TEVA Pharmaceutical Industries Ltd

The significant accounting policies, applied on a consistent basis, are as follows:

Teva Pharmaceutical Industries Limited (the "Company" or "Teva") is an Israeli corporation which, together with its subsidiaries and associated companies (hereafter - "The Teva Group"), is engaged in development, production, marketing and distribution in the two segments of pharmeceuticals and Active Pharmaceutical Ingredients (A.P.I.).

The currency of the primary economic environment in which the operations of the Company and its subsidiaries in Israel and in the United States are conducted is the U.S. dollar ("dollar" or "$"), this in view of the overall trend of increasing dollar sales of the Company. Operating expenses (including purchase of materials) incurred in non-Israeli currencies, mainly the dollar, constitute approximately one half of total operating expenses of each of those companies. Most purchases of materials are also made in non-Israeli currencies (mainly the dollar). Thus, the functional currency of these companies is the dollar.

The functional currency of the other subsidiaries and associated companies, mainly European companies, is their local currency. The financial statements of these companies are included in the consolidation based on translation into dollars in accordance with Statement No. 52 of the Financial Accounting Standards Board of the United States (FASB): assets and liabilities are translated at year end exchange rates, while operating results items are translated at average exchange rates during the year. Differences resulting from translation are presented under shareholders' equity, in the item "other capital surplus.”

The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

1) The consolidated financial statements include the accounts of Teva and all subsidiary companies.

In these financial statements, "subsidiaries" are companies controlled to the extent of over 50%, the financial statements of which are consolidated with those of the Company, while "associated companies" are companies (which are not subsidiaries), controlled to the extent of over 20%, the investment in which is presented by the equity method. A listing of subsidiaries and associated companies is given in the appendix.

2) Consolidation was made based on the financial statements of the subsidiaries, after such adjustments as were necessary due to application of uniform accounting principles by the Teva Group. Significant intercompany transactions and balances were eliminated in consolidation; profits from intercompany sales, not yet realized outside the Group, have also been eliminated.

Raw and packaging materials and purchased products -mainly on the "first-in, first-out" basis. Finished products and products in process: raw material and packaging component - on the "first-in, first-out" basis; labor and overhead - on the average basis over the production period.

Investments in associated companies are accounted for by the equity method. Other investments are carried at cost.

These securities are mainly included under "short-term investments" and stated at market value. The changes in value of these securities are carried to financial income or expenses.

1) These assets are stated at cost, after deduction of the related investment grant.

2) Interest expenses in respect of loans and credit applied to finance the construction or acquisition of fixed assets - incurred until construction of the fixed assets is completed - are charged to cost of such assets.

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

Buildings	Mainly 4%
Machinery and equipment	8.33%-12.5%
Motor vehicles, computer equipment, furniture and other assets	Mainly 15%

4) Fixed assets leased under capital leases are classified as the companies' assets and included at the present value of lease payments as determined by the lease agreement.

Goodwill, representing the excess of cost of investments in subsidiaries acquired over fair value at acquisition, is amortized in equal annual installments, mainly over a period of 40 years.

Under Opinion 57 of the Institute of Certified Public Accountants in Israel (the Israeli Institute) the period of amortization of goodwill should not exceed 20 years. In the opinion of the Company’s management, a 40-year goodwill amortization policy, which deviates from Opinion 57, more appropriately reflects the operating results of the Teva Group, due to the special circumstances of the companies acquired by the group, as follows:

The companies, acquisition of which gave rise to goodwill, are companies of long standing, having a relatively wide range of products which are marketed to a relatively large number of customers.

The companies acquired by the Teva Group have a substantial market share in the countries in which they operate. The markets in which these companies operate implement rather strict registration procedures and are characterized by consolidation of suppliers.

These items are stated at cost and amortized on the straight-line method over their period of use (mainly 5-8 years).

The Company adopted Statement of Financial Accounting Standards FAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This Statement refers to fixed assets and identifiable intangible assets (hereafter - long-lived assets). Under the provisions of FAS
121 the Company reviews its long-lived assets for impairment on an exception basis whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through future cash flows. If it is determined that an impairment loss has occurred based on expected future cash flows, then the loss will be recognized in the statements of income.

1) Deferred taxes are computed in respect to differences between the amounts in these statements and for tax purposes. As to the main factors in respect to which deferred taxes have been provided - see note 9b.

Taxes which would apply in the event of disposal of investments in investee companies have not been taken into account in computing the deferred taxes, as it is the Company's intention to hold these investments, not to realize them.

Deferred tax balances are computed at the tax rate expected to apply to income of the companies in the Teva Group at time of release to income from the deferred tax accounts. The amounts presented in the income statements represent changes in the above balances during the reported years.

2) As stated in note 9a(1), upon distribution of dividends from tax-exempt income of "approved enterprises", dividends distributed will be subject to tax at the rate that would have been applicable had the companies in the Teva Group not been exempted from payment thereof. The Company intends to permanently reinvest the amounts of tax exempt income. Therefore, no deferred income taxes have been provided in respect of such tax-exempt income.

3) The Teva Group might incur additional taxes, not provided for in these financial statements, if dividends are distributed out of the income of non-Israeli companies in the Group.

These shares are presented as a reduction of "shareholders' equity", at their cost to the subsidiaries, under "cost of Company shares held by subsidiaries". Gains and losses, net of related tax, on sale of these shares are carried to "other capital surplus".

These expenses, net of related grants and participations, are charged to income as incurred.

Most of the Group's cash and cash equivalents and short-term investments at December 31, 1998 and 1997 are deposited with Israeli, U.S. and European banks.

The sales in Israel are to the General Health Fund, to the private market, which consists of a large number of pharmacies and of smaller health funds, and to government institutions. Most of the Group's sales abroad are made in North America and Europe, to a large number of customers.

In general, the exposure to concentration of credit risks relating to trade receivables is limited, due to the relatively large number of customers. The Company performs ongoing credit evaluations of its debtors and generally does not require collateral. Most of the trade receivables from non-Israeli customers of the Company and its Israeli subsidiaries are insured with The Foreign Trade Risk Insurance Company. An appropriate allowance for doubtful accounts is included in the accounts. The allowance in respect of trade receivables has been determined for specific debts doubtful of collection.

Gains and losses on derivatives that are hedging existing assets or liabilities are recognized in income commensurate with the results from those assets or liabilities. The difference to be paid or received for interest rate swap agreements is accrued and recognized as an adjustment to interest expense on debentures. Balances receivable or payable in respect of foreign exchange derivatives and swap agreements are included in the balance sheets among other accounts receivable or payable, as appropriate. Cash flows from derivatives are recognized in the statements of cash flows under cash flows provided by operating activities.

The net premiums paid or received in respect of currency options are presented in the balance sheets among other accounts receivable or payable, as appropriate, and charged to financial expenses.

The Group considers all highly liquid investments, which include short-term (up to 3 months) bank deposits that are not restricted as to withdrawal or use and short-term government bonds, the period to maturity of which did not exceed 3 months at time of investment, to be cash equivalents.

Per ADR data have been determined on the basis of the weighted average number of ADRs outstanding during the year and ADRs issuable upon the exercise of options granted under employee stock option plans, net of shares held by subsidiaries.

The earnings used in the computation include the reported earnings, with the addition of an increment in respect of the exercise price of warrants the shares arising upon exercise of which were included in the weighted average number of shares.

The Y2K issue arises because many computerized systems use two digits, rather than four, to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Y2K issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant systems failure, which could affect an entity’s ability to conduct normal business operations.

It is not possible to be certain that all aspects of the Y2K issue affecting the Group, including those related to the efforts of customers, suppliers or other third parties, will be fully resolved.

Management estimates that the special costs relating to resolution of the Y2K issue will amount to $ 2 million in 1998 and expects those costs to aggregate approximately $ 1million and $ 0.5 million in 1999 and 2000, respectively.

1) On July 1, 1998, the Company acquired full ownership and control of Pharmachemie B.V. a Dutch generic pharmaceuticals company and companies related thereto ("Pharmachemie") for approximately $ 83 million. The goodwill arising upon acquisition aggregates $ 85.4 million.

2) The acquisition of Pharmachemie was accounted for by the purchase method. The consideration was attributed to net assets acquired based on the fair value of the assets and liabilities so acquired at acquisition date. The results of operations of Pharmachemie were included in the consolidated income statements from the date of acquisition.

B. Acquisition of rights with respect to products in research and development stage

In December 1997, subsidiaries of the Company and of a Canadian company, Biovail Corporation International ("Biovail"), reached an agreement where under, inter alia, the Teva subsidiary has been granted certain rights in eight controlled release generic products developed by Biovail, for a total consideration of $ 34.5 million.

The said amount was payable upon meeting certain milestones, as specified in the agreement. These milestones pertain mainly to the acceptance of the product applications for filing by the U.S. Food and Drug Administration ("FDA"), for the purpose of obtaining approval.

At the time each milestone was achieved, receipt of FDA approval was not certain, as certain development and regulatory obstacles need to be overcome before FDA approval can be obtained. The Company recorded an expense of $ 13.5 million and $ 21 million in 1998 and 1997, respectively, in respect of these products in accordance with generally accepted accounting principles. These amounts are included in the statements of income as "acquisition of rights with respect to products in research and development stage".

In connection with this agreement, the subsidiary has been granted exclusive distribution rights with respect to the U.S. In 1998 it exercised an option to acquire distribution rights for certain products in additional territories, as stipulated in the agreement.

Effective May 31, 1996, Teva issued 6,616,361 ADRs, with a total value of
$ 290 million, for all of the outstanding common stock of Biocraft Laboratories Inc. ("Biocraft"), a U.S. generic drug company. The merger was accounted for as a pooling of interests.

In connection with the merger, the Company recorded one-time charges in 1996 of $ 19.8 million ($ 14.9 million after tax).

After the merger most of the operations of the Group in the USA are carried out through a single subsidiary: Teva Pharmaceuticals USA, Inc. ("Teva USA").

1) In December 1996, Copaxone®, an innovative product of the Company for the treatment of multiple sclerosis, was granted marketing clearance in the U.S. by the FDA. Copaxone® was launched in the U.S. in March 1997, and in Canada in September 1997. The sale and distribution of Copaxone® in North America is carried out by Hoechst Marion Roussel, Inc. ("HMR"). Copaxone® is jointly marketed in North America by Teva USA and HMR, through partnerships established for that purpose.

Under a separate agreement between the Company and the German parent company of HMR - Hoechst Aktiengesellschaft ("Hoechst"), Hoechst will distribute and sell Copaxone® in Europe and certain other countries. In the core European countries, Copaxone® is to be jointly marketed by Teva and Hoechst.

2) Under the above agreements, Teva is to receive up to $ 50 million. Through December 31, 1996, a total of $ 35 million has been received in respect of both agreements and has been credited to income, as "participation in research and development expenses". Of that amount - $ 10.7 million was received in 1996. No further amounts were received in 1997 and 1998.

Upon receipt of approvals for Copaxone® in certain European countries, as stipulated by the agreement, amounts of up to $ 15 million (in addition to the $ 35 million already received) will become due from Hoechst.