |   |   | (12,376 | ) |
| Net income attributable to Taro                                                  |   | $                      | 64,078 |   |   | $ | 114,023 |   |   | $ | 30,521 |   |
|                                                                             |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net income per ordinary share from continuing operations attributable to Taro:   |   |
|      Basic                                              |   | $                      | 1.60 |   |   | $ | 3.21 |   |   | $ | 1.10 |   |
|      Diluted                                            |   | $                      | 1.54 |   |   | $ | 3.10 |   |   | $ | 1.07 |   |
| Net loss per ordinary share from discontinued operations attributable to Taro:   |   |                   |   |   |   |
|      Basic                                              |   | $                      | (0.01 | ) |   | $ | (0.30 | ) |   | $ | (0.32 | ) |
|      Diluted                                            |   | $                      | (0.01 | ) |   | $ | (0.29 | ) |   | $ | (0.31 | ) |
| Net income per ordinary share attributable to Taro:                              |   |                   |   |   |   |   |   |   |   |   |   |   |
|      Basic                                              |   | $                      | 1.59 |   |   | $ | 2.91 |   |   | $ | 0.78 |   |
|      Diluted                                            |   | $                      | 1.53 |   |   | $ | 2.81 |   |   | $ | 0.76 |   |
| Weighted-average number of ordinary shares used to compute net income per share: |   |
|      Basic                                              |   |                   | 40,272 |   |   |   | 39,232 |   |   |   | 39,200 |   |
|      Diluted                                            |   |                   | 41,850 |   |   |   | 40,568 |   |   |   | 40,423 |   |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD.                       |
|------------------------------------------------------------------------|
|                                                                   |
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY  |
| U.S. dollars and shares in thousands                                   |

|                                                                       |   | Taro Shareholders' Equity |   |   |         |   |   |                      |   |
|----------------------------------------------------------------------------|--------|---------------------------|--------|--------|--------------|--------|--------|---------------------------|--------|
|                                                                       |   | Number ofShares           |   |   | ShareCapital |   |   | AdditionalPaid-in Capital |   |   | AccumulatedOtherComprehensiveIncome (Loss) |   |   | TreasuryShares |   |   | RetainedEarnings(AccumulatedDeficit) |   |   | Total  TaroComprehensiveIncome (Loss) |   |   | Total TaroShareholders' Equity |   |   | Non-controllingInterest |   |   | TotalShareholders’Equity |   |
| Balance at January 1, 2008                                                 |   |                      | 39,196 |   |         |   | 680    |                      |   |   | 221,814 |   |   |   | 27,620 |   |   |   | (1,361 | ) |   |   | (95,515 | ) |   |   |   |   |   | 153,238 |   |   |   |   |   |   | 153,238 |   |
| Exercise of options and issuance of shares of ESPP                         |   |                      | 4      |   |         |   |   |                      |   |   | 2 |   |   |   |   |   |   |   | 32 |   |   |   |   |   |   |   |   |   |   | 34 |   |   |   |   |   |   | 34 |   |
| Share-based compensation                                                   |   |                      |   |   |         |   |   |                      |   |   | 322 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 322 |   |   |   |   |   |   | 322 |   |
| Comprehensive income (loss),net of tax:                                    |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Foreign currencytranslation adjustments      |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   | (19,898 | ) |   |   |   |   |   |   |   |   |   |   | (19,898 | ) |   |   | (19,898 | ) |   |   |   |   |   | (19,898 | ) |
| Net income                                                                 |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 30,521 |   |   |   | 30,521 |   |   |   | 30,521 |   |   |   |   |   |   | 30,521 |   |
| Total comprehensive income:                                                |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 10,623 |   |   |   |   |   |   | $ | - |   |   |   |   |   |
| Balance at December 31, 2008                                               |   |                      | 39,200 |   |         |   | 680    |                      |   |   | 222,138 |   |   |   | 7,722 |   |   |   | (1,329 | ) |   |   | (64,994 | ) |   |   |   |   |   |   | 164,217 |   |   |   |   |   |   |   | 164,217 |   |
| Exercise of options and issuance of shares of ESPP                         |   |                      | 49     |   |         |   |   |                      |   |   | 163 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 163 |   |   |   |   |   |   |   | 163 |   |
| Share-based compensation                                                   |   |                      |   |   |         |   |   |                      |   |   | 307 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 307 |   |   |   |   |   |   |   | 307 |   |
| Comprehensive income (loss),net of tax:                                    |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Foreign currencytranslation adjustments      |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   | 14,258 |   |   |   |   |   |   |   |   |   |   |   | 14,258 |   |   |   | 14,258 |   |   |   |   |   |   |   | 14,258 |   |
| Net income                                                                 |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 114,023 |   |   |   | 114,023 |   |   |   | 114,023 |   |   |   | 2,728 |   |   |   | 116,751 |   |
| Total comprehensive income:                                                |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 128,281 |   |   |   |   |   |   | $ | 2,728 |   |   |   |   |   |
| Balance at December 31, 2009                                               |   |                      | 39,249 |   |         | $      | 680    |                      |   | $ | 222,608 |   |   | $ | 21,980 |   |   | $ | (1,329 | ) |   | $ | 49,029 |   |   |   |   |   |   | $ | 292,968 |   |   |   |   |   |   | $ | 295,696 |   |
|                                                                       |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Exercise of options and issuance of shares of ESPP                         |   |                      | 44     |   |         |   | -      |                      |   |   | 186 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 186 |   |   |   |   |   |   |   | 186 |   |
| Exercise of Sun warrants                                                   |   |                      | 3,788  |   |         |   | -      |                      |   |   | 21,589 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 21,589 |   |   |   |   |   |   |   | 21,589 |   |
| Share-based compensation                                                   |   |                      |   |   |         |   |   |                      |   |   | 285 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 285 |   |   |   |   |   |   |   | 285 |   |
| Comprehensive income (loss),net of tax:                                    |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Foreign currencytranslation adjustments      |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   | 2,436 |   |   |   |   |   |   |   |   |   |   |   | 2,436 |   |   |   | 2,436 |   |   |   |   |   |   |   | 2,436 |   |
|      Unrealized (loss) from Marketable Securities |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   | (230 | ) |   |   |   |   |   |   |   |   |   |   | (230 | ) |   |   | (230 | ) |   |   |   |   |   |   | (230 | ) |
| Net income                                                                 |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 64,078 |   |   |   | 64,078 |   |   |   | 64,078 |   |   |   | 473 |   |   |   | 64,551 |   |
| Total comprehensive income:                                                |   |                      |   |   |         |   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 66,284 |   |   |   |   |   |   | $ | 3,201 |   |   |   |   |   |
| Balance at December 31, 2010                                               |   |                      | 43,081 |   |         | $      | 680    |                      |   | $ | 244,668 |   |   | $ | 24,186 |   |   | $ | (1,329 | ) |   | $ | 113,107 |   |   |   |   |   |   | $ | 381,312 |   |   |   |   |   |   | $ | 384,513 |   |

----

|                                                                                                                           TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| U.S. dollars in thousands (except share and per share data)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

|                                                                                        |   | Year ended December 31, |    |
|---------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                        |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
|                                                                                        |   |                    |    |   |   |   |   |   |   |
| Cash flows from operating activities:                                                       |   |                    |    |   |   |   |   |   |   |
|      Net income                                                    |   | $                       | 64,551  |   |   | $ | 116,751 |   |   | $ | 30,521 |   |
| Adjustments required to reconcile net income to net cash                                    |   |                    |    |   |   |   |   |   |   |
| provided by (used in) operating activities:                                                 |   |                    |    |   |   |   |   |   |   |
|      Depreciation and amortization                                 |   |                    | 18,827  |   |   |   | 18,445 |   |   |   | 21,187 |   |
|      Change in deferred charges and other assets                   |   |                    | 42      |   |   |   | 69 |   |   |   | 101 |   |
|      Impairment of long-lived assets                               |   |                    | 2,730   |   |   |   | 3,534 |   |   |   | 2,847 |   |
|      Share-based compensation expense                              |   |                    | 285     |   |   |   | 307 |   |   |   | 322 |   |
|      Accrued severance pay and other long-term liabilities, net    |   |                    | (122    | ) |   |   | (539 | ) |   |   | 571 |   |
|      Loss (gain) on sale of long-lived assets                      |   |                    | 65      |   |   |   | 34 |   |   |   | (56 | ) |
|      Realized gain on sale of marketable securities                |   |                    | (32     | ) |   |   | - |   |   |   | - |   |
|      Change in derivative instruments, net                         |   |                    | (2,140  | ) |   |   | (4,019 | ) |   |   | 13,066 |   |
|      Effect of exchange differences on inter-company balances      |   |                    | 307     |   |   |   | 8,713 |   |   |   | (13,328 | ) |
|      Increase in long-term debt due to currency fluctuations       |   |                    | 3,362   |   |   |   | 2,401 |   |   |   | 3,736 |   |
|      Deferred income taxes, net                                    |   |                    | 6,720   |   |   |   | (78,191 | ) |   |   | (115 | ) |
|      (Increase) decrease in trade receivables, net                 |   |                    | (11,519 | ) |   |   | 1,081 |   |   |   | 6,606 |   |
|      Decrease in other receivables, prepaid expenses and other     |   |                    | 3,251   |   |   |   | 3,229 |   |   |   | 1,187 |   |
|      (Increase) decrease in inventories, net                            |   |                    | (14,464 | ) |   |   | 762 |   |   |   | (2,912 | ) |
|      Decrease (increase) in long-term receivables and other assets |   |                    | 2,544   |   |   |   | (842 | ) |   |   | (718 | ) |
|      Increase in income tax receivables                            |   |                    | (18     | ) |   |   | (1 | ) |   |   | - |   |
|      (Decrease) increase in trade payables                         |   |                    | (6,367  | ) |   |   | 690 |   |   |   | 7,459 |   |
|      Increase (decrease) in other accounts payable and accrued expenses |   |                    | 5,605   |   |   |   | (5,824 | ) |   |   | (5,412 | ) |
|      (Decrease) increase in income tax payables                    |   |                    | (3,143  | ) |   |   | (2,681 | ) |   |   | 9,815 |   |
| Net cash provided by operating activities                                                   |   |                    | 70,484  |   |   |   | 63,919 |   |   |   | 74,877 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                              |
| U.S. dollars in thousands (except share and per share data)        |

