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

A. General:

1) Operations

Teva Pharmaceutical Industries Limited (the "Company" or "Teva") is an Israeli corporation which, together with its subsidiaries and associated companies ("Teva Group" or "the Group"), is engaged in development, production, marketing and distribution of products in two operating segments, Pharmaceuticals and Active Pharmaceutical Ingredients. 

2) Functional currency

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 50% of the 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 remaining subsidiaries and associated companies, mainly European and Canadian companies, is their local currency. The financial statements of those companies are included in the consolidation based on translation into dollars in accordance with Statement of Financial Accounting Standards ("FAS") 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 "accumulated other comprehensive loss". 

3)Accounting principles 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. 

Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with generally accepted accounting principles 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 years. Actual results could differ from those estimates.

B. Principles of Consolidation:

1) The consolidated financial statements include the accounts of Teva and all of its subsidiaries. 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. "Associated companies" are companies controlled to the extent of 20% or more but are not subsidiaries, the investment in which is accounted for by the equity method. Significant intercompany transactions and balances were eliminated in consolidation; profits from intercompany sales, not yet realized outside the Group, have also been eliminated.  

C. Inventories

These are valued at the lower of cost or market. Cost is determined as follows:

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 - mainly on the "first-in, first-out" basis; labor and overhead - on the average basis over the production period.

D. Investee companies:

These investments are included among "Investments and other assets". Investments in associated companies are accounted for by the equity method. Other investments are carried at cost.

E. Marketable securities:

These securities are included under "short-term investments" and "investments and other assets" and are classified as trading securities or available-for-sale securities. Trading securities are carried at market value, and the changes in value are carried to the statements of income as other income or expenses. Available-for-sale securities are carried at market value with unrealized gains and losses, net of tax, reported as a separate component of "other comprehensive income (loss)".

At December 31, 2000, the Group's available - for - sale securities consisted of equity investments. The fair market value, amortized cost and gross unrealized holding losses at year end were $ 7.0 million, $ 8.1 million and $ 1.1 million, respectively. The Group did not have available for sale securities at December 31, 1999.

F.  Property, plant and equipment:

Property, plant and equipment are carried at cost, after deduction of the related investment grants ($ 6.1 million and $ 4.7 million at December 31, 2000 and 1999, respectively). Equipment leased under capital leases is classified as the Group's assets and included at the present value of lease payments as determined by the lease agreement.

Interest expenses in respect of loans and credit applied to finance the construction or acquisition of property, plant and equipment, incurred until the assets are ready for their intended use, are charged to cost of such assets. Interest capitalized for the years ended December 31, 2000, 1999 and 1998 were $ 0.8 million, $ 0.7 million and $ 0.5 million, respectively.

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

G.  Intangible assets:

Intangible assets consists primarily of goodwill, marketing and product rights and debt issuance costs. Goodwill, representing the excess of cost of investments in subsidiaries acquired over the fair value of net assets at acquisition, is amortized in equal annual installments, mainly over a period of 30 years. Debt issuance costs are amortized over the period of the debentures (mainly 5 years), using the straight-line method. Marketing rights, product rights and other intangible assets are stated at cost and amortized using the straight-line method over their estimated period of useful life, as follows: marketing rights - 30 years; product rights - mainly 12 years; other intangible assets - mainly 5-14 years.

H.  Impairment in value of long-lived assets:

The Company adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived assets to be Disposed of". Under the provisions of FAS 121 the Company reviews its property, plant and equipment and identifiable intangible 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 undiscounted future cash flows. If it is determined that an impairment loss has occurred based on expected discounted future cash flows, then the loss will be recognized in the statements of income.

I.  Deferred income taxes :

Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period. Taxes which would apply in the event of disposal of investments in subsidiaries have not been taken into account in computing deferred taxes, as it is the Company's intention to hold these investments, not to realize them.

The Company intends to permanently reinvest the amounts of tax exempt income and does not intend to cause dividend distribution from such income (see note 10a). Therefore, no deferred taxes have been provided in respect of such tax-exempt income.

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. Calculation of the unrecognized deferred tax liability related to those dividends is not practicable.

J.  Company shares held by subsidiaries:

Company shares held by subsidiaries 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 on sale of these shares, net of related tax, are carried to "additional paid-in capital".

K.  Revenue recognition:

Revenue from the sale of products is recognized when title passes to customers. Provisions for rebates, returns and allowances and other price adjustments are estimated and deducted from gross revenues.

L.  Research and development expenses:

Research and development expenses are charged to income as incurred. Government and other funding of research and development is recognized as a reduction of research and development expenses as the related costs are incurred, or as the related milestone is met.

