----

----

| 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   o 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                                 |   |
| ITEM 18.  FINANCIAL STATEMENTS | 1      |
| ITEM 19.  EXHIBITS             | 2      |

----

| 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 12, 2012 |                                | Group Vice President, Interim Chief Financial Officer |

----

| TARO PHARMACEUTICAL INDUSTRIES LTD. |
|-------------------------------------|
|                                |

|                                                      |                           |  Page  |
|-----------------------------------------------------------|--------------------------------|-------------|
| Reports of Independent Registered Public Accounting Firms |                           | F-2 - F-5   |
|                                                      |                           |        |
| Consolidated Balance Sheets                               |       | F-6 - F-7   |
|                                                      |                           |        |
| Consolidated Statements of Operations                     |                           | F-8         |
|                                                      |                           |        |
| Statements of Changes in Shareholders’ Equity       |                           | F-9         |
|                                                      |                           |        |
| Consolidated Statements of Cash Flows                     |                           | F-10 - F-11 |
|                                                      |                           |        |
| Notes to Consolidated Financial Statements                |                           | F-12 - F-57 |

----

|             | /s/ Ziv Haft                       |
|------------------|------------------------------------|
| Tel Aviv, Israel | 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/ Kost Forer Gabbay & Kasierer |
|------------------|--------------------------------------|
|             |                                 |
|             | KOST FORER GABBAY & KASIERER     |
| March 25, 2010   | A Member of Ernst & Young Global |

----

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

|                                          |   | December31, |    |
|-----------------------------------------------|--------|-------------|---------|
|                                          |   | 2007        |    |   | 2006 |   |
| ASSETS                                        |   |        |    |   |   |   |
| CURRENT ASSETS:                               |   |        |    |   |   |   |
| Cash and cash equivalents                     |   | $           | 45,187  |   |   | $ | 16,140 |   |
| Marketable securities                         |   |        | -       |   |   |   | 114 |   |
| Accounts receivable:                          |   |        |    |   |   |   |   |   |
| Trade, net                                    |   |        | 70,017  |   |   |   | 39,456 |   |
| Other receivables, prepaid expenses and other |   |        | 26,260  |   |   |   | 15,693 |   |
| Inventories                                   |   |        | 66,957  |   |   |   | 56,762 |   |
| Assets held for sale                          |   |        | -       |   |   |   | 5,232 |   |
| TOTAL CURRENT ASSETS                          |   |        | 208,421 |   |   |   | 133,397 |   |
| LONG-TERM RECEIVABLES AND OTHER ASSETS        |   |        | 26,576  |   |   |   | 31,543 |   |
| PROPERTY, PLANT AND EQUIPMENT, NET            |   |        | 211,929 |   |   |   | 219,753 |   |
| GOODWILL                                      |   |        | 7,287   |   |   |   | 7,231 |   |
| INTANGIBLE ASSETS AND DEFERRED COSTS, NET     |   |        | 26,368  |   |   |   | 29,063 |   |
| DEFERRED INCOME TAXES                         |   |        | 2,772   |   |   |   | 3,703 |   |
| TOTAL ASSETS                                  |   | $           | 483,353 |   |   | $ | 424,690 |   |
|                                          |   |        |    |   |   |   |   |   |

----

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

|                                                                      |   | December31, |    |
|---------------------------------------------------------------------------|--------|-------------|---------|
|                                                                      |   | 2007        |    |   | 2006 |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                |   |        |    |
| CURRENT LIABILITIES:                                                      |   |        |    |   |   |   |
| Short-term bank credit and short-term loans                               |   | $           | 108,992 |   |   | $ | 119,326 |   |
| Current maturities of long-term debt                                      |   |        | 31,348  |   |   |   | 28,428 |   |
| Accounts payable:                                                         |   |        |    |   |   |   |   |   |
| Trade payables                                                            |   |        | 20,326  |   |   |   | 18,442 |   |
| Other current liabilities                                                 |   |        | 72,203  |   |   |   | 97,383 |   |
| TOTAL CURRENT LIABILITIES                                                 |   |        | 232,869 |   |   |   | 263,579 |   |
| LONG-TERM LIABILITIES:                                                    |   |        |    |   |   |   |   |   |
|      Long-term debt, net of current maturities   |   |        | 76,361  |   |   |   | 90,377 |   |
|      Deferred income taxes                       |   |        | 5,586   |   |   |   | 5,516 |   |
|      Other long-term liabilities                 |   |        | 15,299  |   |   |   | 15,435 |   |
| TOTAL LONG-TERM LIABILITIES                                               |   |        | 97,246  |   |   |   | 111,328 |   |
| COMMITMENTS AND CONTINGENT LIABILITIES                                    |   |
| TOTAL LIABILITIES                                                         |   |        | 330,115 |   |   |   | 374,907 |   |
| SHAREHOLDERS’ EQUITY:                                               |   |        |    |   |   |   |   |   |
| Share capital:                                                            |   |        |    |   |   |   |   |   |
| Ordinary shares of NIS 0.0001 par value:                                  |   |        |    |   |   |
| Authorized at December 31, 2007 and 2006: 200,000,000 shares; Issued |   |
| at December 31, 2007 and 2006: 39,460,509 and 29,624,218 shares,          |   |
| respectively; Outstanding at December 31, 2007 and 2006:                  |   |
| 39,195,869 and 29,358,265 shares, respectively                            |   |        | 679     |   |   |   | 679 |   |
| Founders’ shares of NIS 0.00001 par value:                          |   |        |    |   |   |
| Authorized, issued and outstanding at December 31, 2007 and 2006:         |   |
| 2,600 shares                                                              |   |        | 1       |   |   |   | 1 |   |
| Additional paid-in capital                                                |   |        | 221,814 |   |   |   | 165,058 |   |
| Accumulated other comprehensive income                                    |   |        | 27,620  |   |   |   | 14,106 |   |
| Treasury stock (264,640 and 265,953 shares at December 31, 2007 and 2006, |   |
| respectively)                                                             |   |        | (1,361  | ) |   |   | (1,388 | ) |
| Accumulated (deficit)                                                     |   |        | (95,515 | ) |   |   | (128,673 | ) |
| TOTAL SHAREHOLDERS’ EQUITY                                          |   |        | 153,238 |   |   |   | 49,783 |   |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                          |   | $           | 483,353 |   |   | $ | 424,690 |   |
|                                                                      |   |        |    |   |   |   |   |   |

----

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

|                                                                                       |   | Year ended December31, |    |
|--------------------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                                       |   | 2007                   |    |   | 2006 |   |   | 2005 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |
| Sales, net                                                                                 |   | $                      | 319,554 |   |   | $ | 252,269 |   |   | $ | 288,623 |   |
| Cost of sales                                                                              |   |                   | 133,229 |   |   |   | 123,516 |   |   |   | 122,615 |   |
| Impairment                                                                                 |   |                   | 170     |   |   |   | 25,862 |   |   |   | - |   |
| Gross profit                                                                               |   |                   | 186,155 |   |   |   | 102,891 |   |   |   | 166,008 |   |
| Operating expenses:                                                                        |   |                   |    |   |   |   |   |   |   |   |   |   |
|      Research and development, net                                |   |                   | 29,817  |   |   |   | 36,273 |   |   |   | 45,714 |   |
|      Selling, marketing, general and administrative               |   |                   | 97,274  |   |   |   | 109,048 |   |   |   | 110,748 |   |
|      Impairment                                                   |   |                   | -       |   |   |   | 27,923 |   |   |   | - |   |
|                                                                                       |   |                   | 127,091 |   |   |   | 173,244 |   |   |   | 156,462 |   |
| Operating income (loss)                                                                    |   |                   | 59,064  |   |   |   | (70,353 | ) |   |   | 9,546 |   |
| Financial expenses, net                                                                    |   |                   | 22,816  |   |   |   | 11,454 |   |   |   | 7,985 |   |
| Other gain, net                                                                            |   |                   | 4,300   |   |   |   | - |   |   |   | - |   |
| Income (loss) before income taxes                                                          |   |                   | 40,548  |   |   |   | (81,807 | ) |   |   | 1,561 |   |
| Tax expense                                                                                |   |                   | 6,212   |   |   |   | 872 |   |   |   | 1,477 |   |
| Net income (loss)                                                                          |   | $                      | 34,336  |   |   | $ | (82,679 | ) |   | $ | 84 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Basic net income (loss) per ordinary share                                                 |   | $                      | 0.99    |   |   | $ | (2.82 | ) |   | $ | 0.0 | (*) |
| Diluted net income (loss) per ordinary share                                               |   | $                      | 0.98    |   |   | $ | (2.82 | ) |   | $ | 0.0 | (*) |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |
| Weighted-average number of ordinary shares used to compute basic income (loss) per share   |   |                   | 34,725  |   |   |   | 29,347 |   |   |   | 29,250 |   |
| Weighted-average number of ordinary shares used to compute diluted income (loss) per share |   |                   | 35,215  |   |   |   | 29,347 |   |   |   | 29,590 |   |
|                                                                                       |   |                   |    |   |   |   |   |   |   |   |   |   |