|                                                                                             |   | Year ended December 31, |    |
|--------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                             |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
|                                                                                             |   |                    |    |   |   |   |   |   |   |
| Cash flows from investing activities:                                                            |   |                    |    |   |   |   |   |   |   |
|      Purchase of property, plant and equipment                          |   |                    | (5,656  | ) |   |   | (5,025 | ) |   |   | (3,572 | ) |
|      Investment in other intangible assets                              |   |                    | (5,097  | ) |   |   | (120 | ) |   |   | (594 | ) |
|      Investment in short-term bank deposits                             |   |                    | (10,026 | ) |   |   | (10,974 | ) |   |   | (10,000 | ) |
|      Proceeds from (investment in) restricted bank deposits             |   |                    | 900     |   |   |   | 1,000 |   |   |   | (6,250 | ) |
|      (Investments in) proceeds from long-term deposits and other assets |   |                    | (310    | ) |   |   | 14 |   |   |   | 70 |   |
|      Proceeds from sale (purchase) of marketable securities, net        |   |                    | (3,891  | ) |   |   | - |   |   |   | - |   |
|      Proceeds from sale of long-lived assets                            |   |                    | 69      |   |   |   | 1,655 |   |   |   | 65 |   |
| Net cash used in investing activities                                                            |   |                    | (24,011 | ) |   |   | (13,450 | ) |   |   | (20,281 | ) |
|                                                                                             |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                            |   |                    |    |   |   |   |   |   |   |   |   |   |
|      Proceeds from issuance of shares, net                              |   |                    | 21,775  |   |   |   | 163 |   |   |   | 34 |   |
|      (Repayment) proceeds of short-term bank debt, net                  |   |                    | (73,331 | ) |   |   | 1,660 |   |   |   | 2,818 |   |
|      Proceeds from long-term debt and capital leases                    |   |                    | 22      |   |   |   | - |   |   |   | - |   |
|      Repayment of long-term debt                                        |   |                    | (34,579 | ) |   |   | (30,403 | ) |   |   | (31,776 | ) |
| Net cash used in financing activities                                                            |   |                    | (86,113 | ) |   |   | (28,580 | ) |   |   | (28,924 | ) |
| Effect of exchange rate changes on cash and cash equivalents                                     |   |                    | 477     |   |   |   | 2,590 |   |   |   | (2,031 | ) |
| (Decrease) increase in cash and cash equivalents                                                 |   |                    | (39,163 | ) |   |   | 24,479 |   |   |   | 23,641 |   |
| Cash and cash equivalents at the beginning of the year                                           |   |                    | 93,307  |   |   |   | 68,828 |   |   |   | 45,187 |   |
| Cash and cash equivalents at the end of the year                                                 |   | $                       | 54,144  |   |   | $ | 93,307 |   |   | $ | 68,828 |   |
|                                                                                             |   |                    |    |   |   |   |   |   |   |   |   |   |
| Supplemental disclosure of cash flow transactions:                                               |   |                    |    |   |   |   |   |   |   |
| Cash paid during the year for:                                                                   |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest                                                                                         |   | $                       | 6,171   |   |   | $ | 8,256 |   |   | $ | 12,039 |   |
| Income taxes                                                                                     |   | $                       | 9,454   |   |   | $ | 11,970 |   |   | $ | 3,197 |   |
|                                                                                             |   |                    |    |   |   |   |   |   |   |   |   |   |
| (a) Non-cash investing and financing transactions:                                               |   |                    |    |   |   |   |   |   |   |
|       Purchase of property, plant and equipment on credit               |   | $                       | 397     |   |   | $ | 755 |   |   | $ | 288 |   |
|       Investment in intangible assets on credit                              |   | $                       | -       |   |   | $ | - |   |   | $ | - |   |

----

|                                                                                                                           TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Notes to consolidated financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| U.S. dollars in thousands (except share and per share data)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

| a.   | Taro Pharmaceutical Industries Ltd. (the “Company” or “Taro”) is an Israeli corporation, which operates in Israel and elsewhere through its Israeli, North American, and European subsidiaries (the “Group”).  The principal business activities of the Group are the production, research, development and marketing of pharmaceutical products.  The Company’s ordinary shares are quoted on the Pink Sheets Electronic Quotation Service (“Pink Sheets”) under the symbol TAROF.  As used herein, the terms “we,” “us,” “our,” “Taro” and the "Company" mean Taro Pharmaceutical Industries Ltd. and its subsidiaries, unless otherwise indicated. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| b.   | On May 18, 2007, the Company, Alkaloida Chemical Company Exclusive Group Ltd. (“Alkaloida”), a subsidiary of Sun Pharmaceutical Industries Ltd. (together with its affiliates “Sun”) (Reuters: SUN.BO, Bloomberg: SUNP IN, NSE: SUNPHARMA, BSE: 524715) and Aditya Acquisition Company Ltd. (“Aditya”) entered into a merger agreement (the “Merger Agreement”).  In addition, Taro entered into a Share Purchase Agreement with Alkaloida, pursuant to which Taro issued Alkaloida 6,787,500 ordinary shares at $6.00 per share, for a total of $40,725 (the “Share Purchase Agreement”).  Under the terms of the Share Purchase Agreement, Sun also received a three-year warrant to purchase additional ordinary shares at $6.00 per share.  On August 2, 2007, Sun exercised a portion of its warrant in favor of Alkaloida, as assignee, and purchased 3,000,000 additional shares at an exercise price of $6.00 per share, or $18,000.  This additional investment, together with its original purchase of Taro’s newly issued shares, brought Sun’s investment in Taro to $58,725.  Taro paid $2,436 in stock issuance costs and therefore retained $56,289 of the proceeds.  The net proceeds were recorded within shareholders’ equity on the consolidated balance sheet in accordance with FASB ASC Subtopic 815-40, “Derivatives and Hedging - Contracts in Entity’s Own Equity”, as the Company did not meet the criteria of a derivative under FASB ASC Section 815-40-30, “Derivatives and Hedging - Contracts in Entity’s Own Equity – Initial Measurement”. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| c.   | The Company, through its Irish subsidiary, owns a pharmaceutical manufacturing and research facility in Ireland, designed primarily for the manufacture of sterile products.  As a result of the delay in receiving regulatory approval for the manufacture of new products, the inability to pursue the launch of certain approved products, and further financial constraints during 2006 which significantly reduced the level of additional investment in the Irish facility, the Company recorded an impairment charge related to its Irish facility during 2006. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Use of estimates: |
|----------------|-------------------|

| b.   | Financial statements in U.S. dollars: |
|----------------|---------------------------------------|

| c.   | Principles of consolidation: |
|----------------|------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| d.   | Cash and cash equivalents: |
|----------------|----------------------------|

| e.   | Marketable securities: |
|----------------|------------------------|

| f.   | Allowance for doubtful accounts: |
|----------------|----------------------------------|

| g.   | Inventories: |
|----------------|--------------|

| h.   | Property, plant and equipment: |
|----------------|--------------------------------|

| (1) | Property, plant and equipment are stated at cost, net of accumulated depreciation.  Payroll and other costs that are direct incremental costs necessary to bring an asset to the condition of its intended use incurred during the construction and validation period of property, plant and equipment are capitalized to the cost of such assets. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Interest costs are capitalized in accordance with FASB ASC Subtopic 835-20, “Interest – Capitalization of Interest”. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Depreciation is calculated utilizing the straight-line method over the estimated useful lives of the assets, from the date the assets are ready for their intended use, at the following annual rates: |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                                                               |  %                  |
|--------------------------------------------------------------------|--------------------------|
| Buildings                                                     |  2.5 - 10           |
| Machinery and equipment                                       |  5 - 20 (mainly 10) |
| Motor vehicles                                                |  15 - 20            |
| Furniture, fixtures, office equipment and computer equipment  |  6 - 33 (mainly 20) |

| (4)   | The Group accounts for costs of computer software developed or obtained for internal use in accordance with FASB ASC Subtopic 350-40, “Intangibles: Goodwill and Other – Internal-Use Software”.  FASB ASC Subtopic 350-40 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software during the application development stage.  During the years 2010 and 2009, the Group capitalized $40 and $71 of software costs, respectively.  Software costs are amortized using the straight-line method over their estimated useful life of three years. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| i.   | Lease of land from Israel Land Administration: |
|----------------|------------------------------------------------|

| j.   | Goodwill: |
|----------------|-----------|

| k.   | Intangible assets and deferred charges and long-lived assets: |
|----------------|---------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| l.   | Treasury shares: |
|----------------|------------------|

| m.   | Revenue recognition: |
|----------------|----------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| n.   | Research and development: |
|----------------|---------------------------|

| o.   | Royalty-bearing grants: |
|----------------|-------------------------|

| p.   | Advertising expenses: |
|----------------|-----------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| q.   | Income taxes: |
|----------------|---------------|

| r.   | Sales and other taxes collected and remitted to governmental authorities: |
|----------------|---------------------------------------------------------------------------|

| s.   | Basic and diluted net income per share attributable to Taro: |
|----------------|--------------------------------------------------------------|

| t.   | Freight and distribution costs: |
|----------------|---------------------------------|

| u.   | Accounting for stock-based compensation: |
|----------------|------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                    | 2010 |   | 2009      |   | 2008      |
|-------------------------|------|--------|-----------|--------|-----------|
| Dividend yield          | N/A  |   | 0%        |   | 0%        |
| Expected volatility     | N/A  |   | 44.5%     |   | 48.4%     |
| Risk-free interest rate | N/A  |   | 1.7%      |   | 3.1%      |
| Expected life of up to  | N/A  |   | 6.9 years |   | 6.9 years |

| v.   | Concentrations of credit risk: |
|----------------|--------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| w.   | Fair value of financial instruments: |
|----------------|--------------------------------------|

| x.   | Accounting for derivatives: |
|----------------|-----------------------------|

| y.   | Fair value measurements: |
|----------------|--------------------------|

| z.   | Discontinued operations: |
|----------------|--------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| aa.   | Reclassification: |
|-----------------|-------------------|

| bb.   | Impact of recently issued accounting standards: |
|-----------------|-------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | The following is a summary of marketable securities which are classified as available-for-sale: |
|----------------|-------------------------------------------------------------------------------------------------|

|                                                | December 31, |
|-----------------------------------------------------|--------------|
|                                                | 2010         |   | 2009 |
|                                                | Amortized    |   | Unrealized |   | Market |   | Amortized |   | Unrealized |   | Market |
|                                                | cost         |   | losses |   | value |   | cost |   | losses |   | value |
| Available-for-sale:                                 |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|      Government debentures | $            |                   3,923 |   | $ |                    (230) |   | $ |                        3,693 |   | $ |                            - |   | $ |             - |   | $ |                      - |

| b.   | The estimated fair value of available-for-sale investments as of December 31, 2010 and 2009 by contractual maturity, are as follows: |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------|

|                                                          |   | December 31, |   |
|---------------------------------------------------------------|--------|--------------|--------|
|                                                          |   | 2010         |   |   | 2009 |
|                                                          |   | Cost         |   |   | MarketValue |   |   | Cost |   |   | MarketValue |   |
| Available-for-sale government debentures:                     |   |
|      Matures in more than five years |   | $            | 3,878  |   |   | $ | 3,693 |   |   | $ | - |   |   | $ | - |   |
|                                                          |   | $            | 3,878  |   |   | $ | 3,693 |   |   | $ | - |   |   | $ | - |   |

| a.   | Trade, net: |
|----------------|-------------|

|                                                 |   | December 31, |    |
|------------------------------------------------------|--------|--------------|---------|
|                                                 |   | 2010         |    |   | 2009 |   |
| Trade accounts receivable, gross                     |   | $            | 141,532 |   |   | $ | 117,122 |   |
|                                                 |   |         |    |   |   |   |   |   |
| Reserves for sales deductions:                       |   |         |    |   |   |   |   |   |
|      Chargebacks            |   |         | (26,559 | ) |   |   | (19,360 | ) |
|      Customer rebates       |   |         | (18,975 | ) |   |   | (16,356 | ) |
|      Other sales deductions |   |         | (22,518 | ) |   |   | (19,216 | ) |
| Allowance for doubtful accounts                      |   |         | (74     | ) |   |   | (547 | ) |
| Trade accounts receivable, net                       |   | $            | 73,406  |   |   | $ | 61,643 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| b.   | Other receivables and prepaid expenses: |
|----------------|-----------------------------------------|