M.  Advertising:

The Group expenses the costs of advertising as they are incurred. Advertising expenses for the years ended December 31, 2000, 1999 and 1998 were $ 10.1 million, $ 10.9 million and 
$ 10.3 million, respectively.

N.  Concentrations of credit risks - allowance for doubtful accounts:

Concentrations of credit risks - allowance for doubtful accounts:

Most of the Group's cash and cash equivalents and short-term investments as of December 31, 2000 and 1999 were deposited with Israeli, U.S. and European banks. The Company is of the opinion that the credit risk in respect of these balances is remote.

Most of the Group's sales are made in North America, Europe and Israel, to a large number of customers. The sales to each of certain three customers constitute approximately 6 % of total consolidated sales in the years ended December 31, 2000 and 1999.

In general, the exposure to the concentration of credit risks relating to trade receivables is limited, due to the relatively large number of customers and their wide geographic distribution. The Group performs ongoing credit evaluations of its debtors and generally does not require collateral. Certain trade receivables are insured under foreign trade risk insurance. An appropriate allowance for doubtful accounts is included in the accounts. The allowance in respect of trade receivables amounts to $ 9.5 million and $ 10.3 million at December 31, 2000 and 1999, respectively, and has been determined for specific debts doubtful of collection.

O.  Derivatives

Foreign currency derivatives are treated as hedges in the accounts when: (1) the item the Company intends to hedge exposes it to a risk, (2) the derivative instrument reduces the exposure to risk and is inversely correlated to the item it is designated to hedge, and (3) it is designated as a hedge from the outset.

Gains and losses on derivatives that hedge existing assets or liabilities in currencies other than the functional currency are recognized in income commensurate with the results from those assets or liabilities. Balances receivable or payable in respect of foreign exchange derivatives are included in the balance sheets among other accounts receivable or payable, as appropriate. Cash flows from foreign exchange 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 under accounts receivable or payable, as appropriate, and carried to the statements of income under "financial expenses - net".

Foreign currency derivatives entered to reduce the Group's Foreign currency exposure with respect to anticipated transactions which do not meet the requirements for applying hedge accounting, are mark to market at each reporting period, with gains and losses recognized currently in "financial expenses - net".

P.  Cash and cash equivalents:

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

Q.  Earnings per American Depository Receipt ("ADR"): ADR

Basic earnings per ADR are computed by dividing net income by the weighted average number of ADRs/ordinary and ordinary "A" shares (including special shares exchangeable into ordinary shares, note 2a(1)) outstanding during the year, net of Company shares held by subsidiaries, after giving retroactive effect to the distribution of a 100% stock dividend in February 2000. 

Diluted earnings per ADR are computed by dividing net income by the weighted average number of ADRs/ordinary and ordinary "A" shares (including special shares) outstanding during the year, net of Company shares held by subsidiaries, taking into account the potential dilution that could occur upon (1) the conversion of the convertible senior debentures, using the if-converted method; and (2) the exercise of options granted under employee stock option plans, using the treasury stock method. 

R.  Comprehensive income:

In addition to net income, other comprehensive income (loss) includes unrealized gains (losses) on securities available-for-sale and translation gains (losses) of non-dollar currency financial statements of subsidiaries and associated companies.

S.  Recently issued accounting pronouncement:

FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" introduces a new approach to accounting treatment of these matters. Under FAS 133, derivative financial instruments are to be included in the balance sheet at their fair value. Any changes in fair value are to be reflected as current gains or losses or other comprehensive gains or losses, depending upon whether the derivative is designated as a hedge and what type of hedging relationship exists.

The Company adopted FAS 133 as of January 1, 2001. The adoption has no material effect on the Company's results of operation or on its financial position.
 

T.  Reclassifications:

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

Note2 - Certain Transactions:

A.  Acquisitions :

1) Acquisition of Novopharm Ltd.: 

In February 2000, the Company signed an agreement to acquire the total shareholding and control of Novopharm Ltd. ("Novopharm"), a Canadian-based generic company which also has operations in the United States and Hungary. Teva also acquired a shareholders' loan of approximately $74 million granted to Novopharm by the vendor (Dan Family Holdings Ltd.), and other rights of the vendor. In consideration, the vendor was issued 2.1 million ordinary shares of Teva and 6.3 million special shares that are exchangeable into ordinary shares of Teva at his discretion a one-to-one ratio. The ordinary shares and the special shares entitled the holders, assuming full conversion to approximately 6.2% of Teva's issued and paid capital at the date of issuance. The value of the shares was determined to be $ 300 million, allocated as $ 226 million for 100% of the share capital of Novopharm and $ 74 million relating to the above-mentioned loan. 

In addition, through December 31, 2000, the Group acquired shares in a subsidiary of Novopharm from the minority shareholders in this subsidiary, for a total amount of 
$ 12 million.