----

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

|                                                                                                                     |   |      |   |   |    |   |   |            |   |    |         |   |   | Accumulated   |   |   |     |   |   | Retained     |   |   |          |   |   |                |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|--------|---------|--------|--------|-----------------|--------|---------|--------------|--------|--------|---------------|--------|--------|----------|--------|--------|--------------|--------|--------|---------------|--------|--------|---------------------|--------|
|                                                                                                                     |   |      |   |   |    |   |   |            |   |    | Deferred     |   |   | Other         |   |   |     |   |   | Earnings     |   |   |  Total   |   |   | Total               |   |
|                                                                                                                     |   | Number of |   |   | Share   |   |   | Additional      |   |    | Stock-based  |   |   | Comprehensive |   |   | Treasury |   |   | (Accumulated |   |   | Comprehensive |   |   | Shareholders’ |   |
|                                                                                                                     |   | Shares    |   |   | Capital |   |   | Paid-in Capital |   |    | Compensation |   |   | Income (loss) |   |   | Shares   |   |   | Deficit)     |   |   | Income (loss) |   |   | Equity              |   |
| Balance at January 1, 2005                                                                                               |   | 29,170    |   |   | $       | 680    |   |            | $      | 162,027 |         |   | $      | (450          | )      |   | $        | 12,498 |   |         | $      | (1,359 | )             |   | $      | (45,913             | )      |   |   |   |   | $ | 127,483 |   |
| Exercise of options and issuance of shares of                                                                            |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |
|      Employee Stock Purchase Plan  (ESPP)                                             |   | 132       |   |   |    |   |   |            |   | 1,940   |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   | 1,940 |   |
| Share-based compensation                                                                                                 |   |      |   |   |    |   |   |            |   | 13      |         |   |   | (13           | )      |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   | - |   |
| Reversal of share-based compensation related to                                                                     |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |
|      forfeiture of stock options previously granted                                             |   |      |   |   |    |   |   |            |   | (81     | )            |   |   | 81            |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   | - |   |
| Share-based compensation                                                                                                 |   |      |   |   |    |   |   |            |   |    |         |   |   | 382           |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   | 382 |   |
| Purchase of treasury stock                                                                                               |   | (21       | )      |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   | (571   | )             |   |   |                |   |   |   |   |   |   | (571 | ) |
| Release of treasury shares to employees under ESPP                                                                       |   | 20        |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   | 532    |          |   |   | (130                | )      |   |   |   |   |   | 402 |   |
| Comprehensive income (loss), net of tax                                                                                  |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |
|      Foreign currency translation     adjustments                           |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | (1,706 | )      |         |   |   |          |   |   |                |   |   |   | (1,706 | ) |   |   | (1,706 | ) |
|      Unrealized gain from available     for sale marketable securities      |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | 55     |   |         |   |   |          |   |   |                |   |   |   | 55 |   |   |   | 55 |   |
| Net income                                                                                                               |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   | 84                  |   |   |   | 84 |   |   |   | 84 |   |
| Total comprehensive (loss):                                                                                              |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   | (1,567 | ) |   |   |   |   |
| Balance at December 31, 2005                                                                                             |   | 29,301    |   |   |    | 680    |   |            |   | 163,899 |         |   |   | -             |   |   |     | 10,847 |   |         |   | (1,398 | )             |   |   | (45,959             | )      |   |   |   |   |   |   | 128,069 |   |
| Exercise of options and issuance of shares of ESPP                                                                       |   | 57        |   |   |    |   |   |            |   | 560     |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 560 |   |
| Share-based compensation                                                                                                 |   |      |   |   |    |   |   |            |   | 599     |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 599 |   |
| Purchase of treasury shares                                                                                              |   | (12       | )      |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   | (196   | )             |   |   |                |   |   |   |   |   |   |   | (196 | ) |
| Release of treasury shares to employees under ESPP                                                                       |   | 12        |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   | 206    |          |   |   | (35                 | )      |   |   |   |   |   |   | 171 |   |
| Comprehensive income (loss), net of tax                                                                                  |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |   |
|      Foreign currency translation                                                               |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |   |
|      adjustments                                                                                     |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | 3,281  |   |         |   |   |          |   |   |                |   |   |   | 3,281 |   |   |   | 3,281 |   |
|      Unrealized gain from available     for sale marketable securities |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | (22    | )      |         |   |   |          |   |   |                |   |   |   | (22 | ) |   |   | (22 | ) |
| Net (loss)                                                                                                               |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | -      |   |         |   |   |          |   |   | (82,679             | )      |   |   | (82,679 | ) |   |   | (82,679 | ) |
| Total comprehensive (loss):                                                                                              |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   | (79,420 | ) |   |   |   |   |
| Balance at December 31, 2006                                                                                             |   | 29,358    |   |   |    | 680    |   |            |   | 165,058 |         |   |   | -             |   |   |     | 14,106 |   |         |   | (1,388 | )             |   |   | (128,673            | )      |   |   |   |   |   |   | 49,783 |   |
| Release of treasury shares to employees under ESPP                                                                       |   | 1         |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   | 27     |          |   |   |                |   |   |   |   |   |   |   | 27 |   |
| Cumulative effect adjustment upon adoption of FIN 48                                                                     |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   | (1,178              | )      |   |   |   |   |   |   | (1,178 | ) |
| Exercise of options and issuance of shares of ESPP                                                                       |   | 49        |   |   |    |   |   |            |   | 183     |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 183 |   |
| Issuance of shares and warrants to Sun, net                                                                              |   | 6,788     |   |   |    |   |   |            |   | 39,189  |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 39,189 |   |
| Exercise of Sun warrants                                                                                                 |   | 3,000     |   |   |    |   |   |            |   | 17,100  |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 17,100 |   |
| Share-based compensation                                                                                                 |   |      |   |   |    |   |   |            |   | 284     |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   | 284 |   |
| Comprehensive income (loss), net of tax                                                                                  |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   |   |   |   |   |   |   |   |
|      Foreign currency translation     adjustments                      |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | 13,597 |   |         |   |   |          |   |   |                |   |   |   | 13,597 |   |   |   | 13,597 |   |
|      Unrealized gain from available     for sale marketable securities      |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | 11     |   |         |   |   |          |   |   |                |   |   |   | 11 |   |   |   | 11 |   |
| Reclassification of unrealized gains from marketable securties to earnings                                               |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     | (94    | )      |         |   |   |          |   |   |                |   |   |   | (94 | ) |   |   | (94 | ) |
| Net income                                                                                                               |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   | 34,336              |   |   |   | 34,336 |   |   |   | 34,336 |   |
| Total comprehensive income:                                                                                              |   |      |   |   |    |   |   |            |   |    |         |   |   |          |   |   |     |   |   |         |   |   |          |   |   |                |   |   | $ | 47,850 |   |   |   |   |   |
| Balance at December 31, 2007                                                                                             |   | 39,196    |   |   | $       | 680    |   |            | $      | 221,814 |         |   | $      | -             |   |   | $        | 27,620 |   |         | $      | (1,361 | )             |   | $      | (95,515             | )      |   |   |   |   |   | $ | 153,238 |   |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD. |
|--------------------------------------------------|
|                                             |
| CONSOLIDATED STATEMENTS OF CASH FLOWS       |
| U.S. dollars in thousands                   |

|                                                                                                         |   | Year ended December 31, |    |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                         |   | 2007                    |    |   | 2006 |   |   | 2005 |   |
|                                                                                                         |   |                    |    |   |   |   |   |   |   |
| Cash flows from operating activities:                                                                        |   |                    |    |   |   |   |   |   |   |
|      Net income (loss)                                                              |   | $                       | 34,336  |   |   | $ | (82,679 | ) |   | $ | 84 |   |
| Adjustments required to reconcile net income (loss) to net cash                                              |   |                    |    |   |   |   |   |   |   |
|           provided by (used in) operating activities:      |   |                    |    |   |   |   |   |   |   |   |   |   |
|      Depreciation and amortization                                                  |   |                    | 22,614  |   |   |   | 25,112 |   |   |   | 24,011 |   |
|      Change in deferred charges and other assets                                    |   |                    | 244     |   |   |   | 842 |   |   |   | 757 |   |
|      Impairment of long-lived assets                                                |   |                    | 170     |   |   |   | 53,785 |   |   |   | - |   |
|      Share-based compensation expense                                               |   |                    | 284     |   |   |   | 599 |   |   |   | 382 |   |
|      Accrued severance pay and other long-term liabilities, net                     |   |                    | (1,492  | ) |   |   | (527 | ) |   |   | 1,156 |   |
|      (Gain) loss on sale of long-lived assets                                       |   |                    | (3,727  | ) |   |   | 1,641 |   |   |   | 36 |   |
|      Realized gain on sale of marketable securities                                 |   |                    | (94     | ) |   |   | - |   |   |   | - |   |
|     (Increase) decrease in fair value of derivative instruments                          |   |                    | (6,948  | ) |   |   | (4,638 | ) |   |   | 2,871 |   |
|      Effect of exchange differences on inter-company balances                       |   |                    | 7,259   |   |   |   | (60 | ) |   |   | 791 |   |
|      Increase (decrease) in long-term debt due to currency fluctuation         |   |                    | 7,714   |   |   |   | 4,967 |   |   |   | (2,469 | )  |
|      Deferred income taxes, net                                                     |   |                    | 2,197   |   |   |   | (3,231 | ) |   |   | (884 | )  |
|      Class action liabilities, net                                                  |   |                    | -       |   |   |   | 3,000 |   |   |   | - |   |
|      (Increase) decrease in trade receivables, net                                  |   |                    | (29,626 | ) |   |   | (3,794 | ) |   |   | 15,924 |   |
|      Decrease in short-term other receivables, prepaid expenses and other           |   |                    | 730     |   |   |   | 3,533 |   |   |   | 39 |   |
|      Decrease (increase) in long-term other receivables, prepaid expenses and other |   |                    | 2,125   |   |   |   | (426 | ) |   |   | (2,506 | )  |
|      Decrease (increase) in interest receivable                                     |   |                    | -       |   |   |   | 588 |   |   |   | (217 | )  |
|      (Increase) decrease in inventories, net                                        |   |                    | (7,430  | ) |   |   | 3,923 |   |   |   | 5,554 |   |
|      Increase (decrease) in trade payables                                          |   |                    | 882     |   |   |   | (3,664 | ) |   |   | 397 |   |
|      Decrease in other accounts payable and accrued expenses                             |   |                    | (28,361 | ) |   |   | (23,959 | ) |   |   | (28,036 | )  |
|      Increase (decrease) in income tax payable                                      |   |                    | 275     |   |   |   | 229 |   |   |   | (510 | )  |
| Net cash provided by (used in) operating activities                                                          |   |                    | 1,152   |   |   |   | (24,759 | ) |   |   | 17,380 |   |

----

|    TARO PHARMACEUTICAL INDUSTRIES LTD. |
|--------------------------------------------------|
|                                             |
| CONSOLIDATED STATEMENTS OF CASH FLOWS       |
| U.S. dollars in thousands                   |

|                                                                                         |   | Year ended December 31, |    |
|----------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                         |   | 2007                    |    |   | 2006 |   |   | 2005 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |
| Cash flows from investing activities:                                                        |   |                    |    |   |   |   |   |   |   |
| Purchase of property, plant and equipment and capitalization of                              |   |                    |    |   |   |   |   |
|           related direct incremental costs |   |                    | (5,984  | ) |   |   | (21,913 | ) |   |   | (47,317 | ) |
|      Proceeds (repayments) from restricted short-term bank deposits |   |                    | -       |   |   |   | 6,326 |   |   |   | (22 | ) |
|      Investment in other intangible assets                          |   |                    | (229    | ) |   |   | (301 | ) |   |   | (2,479 | ) |
|      Proceeds from long-term deposits and other assets              |   |                    | -       |   |   |   | 14,000 |   |   |   | - |   |
|      Investment in marketable securities                            |   |                    | -       |   |   |   | - |   |   |   | (17,762 | ) |
|      Proceeds from sale of marketable securities                    |   |                    | 125     |   |   |   | - |   |   |   | 31,060 |   |
|      Proceeds from sale of long-lived assets                        |   |                    | 10,151  |   |   |   | 272 |   |   |   | 298 |   |
| Net cash provided by (used) in investing activities                                          |   |                    | 4,063   |   |   |   | (1,616 | ) |   |   | (36,222 | ) |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                        |   |                    |    |   |   |   |   |   |   |   |   |   |
|      Proceeds from issuance of shares                               |   |                    | 56,499  |   |   |   | 731 |   |   |   | 2,342 |   |
|      (Repayments) proceeds of short-term bank debt, net             |   |                    | (6,388  | ) |   |   | (1,996 | ) |   |   | 9,472 |   |
|      Proceeds from long-term debt and capital leases                |   |                    | -       |   |   |   | - |   |   |   | 25,408 |   |
|      Purchase of treasury shares related to ESPP                    |   |                    | -       |   |   |   | (196 | ) |   |   | (571 | ) |
|      Repayment of long-term debt                                    |   |                    | (26,373 | ) |   |   | (26,700 | ) |   |   | (24,794 | ) |
|      Repayment of other intangible assets purchased in prior years  |   |                    | -       |   |   |   | (2,200 | ) |   |   | (5,450 | ) |
| Net cash provided by (used in) financing activities                                          |   |                    | 23,738  |   |   |   | (30,361 | ) |   |   | 6,407 |   |
| Effect of exchange rate changes on cash and cash equivalents                                 |   |                    | 94      |   |   |   | 48 |   |   |   | (67 | ) |
| Increase (decrease) in cash and cash equivalents                                             |   |                    | 29,047  |   |   |   | (56,688 | ) |   |   | (12,502 | ) |
| Cash and cash equivalents at the beginning of the year                                       |   |                    | 16,140  |   |   |   | 72,828 |   |   |   | 85,330 |   |
| Cash and cash equivalents at the end of the year                                             |   | $                       | 45,187  |   |   | $ | 16,140 |   |   | $ | 72,828 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| Supplemental disclosure of cash flow transactions:                                           |   |                    |    |   |   |   |   |   |   |   |   |   |
| Cash paid during the year for:                                                               |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest                                                                                     |   | $                       | 14,793  |   |   | $ | 12,989 |   |   | $ | 8,716 |   |
| Income taxes                                                                                 |   | $                       | 3,644   |   |   | $ | 3,465 |   |   | $ | 4,342 |   |
|                                                                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
| (a) Non-cash investing and financing transactions:                                           |   |                    |    |   |   |   |   |   |   |   |   |   |
|       Purchase of property, plant and equipment on credit           |   | $                       | 317     |   |   | $ | 1,582 |   |   | $ | 3,339 |   |
|       Investment in intangible assets on credit                          |   | $                       | 14      |   |   | $ | - |   |   | $ | - |   |

----

|                                                                                                                           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.   | The Company successfully addressed its past liquidity issues by implementing initiatives to improve revenues and cash collections. During 2006, our cash flows were negatively impacted by operating losses, capital expenditures and a reduction in wholesaler inventory. During the year ended December 31, 2007, the Company’s cash on hand increased by $29,047 from $16,140 to $45,187 primarily due to $56,499 of equity issuances, net of issuance costs, and $10,151 of long-lived asset sales offset by $32,761 of debt repayments and $5,982 of capital investments. During the quarter ended March 31, 2010, consolidated cash on hand increased to approximately $125,500, primarily due to higher operating cash flows from increased sales volumes and cash management activities. During the quarter ended March 31, 2010, debt decreased to $160,500, primarily due to scheduled principal payments.  As of March 31, 2010, $100,200 of the Company’s total debt is callable on-demand due to covenant violations. Consolidated cash at March 31, 2010 exceeds callable debt by approximately $25,300. In addition, the Company is current with all of its debt service payments. As a result of the Company’s cash position at March 31, 2010 and the expected cash flows from operations, the Company has the ability to continue as a going concern for the foreseeable future. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | 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”. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                                                                                           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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |

| d.   | In July 2004, Taro U.S.A. entered into a license agreement with Medicis Pharmaceutical Corporation (“Medicis”) for four product lines used in the treatment of skin disorders, including the Lustra® product line and two previously unmarketed products in the United States, Canada and Puerto Rico. The entire purchase price of $35,565 was treated as a product rights purchase and therefore, was recorded on the balance sheet under the line item “other intangible assets and deferred charges, net.” The Company allocated $23,165 for the Lustra® product family. Lustra® and Lustra-AF® were marketed by Medicis for a number of years. One of the previously unmarketed products, from the Lustra® product family, was subsequently launched by Taro under the name Lustra-UltraTM. Taro allocated $12,400 for the second previously unmarketed product, which was subsequently launched by Taro under the name U-KeraTM. During 2006, the Company recorded an impairment charge of $10,023, to write off the remaining carrying value of the U-KeraTM intangible asset and recorded an impairment charge of $13,236 to reduce the carrying value of the Lustra® intangible asset to $6,298. These charges were the result of competitive market pressures and were recorded in cost of sales. The impairments were determined by conducting valuation studies and employing a discounted cash flow analysis. The remaining carrying value is being amortized to cost of sales over the weighted-average life of the product rights. See Note 2.k. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| e.   | In March 2005, the Company, through its subsidiaries, entered into multi-year agreements with Alterna-TCHP, LLC (“Alterna”) to license the Company’s over-the-counter ElixSure® and Kerasal® products in North America. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| f.   | 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. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

----

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

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

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

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

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

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

----

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

| 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 SFAS No. 34, “Capitalization of Interest Cost”. |
|----------------|---------------------------------------------------------------------------------------------------------------|

| 3.   | Depreciation is calculated by 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: |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                               |  %                  |
|--------------------------------------------------------------------|--------------------------|
| 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 Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” (“SOP No. 98-1”). SOP No. 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software during the application development stage. During the years 2007 and 2006, the Group capitalized $56 and $49 of software costs, respectively. Software costs are amortized by the straight-line method over their estimated useful life of three years. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 5.   | On February 7, 2007, the Company, in an effort to improve liquidity, sold a car park adjacent to its Irish facility for $4,050, net of transaction costs and recorded in 2007 a pre-tax gain on this transaction of $3,721. This asset was included in property plant and equipment at December 31, 2006, as the criteria to classify this land as available-for-sale were met after the balance sheet date. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

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

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

| k.   | Impairment of long-lived assets, intangible assets and deferred charges: |
|----------------|--------------------------------------------------------------------------|

----

|                                                                                                                           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: |
|----------------|-----------------------|

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

----

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

| Increase to short-term accrued taxes |   | $       | 1,178 |   |
|--------------------------------------|--------|---------|-------|--------|
| Decrease to valuation allowance      |   | $       | 6,220 |   |
| Decrease to deferred tax assets      |   | $  | 6,220 |   |
| Increase to accumulated deficit |   | $       | 1,178 |   |

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

| s.   | Basic and diluted net income (loss) per share: |
|----------------|------------------------------------------------|

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

----

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

| 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)  |

|                    |   | 2007      |   |   | 2006      |   |   | 2005      |   |
|-------------------------|--------|-----------|--------|--------|-----------|--------|--------|-----------|--------|
| Dividend yield          |   |      | 0      | %      |      |   | 0      | %         |   |   | 0 | % |
| Expected volatility     |   |      | 53.1   | %      |      |   | 58.5   | %         |   |   | 60.0 | % |
| Risk-free interest rate |   |      | 4.7    | %      |      |   | 4.4    | %         |   |   | 4.2 | % |
| Expected life of up to  |   | 6.9 years |   |   | 6.9 years |   |   | 6.9 years |   |

|                                                              |                           |   | December 31, |    |
|-------------------------------------------------------------------|--------------------------------|--------|--------------|---------|
|                                                              |       |   | 2005         |    |
|                                                              |                           |   |         |    |
| Net income - as reported                                          |                           |   | $            | 84      |   |
| Add – stock-based compensation expense recorded in reported |                           |
| net income                                                        |                           |   |         | 382     |   |
| Less - total stock-based compensation expenses under fair         |                           |   |         |    |   |
| value method                                                      |                           |   |         | 14,608  |   |
| Net (loss) - pro-forma                                            |                           |   | $            | (14,142 | )  |
| Earnings per share:                                               |                           |   |         |    |   |
| Basic and diluted net income per ordinary share - as reported(*)  |                           |   | $            | 0.00    |   |
| Basic and diluted net (loss) per ordinary share - pro-forma       |                           |   | $            | (0.48   | )  |

| 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.   | 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)  |

----

|    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)  |

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

|                                                 |   | December 31, |    |
|------------------------------------------------------|--------|--------------|---------|
|                                                 |   | 2007         |    |   | 2006 |   |
| Trade accounts receivable, gross                     |   | $            | 117,557 |   |   | $ | 118,459 |   |
|                                                 |   |         |    |   |   |   |   |   |
| Reserves for sales deductions:                       |   |         |    |   |   |   |   |   |
|      Chargebacks            |   |         | (18,525 | ) |   |   | (40,211 | ) |
|      Customer rebates       |   |         | (12,421 | ) |   |   | (19,628 | ) |
|      Other sales deductions |   |         | (15,853 | ) |   |   | (17,005 | ) |
| Allowance for doubtful accounts                      |   |         | (741    | ) |   |   | (2,159 | ) |
| Trade accounts receivable, net                       |   | $            | 70,017  |   |   | $ | 39,456 |   |

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

|                          |   | December 31, |   |
|-------------------------------|--------|--------------|--------|
|                          |   | 2007         |   |   | 2006 |   |
| Prepaid expenses              |   | $            | 5,804  |   |   | $ | 7,560 |   |
| Deferred income taxes         |   |         | 3,221  |   |   |   | 4,735 |   |
| Government authorities        |   |         | 3,207  |   |   |   | 1,433 |   |
| Advanced to suppliers         |   |         | 551    |   |   |   | 843 |   |
| Derivative instruments        |   |         | 12,953 |   |   |   | 497 |   |
| Office of the Chief Scientist |   |         | 269    |   |   |   | 279 |   |
| Employees                     |   |         | 17     |   |   |   | 21 |   |
| Other                         |   |         | 238    |   |   |   | 325 |   |
|                          |   | $            | 26,260 |   |   | $ | 15,693 |   |

----

|    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)  |

----

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

|                         |   | Beginning balance |    |   | Provisionrecordedfor current period sales |   |     | Credits processed / Payments |   |   | Ending balance |   |
|------------------------------|--------|-------------------|---------|--------|-------------------------------------------|--------|----------|------------------------------|--------|--------|----------------|--------|
| Accounts Receivable Reserves |   |              |    |   |                                      |   |     |                         |   |   |
| Chargebacks                  |   | $                 | (40,211 | )      |                                      | $      | (170,447 | )                            |   | $      | 192,133        |   |   | $ | (18,525 | ) |
| Rebates and Other            |   |              | (38,792 | )      |                                      |   | (63,005  | )                            |   |   | 72,782         |   |   |   | (29,015 | ) |
| Total                        |   | $                 | (79,003 | )      |                                      | $      | (233,452 | )                            |   | $      | 264,915        |   |   | $ | (47,540 | ) |
|                         |   |              |    |   |                                      |   |     |                         |   |   |           |   |   |   |   |   |
| Current Liabilities          |   |              |    |   |                                      |   |     |                         |   |   |           |   |   |   |   |   |
| Returns                      |   | $                 | (34,144 | )      |                                      | $      | (9,243   | )                            |   | $      | 18,286         |   |   | $ | (25,101 | ) |
| Others (1)                   |   | $                 | (23,271 | )      |                                      | $      | (14,498  | )                            |   | $      | 27,213         |   |   | $ | (10,556 | ) |
| Total                        |   | $                 | (57,415 | )      |                                      | $      | (23,741  | )                            |   | $      | 45,499         |   |   | $ | (35,657 | ) |

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

|                                                 |   | December 31, |   |
|------------------------------------------------------|--------|--------------|--------|
|                                                 |   | 2007         |   |   | 2006 |   |
| Raw and packaging materials                          |   | $            | 21,292 |   |   | $ | 15,483 |   |
| Finished goods                                       |   |         | 23,806 |   |   |   | 26,375 |   |
| Work in progress                                     |   |         | 17,162 |   |   |   | 11,892 |   |
| Purchased products for commercial purposes and other |   |         | 4,697  |   |   |   | 3,012 |   |
|                                                 |   | $            | 66,957 |   |   | $ | 56,762 |   |

----

|    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, |    |
|--------------------------------------------------|--------|--------------|---------|
|                                             |   | 2007         |    |   | 2006 |   |
| Cost:                                            |   |         |    |   |   |   |
| Land                                             |   | $            | 12,840  |   |   | $ | 12,500 |   |
| Buildings                                        |   |         | 163,755 |   |   |   | 157,550 |   |
| Leasehold improvements                           |   |         | 3,263   |   |   |   | 3,060 |   |
| Machinery and equipment                          |   |         | 151,878 |   |   |   | 141,583 |   |
| Computer equipment                               |   |         | 30,901  |   |   |   | 29,478 |   |
| Motor vehicles                                   |   |         | 281     |   |   |   | 281 |   |
| Furniture, fixtures and office equipment         |   |         | 8,854   |   |   |   | 8,236 |   |
| Advances for property and equipment              |   |         | 290     |   |   |   | 92 |   |
|                                             |   |         | 372,062 |   |   |   | 352,780 |   |
| Accumulated depreciation and impairment charges: |   |         |    |   |   |   |   |   |
| Buildings                                        |   |         | 42,503  |   |   |   | 35,475 |   |
| Leasehold improvements                           |   |         | 2,733   |   |   |   | 2,439 |   |
| Machinery and equipment                          |   |         | 81,417  |   |   |   | 67,065 |   |
| Computer equipment                               |   |         | 27,543  |   |   |   | 23,051 |   |
| Motor vehicles                                   |   |         | 272     |   |   |   | 236 |   |
| Furniture, fixtures and office equipment         |   |         | 5,665   |   |   |   | 4,761 |   |
|                                             |   |         | 160,133 |   |   |   | 133,027 |   |
| Depreciated cost                                 |   | $            | 211,929 |   |   | $ | 219,753 |   |

| 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 $13,147 and $15,941 as of December 31, 2007 and 2006, respectively. Capitalized interest and other costs were $56, $8,670, and $12,199 for the years ended December 31, 2007, 2006 and 2005, respectively. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   |  Cost of computer equipment includes capitalized development costs of computer software developed for internal use in the amount of $4,416 and $4,158 as of December 31, 2007 and 2006, respectively. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | As for pledges – see Note 13. |
|----------------|-------------------------------------|

----

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

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

|                                                                        |   | December 31, |   |
|-----------------------------------------------------------------------------|--------|--------------|--------|
|                                                                        |   | 2007         |   |   | 2006 |   |
| Cost:                                                                       |   |         |   |   |   |   |
| Product rights                                                              |   | $            | 68,852 |   |   | $ | 68,245 |   |
| Deferred charges in respect of loans and bonds from institutional investors |   |         | 1,246  |   |   |   | 1,216 |   |
| Other deferred cost                                                         |   |         | 1,541  |   |   |   | 1,541 |   |
|                                                                        |   |         | 71,639 |   |   |   | 71,002 |   |
| Accumulated amortization and impairment charges:                            |   |         |   |   |   |   |   |   |
| Product rights                                                              |   |         | 42,689 |   |   |   | 39,602 |   |
| Deferred charges in respect of loans and bonds from institutional investors |   |         | 1,144  |   |   |   | 1,031 |   |
| Other deferred cost                                                         |   |         | 1,438  |   |   |   | 1,306 |   |
|                                                                        |   |         | 45,271 |   |   |   | 41,939 |   |
| Amortized cost                                                              |   | $            | 26,368 |   |   | $ | 29,063 |   |

| b.   | Amortization expenses related to product rights were $2,740, $5,014, and $5,101, for the years ended December 31, 2007, 2006 and 2005, respectively. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | As of December 31, 2007, the estimated amortization expense of product rights for 2008 to 2012 is as follows: 2008 - $2,805; 2009 - $2,932; 2010 - $2,789; 2011 - $2,680; and 2012 - $2,518. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | The weighted-average amortization period for product rights is 14 years. |
|----------------|--------------------------------------------------------------------------|

|                                                          |   | December 31, |   |
|---------------------------------------------------------------|--------|--------------|--------|
|                                                          |   | 2007         |   |   | 2006 |   |
| Prepayment of land leased from Israel Land Administration (1) |   | $            | 15,065 |   |   | $ | 15,292 |   |
| Receivable related to class action lawsuit                    |   |         | 7,000  |   |   |   | 7,000 |   |
| Derivative instruments (2)                                    |   |         | 659    |   |   |   | 5,743 |   |
| Severance pay fund (3)                                        |   |         | 3,649  |   |   |   | 2,755 |   |
| Long-term deposit                                             |   |         | 84     |   |   |   | - |   |
| Other                                                         |   |         | 119    |   |   |   | 753 |   |
|                                                          |   | $            | 26,576 |   |   | $ | 31,543 |   |

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

| (2)   | See Note 9. |
|-----------------|-------------|

| (3)   | 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 11.b. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

|                                               |   | December 31, |   |
|----------------------------------------------------|--------|--------------|--------|
|                                               |   | 2007         |   |   | 2006 |   |   | 2005 |   |
| Pension, retirement savings and severance expenses |   | $            | 3,902  |   |   | $ | 4,763 |   |   | $ | 3,688 |   |

| 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)  |

|                                                                 |   | Weighted -    |   |   |         |   |   |   |   |
|----------------------------------------------------------------------|--------|---------------|--------|--------|--------------|--------|--------|--------|--------|
|                                                                 |   | average       |   |   |         |   |   |   |   |
|                                                                 |   | interest rate |   |   | Amount       |   |
|                                                                 |   | December 31,  |   |   | December 31, |   |
|                                                                 |   | 2007          |   |   | 2006         |   |   | 2007   |   |   | 2006 |   |
| Short-term bank credit and short-term loans:                         |   |          |   |   |         |   |   |   |   |   |   |   |
| In, or linked to, U.S. dollars (1) (2) (3) (4)                       |   |          | 6.92   | %      |         |   | 6.92   | %      |   | $ | 80,841 |   |   | $ | 91,304 |   |
| In NIS (5)                                                           |   |          | 7.07   | %      |         |   | 7.55   | %      |   |   | 10,759 |   |   |   | 11,002 |   |
| In Canadian dollars (6) (7)                                          |   |          | 6.97   | %      |         |   | 6.45   | %      |   |   | 17,392 |   |   |   | 17,020 |   |
|                                                                 |   |          |   |   |         |   |   |   |   |   | 108,992 |   |   |   | 119,326 |   |
| Reclass from long-term debt, included in the above amounts (8)       |   |          |   |   |         |   |   |   |   |   | 35,181 |   |   |   | 42,783 |   |
| Total utilized credit lines and short-term loans                     |   |          |   |   |         |   |   |   |   | $ | 73,811 |   |   | $ | 76,543 |   |
| Total authorized credit lines and short-term loans                   |   |          |   |   |         |   |   |   |   | $ | 76,042 |   |   | $ | 78,765 |   |
| Unutilized credit lines                                              |   |          |   |   |         |   |   |   |   | $ | 2,231 |   |   | $ | 2,222 |   |
| Weighted-average interest rates at the end of the year for all loans |   |          | 6.94   | %      |         |   | 6.91   | %      |   |   |   |   |   |   |   |   |

| (1)   | This amount includes approximately $28,100 of outstanding debt under a $40,000 Taro U.S.A. credit facility at December 31, 2007 and 2006, respectively. This credit facility bears interest at a rate of LIBOR plus 2.75% and is secured by a first lien on Taro U.S.A.’s accounts receivable, inventory and all products and proceeds thereof. Additional borrowings are currently not available under this facility due to covenant defaults. Subsequent to the balance sheet date, the Company amended this credit agreement to extend the maturity date to October 5, 2010. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | This amount includes approximately $9,750 and $10,000 of outstanding debt under a $10,000 Taro U.S.A. credit facility at December 31, 2007 and 2006, respectively. The Company entered into a letter agreement with this financial institution as described in Note 12.a.3. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | This amount includes approximately $23,800 and $29,327 of outstanding debt under the Company’s credit facilities in Israel at December 31, 2007 and 2006, respectively. |
|-----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| (4)   | This amount includes approximately $19,191 and $23,877 of long-term debt reclassified as short-term due to covenant defaults at December 31, 2007 and 2006, respectively. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5)   | This amount represents outstanding debt under the Company’s credit facilities of $6,193 and $4,389 and a reclassification from long-term debt of $4,566 and $6,613 in Israel at December 31, 2007 and 2006, respectively. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (6)   | This amount includes approximately $5,967 and $4,728 of outstanding debt at December 31, 2007 and 2006, respectively, 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 $8,070 and $6,865 at December 31, 2007 and 2006, respectively. This facility is secured by a general security agreement over the Canadian subsidiary’s assets other than real property and certain other capital assets. In addition, the agreement provides the lending institution a second lien on real property and other capital assets in Canada, and the United States. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (7)   | This amount includes approximately $11,424 and $12,292 of long-term debt reclassified as short-term due to covenant defaults at December 31, 2007 and 2006, respectively. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (8)   | These amounts represent long-term debt classified as short-term debt due to covenant defaults described in Notes 12.a.1, 12.a.3, 12.a.4 and 12.a.6. |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                           |   | December 31, |   |
|--------------------------------|--------|--------------|--------|
|                           |   | 2007         |   |   | 2006 |   |
| Returns reserve                |   | $            | 25,101 |   |   | $ | 34,144 |   |
| Due to customers (1)           |   |         | 1,626  |   |   |   | 16,327 |   |
| Employees and payroll accruals |   |         | 11,432 |   |   |   | 7,382 |   |
| Deferred revenue               |   |         | 1,176  |   |   |   | 7,055 |   |
| Medicaid and indirect rebates  |   |         | 5,038  |   |   |   | 6,944 |   |
| Accrued income taxes           |   |         | 9,443  |   |   |   | 6,163 |   |
| Payable to Medicis             |   |         | -      |   |   |   | 5,100 |   |
| Legal and audit fees           |   |         | 2,166  |   |   |   | 4,429 |   |
| Accrued expenses               |   |         | 7,600  |   |   |   | 4,183 |   |
| Interest payable               |   |         | 1,726  |   |   |   | 2,072 |   |
| Other                          |   |         | 6,895  |   |   |   | 3,584 |   |
|                           |   | $            | 72,203 |   |   | $ | 97,383 |   |

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

----

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

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

|                        |   | December 31, |   |
|-----------------------------|--------|--------------|--------|
|                        |   | 2007         |   |   | 2006 |   |
| Class action lawsuit        |   | $            | 10,000 |   |   | $ | 10,000 |   |
| Accrued severance pay       |   |         | 4,642  |   |   |   | 3,645 |   |
| Deferred revenue            |   |         | -      |   |   |   | 1,176 |   |
| Grant from Irish government |   |         | 233    |   |   |   | 538 |   |
| Other                       |   |         | 424    |   |   |   | 76 |   |
|                        |   | $            | 15,299 |   |   | $ | 15,435 |   |

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

|                                                               |   | December 31, |    |
|--------------------------------------------------------------------|--------|--------------|---------|
|                                                               |   | 2007         |    |   | 2006 |   |
| Loans from institutional investors and bonds (1)              |   | $            | 8,313   |   |   | $ | 10,296 |   |
| Loans from institutional investors and bonds (2)              |   |         | 97,040  |   |   |   | 102,393 |   |
| Banks (3)                                                          |   |         | 1,577   |   |   |   | 5,333 |   |
| Term loan from Canadian bank (4)                                   |   |         | 14,451  |   |   |   | 19,308 |   |
| Mortgage for U.S. distribution facility (5) (6)                    |   |         | 10,450  |   |   |   | 12,650 |   |
| Mortgage for U.S. office facility (6)                              |   |         | 11,059  |   |   |   | 11,608 |   |
|                                                               |   |         | 142,890 |   |   |   | 161,588 |   |
| Less: current maturities                                           |   |         | 31,348  |   |   |   | 28,428 |   |
| Less: long-term debt reclassified as short-term loans (1, 3, 4, 6) |   |         | 35,181  |   |   |   | 42,783 |   |
|                                                               |   | $            | 76,361  |   |   | $ | 90,377 |   |

| 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, 2007 and 2006 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, 2007 and 2006, the Company was current with its payment obligations but not in compliance with other covenants. Since the Company was not in compliance with certain covenants as described above and since according to the provisions of the agreements, the lenders have the right to accelerate the obligations after notice and opportunity to cure, the Company has reclassified the long-term portion of its long-term debt to these lenders in the amount of $5,032 and $7,404, to short-term loans at December 31, 2007 and 2006, respectively. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 was 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. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| 3.   | In 2004, in connection with the long and short-term loans provided by four banks, the Company provided each such bank with undertakings including provisions that it would: (i) not pledge any of its current or future assets without the prior written consent of such bank, provided that Taro is allowed to pledge any newly acquired assets to secure financing provided to acquire such assets and to pledge any fixed assets up to an aggregate of $20,000, which includes the pledges in favor of the lenders under the 1999 and 2000 debenture and loan agreements; (ii) not sell or transfer any of the current or future assets of the Company (excluding current assets) without the prior written consent of such lender, provided that the Company is allowed to sell any asset without consent of such lender if the sale proceeds do not exceed 5% of the total assets (based on the audited financial statements) less the current assets and goodwill (based on the audited financial statements); (iii) comply with certain financial covenants, one of which requires that the Company’s operating income will exceed 12% of sales, and another which requires that the Company maintain a ratio of debt to EBITDA not to exceed 3.5 over a rolling three-year average, and (iv) comply with certain financial reporting requirements. Excluding the mortgage relating to the distribution facility in New Jersey that is described in (6) below, the loans covered by the foregoing covenants and negative pledge undertakings matured in 2008 and bore interest ranging from LIBOR plus 0.9% to LIBOR plus 2%. As of December 31, 2007, the Company was current with its payment obligations but was not in compliance with the covenants. Since the Company was not in compliance with certain covenants as described above and otherwise set forth in the original loan agreements with these banks, and since according to the agreements, the banks have the right to accelerate their obligations, the Company has reclassified the long-term portion of its long-term debt to these banks. As of December 31, 2006, the Company reclassified long-term loans in the amount of $1,577 as short-term loans. No amounts were reclassified as short-term loans at December 31, 2007. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 is 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 10 above, and a subordinated lien on the buildings and land securing the mortgage loans described in (6) 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 1.5:1 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 $11,424 and $12,293, as short-term loans at December 31, 2007 and 2006, respectively. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|    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, the Company’s U.S. subsidiary 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. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 (4) above has a subordinated security position in the facilities which are the subject of the mortgages. The mortgage on the New York facility was $11,059 and $11,608, as of December 31, 2007 and 2006, 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, which the Company failed to meet. 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. The mortgage on the New Jersey facility, as described in (5) above, was $10,450 and $12,650, as of December 31, 2007 and December 31, 2006, 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. The mortgage holder is one of the banks with which the Company entered into a letter agreement, with similar covenants, as described in (3) above. On November 28, 2008, the principal amount of this mortgage was increased from $4,743 to $12,992, and the interest rate swap was terminated. Since the Company, with respect to each such mortgage, was not in compliance with certain financial and other 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 $18,725 and $21,509, respectively, as short-term loans at December 31, 2007 and 2006, respectively. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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: |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|    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, |   |
|                                      |   | 2007                           |   |   | 2006               |   |   | 2007 |   |   | 2006 |   |
| In, or linked to, U.S. dollars            |   |                           | 6.08%  |   |               |   | 5.98% |   |   | $ | 62,882 |   |   | $ | 81,643 |   |
| In Canadian dollars                       |   |                           | 7.09%  |   |               |   | 6.33% |   |   |   | 14,451 |   |   |   | 19,308 |   |
| In Israeli currency – linked to CPI |   |                           | 6.08%  |   |               |   | 6.17% |   |   |   | 65,557 |   |   |   | 60,637 |   |
|                                      |   |                           |   |   |               |   |   |   |   | $ | 142,890 |   |   | $ | 161,588 |   |

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

|       |   | December 31, |    |
|------------|--------|--------------|---------|
|       |   | 2007         |    |
| 2008       |   | $            | 31,348  |   |
| 2009       |   |         | 29,809  |   |
| 2010       |   |         | 28,383  |   |
| 2011       |   |         | 14,648  |   |
| 2012       |   |         | 13,462  |   |
| Thereafter |   |         | 25,240  |   |
|       |   | $            | 142,890 |   |

|                                              |   | December 31, |   |
|---------------------------------------------------|--------|--------------|--------|
|                                              |   | 2007         |   |   | 2006 |   |
| Short-term bank credit and short-term loans (1)   |   | $            | 34,067 |   |   | $ | 32,841 |   |
| Long-term debt (including current maturities) (2) |   | $            | 44,274 |   |   | $ | 53,862 |   |

| (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, 2007 and 2006. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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 2012. The minimum annual rental payments, under non-cancelable lease agreements, are as follows: |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                |   | December 31, |   |
|---------------------|--------|--------------|--------|
|                |   | 2007         |   |
| 2008                |   | $            | 2,183  |   |
| 2009                |   |         | 1,471  |   |
| 2010                |   |         | 975    |   |
| 2011                |   |         | 75     |   |
| 2012 and thereafter |   |         | 39     |   |
|                |   | $            | 4,743  |   |

| 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: |
|-----------------|--------------------------------------------------------------------------------------------------|

|   | On September 29, 2009, the Company filed a lawsuit against Sun and certain of its affiliates in the United States District Court for the Southern District of New York alleging among other things, failure to disclose material information in the Sun Offer.  On October 1, 2010, the Court entered a So-ordered Stipulation of Dismissal without prejudice and dismissed all pending motions as moot. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 16 for further details. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| 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 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 April 28, 2008, the Company agreed to pay $10,000, of which $7,000 will be provided by its insurance company, as part of a settlement with plaintiffs in a class action suit, Zwickel v. Taro Pharmaceutical Industries Ltd., 04-CV-5969 (S.D.N.Y.). The legal proceedings were initially filed in 2004, and a consolidated amended complaint was filed in 2007, against the Company and certain of its current and former officers and directors alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The settlement amount of $10,000 owed by the Company was accrued as part of other long-term liabilities in the 2006 consolidated balance sheet. The receivable from the insurance company was recorded as part of long-term receivables and other assets in the 2007 and 2006 consolidated balance sheets. On October 26, 2009, the Company fulfilled its obligation as per the terms of the settlement agreement and the Company’s insurer paid its respective settlement amount as well. |
|------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| d.   | In 2003, the Company and its Irish subsidiary entered into an agreement with a government agency in Ireland to receive grants for the development and provision of employment for a manufacturing facility in Ireland. The obligation to repay these grants terminated in 2008 and 2009, subject to the continued operation and control by the Company’s Irish subsidiary. The grants, or portions thereof, may be revoked if jobs related to the grants remain vacant for a period in excess of six calendar months. As of December 31, 2007 and 2006, the balance of grants received was $233 and $538, respectively, and is included in other long-term liabilities. Subsequent to the balance sheet date, the Company fulfilled all of its obligations under the terms of the grant agreement and earned the full benefit of the grant. This grant was amortized as earned by the Company. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| e.   | Subsequent to the balance sheet date, in November 2009, the Company’s Irish subsidiary sold a vial filling line for $1,485, net of transaction costs. For further details see Note 1.f. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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 the Company’s shares is allocated to the ordinary shares. |
|----------------|---------------------------------------------------------------------------------------------------|

| b.   | Founders’ Shares: |
|----------------|-------------------------|

| 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. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| 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.   | During December 2005, the Company accelerated the vesting period of 1,052,030 options outstanding with a weighted-average exercise price of $35.23, which was higher than the market price at the time of the acceleration, and with remaining vesting periods prior to acceleration from one to five-years. The decision to accelerate the vesting of those options was based primarily upon the issuance of SFAS 123(R) which required the Company to record compensation expense for all unvested stock options effective January 1, 2006. The Company believes that the acceleration of vesting of those options will enable the Company to avoid recognizing stock-based compensation expenses associated with these options in future periods. An additional reason for the acceleration of the vesting period was to make the options more attractive to the recipients. |
|----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.   | A summary of the Company’s stock option activity (except options to non-employees) and related information for the year ended December 31, 2007 is as follows: |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                             |   |      |      |   |     |   |           |      |   |   | Weighted-         |   |   |            |   |
|--------------------------------------------------|--------|-----------|-----------|--------|----------|--------|----------------|-----------|--------|--------|-------------------|--------|--------|-----------------|--------|
|                                             |   |      |      |   |     |   |           | Weighted- |   |   | average           |   |   |            |   |
|                                             |   |      |      |   |     |   |           | average   |   |   | remaining         |   |   |            |   |
|                                             |   | Number of |      |   | Exercise |   |           | exercise  |   |   |  contractual |   |   | Aggregate       |   |
|                                             |   | options   |      |   | price    |   |           | price     |   |   | terms             |   |   | intrinsic value |   |
|                                             |   |      |      |   | $        |   |           | $         |   |   | (in years)        |   |   |            |   |
| Outstanding at December 31, 2006                 |   |      | 1,387,129 |   |     |   | $2.38 - $69.26 |      |   | $      | 25.20             |   |   |            |   |   |   |   |
| Exercised                                        |   |      | (41,400   | )      |     |   | $2.44 - $4.63  |      |   | $      | 3.10              |   |   |            |   |   |   |   |
| Forfeited                                        |   |      | (206,024  | )      |     |   | $2.38 - $69.26 |      |   | $      | 28.36             |   |   |            |   |   |   |   |
| Granted                                          |   |      | 75,000    |   |     |   | $6.23 - $10.13 |      |   | $      | 6.75              |   |   |            |   |   |   |   |
| Outstanding at December 31, 2007                 |   |      | 1,214,705 |   |     |   | $2.38 - $69.26 |      |   | $      | 24.31             |   |   |            | 5.66   |   |   | $ | 586 |   |
| Exercisable at December 31, 2007                 |   |      | 863,455   |   |     |   |           |      |   | $      | 26.83             |   |   |            | 4.74   |   |   | $ | 491 |   |
| Vested and expected to vest at December 31, 2007 |   |      | 897,519   |   |     |   |           |      |   | $      | 25.15             |   |   |            | 5.40   |   |   | $ | 417 |   |
|                                             |   |      |      |   |     |   |           |      |   |   |              |   |   |            |   |   |   |   |   |   |

----

|    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               |                  |   | 2007                |   |   | life |   |   | price |   |   | 2007 |   |   |   |   | price |   |
|                |                  |   |                |   |   | (in years) |   |   | $ |   |   |   |   |   |   |   | $ |   |
|                | $2.38 – $10.00  |   |                |   | 182,325 |   |   |   | 4.33 |   |   | $  | 4.48 |   |   |   | 117,325 |   |   |   |   | $ | 3.52 |   |
|                | $10.01 – $20.00 |   |                |   | 345,150 |   |   |   | 6.03 |   |   | $  | 13.40 |   |   |   | 141,100 |   |   |   |   | $ | 12.56 |   |
|                | $20.01 – $30.00 |   |                |   | 241,900 |   |   |   | 6.42 |   |   | $  | 24.68 |   |   |   | 216,700 |   |   |   |   | $ | 24.66 |   |
|                | $30.01 – $40.00 |   |                |   | 304,980 |   |   |   | 5.35 |   |   | $  | 33.60 |   |   |   | 268,980 |   |   |   |   | $ | 33.55 |   |
|                | $40.01 – $69.26 |   |                |   | 140,350 |   |   |   | 5.92 |   |   | $  | 56.50 |   |   |   | 119,350 |   |   |   |   | $ | 55.42 |   |
|                |                  |   |                |   | 1,214,705 |   |   |   | 5.67 |   |   | $ | 24.36 |   |   |   | 863,455 |   |   |   |   | $ | 26.83 |   |

| 5.   | 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,       |   |
|                                             |   | 2007                       |   |   | 2006                          |   |   | 2005 |   |   | 2007 |   |   | 2006 |   |   | 2005 |   |
| Weighted-average exercise price                  |   | $                          | 0.00   |   |                          | $      | 0.00 |   |   | $ | 33.37 |   |   | $ | 6.75 |   |   | $ | 14.03 |   |   | $ | 28.38 |   |
| Weighted-average fair value on the date of grant |   | $                          | 0.00   |   |                          | $      | 0.00 |   |   | $ | 19.61 |   |   | $ | 4.00 |   |   | $ | 8.64 |   |   | $ | 17.63 |   |

| 6.   | There was no activity related to non-employees stock options as of December 31, 2007 and 2006. |
|----------------|------------------------------------------------------------------------------------------------|

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

| e.   | Net income (loss) per share: |
|----------------|------------------------------|

|                                       |   | Year ended December 31, 2007 |   |   | Year ended December 31, 2006 |   |       | Year ended December 31, 2005 |   |
|--------------------------------------------|--------|------------------------------|--------|--------|------------------------------|--------|------------|------------------------------|--------|
|                                       |   |                         |   |   |                         |   |       | Per                          |   |   |   |   |   |   |   |   | Per |   |   |   |   |   |   |   |   | Per |   |
|                                       |   | Net income                   |   |   | Shares                       |   |       | Share                        |   |   | Net (loss) |   |   | Shares |   |   | Share |   |   | Net income |   |   | Shares |   |   | Share |   |
|                                       |   | (numerator)                  |   |   | (denominator)                |   |       | Amount                       |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |   | (numerator) |   |   | (denominator) |   |   | Amount |   |
|                                       |   |                         |   |   |                         |   |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic EPS:                            |   | $                            | 34,336 |   |                         |   | 34,724,702 |                         |   | $ | 0.99 |   |   | $ | (82,679) |   |   |   | 29,347,202 |   |   | $ | (2.82) |   |   | $ | 84 |   |   |   | 29,250,398 |   |   | $ | 0.00 |   |
|                                       |   |                         |   |   |                         |   |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Effect of dilutive securities:             |   |                         |   |   |                         |   |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|     Stock options      |   |                         | -      |   |                         |   | 78,496     |                         |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 339,899 |   |   |   | - |   |
|     Sun Stock Warrants |   |                         |   |   |                         |   | 411,439    |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                               |   | $                            | 34,336 |   |                         |   | 35,214,637 |                         |   | $ | 0.98 |   |   | $ | (82,679) |   |   |   | 29,347,202 |   |   | $ | (2.82) |   |   | $ | 84 |   |   |   | 29,590,297 |   |   | $ | 0.00 |   |
|                                       |   |                         |   |   |                         |   |       |                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| 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 their 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 others, a gradual decrease in the corporate tax rate in Israel to the following tax rates: in 2005 - 34%, in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%. 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 25, 2009, the Knesset approved new legislation which provides for lower tax rates in the years 2011-2016. According to the new legislation, the corporate tax rate is to be gradually reduced over the years 2010-2016. The top income tax rate will decrease from 25% in 2010 to 18% in 2016. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| 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. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 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. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

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

| f.   | Income (loss) before income taxes comprises of the following: |
|----------------|---------------------------------------------------------------|

|                                                              |   | Year ended December 31, |   |
|-------------------------------------------------------------------|--------|-------------------------|--------|
|                                                              |   | 2007                    |   |   | 2006 |   |   | 2005 |   |
|                                                              |   |                    |   |   |   |   |   |   |   |
| Domestic (Israel)                                                 |   | $                       | 20,728 |   |   | $ | (17,098) |   |   | $ | 22,729 |   |
| Foreign (North America, the Cayman Islands, Ireland and the U.K.) |   |                    | 19,820 |   |   |   | (64,709) |   |   |   | (21,168) |   |
|                                                              |   | $                       | 40,548 |   |   | $ | (81,807) |   |   | $ | 1,561 |   |

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

|                  |   | Year ended December 31, |   |
|-----------------------|--------|-------------------------|--------|
|                  |   | 2007                    |   |   | 2006 |   |   | 2005 |   |
|                  |   |                    |   |   |   |   |   |   |   |
| Current taxes    |   | $                       | 4,015  |   |   | $ | 4,103 |   |   | $ | 2,361 |   |
| Deferred income taxes |   |                    | 2,197  |   |   |   | (3,231) |   |   |   | (884) |   |
|                  |   | $                       | 6,212  |   |   | $ | 872 |   |   | $ | 1,477 |   |
|                  |   |                    |   |   |   |   |   |   |   |   |   |   |
| Domestic              |   | $                       | 3,049  |   |   | $ | 1,470 |   |   | $ | 1,240 |   |
| Foreign               |   |                    | 3,163  |   |   |   | (598) |   |   |   | 237 |   |
|                  |   | $                       | 6,212  |   |   | $ | 872 |   |   | $ | 1,477 |   |

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

|                                                                                     |   | Year ended December 31, |    |
|------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                     |   | 2007                    |    |   | 2006 |   |   | 2005 |   |
|                                                                                     |   |                    |    |   |   |   |   |   |   |
| Income (loss) before income taxes                                                   |   | $                       | 40,548  |   |   | $ | (81,807) |   |   | $ | 1,561 |   |
| Statutory tax rate                                                                       |   |                    | 29%     |   |   |   | 31% |   |   |   | 34% |   |
| Theoretical tax (credits)                                                                |   | $                       | 11,759  |   |   | $ | (25,360) |   |   | $ | 531 |   |
| Deferred tax in respect of losses for which valuation                                    |   |                    |    |   |   |   |   |   |   |   |   |   |
|        allowance was provided                                        |   |                    | 2,462   |   |   |   | 24,923 |   |   |   | 2,287 |   |
| (Benefit) tax in respect to prior years                                                  |   |                    | (601)   |   |   |   | 303 |   |   |   | - |   |
| Tax in respect to advanced years                                                         |   |                    | -       |   |   |   | - |   |   |   | 317 |   |
| “Approved Enterprise” (benefit) expense (1)                                  |   |                    | (4,353) |   |   |   | 1,874 |   |   |   | (3,263) |   |
| Effect of different tax rates in other countries                                         |   |                    | 768     |   |   |   | 4,517 |   |   |   | 753 |   |
| Non-deductible expenses                                                                  |   |                    | 3,480   |   |   |   | 4,800 |   |   |   | 2,477 |   |
| Canadian tax benefits in respect of research and                                         |   |                    |    |   |   |   |   |   |   |   |   |   |
|        development expenses                                          |   |                    | (865)   |   |   |   | (1,332) |   |   |   | (1,427) |   |
| Utilization of net operating losses                                                      |   |                    | (6,452) |   |   |   | (29) |   |   |   | (5,592) |   |
| Deferred tax asset on temporary differences for which a valuation allowance was provided |   |                    | (907)   |   |   |   | (7,670) |   |   |   | 5,439 |   |
| Other                                                                                    |   |                    | 921     |   |   |   | (1,154) |   |   |   | (45) |   |
| Income taxes in the Statements of Operations                                             |   | $                       | 6,212   |   |   | $ | 872 |   |   | $ | 1,477 |   |

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

|    |   | Year ended December 31, |   |
|---------|--------|-------------------------|--------|
|    |   | 2007                    |   |   | 2006 |   |   | 2005 |   |
|    |   |                    |   |   |   |   |   |   |   |
| Basic   |   | $                       | 0.13   |   |   | $ | (0.06) |   |   | $ | 0.11 |   |
| Diluted |   | $                       | 0.12   |   |   | $ | (0.06) |   |   | $ | 0.11 |   |

----

|    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, |   |
|-------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                    |   | 2007                          |   |   | 2006 |   |   | 2005 |   |
|                                                                    |   |                          |   |   |   |   |   |   |   |
| On Israeli operations (not including “Approved Enterprise”) |   |                          | 29.0   | % |   |   | 31.0 | % |   |   | 34.0 | % |
| On U.S. operations *                                                    |   |                          | 34.0   | % |   |   | 35.0 | % |   |   | 34.0 | % |
| On Canadian operations *                                           |   |                          | 34.1   | % |   |   | 34.1 | % |   |   | 33.8 | % |
| On U.K. operations *                                                    |   |                          | 30.0   | % |   |   | 35.0 | % |   |   | 35.0 | % |

|    | * The U.S., U.K., Irish and Canadian subsidiaries are taxed on the basis of the tax laws prevailing in their countries of residence. The Canadian subsidiary qualifies for research and development tax credits, thereby reducing its effective tax rate. |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

|                                        |   | December 31, |      |
|---------------------------------------------|--------|--------------|-----------|
|                                        |   | 2007         |      |   | 2006 |   |
| Deferred tax assets:                        |   |         |      |   |   |   |
| Net operating loss carryforward             |   | $            | 64,424    |   |   | $ | 70,627 |   |
| Deferred revenue                            |   |         | 1,933     |   |   |   | 2,818 |   |
| Property, plant, and equipment         |   |         | 2,581     |   |   |   | 2,537 |   |
| Accrued expenses                            |   |         | 21,474    |   |   |   | 18,423 |   |
| Bad debt allowance                          |   |         | 193       |   |   |   | 775 |   |
| Amortization and impairment                 |   |         | 9,493     |   |   |   | 10,078 |   |
| Other, net                                  |   |         | 5,926     |   |   |   | 9,076 |   |
| Total deferred tax assets                   |   |         | 106,024   |   |   |   | 114,334 |   |
| Valuation allowance for deferred tax assets |   |         | (100,031) |   |   |   | (105,896) |   |
| Net deferred tax assets                     |   |         | 5,993     |   |   |   | 8,438 |   |
| Deferred tax liabilities:              |   |         |      |   |   |   |   |   |
| Property, plant, and equipment         |   |         | (4,394)   |   |   |   | (4,490) |   |
| Amortization                                |   |         | (84)      |   |   |   | (81) |   |
| Other, net                             |   |         | (1,532)   |   |   |   | (1,450) |   |
| Total deferred tax liabilities         |   |         | (6,010)   |   |   |   | (6,021) |   |
| Net deferred tax (liabilities) assets       |   | $            | (17)      |   |   | $ | 2,417 |   |
| Domestic                               |   | $            | 1,871     |   |   | $ | 2,456 |   |
| Foreign                                |   |         | (1,888)   |   |   |   | (39) |   |
|                                        |   | $            | (17)      |   |   | $ | 2,417 |   |

|                                                                                     |   | December 31, |    |
|------------------------------------------------------------------------------------------|--------|--------------|---------|
|                                                                                     |   | 2007         |    |   | 2006 |   |
| Among current assets (“other receivables, prepaid expenses and other”)  |   | $            | 3,221   |   |   | $ | 4,735 |   |
| Long-term deferred income tax assets                                                |   |         | 2,772   |   |   |   | 3,703 |   |
| Among short-term liabilities                                                        |   |         | (424)   |   |   |   | (505) |   |
| Among long-term liabilities                                                         |   |         | (5,586) |   |   |   | (5,516) |   |
|                                                                                     |   | $            | (17)    |   |   | $ | 2,417 |   |

----

|    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: |
|----------------|------------------|

| 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.   | Deferred taxes for income taxes were not provided for on a cumulative total of $81,748 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. |
|----------------|-----------------------------------------------------------------------------------------------|

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

----

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

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

|                                                                |   | December 31, |   |
|---------------------------------------------------------------------|--------|--------------|--------|
|                                                                |   | 2007         |   |
| Unrecognized tax benefits at January 1, 2007                        |   | $            | 12,023 |   |
| Increases as a result of positions taken in prior periods |   |         | 408    |   |
| Increases as a result of positions taken in current period          |   |         | 2,168  |   |
| Unrecognized tax benefits at December 31, 2007                 |   | $            | 14,599 |   |

----

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

|                                                                |   | Year Ended December 31, |    |
|---------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                |   | 2007                    |    |   | 2006 |   |   | 2005 |   |
|                                                                |   |                    |    |   |   |   |   |   |   |
| Sales by location of customers:                                |   |                    |    |   |   |   |   |   |   |
| Israel                                                         |   | $                       | 17,362  |   |   | $ | 14,942 |   |   | $ | 15,243 |   |
| Canada                                                         |   |                    | 34,913  |   |   |   | 37,266 |   |   |   | 26,420 |   |
| U.S.A.                                                              |   |                    | 258,519 |   |   |   | 192,785 |   |   |   | 243,416 |   |
| Other                                                          |   |                    | 8,760   |   |   |   | 7,276 |   |   |   | 3,544 |   |
|                                                                |   | $                       | 319,554 |   |   | $ | 252,269 |   |   | $ | 288,623 |   |
| Research and development expenses, net:                        |   |                    |    |   |   |   |   |   |   |   |   |   |
| Total expenses                                                 |   | $                       | 29,508  |   |   | $ | 36,703 |   |   | $ | 46,273 |   |
| Less — grants and participations                         |   |                    | (309    | ) |   |   | 430 |   |   |   | 559 |   |
|                                                                |   | $                       | 29,817  |   |   | $ | 36,273 |   |   | $ | 45,714 |   |
| Selling, marketing, general and administrative expenses:       |   |                    |    |   |   |   |   |   |   |   |   |   |
| Selling and marketing                                          |   | $                       | 32,257  |   |   | $ | 34,862 |   |   | $ | 36,258 |   |
| Advertising                                                    |   |                    | 6,473   |   |   |   | 11,741 |   |   |   | 20,836 |   |
| General and administrative *                                        |   |                    | 58,544  |   |   |   | 62,445 |   |   |   | 53,654 |   |
|                                                                |   | $                       | 97,274  |   |   | $ | 109,048 |   |   | $ | 110,748 |   |
| * Including provision for doubtful accounts                    |   | $                       | (23     | ) |   | $ | 1,030 |   |   | $ | 1,201 |   |
| Financial expenses:                                                 |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest and exchange differences on long-term liabilities     |   | $                       | 9,313   |   |   | $ | 8,749 |   |   | $ | 6,498 |   |
| Income in respect of deposits                                  |   |                    | (1,162  | ) |   |   | (2,232 | ) |   |   | (2,200 | ) |
| Expenses in respect of short-term credit                       |   |                    | 6,339   |   |   |   | 5,325 |   |   |   | 3,214 |   |
| Foreign currency transaction losses (gains)                    |   |                    | 8,326   |   |   |   | (388 | ) |   |   | 473 |   |
|                                                                |   | $                       | 22,816  |   |   | $ | 11,454 |   |   | $ | 7,985 |   |
|                                                                |   |                    |    |   |   |   |   |   |   |   |   |   |
| Interest capitalized in cost of property, plant, and equipment |   | $                       | -       |   |   | $ | 2,952 |   |   | $ | 4,455 |   |

----

|    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, 2007 and as of                                                 |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |
|      |        December 31, 2007:                                          |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |
|      | Sales to unaffiliated customers **                                                     |   | $      | 17,362  |   |     | $      | 34,913 |   |   | $      | 258,519 |   |   | $            | 8,760  |   |   | $ | 319,554 |   |
|      | Long-lived assets ***                                                                  |   | $      | 117,339 |   |     | $      | 62,757 |   |   | $      | 46,860  |   |   | $            | 18,628 |   |   | $ | 245,584 |   |
|      | Year ended December 31, 2006 and as of                                                 |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
|      |        December 31, 2006:                                          |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
|      | Sales to unaffiliated customers **                                                     |   | $      | 14,942  |   |     | $      | 37,266 |   |   | $      | 192,785 |   |   | $            | 7,276  |   |   | $ | 252,269 |   |
|      | Long-lived assets ***                                                                  |   | $      | 126,531 |   |     | $      | 62,725 |   |   | $      | 51,385  |   |   | $            | 15,406 |   |   | $ | 256,047 |   |
|      | Year ended December 31, 2005 and as of                                                 |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
|      |        December 31, 2005:                                          |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
|      | Sales to unaffiliated customers**                                                      |   | $      | 15,243  |   |     | $      | 26,420 |   |   | $      | 243,416 |   |   | $            | 3,544  |   |   | $ | 288,623 |   |
|      | Long-lived assets ***                                                                  |   | $      | 128,490 |   |     | $      | 70,653 |   |   | $      | 82,785  |   |   | $            | 30,516 |   |   | $ | 312,444 |   |
|      |                                                                                   |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
| *    | Includes operations in both Canada and Cayman Islands.                                 |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |
| **   | Based on customer's location.                                                          |   |   |    |   |     |   |   |   |   |   |    |   |   |         |   |   |   |   |   |   |
| ***  | Includes Property, Plant and Equipment, net, Goodwill and Intangible Assets, Net. |   |   |    |   |     |   |   |   |   |   |    |   |   |

| b.   | For the year ended December 31, 2007, the Company had net sales to two different customers of 15.8% and 10.1% of consolidated net sales. For the years ended December 31, 2006, and 2005, the Company had net sales to a different single customer of 12.0%, and 22.7% of consolidated net sales, respectively. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| c.   | Sales by therapeutic category, as a percentage of total sales for the years ended December 31, 2007, 2006 and 2005: |
|----------------|---------------------------------------------------------------------------------------------------------------------|

|                       |   | Year ended December 31, |   |
|----------------------------|--------|-------------------------|--------|
| Category                   |   | 2007                    |   |   | 2006 |   |   | 2005 |   |
|                       |   | %                       |   |
| Dermatological and topical |   |                    | 67     |   |   |   | 67 |   |   |   | 71 |   |
| Cardiovascular             |   |                    | 12     |   |   |   | 13 |   |   |   | 12 |   |
| Anti-inflammatory          |   |                    | 7      |   |   |   | 7 |   |   |   | 8 |   |
| Neuropsychiatric           |   |                    | 9      |   |   |   | 7 |   |   |   | 5 |   |
| Other                      |   |                    | 5      |   |   |   | 6 |   |   |   | 4 |   |
| Total                      |   |                    | 100    |   |   |   | 100 |   |   |   | 100 |   |

----

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

| a.   | Licensing Agreements: |
|----------------|-----------------------|

| 1.   | In June 2009, Taro and Quinnova Pharmaceuticals, Inc. (“Quinnova”) entered into an agreement to co-promote “Neosalus” and “Cleanse & Treat” (the “Co-Promote Products”) in the United States. Until the expiration of the agreement in September 2010, Taro’s branded division, TaroPharma®, and Quinnova were engaged in the coordinated marketing of the Co-Promote Products. This agreement has been terminated upon mutual agreement of the parties. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.   | In May 2010, Taro and Quinnova entered into an agreement to co-promote Taro’s Topicort and desoximetasone products. Under the terms of the arrangement, Taro manufactures and Quinnova distributes the products. The parties mutually agreed to terminate the agreement in January 2011. |
|----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 3.   | In May 2010, Taro and Glenmark Generics Inc., USA, a wholly owned subsidiary of Glenmark Generics Ltd Limited, India (“Glenmark”), entered into an exclusive license and supply agreement for a branded product. Glenmark Generics Inc., USA will manufacture the product and Taro will distribute the product to customers. Taro paid an up-front payment for distribution rights and will pay an additional amount upon the first shipment to customers. Taro will also pay royalties based on the amounts of sales to its customers. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| b.   | Major Shareholder Transactions: |
|----------------|---------------------------------|

|   | For a detailed description of major shareholder transactions, see Note 1.c. |
|--------|-----------------------------------------------------------------------------|

| c.   | Other: |
|----------------|--------|

|   | 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 the methodology will, effective October 1, 2010, be 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, changes the definition of AMP to exclude sales to certain customer classes that are currently included.  These changes may have the effect of reducing the Medicaid reimbursement rates for certain medications that the Company currently sells.  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.  These changes may increase the Medicaid rebates the Company has to pay for certain medications that the Company currently sells. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| d.   | 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 $6,300 in fees and expenses.  The proceedings are in the very early stages and the Company denies liability in the matter. |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| e.   | On April 28, 2011, the Company filed a lawsuit against Suven Life Sciences Ltd. ("Suven") in the United States District Court for 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. |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| f.   | 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. |
|----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| g.   | 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. |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| h.   | Stock options: |
|----------------|----------------|

|   | Between 2008 and May 25, 2011 a total of 39,000 stock options were granted to the Company’s directors and all currently remain unexercised. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

----

|    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            |    |
| 2007   |   | $            | 14,287 |   |              | $      | 2,403  |        |   | $      | 574                |   |   | $                 | (4,829  | ) |   | $ | 12,435 |   |
| 2006   |   |         | 18,712 |   |              |   | 4,859  |        |   |   | 82                 |   |   |              | (9,366  | ) |   |   | 14,287 |   |
| 2005   |   |         | 26,927 |   |              |   | 1,839  |        |   |   | 247                |   |   |              | (10,301 | ) |   |   | 18,712 |   |

|   |   |         |   |   | Additions — |   |   |               |   |   |              |   |
|--------|--------|--------------|--------|--------|-------------------|--------|--------|--------------------|--------|--------|-------------------|--------|
|   |   | Balance at   |   |   | Charged to        |   |   |               |   |   |              |   |
|   |   | beginning of |   |   | costs and         |   |   | Deductions — |   |   | Balance at end of |   |
| Year   |   | period       |   |   | expenses          |   |   | Write-offs         |   |   | period            |   |
| 2007   |   | $            | 2,159  |   |              | $      | (23    | )                  |   | $      | (1,395            | )      |   | $ | 741 |   |
| 2006   |   |         | 1,778  |   |              |   | 1,030  |               |   |   | (649              | )      |   |   | 2,159 |   |
| 2005   |   |         | 4,421  |   |              |   | 1,201  |               |   |   | (3,844            | )      |   |   | 1,778 |   |