|                      |   | December 31, |   |
|---------------------------|--------|--------------|--------|
|                      |   | 2010         |   |   | 2009 |   |
| Prepaid expenses          |   | $            | 4,543  |   |   | $ | 7,736 |   |
| Deferred income taxes (1) |   |         | 37,855 |   |   |   | 32,069 |   |
| Government authorities    |   |         | 2,409  |   |   |   | 2,098 |   |
| Advances to suppliers     |   |         | 1,452  |   |   |   | 2,189 |   |
| Derivative instruments    |   |         | 1,917  |   |   |   | 917 |   |
| Other                     |   |         | 1,075  |   |   |   | 594 |   |
|                      |   |         | 49,251 |   |   |   | 45,603 |   |

| (1)   | See Note 2.q. |
|-----------------|---------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| For the Year Ended December 31, 2010 |
|--------------------------------------|
|                                 |   | Beginning balance |   |   | Provision recordedfor current period sales |   |   | Credits processed/ Payments |   |   | Ending balance |   |
| Accounts Receivable Reserves         |   |   |   |   |   |   |   |   |   |   |
| Chargebacks                          |   | $ | (19,360 | ) |   | $ | (170,887 | ) |   | $ | 163,688 |   |   | $ | (26,559 | ) |
| Rebates and Other                    |   |   | (36,119 | ) |   |   | (85,861 | ) |   |   | 80,413 |   |   |   | (41,567 | ) |
| Total                                |   | $ | (55,479 | ) |   | $ | (256,748 | ) |   | $ | 244,101 |   |   | $ | (68,126 | ) |
|                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current Liabilities                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Returns                              |   | $ | (22,514 | ) |   | $ | (13,146 | ) |   | $ | 13,698 |   |   | $ | (21,962 | ) |
| Other (1)                            |   |   | (15,264 | ) |   |   | (25,979 | ) |   |   | 28,144 |   |   |   | (13,099 | ) |
| Total                                |   | $ | (37,778 | ) |   | $ | (39,125 | ) |   | $ | 41,842 |   |   | $ | (35,061 | ) |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| For the Year Ended December 31, 2009 |
|--------------------------------------|
|                                 |   | Beginning balance |   |   | Provision recordedfor current period sales |   |   | Credits processed/ Payments |   |   | Ending balance |   |
| Accounts Receivable Reserves         |   |   |   |   |   |   |   |   |   |   |
| Chargebacks                          |   | $ | (23,904 | ) |   | $ | (208,482 | ) |   | $ | 213,026 |   |   | $ | (19,360 | ) |
| Rebates and Other                    |   |   | (40,666 | ) |   |   | (80,262 | ) |   |   | 84,809 |   |   |   | (36,119 | ) |
| Total                                |   | $ | (64,570 | ) |   | $ | (288,744 | ) |   | $ | 297,835 |   |   | $ | (55,479 | ) |
|                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Current Liabilities                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Returns                              |   | $ | (22,279 | ) |   | $ | (11,327 | ) |   | $ | 11,092 |   |   | $ | (22,514 | ) |
| Other (1)                            |   |   | (9,697 | ) |   |   | (25,838 | ) |   |   | 20,271 |   |   |   | (15,264 | ) |
| Total                                |   | $ | (31,976 | ) |   | $ | (37,165 | ) |   | $ | 31,363 |   |   | $ | (37,778 | ) |

| (1) | Includes indirect rebates. |
|-----|----------------------------|

|                                                 |   | December 31, |   |
|------------------------------------------------------|--------|--------------|--------|
|                                                 |   | 2010         |   |   | 2009 |   |
| Raw and packaging materials                          |   | $            | 27,857 |   |   | $ | 22,385 |   |
| Finished goods                                       |   |         | 33,709 |   |   |   | 26,457 |   |
| Work in progress                                     |   |         | 15,979 |   |   |   | 14,872 |   |
| Purchased products for commercial purposes and other |   |         | 6,164  |   |   |   | 4,263 |   |
|                                                 |   | $            | 83,709 |   |   | $ | 67,977 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

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

|                                                                |   | December 31, |    |
|---------------------------------------------------------------------|--------|--------------|---------|
|                                                                |   | 2010         |    |   | 2009 |   |
| Cost:                                                               |   |         |    |   |   |   |
|        Land                                     |   | $            | 10,348  |   |   | $ | 12,411 |   |
|        Buildings                                |   |         | 140,806 |   |   |   | 140,068 |   |
|        Leasehold improvements                   |   |         | 3,258   |   |   |   | 3,186 |   |
|        Machinery and equipment                  |   |         | 147,904 |   |   |   | 144,111 |   |
|        Computer equipment                       |   |         | 32,699  |   |   |   | 31,610 |   |
|        Motor vehicles                           |   |         | 264     |   |   |   | 303 |   |
|        Furniture, fixtures and office equipment |   |         | 8,915   |   |   |   | 8,787 |   |
|        Advances for property and equipment      |   |         | 679     |   |   |   | 489 |   |
|                                                                |   |         | 344,873 |   |   |   | 340,965 |   |
| Accumulated depreciation and impairment charges:                    |   |         |    |   |   |   |   |   |
|        Buildings                                |   | $            | 37,612  |   |   | $ | 33,771 |   |
|        Leasehold improvements                   |   |         | 3,208   |   |   |   | 3,021 |   |
|        Machinery and equipment                  |   |         | 102,343 |   |   |   | 91,495 |   |
|        Computer equipment                       |   |         | 30,968  |   |   |   | 29,611 |   |
|        Motor vehicles                           |   |         | 229     |   |   |   | 288 |   |
|        Furniture, fixtures and office equipment |   |         | 6,917   |   |   |   | 6,611 |   |
|                                                                |   |         | 181,277 |   |   |   | 164,797 |   |
| Depreciated cost                                                    |   | $            | 163,596 |   |   | $ | 176,168 |   |

| b.   | Cost of property, plant and equipment includes capitalized interest expenses, capitalized direct incremental costs (such as payroll and related expenses) and other internal costs incurred in order to bring the assets to their intended use in the amount of $16,832 as of December 31, 2010 and 2009.  Capitalized interest and other costs were $40 and  $71 for the years ended December 31, 2010 and 2009, respectively. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | Cost of computer equipment includes capitalized development costs of computer software developed for internal use in the amount of $4,701 and $4,634 as of December 31, 2010 and 2009, respectively. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | As for pledges – see Note 15. |
|----------------|-------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Composition: |
|----------------|--------------|

|                                                                                                   |   | December 31, |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------|--------|
|                                                                                                   |   | 2010         |   |   | 2009 |   |
| Cost:                                                                                                  |   |         |   |   |   |   |
|        Product and distribution rights                                             |   | $            | 73,525 |   |   | $ | 68,382 |   |
|        Deferred charges in respect of loans and bonds from institutional investors |   |         | 183    |   |   |   | 1,304 |   |
|        Other deferred costs                                                        |   |         | 1,541  |   |   |   | 1,541 |   |
|                                                                                                   |   |         | 75,249 |   |   |   | 71,227 |   |
| Accumulated amortization and impairment charges:                                                       |   |         |   |   |   |   |   |   |
|        Product and distribution rights                                             |   |         | 50,818 |   |   |   | 47,593 |   |
|        Deferred charges in respect of loans and bonds from institutional investors |   |         | 166    |   |   |   | 1,276 |   |
|        Other deferred costs                                                        |   |         | 1,494  |   |   |   | 1,475 |   |
|                                                                                                   |   |         | 52,478 |   |   |   | 50,344 |   |
| Amortized cost                                                                                         |   | $            | 22,771 |   |   | $ | 20,883 |   |

| b.   | Amortization expenses related to product rights were $3,083, $2,915 and $2,813 for the years ended December 31, 2010, 2009 and 2008, respectively. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | As of December 31, 2010, the estimated amortization expense of product and distribution rights for 2011 to 2015 is as follows: 2011 - $3,597; 2012 - $3,467; 2013 - $3,427; 2014 - $3,174; 2015 - $2,974. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | The weighted-average amortization period for product rights is approximately 8 years. |
|----------------|---------------------------------------------------------------------------------------|

|                                                          |   | December 31, |   |
|---------------------------------------------------------------|--------|--------------|--------|
|                                                          |   | 2010         |   |   | 2009 |   |
| Prepayment of land leased from Israel Land Administration (1) |   | $            | 14,176 |   |   | $ | 14,774 |   |
| Restricted bank deposits (2)                                  |   |         | 4,350  |   |   |   | 5,250 |   |
| Derivative instruments (3)                                    |   |         | 5,485  |   |   |   | 4,077 |   |
| Severance pay fund (4)                                        |   |         | 6,319  |   |   |   | 5,480 |   |
| Long-term security deposit                                    |   |         | 310    |   |   |   | - |   |
| Employee escrow (5)                                           |   |         | -      |   |   |   | 1,947 |   |
| Other                                                         |   |         | 23     |   |   |   | 21 |   |
|                                                          |   | $            | 30,663 |   |   | $ | 31,549 |   |

| (1)   | The land is leased for a period of 49 years and is subject to renewal.  This amount was prepaid (see Note 2.i). |
|-----------------|---------------------------------------------------------------------------------------------------------------------------|

| (2)   | Amount represents restricted bank deposits pursuant to an interest rate swap agreement associated with loan agreements in Israel (see Note 10). |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | See Note 10. |
|-----------------|--------------|

| (4)   | Under Israeli law, the Company and its Israeli subsidiaries are required to make severance or pension payments to dismissed employees and to employees terminating employment under certain other circumstances.  Deposits are made with a pension fund or other insurance plans to secure pension and severance rights for the employees in Israel.  These amounts represent the balance of the deposits in those funds (including profits) that will be used to cover the Company’s severance obligations (see Note 13.b). |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Amount represents an escrow account for certain deferred payments to the Company’s former General Manager.  The amount was remitted to this individual following his separation from the Company in November 2010. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                                               |   | December 31, |   |
|----------------------------------------------------|--------|--------------|--------|
|                                               |   | 2010         |   |   | 2009 |   |   | 2008 |   |
| Pension, retirement savings and severance expenses |   | $            | 7,614  |   |   | $ | 4,047 |   |   | $ | 4,928 |   |

| a.   | Interest rates: |
|----------------|-----------------|

| b.   | Currency exchange rates: |
|----------------|--------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|   |   | Rate of Inflation |   |   | Rate of Devaluation(Appreciation)Against U.S. Dollar |   |   | Rate of Exchange ofU.S. Dollar |   |
|--------|--------|-------------------|--------|--------|------------------------------------------------------|--------|--------|--------------------------------|--------|
| Year   |   | Israel (1)        |   |   | Canada (2)                                           |   |   | Israel (1)                     |   |   | Canada (2) |   |   | Israel (1) |   |   | Canada (2) |   |
| 2009   |   |              | 3.91   | %      |                                                 |   | 1.32   | %                              |   |   | -0.71 | % |   |   | -14.54 | % |   |   | 3.78 |   |   |   | 1.05 |   |
| 2010   |   |              | 2.66   | %      |                                                 |   | 2.35   | %                              |   |   | -5.99 | % |   |   | -4.97 | % |   |   | 3.55 |   |   |   | 0.99 |   |

| (1)  | Per Bank of Israel   |
|-----------|----------------------|
|      |                 |
| (2)  | Statistics of Canada |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                        |   | December 31, 2010                                 |   |
|-----------------------------|--------|---------------------------------------------------|--------|
|                        |   | Quoted Market Pricesof Identical Assets (Level 1) |   |   | Significant OtherObservable Inputs (Level 2) |   |   | Significant UnobservableInputs (Level 3) |   |
|  Assets                |   |                                              |   |   |   |   |   |   |   |
|  Marketable securities |   | $                                                 | 3,693  |   |   | $ | - |   |   | $ | - |   |
|  Cross-currency swaps  |   |                                              | -      |   |   |   | 7,092 |   |   |   | - |   |
|                        |   | $                                                 | 3,693  |   |   | $ | 7,092 |   |   | $ | - |   |
|  Liabilties            |   |                                              |   |   |   |   |   |   |   |   |   |   |
|  Interest rate swap    |   | $                                                 | -      |   |   | $ | 1,120 |   |   | $ | - |   |
|                        |   |                                              |   |   |   |   |   |   |   |   |   |   |
|                        |   | December 31, 2009                                 |   |
|                        |   | Quoted Market Pricesof Identical Assets (Level 1) |   |   | Significant OtherObservable Inputs (Level 2) |   |   | Significant UnobservableInputs (Level 3) |   |
|  Assets                |   |                                              |   |   |   |   |   |   |   |   |   |   |
|  Cross-currency swaps  |   | $                                                 | -      |   |   | $ | 4,979 |   |   | $ | - |   |
|  Liabilties            |   |                                              |   |   |   |   |   |   |   |   |   |   |
|  Interest rate swap    |   | $                                                 | -      |   |   | $ | 852 |   |   | $ | - |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                                                                 |   | Weighted -    |   |   |         |   |   |   |   |
|----------------------------------------------------------------------|--------|---------------|--------|--------|--------------|--------|--------|--------|--------|
|                                                                 |   | average       |   |   |         |   |   |   |   |
|                                                                 |   | interest rate |   |   | Amount       |   |
|                                                                 |   | December 31,  |   |   | December 31, |   |
|                                                                 |   | 2010          |   |   | 2009         |   |   | 2010   |   |   | 2009 |   |
| Short-term bank credit and short-term loans:                         |   |          |   |   |         |   |   |   |   |   |   |   |
| In, or linked to, U.S. dollars (1) (2) (3) (4)                       |   |          | 1.78   | %      |         |   | 3.47   | %      |   | $ | 14,885 |   |   | $ | 76,656 |   |
| In NIS (5)                                                           |   |          | 0.00   | %      |         |   | 4.47   | %      |   |   | - |   |   |   | 8,212 |   |
| In Canadian dollars (6) (7)                                          |   |          | 0.00   | %      |         |   | 3.18   | %      |   |   | - |   |   |   | 11,222 |   |
|                                                                 |   |          |   |   |         |   |   |   |   |   | 14,885 |   |   |   | 96,090 |   |
| Reclass from long-term debt, included in the above amounts (8)       |   |          |   |   |         |   |   |   |   |   | 14,885 |   |   |   | 22,846 |   |
| Total utilized credit lines and short-term loans                     |   |          |   |   |         |   |   |   |   | $ | - |   |   | $ | 73,244 |   |
| Total authorized credit lines and short-term loans                   |   |          |   |   |         |   |   |   |   | $ | 5,000 |   |   | $ | 74,681 |   |
| Unutilized credit lines                                              |   |          |   |   |         |   |   |   |   | $ | 5,000 |   |   | $ | 1,437 |   |
| Weighted-average interest rates at the end of the year for all loans |   |          | 1.78   | %      |         |   | 3.53   | %      |   |   |   |   |   |   |   |   |

| (1)   | Includes $14,885 and $17,780 of long-term debt reclassified as short-term due to covenant defaults at December 31, 2010 and 2009, respectively. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes $28,100 of outstanding debt under a $40,000 Taro U.S.A. credit facility at December 31, 2009.  This credit facility bears interest at a rate of LIBOR plus 3.25% and is secured by a first lien on Taro U.S.A.’s accounts receivable, inventory and all products and proceeds thereof.  On October 5, 2010, the Company retired the $28,100 of outstanding debt and $264 of accrued interest.  The bank has no further right to any of the Company’s assets as collateral since the facility was cancelled. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Includes $9,750 of outstanding debt under a $10,000 Taro U.S.A. credit facility at December 31, 2009.  The Company entered into a letter agreement with this financial institution as described in Note 14.a.3.  On October 28, 2010, the Company retired the $9,750 of outstanding debt and $109 of accrued interest.  The bank has no further right to any of the Company’s assets as collateral since the facility was cancelled. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Includes $21,026 of outstanding debt under the Company’s credit facilities in Israel at December 31, 2009.  At December 31, 2010 the Company had no outstanding borrowings under these credit facilities.  See Note 14.a.3 for a description of the covenants. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | Represents outstanding debt, in Israel, under the Company’s credit facilities of $8,212 at December 31, 2009.  At December 31, 2010 the Company had no outstanding borrowings under these credit facilities.  See Note 14.a.2 for a description of the covenants. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6)   | Includes $6,156 of outstanding debt at December 31, 2009 under a demand revolving line of credit to Taro Pharmaceuticals Inc., the Company’s indirect Canadian subsidiary.  The amount available under this line of credit was $7,612 at December 31, 2009.  This facility is secured by a general security agreement over the Canadian subsidiary’s assets.  This debt was retired in May 2010.  The bank has no further right to any of the Company’s assets as collateral. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7)   | Includes $5,067 of long-term debt reclassified as short-term due to covenant defaults at December 31, 2009.  On November 1, 2010, the Company retired the remaining balance of this debt of $5,710 and paid $11 of accrued interest and a $171 prepayment fee.  The bank has no further right to any of the Company’s assets as collateral. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8)   | Represents long-term debt classified as short-term debt due to covenant defaults described in Notes 14.a.1, 14.a.4 and 14.a.6. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Other current liabilities: |
|----------------|----------------------------|

|                           |   | December 31, |   |
|--------------------------------|--------|--------------|--------|
|                           |   | 2010         |   |   | 2009 |   |
| Returns reserve                |   | $            | 21,962 |   |   | $ | 22,514 |   |
| Due to customers (1)           |   |         | 390    |   |   |   | 1,849 |   |
| Employees and payroll accruals |   |         | 17,401 |   |   |   | 11,783 |   |
| Deferred revenue               |   |         | 1,052  |   |   |   | 20 |   |
| Medicaid and indirect rebates  |   |         | 12,709 |   |   |   | 13,415 |   |
| Accrued income taxes           |   |         | 12,882 |   |   |   | 15,854 |   |
| Legal and audit fees           |   |         | 945    |   |   |   | 3,137 |   |
| Accrued expenses               |   |         | 7,627  |   |   |   | 5,737 |   |
| Interest payable               |   |         | 312    |   |   |   | 841 |   |
| Deferred taxes                 |   |         | 335    |   |   |   | 311 |   |
| OCS and other royalties        |   |         | 2,771  |   |   |   | 771 |   |
| Other                          |   |         | 1,300  |   |   |   | 831 |   |
|                           |   | $            | 79,686 |   |   | $ | 77,063 |   |

| (1)   | Amount due to customers in excess of their outstanding balance as a result of chargebacks, rebates and other deductions. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------|

| b.   | Other long-term liabilities: |
|----------------|------------------------------|

|                  |   | December 31, |   |
|-----------------------|--------|--------------|--------|
|                  |   | 2010         |   |   | 2009 |   |
| Accrued severance pay |   | $            | 7,013  |   |   | $ | 6,357 |   |
| Interest rate swap    |   |         | 1,121  |   |   |   | 852 |   |
| Accrued taxes         |   |         | 442    |   |   |   | 382 |   |
|                  |   | $            | 8,576  |   |   | $ | 7,591 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Composed as follows: |
|----------------|----------------------|

|                                                            |   | December 31, |   |
|-----------------------------------------------------------------|--------|--------------|--------|
|                                                            |   | 2010         |   |   | 2009 |   |
| Loans from institutional investors and bonds (1)           |   | $            | -      |   |   | $ | 1,960 |   |
| Loans from institutional investors and bonds (2)           |   |         | 41,607 |   |   |   | 59,975 |   |
| Bank loans (3)                                                  |   |         | 25     |   |   |   | - |   |
| Term loan from Canadian bank (4)                                |   |         | -      |   |   |   | 7,921 |   |
| Mortgage for U.S. distribution facility (5) (6)                 |   |         | 8,594  |   |   |   | 10,793 |   |
| Mortgage for U.S. headquarters facility (6)                     |   |         | 9,194  |   |   |   | 9,854 |   |
|                                                            |   |         | 59,420 |   |   |   | 90,503 |   |
| Less: current maturities                                        |   |         | 13,310 |   |   |   | 29,277 |   |
| Less: long-term debt reclassified as short-term loans (1, 4, 6) |   |         | 14,885 |   |   |   | 22,846 |   |
|                                                            |   | $            | 31,225 |   |   | $ | 38,380 |   |

| (1)   | In 1999 and 2000, the Company entered into a series of debenture and loan agreements in Israel, secured by a floating charge on substantially all of its property, assets and rights.  The debentures were issued in separate tranches during 1999 and 2000 for a term of 10 years, with the last tranche maturing in November 2010; most of the loan balance at December 31, 2009 was linked to Israeli CPI plus 8.25%.  Under the debentures, Taro provided certain undertakings that, among other things, as long as the loan is outstanding, (i) the ratio between long-term liabilities and shareholders’ equity shall not exceed two and the current ratio (defined as current assets divided by current liabilities) shall not be less than one and (ii) the ratio of current assets and liabilities shall not exceed one.  Such ratios are based on the Company’s audited financial statements.  As of December 31, 2009, the Company was current with its payment obligations but not in compliance with other covenants.  The Company retired the remaining balance in November 2010. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | In 2003, the Company entered into two series of loan agreements, subsequently amended, with multiple lenders in Israel.  Approximately half of the amount of the loans were issued in U.S. dollars at an interest rate of 6.0 – 6.1%, maturing in 2010.  The other half of the loans were issued in NIS at a rate of Israeli CPI plus 5.8%, maturing in 2014.  The debentures, provided certain undertakings, including (i) not to encumber any of its assets, unless to secure indebtedness, as defined in such agreements, which in the aggregate does not exceed $20,000, or unless to encumber newly acquired assets to secure financing provided to acquire such assets, and (ii) not to incur any additional indebtedness as long as the ratio of EBITDA to total net interest expense and current principal payable on long-term indebtedness is less than 2:1.  The test is based on the Company’s audited financial statements, and is performed on April 1 of each year with respect to the prior calendar year.  Since the Company was not in compliance with the above described covenants, no additional indebtedness has been incurred by the Company.  Although additional borrowing by the Company is restricted, the lenders do not have the right to accelerate their obligations and, thus, these loans have not been reclassified as short-term debt. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | In April 2010, the Company entered into a vehicle financing loan of $28 at 0.0% interest rate over 5 years for which the bank registered a lien.  The loan will expire in April 2015. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | During 2004, Taro Pharmaceuticals Inc., the Company’s indirect Canadian subsidiary, refinanced its mortgage payable and its plant expansion term loans with a new term loan.  The new term loan was collateralized by a first lien on the Canadian subsidiary’s land, buildings and certain manufacturing equipment, a lien covering all other assets, subject to prior liens indicated in Note 12 above, and a subordinated lien on the buildings and land securing the mortgage loans described in (5) below, as well as certain equipment of Taro U.S.A.  Taro U.S.A. and two of its subsidiaries have provided guarantees to the lender for the full amount of the loan.  The Canadian subsidiary provided undertakings in the relevant loan documentation that include certain (i) financial covenants, requiring the Canadian subsidiary to maintain a maximum ratio of debt to tangible net worth of 1.60:1 and a ratio of current assets to current liabilities of 1.50:1 or more and (ii) financial reporting covenants relating to the Company and certain subsidiaries, including the Canadian subsidiary.  Since the Canadian subsidiary was not in compliance with certain covenants as described above, and in accordance with the agreement, the bank has the right to accelerate its obligation.  The Company has reclassified the long-term portion of its long-term debt to this bank in the amount of $5,067 as short-term loans at December 31, 2009.  On November 1, 2010, the Company retired the remaining balance of this debt of $5,710 and paid $11 of accrued interest and a $171 prepayment fee.  The bank has no further right to any of the Company’s assets as collateral. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| (5)   | On January 8, 2004, Taro U.S.A. expanded its distribution capacity with the purchase of a 315,000 square foot distribution center on 25 acres of land in South Brunswick, New Jersey.  Taro acquired the facility for $18,433, of which, $13,200 was financed by a mortgage.  This facility is subject to depreciation on a straight-line basis over a 40 year period.  The mortgage on the New Jersey facility was $8,594 and $10,793, as of December 31, 2010 and 2009, respectively, was for an original term of seven years, bearing interest at the rate of LIBOR plus 1.85% and has certain financial and reporting covenants.  The interest rate of the mortgage was effectively fixed at 4.66%, as the Company had an interest rate swap in place through November 28, 2008.  On November 28, 2008, the principal amount of this mortgage was increased $4,743 to $12,993, and the interest rate swap was terminated. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6)   | In 2005, Taro U.S.A. and two of its subsidiaries entered into obligations, secured by mortgages on the Company’s U.S. headquarters facility located in New York and distribution facility located in New Jersey.  The Company guaranteed these obligations.  The Canadian bank described in (3) above has a subordinated security position in the facilities which are the subject of the mortgages.  Effective November 1, 2010, the Canadian bank has no further right to any of the Company’s assets as collateral.  The mortgage on the New York facility was $9,194 and $9,854 as of December 31, 2010 and 2009, respectively, was for an original term of 15 years, bears interest at the rate of LIBOR plus 1.25%, and has a graduating debt service coverage ratio covenant of 1.90.  At December 31, 2010 and 2009 the debt service coverage ratio was 2.10 and 2.05, respectively.  The interest rate of this mortgage is effectively fixed at 6.16%, as the Company has an interest rate swap in place which is concurrent with the 15-year term of the mortgage.  Since the Company, with respect to each mortgage referenced above, was not in compliance with certain covenants and because each lender has the right to accelerate its obligations, the Company has reclassified the long-term portion of each mortgage, in the amount of $14,885 and $17,780 as short-term loans at December 31, 2010 and 2009, respectively. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| b.   | Classified by currency, linkage terms and interest rates, the total amount of the liabilities (including current maturities and the reclassified short-term portion) is as follows: |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                     |   | Weighted-Average Interest Rate |   |   | Amount       |   |
|----------------------------------------------------------|--------|--------------------------------|--------|--------|--------------|--------|
|                                                     |   | December 31,                   |   |   | December 31, |   |
|                                                     |   | 2010                           |   |   | 2009         |   |   | 2010 |   |   | 2009 |   |
| In, or linked to, U.S. dollars (1)                       |   |                           | 2.18   | %      |         |   | 3.25 | % |   | $ | 19,473 |   |   | $ | 34,905 |   |
| In Canadian dollars (subject to variable interest rates) |   |                           | 0.00   | %      |         |   | 3.40 | % |   |   | 25 |   |   |   | 7,921 |   |
| In Israeli currency – linked to CPI                |   |                           | 5.80   | %      |         |   | 5.89 | % |   |   | 39,922 |   |   |   | 47,677 |   |
|                                                     |   |                           |   |   |         |   |   |   |   | $ | 59,420 |   |   | $ | 90,503 |   |

| (1)   | Includes loans in the amount of $17,787 and $23,898 as of December 31, 2010 and 2009, respectively, which are subject to variable interest rates linked to LIBOR.  The remaining outstanding debt is subject to fixed interest rates. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | The debt matures as follows: |
|----------------|------------------------------|

|       |   | December 31, |   |
|------------|--------|--------------|--------|
|       |   | 2010         |   |
| 2011       |   | $            | 13,310 |   |
| 2012       |   |         | 17,547 |   |
| 2013       |   |         | 11,202 |   |
| 2014       |   |         | 11,252 |   |
| 2015       |   |         | 900    |   |
| Thereafter |   |         | 5,209  |   |
|       |   | $            | 59,420 |   |

|                                              |   | December 31, |   |
|---------------------------------------------------|--------|--------------|--------|
|                                              |   | 2010         |   |   | 2009 |   |
| Short-term bank credit and short-term loans (1)   |   | $            | 6      |   |   | $ | 34,256 |   |
| Long-term debt (including current maturities) (2) |   | $            | 17,787 |   |   | $ | 30,529 |   |

| (1)   | Short-term bank credits and short-term loans primarily include $28,100 of debt secured by accounts receivable, inventory and all products and proceeds thereof of Taro U.S.A. at December 31, 2009.  On October 28, 2010, the Company retired the $28,100 outstanding debt principal and $264 of accrued interest. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Long-term debt primarily includes mortgages secured by facilities in the U.S.A. and Canada. |
|-----------------|---------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Companies of the Group have leased offices, warehouse space and equipment under operating leases for periods through 2015.  The minimum annual rental payments, under non-cancelable lease agreements, are as follows: |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|       |   | December 31, |   |
|------------|--------|--------------|--------|
|       |   | 2010         |   |
| 2011       |   | $            | 2,571  |   |
| 2012       |   |         | 2,172  |   |
| 2013       |   |         | 1,586  |   |
| 2014       |   |         | 3,291  |   |
| 2015       |   |         | 265    |   |
| Thereafter |   |         | -      |   |
|       |   | $            | 9,885  |   |

| b.   | Royalty commitments: |
|----------------|----------------------|

| c.   | Legal proceedings: |
|----------------|--------------------|

| 1.   | Legal actions commenced by the Company: |
|----------------|-----------------------------------------|

| i.   | Company’s lawsuit related to Special Tender Offer: |
|----------------|----------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| ii.   | Company’s lawsuit related to Sun’s failure to disclose information in the Sun Offer: |
|-----------------|--------------------------------------------------------------------------------------------------|

| iii.   | Company’s lawsuit related to Ireland: |
|------------------|---------------------------------------------|

| iv.   | Company’s lawsuit related to Ovide® (malathion) Lotion: |
|-----------------|--------------------------------------------------------------------|

| 2.   | Legal actions by certain shareholders: |
|----------------|----------------------------------------|

| i.   | Templeton’s lawsuits related to proposed Merger Agreement: |
|----------------|------------------------------------------------------------------|

| ii.   | Sun’s lawsuit related to the termination of the Merger Agreement and enforcement of the Option Agreement: |
|-----------------|-----------------------------------------------------------------------------------------------------------------|

| iii.   | Sun’s lawsuit related to the issuance of audited financial statements: |
|------------------|------------------------------------------------------------------------------|

| iv.   | Sun’s litigation relating to the Company’s engagement of Guggenheim Securities, LLC (“Guggenheim”): |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| 3.   | Litigations related to Israeli taxation: |
|----------------|------------------------------------------|

| i. | The Company has challenged a tax assessment by the Israel Income Tax Authority (“ITA”) on certain options granted in 1992 to certain officers of Taro U.S.A.  The ITA claimed that taxes should have been withheld by the Company and assessed a payment of approximately $34,000 nominal amount of tax and approximately $19,000 in interest and other charges to be paid by Taro.  In January 2008, the Company filed an appeal against the assessment with the Haifa District Court.  In addition, applications for the conduct of Mutual Agreement Proceedings (“MAP”) pursuant to the Israel-United States tax treaty with respect to this matter have been filed both with the Israel Tax Authority and the U.S. Internal Revenue Service.  MAP proceedings are intended to resolve matters of double taxation; the Company itself is not a party to those MAP proceedings.  Based on the opinion of counsel, the Company believes that no Israeli tax liability or withholding obligation arose as a result of the option exercise because both under Israeli tax law and under the Israel/U.S. Tax Treaty, no Israeli tax can be imposed on the employment or service income (including compensatory option gains) of United States residents derived from employment or services performed in the United States. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ii. | On December 31, 2009, the Company and the ITA reached an agreement related to a tax assessment for the Company’s taxes for the years 2002 and 2003.  The Company is fully reserved for the amounts agreed to with the ITA and believes that an unfavorable result is more likely than not (see Note 18). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | Other Legal Actions: |
|----------------|----------------------|

| i.   | On November 10, 2004, the Company was sued in the Superior Court of New Jersey in Atlantic County along with other defendants in a purported class action lawsuit for alleged personal injuries related to defendants’ sale of amiodarone.  On June 9, 2010, the class action case was dismissed with prejudice, with a window of 150 days for individual claimants to file lawsuits.  Only one suit was commenced against the Company.  In early 2011, an agreement to resolve this matter was reached which will have no material impact on the Company’s financial position. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ii.   | A group of former Israeli soldiers have filed three lawsuits for personal injury against the Municipality of Haifa, The Israel Oil Refineries Ltd., The Haifa Town Union Sewage and Haifa Chemicals Ltd. alleging that they contracted serious illnesses as a result of their military service which included diving in the Kishon River near Haifa Bay.  In 2005, the Company and over 40 municipalities, governmental entities (including the State of Israel), cooperative villages (kibbutzim) and other companies, were named as third party defendants in these lawsuits.  The hearing of the lawsuits was consolidated with the hearing of another lawsuit filed by a group of fishermen also claiming to suffer from serious illnesses as a result of their activities in the Kishon River.  The proceedings are currently in different stages, during which the parties present the evidence in the cases to the court. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| iii.   | On March 7, 2011, the Company was sued by The Blackstone Group L.P. (“Blackstone”) in the Supreme Court of the State of New York, County of New York.  The lawsuit alleges breach of contract relating to fees under an agreement whereby Blackstone would provide certain financial advisory services to the Company.  Blackstone seeks approximately $6.3 million in fees and expenses.  The proceedings are in the very early stages and the Company denies liability in the matter. |
|------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | In 2008, the Company entered into severance agreements tied to change in control, with certain executives whereby each executive would receive salary and benefits for a period of time if terminated after a change in control.  In November 2010 and April 2011, the Company terminated employment of certain of these executives. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| e.   | Licensing Agreements: |
|----------------|-----------------------|

| 1.   | In May 2010, Taro and Quinnova Pharmaceuticals, Inc. entered into an agreement to co-promote Taro’s Topicort and desoximetasone products.  Under the terms of the arrangement, Taro manufactured and Quinnova co-promoted the products.  The parties mutually agreed to terminate the agreement in January 2011. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | In May 2010, Taro and Glenmark Generics Inc., USA, a wholly owned subsidiary of Glenmark Generics Ltd., India (“Glenmark”), entered into an exclusive license and supply agreement for a branded product.  Glenmark Generics Inc., USA manufactures the product and Taro distributes the product to customers.  Taro made an up-front payment of $2,500 for distribution rights and an additional amount of $2,500 upon the first shipment to customers, for a total of $5,000, which is being amortized over six years.  Taro also pays royalties based on the amounts of sales to its customers. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| f.   | Other: |
|----------------|--------|

| a.   | Payments to pharmacies for Medicaid-covered outpatient prescription drugs are set by the states.  For multiple source drugs, Federal reimbursements to states for the Federal share of those payments are subject to a Federal upper limit (FUL) ceiling.  Health care reform legislation enacted in March 2010 changed the methodology by which the Centers for Medicare & Medicaid Services (CMS) calculates the FULs so that, effective October 1, 2010,the methodology is based on the weighted average of the average manufacturer prices (AMPs) reported to the government by manufacturers of each of the therapeutically equivalent multiple source drugs.  The legislation also, effective October 1, 2010, changed the definition of AMP to exclude sales to certain customer classes that were previously included.  In addition, under the Medicaid Drug Rebate Program, manufacturers are required, as a condition of Federal payment for their drugs under Medicaid, to pay rebates to state Medicaid programs on drugs dispensed to Medicaid beneficiaries in the state.  The amount of the rebate is based on the AMP of the drug.  Besides changing the definition of AMP, the health care reform legislation increased the minimum Medicaid Rebate, effective January 1, 2010. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| a.   | Pertinent rights and privileges of ordinary shares: |
|----------------|-----------------------------------------------------|

| 1.   | 100% of the rights to profits are allocated to the ordinary shares. |
|----------------|---------------------------------------------------------------------|

| 2.   | 100% of the dissolution rights are allocated to the ordinary shares. |
|----------------|----------------------------------------------------------------------|

| 3.   | Two-thirds of the voting power of all of the Company’s shares is allocated to the ordinary shares. |
|----------------|----------------------------------------------------------------------------------------------------------|

| b.   | Founders’ shares: |
|----------------|-------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| c.   | Stock option plans: |
|----------------|---------------------|

| 1.   | The Company’s 1991 Stock Incentive Plan provided for the issuance of incentive stock options, non-qualified stock options, and stock appreciation rights to key employees and associates of the Group. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | The Company’s 1999 Stock Incentive Plan (“1999 plan”) provides for the issuance of incentive stock options, non-qualified stock options, and stock appreciation rights to key employees and associates of the Group. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | A summary of the Company’s stock option activity (except options to non-employees) and related information for the year ended December 31, 2010 is as follows: |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   |      |     |   |     |           |                                                                                   | Weighted- |   |   |              |   |   |            |   |
|--------------------------------------------------|--------|-----------|----------|--------|----------|----------------|----------------------------------------------------------------------------------------|-----------|--------|--------|-------------------|--------|--------|-----------------|--------|
|                                             |   |      |     |   |     |           |                                                                                   | average   |   |   | Weighted-         |   |   |            |   |
|                                             |   | Number of |     |   | Exercise |           |                                                                                   | exercise  |   |   | average remaining |   |   | Aggregate       |   |
|                                             |   | options   |     |   | price    |           |                                                                                   | price     |   |   | contractual terms |   |   | intrinsic value |   |
|                                             |   |      |     |   | $        |           |                                                                                   | $         |   |   | (in years)        |   |   |            |   |
| Outstanding at December 31, 2009                 |   |      | 998,905  |   |     | $2.38 - $68.51 |                                                                                   |      | $      | 26.18  |              |   |   |            |   |   |   |
|      Exercised          |   |      | (44,975  | )      |     | $2.44-$12.91   |                                                                                   |      | $      | 4.14   |              |   |   |            |   |   |   |
|      Forfeited          |   |      | (362,750 | )      |     | $2.44-$66.95   |                                                                                   |      | $      | 29.47  |              |   |   |            |   |   |   |
|      Granted            |   |      | -        |   |     |           |                - |      |   | $      | -                 |   |   |            |   |   |   |   |
| Outstanding at December 31, 2010                 |   |      | 591,180  |   |     | $2.38 - $68.51 |                                                                                   |      | $      | 25.84  |              |   |   | 2.59            |   |   | $ | 480 |   |
| Exercisable at December 31, 2010                 |   |      | 557,080  |   |     |           |                                                                                   |      |   | $      | 26.56             |   |   |            | 2.44   |   |   | $ | 462 |   |
| Vested and expected to vest at December 31, 2010 |   |      | 375,343  |   |     |           |                                                                                   |      |   | $      | 25.07             |   |   |            | 2.58   |   |   | $ | 392 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| Options outstanding   |   |   | Options exercisable |    |
|-----------------------|--------|--------|---------------------|---------|
|                  |   |   |                |    |   | Weighted- |   |   |   |   |   |   |   |   |   |   |
|                  |   |   | Outstanding         |    |   | average |   |   | Weighted- |   |   | Exercisable |   |   | Weighted- |   |
| Range of              |   |   | as of               |    |   | remaining |   |   | average |   |   | as of |   |   | average |   |
| exercise              |   |   | December 31,        |    |   | contractual |   |   | exercise |   |   | December 31, |   |   | exercise |   |
| price                 |   |   | 2010                |    |   | life |   |   | price |   |   | 2010 |   |   | price |   |
|                  |   |   |                |    |   | (in years) |   |   | $  |   |   |   |   |   |   | $ |   |
| $2.38 – $10.00  |   |   |                | 20,200  |   |   |   | 0.00 |   |   | $ | 3.43 |   |   |   | 20,200 |   |   | $ | 3.43 |   |
| $10.01 – $20.00 |   |   |                | 197,250 |   |   |   | 2.50 |   |   | $ | 13.23 |   |   |   | 163,150 |   |   | $ | 13.09 |   |
| $20.01 – $30.00 |   |   |                | 151,000 |   |   |   | 3.22 |   |   | $ | 24.22 |   |   |   | 151,000 |   |   | $ | 24.22 |   |
| $30.01 – $40.00 |   |   |                | 152,680 |   |   |   | 2.27 |   |   | $ | 33.47 |   |   |   | 152,680 |   |   | $ | 33.47 |   |
| $40.01 – $68.51 |   |   |                | 70,050  |   |   |   | 2.92 |   |   | $ | 54.63 |   |   |   | 70,050 |   |   | $ | 54.63 |   |
|                  |   |   |                |    | 591,180 |   |   |   | 2.59 |   |   | $ | 25.84 |   |   |   | 557,080 |   |   | $ | 26.56 |   |

| 4.   | The weighted-average price and fair values for options granted were: |
|----------------|----------------------------------------------------------------------|

|                                             |   | Granted below market price |   |   | Granted equal to market price |   |
|--------------------------------------------------|--------|----------------------------|--------|--------|-------------------------------|--------|
|                                             |   | Year ended December 31,    |   |   | Year ended December 31,       |   |
|                                             |   | 2010                       |   |   | 2009                          |   |   | 2008 |   |   | 2010 |   |   | 2009 |   |   | 2008 |   |
| Weighted-average exercise price                  |   | $                          | -      |   |                          | $      | - |   |   | $ | - |   |   | $ | - |   |   | $ | 9.50 |   |   | $ | 7.70 |   |
| Weighted-average fair value on the date of grant |   | $                          | -      |   |                          | $      | - |   |   | $ | - |   |   | $ | - |   |   | $ | 9.02 |   |   | $ | 4.10 |   |

| 5.   | There were 18,000 stock options exercised by non-employees, at an exercise price of $3.39 per share, during the year ended December 31, 2010. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | Dividends: |
|----------------|------------|

| e.   | Net income per share: |
|----------------|-----------------------|

|                                       |   | Year ended December 31, 2010              |   |   | Year ended December 31, 2009 |   |           | Year ended December 31, 2008 |                                      |
|--------------------------------------------|--------|-------------------------------------------|--------|--------|------------------------------|--------|----------------|------------------------------|-------------------------------------------|
|                                       |   | Net incomeattributable to Taro(numerator) |   |   | Shares(denominator)          |   | PerShareAmount |                         | Net incomeattributable to Taro(numerator) |   |   | Shares(denominator) |   | PerShareAmount |   | Net incomeattributable to Taro(numerator) |   |   | Shares(denominator) |   | PerShareAmount |   |
|                                       |   |                                      |   |   |                         |   |           |                         |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic EPS:                            |   | $                                         | 64,078 |   |                         |   | 40,271,669     |                         |                                      | $ | 1.59 |   |   | $ | 114,023 |   |   |   | 39,232,270 |   |   | $ | 2.91 |   |   | $ | 30,521 |   |   |   | 39,200,342 |   |   | $ | 0.78 |   |
|                                       |   |                                      |   |   |                         |   |           |                         |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities:             |   |                                      |   |   |                         |   |           |                         |                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Stock options      |   |                                      | -      |   |                         |   | 68,169         |                         |                                      |   | - |   |   |   | - |   |   |   | 55,141 |   |   |   | - |   |   |   | - |   |   |   | 76,399 |   |   |   | - |   |
|     Sun Stock Warrants |   |                                      | -      |   |                         |   | 1,510,486      |                         |                                      |   | - |   |   |   | - |   |   |   | 1,280,436 |   |   |   | - |   |   |   | - |   |   |   | 1,146,060 |   |   |   | - |   |
| Diluted EPS:                               |   | $                                         | 64,078 |   |                         |   | 41,850,324     |                         |                                      | $ | 1.53 |   |   | $ | 114,023 |   |   |   | 40,567,847 |   |   | $ | 2.81 |   |   | $ | 30,521 |   |   |   | 40,422,801 |   |   | $ | 0.76 |   |

| f.   | 2000 Employee Stock Purchase Plan: |
|----------------|------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985 of Israel: |
|----------------|----------------------------------------------------------------------------------------------------|

| b.   | Tax rates applicable to the income of the Israeli companies in the Group: |
|----------------|---------------------------------------------------------------------------|

| 1.   | Generally, Israeli companies are subject to corporate tax on taxable income.  On July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among other things, a gradual decrease of the corporate tax rate in Israel up to 25% for the tax year 2010 and beyond.  However; the effective tax rate payable by a company that derives income from an Approved Enterprise, as discussed below, may be considerably less. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | On July 14, 2009, the Knesset approved new legislative Amendments to implement the economic program for 2009 - 2010, which states, among other things, the further gradual reduction of corporate tax rate in Israel to the following tax rates: in 2009 – 26%, in 2010 – 25%, in 2011 – 24%, in 2012 – 23%, in 2013 – 22%, in 2014 – 21%, in 2015 – 20% and in 2016 and thereafter – 18%. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | Pursuant to another amendment to the Income Tax Ordinance, which became effective in 2003, capital gains are taxed at a reduced rate of 25% from January 1, 2003, instead of the regular corporate tax rate at which such gains were taxed until the aforementioned date.  This amendment stipulates that with regard to the sale of assets acquired prior to January 1, 2003, the reduced tax rate will be applicable only for the gain allocated to capital gains earned after the implementation of the amendment, which will be calculated as prescribed by the amendment. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| c.   | Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969: |
|----------------|-----------------------------------------------------------------------------|

| d.   | Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“the Law”): |
|----------------|--------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| e.   | On July 24, 2002, Amendment 132 to the Israeli Income Tax Ordinance (“the Ordinance Amendment”) was approved by the Israeli Parliament and came into effect on January 1, 2003.  The principal objectives of the Ordinance Amendment were to broaden the categories of taxable income and to reduce the tax rates imposed on employees’ income. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| f.   | Income from continuing and discontinued operations before income taxes comprises of the following: |
|----------------|----------------------------------------------------------------------------------------------------|

|                                                              |   | Year ended December 31, |   |
|-------------------------------------------------------------------|--------|-------------------------|--------|
|                                                              |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                              |   |                    |   |   |   |   |   |   |   |
| Domestic (Israel)                                                 |   | $                       | 37,371 |   |   | $ | 35,836 |   |   | $ | 23,605 |   |
| Foreign (North America, the Cayman Islands, Ireland and the U.K.) |   |                    | 37,657 |   |   |   | 11,258 |   |   |   | 20,457 |   |
| Income from continuing and discontinued operations before taxes   |   | $                       | 75,028 |   |   | $ | 47,094 |   |   | $ | 44,062 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| g.   | Taxes on income comprise of the following: |
|----------------|--------------------------------------------|

|                  |   | Year ended December 31, |   |
|-----------------------|--------|-------------------------|--------|
|                  |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                  |   |                    |   |   |   |   |   |   |   |
| Current taxes    |   | $                       | 7,021  |   |   | $ | 8,263 |   |   | $ | 13,158 |   |
| Prior years' taxes    |   |                    | (3,264 | ) |   |   | 271 |   |   |   | 498 |   |
| Deferred income taxes |   |                    | 6,720  |   |   |   | (78,191 | ) |   |   | (115 | ) |
|                  |   | $                       | 10,477 |   |   | $ | (69,657 | ) |   | $ | 13,541 |   |
|                  |   |                    |   |   |   |   |   |   |   |   |   |   |
| Domestic              |   | $                       | 1,400  |   |   | $ | 6,609 |   |   | $ | 2,726 |   |
| Foreign               |   |                    | 9,077  |   |   |   | (76,266 | ) |   |   | 10,815 |   |
|                  |   | $                       | 10,477 |   |   | $ | (69,657 | ) |   | $ | 13,541 |   |

| h.   | Reconciliation of the theoretical tax expenses to the actual tax expenses: |
|----------------|----------------------------------------------------------------------------|

|                                                                                     |   | Year ended December 31, |   |
|------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                     |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                                                                     |   |                    |   |   |   |   |   |   |   |
| Income from continuing and discontinued operations before taxes                          |   | $                       | 75,028 |   |   | $ | 47,094 |   |   | $ | 44,062 |   |
| Statutory tax rate                                                                       |   |                    | 25     | % |   |   | 26 | % |   |   | 27 | % |
| Theoretical tax                                                                          |   | $                       | 18,757 |   |   | $ | 12,244 |   |   | $ | 11,897 |   |
|                                                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| Deferred tax in respect of losses for which valuation allowance was provided             |   |                    | (1,062 | ) |   |   | 3,000 |   |   |   | 915 |   |
| Tax (benefit) in respect to prior years                                                  |   |                    | (14    | ) |   |   | 280 |   |   |   | 21 |   |
| “Approved Enterprise” benefit (1)                                            |   |                    | (5,199 | ) |   |   | (5,332 | ) |   |   | (5,053 | ) |
| Effect of different tax rates in other countries                                         |   |                    | 414    |   |   |   | 186 |   |   |   | 5,871 |   |
| Non-deductible expenses                                                                  |   |                    | (912   | ) |   |   | 2,609 |   |   |   | 4,373 |   |
| Canadian tax benefits in respect of research and development expenses                    |   |                    | (1,462 | ) |   |   | (1,369 | ) |   |   | (1,099 | ) |
| Utilization of net operating losses                                                      |   |                    | -      |   |   |   | (2,969 | ) |   |   | (15,187 | ) |
| Deferred tax asset on temporary differences for which a valuation allowance was provided |   |                    | 52     |   |   |   | (1,693 | ) |   |   | 12,010 |   |
| Reversal of valuation allowance against deferred tax assets in the U.S.                  |   |                    | -      |   |   |   | (76,694 | ) |   |   | - |   |
| Other                                                                                    |   |                    | (97    | ) |   |   | 81 |   |   |   | (207 | ) |
| Income taxes in the Statements of Operations                                             |   | $                       | 10,477 |   |   | $ | (69,657 | ) |   | $ | 13,541 |   |

| (1)   | Per share tax benefit resulting from the income exemption: |
|-----------------|------------------------------------------------------------|

|    |   | Year ended December 31, |   |
|---------|--------|-------------------------|--------|
|    |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|    |   |                    |   |   |   |   |   |   |   |
| Basic   |   | $                       | 0.13   |   |   | $ | 0.14 |   |   | $ | 0.13 |   |
| Diluted |   | $                       | 0.12   |   |   | $ | 0.13 |   |   | $ | 0.13 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| i.   | Current taxes are calculated at the following rates: |
|----------------|------------------------------------------------------|

|                                                                    |   | Year ended December 31, |       |
|-------------------------------------------------------------------------|--------|-------------------------|------------|
|                                                                    |   | 2010                    |       |   | 2009 |   |   | 2008 |   |
|                                                                    |   |                    |       |   |   |   |   |   |   |
| On Israeli operations (not including “Approved Enterprise”) |   |                    |  25.0 | %  |   |   |  26.0 | %  |   |   |  27.0 | % |
| On U.S. operations *                                                    |   |                    | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |
| On Canadian operations *                                                |   |                    | 31.0       | % |   |   | 33.0 | % |   |   | 33.5 | % |
| On U.K. operations *                                                    |   |                    | 26.0       | % |   |   | 28.0 | % |   |   | 28.5 | % |
| On Ireland operations *                                                 |   |                    | 12.5       | % |   |   | 12.5 | % |   |   | 12.5 | % |

| j.   | Deferred income taxes: |
|----------------|------------------------|

|                                                          |   | December 31, |    |
|---------------------------------------------------------------|--------|--------------|---------|
|                                                          |   | 2010         |    |   | 2009 |   |
| Deferred tax assets:                                          |   |         |    |   |   |   |
|      Net operating loss carryforward |   | $            | 32,948  |   |   | $ | 44,123 |   |
|      Deferred revenue                |   |         | 2,368   |   |   |   | 2,029 |   |
|      Property, plant, and equipment       |   |         | 1,959   |   |   |   | 1,749 |   |
|      Accrued expenses                |   |         | 38,647  |   |   |   | 33,261 |   |
|      Bad debt allowance              |   |         | 11      |   |   |   | 83 |   |
|      Amortization and impairment     |   |         | 8,003   |   |   |   | 8,908 |   |
|      Other, net                      |   |         | 5,631   |   |   |   | 5,977 |   |
| Total deferred tax assets                                     |   |         | 89,567  |   |   |   | 96,130 |   |
| Valuation allowance for deferred tax assets                   |   |         | (15,222 | ) |   |   | (13,542 | ) |
| Net deferred tax assets                                       |   |         | 74,345  |   |   |   | 82,588 |   |
| Deferred tax liabilities:                                |   |         |    |   |   |   |   |   |
|      Property, plant, and equipment       |   |         | (2,393  | ) |   |   | (3,238 | ) |
|      Amortization                    |   |         | 18      |   |   |   | (10 | ) |
|      Other, net                           |   |         | (302    | ) |   |   | (875 | ) |
| Total deferred tax liabilities                           |   |         | (2,677  | ) |   |   | (4,123 | ) |
| Net deferred tax assets (liabilities)                         |   | $            | 71,668  |   |   | $ | 78,465 |   |
|        Domestic                      |   | $            | 3,577   |   |   | $ | 3,847 |   |
|        Foreign                       |   |         | 68,091  |   |   |   | 74,618 |   |
|                                                          |   | $            | 71,668  |   |   | $ | 78,465 |   |

|                                                                              |   | December 31, |   |
|-----------------------------------------------------------------------------------|--------|--------------|--------|
|                                                                              |   | 2010         |   |   | 2009 |   |
| Among current assets (“other receivables and prepaid expenses”)  |   | $            | 37,855 |   |   | $ | 32,069 |   |
| Long-term deferred income tax assets                                         |   |         | 36,490 |   |   |   | 50,520 |   |
| Among short-term liabilities                                                 |   |         | (335   | ) |   |   | (311 | ) |
| Among long-term liabilities                                                  |   |         | (2,342 | ) |   |   | (3,813 | ) |
|                                                                              |   | $            | 71,668 |   |   | $ | 78,465 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| k.   | Carryforward tax losses: |
|----------------|--------------------------|

| 1.   | The Company: |
|----------------|--------------|

| 2.   | Canadian subsidiary: |
|----------------|----------------------|

| 3.   | U.K. subsidiary: |
|----------------|------------------|

| 4.   | Irish subsidiary: |
|----------------|-------------------|

| 5.   | U.S. subsidiary: |
|----------------|------------------|

| 6.   | Hungarian subsidiary: |
|----------------|-----------------------|

| l.   | The Company’s Board of Directors has determined that its U.S. subsidiary will not pay any dividend as long as such payment will result in any tax expense for the Company. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| m.   | At December 31, 2010, deferred income taxes were not provided for on a cumulative total of $121,132 of the undistributed earnings of Taro Canada, which are not taxable provided earnings remain undistributed.  Taro Canada intends to invest these earnings indefinitely in its operations. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| n.   | Foreign withholding taxes have been accrued as necessary by the Company and its subsidiaries.  At December 31, 2010, the Company reversed $4,270 of withholding tax accruals due to the favorable treaty provisions realized from the assignment of intercompany loans to its Hungarian subsidiary. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| o.   | Tax assessments: |
|----------------|------------------|

| p.   | Uncertain tax positions: |
|----------------|--------------------------|

|                                                       |   | December 31, |   |
|------------------------------------------------------------|--------|--------------|--------|
|                                                       |   | 2010         |   |   | 2009 |   |
| Unrecognized tax benefits balance at beginning of year     |   | $            | 19,961 |   |   | $ | 17,626 |   |
| Increases as a result of positions taken in prior period   |   |         | 260    |   |   |   | 673 |   |
| Decreases as a result of positions taken in prior period   |   |         | (27    | ) |   |   | (109 | ) |
| Increases as a result of positions taken in current period |   |         | 1,594  |   |   |   | 2,736 |   |
| Decreases due to expiration of statute of limitations      |   |         | (671   | ) |   |   | (965 | ) |
| Unrecognized tax benefits at end of year                   |   | $            | 21,117 |   |   | $ | 19,961 |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                                                                  |   | Year Ended December 31, |    |
|-----------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                  |   | 2010                    |    |   |   | 2009(*) |   |   | 2008(*) |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |
| Sales by location of customers :                                 |   |                    |    |   |   |   |   |   |   |   |   |
| Israel                                                           |   | $                       | 19,589  |   |   | $ | 21,373 |   |   | $ | 22,194 |   |
| Canada                                                           |   |                    | 44,169  |   |   |   | 32,775 |   |   |   | 36,301 |   |
| U.S.A.                                                                |   |                    | 305,858 |   |   |   | 278,301 |   |   |   | 255,531 |   |
| Other                                                            |   |                    | 22,919  |   |   |   | 23,487 |   |   |   | 13,325 |   |
|                                                                  |   | $                       | 392,535 |   |   | $ | 355,936 |   |   | $ | 327,351 |   |
| Selling, marketing, general and administrative expenses:              |   |                    |    |   |   |   |   |   |   |
| Selling and marketing                                            |   | $                       | 41,673  |   |   | $ | 36,624 |   |   | $ | 35,330 |   |
| Advertising                                                      |   |                    | 6,827   |   |   |   | 5,505 |   |   |   | 6,979 |   |
| General and administrative *                                          |   |                    | 59,402  |   |   |   | 58,215 |   |   |   | 54,816 |   |
|                                                                  |   | $                       | 107,902 |   |   | $ | 100,344 |   |   | $ | 97,125 |   |
| * Including provision for doubtful accounts                      |   | $                       | (473    | ) |   | $ | 75 |   |   | $ | 286 |   |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| Financial expenses:                                                   |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest and exchange differences on long-term liabilities       |   | $                       | 5,252   |   |   | $ | 1,656 |   |   | $ | 10,515 |   |
| Income in respect of deposits                                    |   |                    | (985    | ) |   |   | (1,473 | ) |   |   | (750 | ) |
| Expenses in respect of short-term credit                         |   |                    | 2,291   |   |   |   | 2,792 |   |   |   | 4,060 |   |
| Foreign currency transaction losses (gains)                      |   |                    | 5,282   |   |   |   | 10,600 |   |   |   | (15,579 | ) |
|                                                                  |   | $                       | 11,840  |   |   | $ | 13,575 |   |   | $ | (1,754 | ) |
|                                                                  |   |                    |    |   |   |   |   |   |   |   |   |   |
| (*) Adjusted for the discontinued operations of the Irish subsidiary. |   |                    |    |   |   |   |   |   |   |   |

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

| a.   | Geographic Area Information: |
|----------------|------------------------------|

|                                              |   | Israel |    |   | Canada* |   |   | U.S.A. |   |   | Other ** |   |   | Consolidated ** |   |
|---------------------------------------------------|--------|--------|---------|--------|---------|--------|--------|--------|--------|--------|----------|--------|--------|-----------------|--------|
| Year ended December 31, 2010 and as of            |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |
|       December 31, 2010: |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |
| Sales to unaffiliated customers ***               |   | $      | 19,589  |   |    | $      | 44,169 |   |   | $      | 305,858  |   |   | $               | 22,919 |   |   | $ | 392,535 |   |
| Long-lived assets ****                            |   | $      | 99,353  |   |    | $      | 45,718 |   |   | $      | 45,334   |   |   | $               | 3,247  |   |   | $ | 193,652 |   |
| Year ended December 31, 2009 and as of            |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |   |   |   |   |   |
|       December 31, 2009: |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |   |   |   |   |   |
| Sales to unaffiliated customers ***               |   | $      | 21,373  |   |    | $      | 32,775 |   |   | $      | 278,301  |   |   | $               | 23,487 |   |   | $ | 355,936 |   |
| Long-lived assets ****                            |   | $      | 104,877 |   |    | $      | 49,530 |   |   | $      | 42,283   |   |   | $               | 7,626  |   |   | $ | 204,316 |   |
| Year ended December 31, 2008 and as of            |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |   |   |   |   |   |
|       December 31, 2008: |   |   |    |   |    |   |   |   |   |   |     |   |   |            |   |   |   |   |   |   |
| Sales to unaffiliated customers ***               |   | $      | 22,194  |   |    | $      | 36,301 |   |   | $      | 255,531  |   |   | $               | 13,325 |   |   | $ | 327,351 |   |
| Long-lived assets ****                            |   | $      | 110,671 |   |    | $      | 49,656 |   |   | $      | 43,998   |   |   | $               | 13,191 |   |   | $ | 217,516 |   |

| *    | Includes operations in both Canada and Cayman Islands.                                       |
|------|----------------------------------------------------------------------------------------------|
| **   | Adjusted for the discontinued operations of the Irish subsidiary.                            |
| ***  | Based on customer's location.                                                                |
| **** | Includes property, plant and equipment, net; goodwill  and intangible assets, net. |

| b.   | For the year ended December 31, 2010, the Company had net sales to three different customers of 15.9%, 11.0% and 10.5% of consolidated net sales. For the year ended December 31, 2009, the Company had net sales to two different customers of 15.5% and 11.0% of consolidated net sales.  For the year ended December 31, 2008, the Company had net sales to a single customer of 16.7% of consolidated net sales. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | Sales by therapeutic category, as a percentage of total sales for the years ended December 31, 2010, 2009 and 2008: |
|----------------|---------------------------------------------------------------------------------------------------------------------|

|                       |   | Year ended December 31, |   |
|----------------------------|--------|-------------------------|--------|
| Category                   |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                       |   | %                       |   |
| Dermatological and topical |   |                    | 60     |   |   |   | 57 |   |   |   | 67 |   |
| Cardiovascular             |   |                    | 14     |   |   |   | 15 |   |   |   | 12 |   |
| Neuropsychiatric           |   |                    | 14     |   |   |   | 16 |   |   |   | 8 |   |
| Anti-inflammatory          |   |                    | 5      |   |   |   | 5 |   |   |   | 5 |   |
| Other                      |   |                    | 7      |   |   |   | 7 |   |   |   | 8 |   |
| Total                      |   |                    | 100    |   |   |   | 100 |   |   |   | 100 |   |

| a.   | During 2010, the Company’s management decided to sell the Irish facility.  The results of operations of the Irish facility have been classified as discontinued operations in the Consolidated statements of operations and prior periods results have been reclassified accordingly. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | The following is the composition from discontinued operations: |
|----------------|----------------------------------------------------------------|

----

|       TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------|
|                                                                    |
| Notes to consolidated financial statements                         |
| U.S. dollars in thousands (except share and per share data)        |

|                                                                   |   | Year ended December31, |   |
|------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                   |   | 2010                   |   |   | 2009 |   |   | 2008 |   |
|                                                                   |   |                   |   |   |   |   |   |   |   |
| Sales, net                                                             |   | $                      | (931   | ) |   | $ | (1,705 | ) |   | $ | (1,685 | ) |
| Cost of sales                                                          |   |                   | 3,278  |   |   |   | 7,682 |   |   |   | 8,834 |   |
| Gross loss                                                             |   |                   | 2,347  |   |   |   | 5,977 |   |   |   | 7,149 |   |
| Operating expenses:                                                    |   |                   |   |   |   |   |   |   |   |   |   |   |
|     Research and development, net                  |   |                   | 267    |   |   |   | 940 |   |   |   | 1,364 |   |
|     Selling, marketing, general and administrative |   |                   | 921    |   |   |   | 1,858 |   |   |   | 1,900 |   |
| Operating loss                                                         |   |                   | 3,535  |   |   |   | 8,775 |   |   |   | 10,413 |   |
| Financial expenses, net                                                |   |                   | (3,139 | ) |   |   | 2,952 |   |   |   | 2,549 |   |
| Other gain, net                                                        |   |                   | (44    | ) |   |   | (13 | ) |   |   | (586 | ) |
| Loss before income taxes                                               |   |                   | 352    |   |   |   | 11,714 |   |   |   | 12,376 |   |
| Tax expense                                                            |   |                   | -      |   |   |   | - |   |   |   | - |   |
| Net loss from discontinued operations                                  |   | $                      | 352    |   |   | $ | 11,714 |   |   | $ | 12,376 |   |

| a.   | On April 28, 2011, the Company filed a lawsuit against Suven Life Sciences Ltd. ("Suven") in the United States District Court of New Jersey for infringement of its United States Patent No. 7,560,445 covering its Ovide® (malathion) Lotion, 0.5%.  The suit alleges that Suven's abbreviated new drug application seeking approval from the U.S. Food and Drug Administration to sell its own malathion lotion infringes Taro's patent. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | On April 29, 2011, the Board ratified a collective bargaining agreement dated as of April 6, 2011 (the “Agreement”) among Taro, the Histadrut Trade Union and Taro’s Employees Committee on behalf of Taro’s Israeli employees.  The Agreement has a term of five years and automatically renews for two-year periods unless notice is provided by either side prior to the end of a term.  The Agreement memorializes current employee-employer relations practices of Taro as well as additional rights relating to job security, compensation and other benefits.  Additionally, the Agreement, inter alia, provides for a one-time payment of $1,500 (payable in NIS) to be divided among Taro’s Israeli employees as of the date of the Agreement.  This amount has been accrued as of December 31, 2010. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | Stock options: |
|----------------|----------------|

----

|                                                                      TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| U.S. dollars in thousands                                                                                                                                                                                                                                                                                                                                                                                                                                         |

|   |   |         |   |   | Additions — |   |   | Foreign     |   |   |               |   |   |              |    |
|--------|--------|--------------|--------|--------|-------------------|--------|--------|-------------|--------|--------|--------------------|--------|--------|-------------------|---------|
|   |   | Balance at   |   |   | Charged to        |   |   | currency    |   |   | Deductions — |   |   |              |    |
|   |   | beginning of |   |   | costs and         |   |   | translation |   |   | Write-offs of      |   |   | Balance at end of |    |
| Year   |   | period       |   |   | expenses          |   |   | adjustments |   |   | Inventory          |   |   | period            |    |
| 2010   |   | $            | 12,006 |   |              | $      | 6,693  |        |   | $      | 181                |   |   | $                 | (7,976  | ) |   | $ | 10,904 |   |
| 2009   |   | $            | 15,726 |   |              | $      | 6,762  |        |   | $      | 441                |   |   | $                 | (10,923 | ) |   | $ | 12,006 |   |
| 2008   |   | $            | 12,435 |   |              | $      | 5,704  |        |   | $      | (614               | )      |   | $                 | (1,799  | ) |   | $ | 15,726 |   |

|   |   |         |   |   | Additions — |   |   |               |   |   |              |   |
|--------|--------|--------------|--------|--------|-------------------|--------|--------|--------------------|--------|--------|-------------------|--------|
|   |   | Balance at   |   |   | Charged to        |   |   |               |   |   |              |   |
|   |   | beginning of |   |   | costs and         |   |   | Deductions — |   |   | Balance at end of |   |
| Year   |   | period       |   |   | expenses          |   |   | Write-offs         |   |   | period            |   |
| 2010   |   | $            | 547    |   |              | $      | (473   | )                  |   | $      | -                 |   |   | $ | 74 |   |
| 2009   |   | $            | 630    |   |              | $      | 75     |               |   | $      | (158              | )      |   | $ | 547 |   |
| 2008   |   | $            | 741    |   |              | $      | 286    |               |   | $      | (397              | )      |   | $ | 630 |   |