This transaction is accounted for by the purchase method. The consideration for the acquisition was attributed to net assets on the basis of fair value of assets acquired and liabilities assumed on acquisition date. 

An amount of $ 34 million out of the cost of acquisition was attributed to in-process research and development, that was in various stages of development, had not reached technological feasibility and has no alternative use. This amount was expensed upon acquisition, in accordance with generally accepted accounting principles. The amount attributed to in-process research and development was based on an independent opinion obtained by management using the income approach. The income approach reflects the present value of the net operating cash flows generated by such research and development projects, the relative risk associated with such projects and an appropriate discount rate. The excess of cost of acquisition over the fair value of net tangible assets on acquisition date, not attributable to in-process research and development amounted to $ 326 million, allocated as $ 252 million to goodwill and $ 74 million to other identifiable intangible assets including marketing rights, product rights and workforce.

Additional purchase liabilities recorded included $ 13.4 million for severance pay and related costs associated with the shut-down and consolidation of certain acquired facilities. At December 31, 2000, purchase liabilities of $ 10.1 million in respect of the above were outstanding. Novopharm had terminated the employment of 103 of the 200 employees whose employment was to be terminated.

Goodwill is amortized over 30 years, using the straight-line method; other identifiable intangible assets are amortized over 12-30 years, using the straight-line method. The amount of goodwill is subject to adjustments, mainly as a result of completion of the consolidation plan and shut down of activities, which may involve additional liabilities. In addition, the amount of goodwill could be influenced by the resolution of contingent liabilities pending as of the acquisition date.

The acquisition of Novopharm became effective at the beginning of April 2000, and therefore, the operations of Novopharm were consolidated in the consolidated financial statements of Teva commencing the second quarter of 2000.

2) Acquisition of Copley Pharmaceutical Inc.:

In September 1999, the wholly-owned subsidiary Teva Pharmaceuticals USA, Inc. ("Teva USA") acquired full control and ownership of Copley Pharmaceutical, Inc. ("Copley"), a U.S. generic pharmaceutical company, for $ 220 million. The acquisition of Copley was accounted for by the purchase method. The consideration for the acquisition was attributed to net assets, on the basis of fair value of the assets acquired and liabilities assumed on the acquisition date. The results of operations of Copley have been included in the consolidated financial statements of Teva commencing October 1, 1999.

An amount of $ 17.7 million out of the acquisition price was attributed to the acquisition of in-process research and development, that was in various stages of development, had not reached technological feasibility and has no alternative use. This amount was expensed upon acquisition, in accordance with generally accepted accounting principles. The amount attributed to in-process research and development was based on an independent opinion obtained by management, using the income approach (see (1) above). The excess of cost of acquisition over the fair value of net tangible assets on acquisition date, not attributed to in-process research and development (after adjustment in 2000) - $ 117 million - is presented as goodwill and is being amortized over 30 years using the straight-line method. 

Additional purchase liabilities recorded included approximately $ 8.4 million for severance and related costs associated with the shut-down and consolidation of certain acquired facilities. At December 31, 2000 liabilities of approximately $ 2.2 million in severance and facility related costs remained on the balance sheet. The Company had terminated 219 of the 250 employees whose employment was to be terminated. The Company expects to complete its termination of employees and consolidation of facilities in 2001.

 3) Certain pro forma data

Hereafter are certain unaudited pro forma combined statements of income data for the years ended December 31, 2000 and 1999, as if the acquisition of Novopharm and Copley occurred on January 1, 1999, after giving effect to purchase accounting adjustments, including amortization of goodwill and other identifiable intangible assets, the elimination of intercompany transactions and profits not yet realized outside the Group, the effect of additional financing obtained to complete the Copley acquisition, but excluding non-recurring charges directly attributable to the acquisitions (acquired in-process research and development, in the amount of $ 34.4 million and $ 17.7 million, in 2000 and 1999, respectively). The pro forma financial information is not necessarily indicative of the combined results that would have been attained had the acquisitions taken place at the beginning of 1999, nor is it necessarily indicative of future results.

4) Acquisition of the Pharmachemie N.V. group:

On July 1, 1998, the Company acquired full ownership and control of Pharmachemie N.V., a Dutch generic pharmaceutical company, and companies related thereto ("Pharmachemie") for approximately $ 83 million. The goodwill arising upon acquisition, (after adjustment in 1999), aggregated $ 89.7 million and is being amortized over 40 years, using the straight-line method. The acquisition of Pharmachemie was accounted for by the purchase method. The operations of Pharmachemie were included in the consolidated financial statements of Teva from the date of acquisition. 

B.  Cooperation agreements: