ITEM 4: INFORMATION ON THE COMPANY

Teva Pharmaceutical Industries Limited is a global pharmaceutical company producing drugs in all major treatment categories. Teva is one of the world’s largest generic drug companies and has the leading position in the U.S. generic market. Teva has successfully utilized its production and research capabilities to establish a global pharmaceutical operation focused on supplying the growing demand for generic drugs and on opportunities for proprietary branded products for specific niche categories, with its leading branded drug being Copaxone ^® for multiple sclerosis. Teva’s active pharmaceutical ingredients (“API”) business provides both significant revenues and profits from sales to third party manufacturers and strategic benefits to Teva’s own pharmaceutical production through its timely delivery of significant raw materials.

Teva’s operations are conducted directly and through subsidiaries in Israel, Europe, North America and several other jurisdictions. During 2004, Teva generated approximately 64% of its sales in North America, 26% in Europe and 10% in the rest of the world, predominantly in Israel. For a breakdown of Teva’s sales by business segment and by geographic market for the past three years, see “Item 5: Operating and Financial Review and Prospects – Results of Operations – Sales – General.”

Teva was incorporated in Israel on February 13, 1944 and is the successor to a number of Israeli corporations, the oldest of which was established in 1901. Its executive offices are located at 5 Basel Street, P.O. Box 3190, Petach Tikva 49131 Israel, telephone number 972-3-926-7267.

2004 Acquisitions. Teva’s significant growth during the past decade is in large part attributable to numerous acquisitions it has made in North America and Europe. In January 2004, Teva completed its acquisition of Sicor Inc., a generic pharmaceutical company based in California, with facilities in Mexico, Italy and Lithuania, for approximately $3.46 billion in cash and Teva shares. This acquisition, Teva’s largest acquisition to date, combined Teva’s oral dose generic drugs franchise with Sicor’s generic injectables business, with Sicor’s API business complementing Teva’s global API offerings. The Sicor acquisition further provided Teva with new capabilities for the development and production of biological products. Integration of Sicor’s businesses into Teva’s operations was substantially completed during 2004. In addition, in December 2004, Teva acquired Dorom S.r.l., one of the largest suppliers of generic pharmaceuticals to the Italian retail market, for approximately $93 million in cash.

Pharmaceutical Products

Generic Products

Teva is one of the largest generic drug companies in the world. Generic drugs are the chemical and therapeutic equivalents of brand-name drugs, typically sold under their generic chemical names at prices below those of their brand-name equivalents. These drugs are required to meet similar governmental regulations as their brand-name equivalents and must receive regulatory approval prior to their sale in any given country. Generic drugs may be manufactured and marketed only if relevant patents on their brand-name equivalents (and any additional government-mandated market exclusivity periods) have expired, been challenged and invalidated, or otherwise validly circumvented.

Global generic pharmaceutical sales have been positively impacted in recent years by the increased awareness and acceptance among consumers, physicians and pharmacists that generic drugs are the equivalents of brand-name drugs. Among the factors contributing to this increased awareness are the passage of legislation permitting or encouraging substitution and the publication by regulatory authorities

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of lists of equivalent drugs, which provide physicians and pharmacists with generic drug alternatives. In addition, various government agencies and many private managed care or insurance programs encourage the substitution of generic drugs for brand-name pharmaceuticals as a cost-savings measure in the purchase of, or reimbursement for, prescription drugs. Teva believes that these factors, together with demographic trends, including an aging population and a corresponding increase in health care costs, as well as the large volume of branded products losing patent protection over the coming years, should lead to continued expansion of the generic pharmaceuticals market.

Through the coordinated efforts of research and development staff in Israel, Europe and North America, and through alliances with other companies, Teva seeks to constantly expand its range of generic products. Teva’s product development strategy emphasizes not only introducing its generic products upon the patent expiration date of the equivalent brand-name pharmaceutical but also the goal of market introduction at the earliest possible date, which may involve attempting to invalidate or otherwise validly circumvent such patents.

Teva is able to differentiate itself from its competitors in its major markets by offering a range of capabilities that it believes ultimately adds value for its customers and enhances Teva’s business:

North America

Teva Pharmaceuticals USA, Inc. (“Teva USA”), Teva’s principal subsidiary, is the leading generic drug company in the United States. Teva USA markets approximately 220 generic products representing approximately 600 dosage strengths and packaging sizes, which are distributed and sold in the United States. In addition, through Sicor, Teva USA has the capability to formulate, fill, label and package finished dosage forms of injectable pharmaceutical products, which are principally sold in the United States. Teva believes that a broad line of products has been and will continue to be of strategic significance as the generics industry continues to grow and as it experiences the effects of consolidation among purchasers, including large drugstore chains, wholesaling organizations, buying groups and managed care providers.

Through Novopharm Limited, Teva manufactures and markets generic prescription drugs in Canada. Novopharm is the second largest generic drug company in Canada in terms of prescriptions, with a product portfolio covering approximately 80% of the Canadian generic market sales requirements. Novopharm’s portfolio includes 170 generic products representing over 700 dosage forms and packaging sizes.

Products. Teva USA manufactures or imports all types of generic pharmaceutical products in a variety of dosage forms, including tablets, capsules, ointments, creams and liquids, and

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through its recent acquisition of Sicor, injectables. During 2004, Teva sold the generic versions of the following branded products in the United States that were not sold during 2003 (listed in the order of their launch during the year): Floxin ^® , Lotensin ^® , Wellbutrin ^™ SR, Buspar ^® , Zaroxolyn ^® , Oxycontin ^® (80 mg.), Ortho Cyclen ^® -28, Ortho Tri-Cyclen ^® , Zebeta ^® , Fludara ^® , Zyban ^® , Cipro ^® , Adenocard ^® , Glucophage ^® XR, Brethine ^® , Paraplatin ^® , Diflucan ^® , Prilosec ^® , Depo-Provera ^® , Augmentin ^® ES, Betapace AF ^® , Rebetol ^® , Neurontin ^® , Romazicon ^® , Pletal ^® , Ceftin ^® and Accupril ^® .

The FDA requires companies to submit abbreviated new drug applications (“ANDAs”) for approval to manufacture and market generic forms of brand-name drugs. During 2004, Teva received in the United States 28 final generic drug approvals and 12 tentative approvals. The 12 tentative approvals received were for generic equivalents of the following products: Propecia ^® , Zyrtec ^® , Coreg ^® , Levaquin ^® , Ifex ^® , Tricor ^® , Pepcid RPD ^® , Avandia ^® , Glucophage XR ^® , Oxycontin ^® (10, 20, 40 mg) Topamax ^® and Cerebyx ^® . A “tentative approval” letter indicates that the FDA has substantially completed its review of an application and final approval is expected once the relevant patent expires, a court decision is reached or the 30 month stay elapses.

Teva’s potential for revenue growth of generic products in the United States is closely related to its pipeline of pending ANDAs with the FDA, as well as tentative approvals already granted. As of February 8, 2005, Teva had 140 product registrations awaiting FDA approval (including some from strategic partnerships), including 18 tentative approvals. Collectively, the brand-name versions of these products had corresponding U.S. 2004 sales exceeding $82 billion. Branded product market size is a commonly used measurement of the relative significance of a potential generic product. Generic equivalents of any given product are typically sold at prices below the branded price, and in those instances where there are multiple generic producers of the same product, substantially below the branded price.

In most instances, FDA approval is granted on the expiration of the underlying patents. However, companies are rewarded with marketing exclusivities, as provided by law, by challenging or circumventing these patents. As part of its strategy, Teva actively reviews pharmaceutical patents and seeks opportunities to challenge those patents where it believes that such patents are either invalid or are not infringed by the generic version. Aside from the financial benefits of marketing exclusivities, Teva believes that these activities improve health care by allowing consumers faster access to more affordable medications.

As of February 8, 2005, Teva’s product registrations included 122 applications which are pending FDA approval and 18 which have been tentatively approved. Of these applications, 76 were “Paragraph IV” applications – i.e., applications that challenge patents of branded products. Teva believes it is the first to file on 26 of these applications, with aggregate annual U.S. branded sales of more than $21 billion.

In Canada, the Therapeutic Products Directorate of Health Canada requires companies to make an Abbreviated New Drug Submission (“ANDS”) in order to receive approval to manufacture and market generic pharmaceuticals. During 2004, Novopharm launched 16 generic equivalents of the following brand products: Zocor ^® , Cipro ^® , Imovane ^® , Zantac Oral Solution ^® , Mobicox ^® , Remeron ^® , Levaquin ^® , Arava ^® , Paxil ^® , Lamictal ^® , Clavulin ^® , Floxin ^® , Celexa ^® , Elavil ^® , Tofranil ^® and Valium ^® .

In 2004, Novopharm submitted applications for 31 products to the Therapeutic Products Directorate that are still awaiting approval. Collectively, the brand name versions of these products had annual Canadian sales in 2004 exceeding U.S. $2.5 billion.

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Joint Ventures. As part of its strategy to reach the market with generic versions as early as possible, Teva seeks to enter into alliances with partners to acquire rights to products it does not have and/or to otherwise share development costs or litigation risks. Teva’s most significant joint ventures are described below:

In 1997, Teva and Biovail Corporation International entered, through subsidiaries, into a ten year marketing and product development agreement which provided Teva with exclusive U.S. marketing rights for Biovail’s pipeline of eight controlled-release generic versions of successful brands. These products included generic versions of Cardizem ^® SR, Cardizem ^® CD, Trental ^® , Verelan ^® , Adalat ^® CC, Procardia XL ^® , Dilacor ^® XR and Voltaren ^® XR. Biovail was responsible for the regulatory filing and approval process as well as the manufacturing of the products. To date, five of these eight products are being marketed by Teva USA (Trental ^® , Cardizem ^® CD, Adalat ^® CC, Procardia XL ^® and Voltaren ^® XR).

During 2004, this agreement with Biovail was extended by an additional four year period and also granted Teva an option to market an additional generic product currently under development by Biovail. Furthermore, under the 2004 amendment, Biovail transferred all development and intellectual property rights for two additional extended release generic products, which Teva will have the right to independently develop and ultimately manufacture. In consideration for these agreements Teva has made up front payments and has committed to certain milestone payments. As part of the 2004 amendment, the gross margin percentage shared with Biovail was modestly increased for the remaining extended term. Teva and Biovail have also entered into a long-term API supply agreement under which Biovail will increase its purchases of raw material from Teva’s API division.

In September 1999, Teva entered into a strategic alliance with Savient Pharmaceuticals Inc. (formerly, Bio-Technology General Corp.) for the development and worldwide commercialization of generic equivalents of biotechnology products. In addition to granting Teva U.S. exclusive marketing rights for Savient’s human growth hormone, Savient agreed to develop and produce certain biogenerics which would be sold by Teva. Teva had intended to launch Savient’s human growth hormone product in 2002. However, just prior to launch, Novo Nordisk Pharmaceuticals, Inc. and Novo Nordisk A/S sued Teva USA and Savient for patent infringement and obtained a preliminary injunction, which prevented the launch of the product. In August 2004, the patents were ruled invalid and unenforceable and subsequently, Teva and Savient partially settled their dispute with Novo Nordisk. As a result, Teva launched the product in February 2005.

In June 2001, Teva entered into a strategic alliance agreement for twelve controlled release generic pharmaceutical products with Impax Laboratories, Inc. The agreement grants Teva exclusive U.S. marketing rights and an option to acquire exclusive marketing rights in the rest of North America, South America, the European Union and Israel. Teva subsequently exercised its option with respect to the marketing rights of certain products in Canada. The products subject to the agreement include the following products as to which Impax had pending ANDAs at the FDA and has now received final or tentative approval: generic versions of Claritin ^® D12, Claritin ^® D24, Claritin ^® Reditabs, Wellbutrin ^® SR tablets, Zyban ^® tablets and Prilosec ^® capsules. During 2004, generic versions of Wellbutrin ^® SR tablets, Zyban ^® tablets and Prilosec ^® capsules were launched.

In July 2003, Teva entered into an exclusivity transfer agreement with Andrx Corporation and Impax relating to pending ANDAs for bioequivalent versions of Wellbutrin ^® SR and Zyban ^® (bupropion hydrochloride) 100 mg and 150 mg Extended Release Tablets filed by Andrx, as well as by Impax. Pursuant to Teva’s strategic alliance agreement with Impax, Teva has U.S. marketing rights to Impax’s versions of these products. Under the exclusivity transfer agreement, Andrx enabled Impax to launch its own product through Teva, with the parties sharing certain payments with Andrx relating to the sale of the product for the 180-day market exclusivity period.

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In December 2003, Teva entered into a strategic alliance agreement with Andrx Corporation to develop and market generic oral contraceptive pharmaceutical products. The agreement grants Teva exclusive marketing rights in the U.S. and Canada to Andrx’s line of generic oral contraceptive products currently pending regulatory approval. Andrx is responsible for all formulations, U.S. regulatory submissions and the manufacturing of products covered under the agreement. The agreement also provides Teva with an option to acquire from Andrx similar marketing rights in the U.S. and Canada to additional oral contraceptive products that are currently in development but have not yet been submitted for regulatory approval as well as other future oral contraceptive products that the parties agree upon.

In April 2004, Teva entered into an exclusivity sharing agreement with Alpharma Inc. pertaining to the distribution of gabapentin, the generic version of Neurontin ^® , tablets and capsules. Alpharma held final approval for the gabapentin capsules, while Teva had tentative approval for the tablets. Under the terms of the agreement, Alpharma permitted Teva to launch its generic version of Neurontin ^® in the U.S. within Alpharma’s exclusivity period in exchange for a specified portion of the profits. In addition, the parties have agreed to certain risk sharing arrangements relating to patent litigation risks regarding the products. In October and December 2004, the capsules and tablets were launched, respectively.

In October 2004, Teva entered into a strategic alliance with Ranbaxy Pharmaceuticals Inc. for the exclusive marketing rights in the U.S. for the generic version of Accupril ^® . Under the agreement, Teva agreed to relinquish its exclusivity rights for the product. In addition, Teva agreed to purchase and distribute Ranbaxy’s approved version of the product in the U.S. The parties will share in profits of the sales as long as Teva continues to distribute Ranbaxy’s product. The agreement may be terminated by Teva at any time. The generic version of Accupril ^® was launched by Teva in December 2004.

As a result of the Sicor acquisition, Teva now participates in an exclusive U.S. distribution arrangement with Baxter Healthcare Corporation for the generic version of Propofol ^® . Under the agreement, Teva produces the product and sells it to Baxter, who then performs all marketing and distribution functions related to the product. The contract pays Teva a manufacturing fee and an additional profit split based on gross margin.

In February 2005, as settlement of a patent dispute with GlaxoSmithKline (“GSK”) over the generic version of Lamictal ^® , Teva was granted an exclusive royalty-bearing license from GSK to distribute generic lamotrigine chewable tablets (5 mg and 25 mg) in the United States no later than June 2005. The agreement with GSK, which remains subject to government review, also granted Teva the exclusive right to manufacture and sell its own generic version of lamotrigine tablets (25 mg, 100 mg, 150 mg and 200 mg) in the U.S. with an expected launch in 2008 prior to patent expiry (including any period of pediatric exclusivity).

Marketing and Sales. The marketing of generic pharmaceutical products in the United States is conducted through Teva USA. During 2004, 29% of Teva USA’s sales were made to drug store chains, 40% to drug wholesalers, 21% through partner marketing arrangements, 5% to generic distributors, hospitals and affiliated organizations and 5% to others, including mail order distributors, governmental institutions and managed care institutions. Over the last several years, the percentage of sales to drug store chains has continued to increase, while the Sicor acquisition has increased Teva USA’s sales to the hospital market.

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Teva USA has a sales force that actively markets Teva USA’s products. Key account representatives for generic products call on purchasing agents for chain drug stores, drug wholesalers, health maintenance organizations, pharmacy buying groups and nursing homes. Teva USA also contacts its retail customers and supports its wholesale selling effort with telemarketing as well as professional journal advertising and exhibitions at key medical and pharmaceutical conventions. From time to time, Teva USA bids for government-tendered contracts.

Sicor’s finished dosage injectable pharmaceutical products are primarily used in hospitals and clinics for critical care, anesthesiology and oncology, and are marketed through a dedicated sales force and its marketing partners, including Baxter Healthcare Corporation and Faulding Pharmaceutical Co., as well as through relationships with hospital group purchasing organizations, managed care groups and other large health care purchasing organizations.

In Canada, Novopharm has a sales force, which markets its products to approximately 7,500 pharmacies. Novopharm also has a hospital sales division, which covers approximately 900 hospitals throughout Canada. The business is conducted primarily through multi-year contracts with major group purchasing organizations, or buying groups to which many hospitals belong. Novopharm is the generic market leader within this segment, and offers over 50 generic injectable dosage forms.

Europe

Teva believes that the evolving European generics market has the potential to provide it with opportunities for substantial growth in its sales. The European generics market varies considerably from country to country. The Netherlands and the United Kingdom have well-established markets for drugs sold under their generic names. In certain European countries, there is a market for branded generics but not for products sold under their generic names; in other European countries, there is a market for both branded generics and products sold under their generic name. In France, the generic pharmaceutical market has begun to expand, while in Italy the development of a generics market is progressing more slowly. However, in France and in particular Italy, patent/data exclusivity issues have delayed the significant generic opportunities that have already occurred in other markets. In Germany, the government pressure to reduce prices has resulted in a substantial clawback or repayment to the government by pharmaceutical manufacturers over 2004. The expansion of the European Union means that European regulatory processes have now been expanded to include 10 new member states, which should provide greater opportunities to Teva to develop additional markets.

Teva currently sells in Europe approximately 450 generic products representing over 4,000 dosage strengths and packaging sizes. Among the significant products sold by Teva in Europe during 2004 were the generic versions of Neurontin ^® , Zocor ^® , Losec ^® , Tritace ^® and Lipostat ^® , that were launched during 2003 and 2004. In the past five years, Teva received more than 475 generic approvals, corresponding to 75 compounds in 151 formulations. In addition, in Europe, as of December 31, 2004, 123 compounds representing 265 formulations and 737 marketing authorization applications were pending approval, with over 275 additional compounds approved for development. Teva believes that this pipeline of approvals and applications will generate significant growth in the next several years and includes important products, some of which Teva expects to launch in 2005 in the U.K., The Netherlands and other markets upon anticipated patent or data exclusivity expirations.

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Teva’s rapid growth in Europe over the last few years has been generated by a combination of acquisitions (the latest being Dorom S.r.l., one of the largest suppliers of generic pharmaceuticals to the Italian retail market, previously owned by Pfizer) and the development of existing businesses. Teva seeks to establish itself as a leader in the European market for generic products by leveraging its strengths, including its leadership in the more mature generic markets, its active pharmaceutical ingredients business, and its ability to utilize the broad range of products already existing in its generic product portfolio as well as global R&D synergies. To date, however, because of the fragmented nature of the European generic markets, Teva’s European cost structure is higher than that which it experiences in the United States.

Operations in Selected European Countries

The Netherlands. The Dutch market continues to be characterized by increasing price erosion as pressure from the government and buyers negatively impact margins. Through Pharmachemie B.V., its Dutch subsidiary, Teva maintained its leading position in the generic market in 2004, as well as its market share. Teva launched during 2004, among others, generic versions of Tritace ^® , Lipostat ^® and Taxol ^® , which represented key new product opportunities. The reimbursement prices for multi-source products were reduced substantially after negotiations among the government, the insurers, the generic manufacturers and the pharmacists’ association. The result was that discounts were exchanged for reduced list prices for generics, which had a positive impact on generics. A further result of the negotiations was that a number of generic products were removed from the reimbursement list with negative effect on their sales.

United Kingdom. During 2004, Teva UK (formerly known as Approved Prescription Services Limited), one of the leading generic drug companies in the United Kingdom, strengthened its position among its customers as a result of the recent launches and further anticipated launches. Teva UK products include pharmaceuticals in all major treatment categories. Teva UK launched during 2004 some substantial products including the generic versions of Tritace ^® , Lipostat ^® , Klaricid ^® and Taxol ^® and strengthened its position in other products such as the generic version of Neurontin ^® .

Hungary. Teva operates in Hungary through its subsidiaries Teva Pharmaceutical Works Company Limited by Shares (“Teva Pharmaceutical Works”) (previously Biogal Pharmaceutical Works Ltd.), Teva Hungary Ltd. (previously Biogal – Teva Pharma RT), Humantrade Ltd. and Human Pharmaceutical Manufacturing Co. Ltd. Teva Pharmaceutical Works, one of the largest pharmaceutical manufacturers in Hungary, develops and produces both finished dosage pharmaceutical products and active pharmaceutical ingredients. Teva Pharmaceutical Works’ products include pharmaceuticals in all major treatment categories, and its production capabilities include solid forms, tablets, coated pellets, soft and hard gelatin capsules, liquid and other semi-solid forms, as well as sterile products and blood fractionation products. This year the company substantially strengthened its position in products such as the generic version of Zocor ^® and launched new products such as the generic versions of Tritace ^® and Istin ^® . The sale of finished dosage pharmaceutical products in Hungary and to other Teva subsidiaries outside Hungary represent approximately 46% of Teva Pharmaceutical Works’ sales, with the balance coming from sales of active pharmaceutical ingredients. Teva Hungary Ltd. is the marketing company of Teva in Hungary and is one of the leading companies in the market. Humantrade Ltd. is a wholesale company that distributes both Teva products and products of other manufacturers to pharmacies and hospitals in Hungary.

France. Teva Classics, which Teva acquired from Bayer in 2002, was ranked the fourth leading generic drug company in France as of the end of 2004. The French government introduced a reference price system in October 2003 with new measures planned for 2005, in an attempt to increase the

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generic penetration rate in the French market. Although these regulatory changes are still in process, Teva anticipates that the implementation of this system will favor increased generic drug use over time. While market conditions remain challenging, in 2004 Teva Classics launched a number of significant molecules including the generic equivalent of Losec ^® and Augmentin ^® .

Italy. Teva Pharma Italy was established and commenced its operation in the mid-1990’s. Towards the end of 2004, following its launch of the generic version of Neurontin ^® , the company achieved a leading position in the retail generic market in addition to its well established position in hospital anticancer generics. In December 2004, Teva completed the acquisition of Dorom S.r.l., which should further strengthen its leading position in the emerging Italian generic market.

Other European Highlights. Teva continues to register products in most European countries and is actively exploring the expansion of its sales and marketing organization to markets where it currently does not have a presence. Teva has several small operations in Germany, Belgium and the Czech Republic and continues to look for ways to expand them. In 2004, Teva established subsidiaries in Spain, Sweden, Portugal and the Slovak Republic with an intention to expand its operations in these countries. In Portugal, the generic market has become increasingly attractive, as the government is promoting the generic industry.

Rest of the World

Teva’s pharmaceutical sales outside of North America and Europe reached $419 million in 2004. The Israeli market represented approximately 63% of these sales, with the balance sold through Teva’s International Products Division.

Israel. Teva is the largest non-governmental supplier of health care products and services in Israel. In the domestic market, Teva is involved in the marketing, promotion, selling and distribution of a wide range of health care products. These include innovative pharmaceutical products, generics, over-the-counter and consumer health care products, hospital supplies, dialysis equipment and disposables, diagnostics and home care services. In recent years, Teva has increased its distribution and wholesaling activities in Israel.

In Israel, Teva has aligned all of its products and services with the needs of its main customers, namely health funds, hospitals, private pharmacies and pharmacy chains. It has built its Israeli product portfolio through licensing arrangements, as well as through its own product development. Teva intends to introduce new products into the Israeli market and maintains ongoing contact with other pharmaceutical, biotechnology, hospital supply and health care companies around the world.

Teva estimates that in 2004 the Israeli market for pharmaceuticals was approximately $700 million based on manufacturers’ selling prices, comprised of three market categories: health care plans, private pharmacies and chains and governmental hospitals. Teva is a significant medical supplier to each of these market categories. Substantially all of Teva’s pharmaceutical and hospital supplies sales in Israel are made through its distribution company, Salomon, Levin and Elstein Ltd., Israel’s largest drug wholesaler, which sells directly to institutional customers, as well as to the private pharmacies and chains.

Several issues affected Teva’s pricing policy in Israel in 2004. The national health budget was only marginally increased during 2004, causing government-sponsored health funds to institute cost-saving measures restricting expenditures for pharmaceutical products. Furthermore, Teva’s prices were affected by pricing regulations that mandate that the retail prices of pharmaceuticals in Israel may not exceed the average of prices in four European markets (the U.K., Germany, France and Belgium) (the so-called “Dutch Model”). Lastly, and to a lesser degree, the Israeli health care funds utilized parallel importing, primarily to pressure Israeli producers into granting price reductions.

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Other countries . Teva’s International Products Division oversees Teva’s various activities in the rest of the world. Its focus is on pharmaceuticals, mainly Copaxone ^® , Alpha D ^{3 ®} (Teva’s bone metabolism product) and a line of oncology products. Sales include direct exports from Israel and sales from Teva’s other manufacturing sites. Sales are made through affiliated companies, local representatives and distributors in the different markets.

The acquired Sicor operations in Mexico provide Teva with an operational and marketing platform that increases the reach of the International Products Division primarily in Mexico and in other existing and new markets, including in Central and South America, the Middle East and Europe. Sicor’s Mexican pharmaceutical operation produces drugs in several finished dosage forms, including injectable oncolytic agents and critical care and biopharmaceutical products. The main customer in Mexico is the Government of Mexico, which makes its purchases through tenders.

Biopharmaceutical Operations

Teva’s biopharmaceutical operations provide a platform for manufacturing and marketing biopharmaceutical products. Teva’s Lithuanian subsidiary develops and manufactures generic recombinant protein bulk substances that are registered in several countries primarily in the CIS countries and other developing nations. Teva’s Lithuanian facilities offer recombinant bacterial R&D and manufacturing capabilities. Teva’s finished dosage biopharmaceutical manufacturing facility in Toluca, Mexico became operational in the first quarter of 2002 having been designed to meet the regulatory requirements of the United States and the European Union. Teva’s biopharmaceutical operations also include a 45% ownership interest in Tianjin Hualida Biotechnology Company Ltd. a biopharmaceutical research and development and manufacturing company located in China.

During 2004, Teva’s biopharmaceutical product portfolio included interferon alpha, granulocyte colony-stimulating factor (“GCSF”) and human growth hormone (“hGH”), with annual sales reaching $20 million mainly in Lithuania, Mexico, China (as part of a joint venture) and other CIS and developing nations. Teva’s U.S. sales of hGH began in 2005 pursuant to a strategic alliance agreement with Savient Pharmaceuticals. In 2005, Teva established a specially dedicated group of research and development scientists based in Israel and appointed a Group Vice President with specific responsibility for Teva’s global biopharmaceutical operations.

Proprietary Products

Teva’s strategy with regard to its proprietary products is to leverage its access to Israeli-based academic research in order to develop innovative compounds for use in selected therapeutic markets. Teva’s proprietary research and development pipeline is currently focused mainly in two specialty areas: neurological disorders and autoimmune diseases.

In conducting its research and development, Teva seeks to manage its resources conservatively and to limit its risk exposure. At the drug discovery phase, Teva leverages its relationship with the Israeli academic community to gain early access to potential projects. Once these projects progress into the more costly clinical study phase, Teva’s strategy is to explore corporate partnering options through which it can share the risks associated with each project.

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Multiple Sclerosis

Copaxone ^®

Copaxone ^® , Teva’s leading product and its first major innovative drug, is used for the reduction of relapse rate in patients with relapsing-remitting multiple sclerosis (“MS”). Copaxone ^® is a new class of modifying therapy with a dual mode of action that offers MS patients a different treatment concept. Copaxone ^® has demonstrated, in controlled clinical trials, significant reductions in relapse rates as well as significant effects on activity and burden of disease as monitored by magnetic resonance imaging (“MRI”). Moreover, Copaxone ^® ’s efficacy was shown to be sustained over 10 years as measured in MS patients since the beginning of U.S. phase III pivotal clinical study. Copaxone ^® is well-tolerated and is not associated with the development of neutralizing antibodies, as shown in both clinical trials and post-marketing experience.

Multiple sclerosis is a disease characterized by both inflammation and neurodegeneration, which are interrelated but also independent processes with different underlying mechanisms. Copaxone ^® effectively addresses both MS pathologies via its dual mode of action.

Copaxone ^® regulates inflammation as shown by the reduction of relapses and disease activity. Copaxone ^® also controls neurodegeneration, as was shown by its effect on three MRI markers of neurodegeneration: (1) reducing by 50% the number of permanent “black holes” (permanent MS lesions in the brain) (Neurology 2001) which represent areas where the most severe and irreversible brain tissue damage has occurred; (2) reducing significantly the rate of brain atrophy (Neurology 2004) ; and (3) reducing axonal damage, as demonstrated by magnetic resonance spectroscopy (“MRS”), a technique which looks at the integrity of the myelin sheet (presented at the ENS, ECTRIMS 2003 and ECTRIMS 2004).

Two studies published in Brain (2002) and J. Neurological Sciences (2003) showed that Copaxone ^® may have neuroprotective properties by stimulating the release of a factor called brain-derived neurotrophic factor, or BDNF, which helps to protect the brain from axonal loss.

Furthermore, Copaxone ^® has demonstrated sustained effect over the term of 10 years, the longest term of any of the current MS therapies. In a follow-up of patients taking Copaxone ^® for over 10 years, the average relapse rate was reduced to about one every five years, while physical function was maintained in the majority of patients.

To date, Copaxone ^® has been approved for marketing in 43 countries worldwide, including the United States, Mexico, Israel, Canada, 15 European Union countries, Switzerland, Australia, Russia, Brazil and Argentina. Copaxone ^® was first launched in Israel in December 1996, followed by launch in the United States in March 1997, and approval in 2001 in all European countries, through the European Mutual Recognition Procedures.

In 2004, in-market global sales of Copaxone ^® amounted to $936 million, of which $625 million were in the United States, where Copaxone ^® reached a quarterly market share in terms of total prescriptions of 32.6%, the second largest MS therapy in the U.S. Global in market sales of Copaxone ^® in 2004 grew by 30% over those of 2003, a rate of growth that exceeded the growth of the global market of MS products.

Outside the United States, Copaxone ^® in-market sales reached $311 million in 2004, an increase of 38%, driven by significant sales increases in Italy, U.K., France and Germany, the largest MS market in Europe.

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During the fourth quarter of 2004, global in-market sales of Copaxone ^® exceeded for the first time an annual run rate of $1 billion.

In 2002, Teva launched Copaxone ^® in North America in a ready-to-use pre-filled syringe, which significantly improves the ease of use by patients. In October 2003, the Copaxone ^® pre-filled syringe was launched in Israel. In June 2004, Teva and Sanofi-Aventis started the rolling launches of Copaxone ^® pre-filled syringe across the European Union.

In North America, Copaxone ^® is marketed through Teva Neuroscience and is distributed by Sanofi-Aventis. Teva manufactures the product and supplies it to Sanofi-Aventis through Teva USA. Teva Neuroscience Inc., a wholly owned subsidiary of Teva, actively markets and promotes the product in the United States and Canada through a wide range of activities, including doctor detailing, educational seminars, websites and patient support programs, such as Shared Solutions ^™ and MS Watch ^™ .

Teva and Sanofi-Aventis also have a collaborative arrangement for the marketing of Copaxone ^® in Europe and other markets. Under the terms of this arrangement, following approval in these markets, Copaxone ^® is co-promoted in certain European countries, and in other countries Sanofi-Aventis is the sole marketer. The product is manufactured by Teva, and Sanofi-Aventis purchases it from Teva and sells and distributes it in Europe.

Teva is seeking to develop an oral therapy for MS. Teva’s oral formulation of Copaxone ^® was tested in a large clinical trial, CORAL, conducted from 2000 to 2002; however, the results of the trials were not statistically significant. In 2003, Teva and H. Lundbeck A/S, a Denmark-based, publicly traded pharmaceutical company and Teva’s strategic partner in the development of oral Copaxone ^® , continued their collaboration on this project and in late 2004 initiated a Phase II clinical trial of an oral Copaxone ^® formulation.

Laquinimod

In June 2004, Teva signed an agreement with Active Biotech AB, a Sweden-based biotechnology company, to develop and commercialize laquinimod, a novel immunomodulatory compound which has the potential to be one of the first orally available disease modifying treatment for MS. A recent Phase II study shows that oral laquinimod in a dosage of 0.3 mg daily is well tolerated and effective in suppressing development of active MRI lesions in relapsing-remitting MS. Treatment over six months with 0.3 mg of laquinimod daily resulted in a 30% decrease in MRI disease activity. Patients with disease activity at the start of the study showed a decrease of more than 40%. The study also confirmed laquinimod’s advantageous safety profile.

Under the terms of the agreement, Teva acquired the exclusive rights to develop, register, manufacture and commercialize laquinimod worldwide, with the exception of the Nordic and Baltic countries, where Active Biotech will retain all commercial rights. Teva has made an upfront payment to Active Biotech and has agreed to conduct and fund the further clinical development of laquinimod. The agreement between the two companies also calls for Teva to make payments to Active Biotech upon the achievement of various sales targets and other milestones, with maximum payments of $92 million. Active Biotech will also receive tiered double digit royalties on sales of the product.

MS remains an important focus of Teva’s development efforts, and it continues to investigate potential improvement of Copaxone ^® and explore other molecules as future therapies for MS.

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Parkinson’s Disease

Agilect ^® /Azilect ^® (rasagiline mesylate)

In September and October 2003, applications to market Agilect ^® /Azilect ^® (rasagiline’s brand name in the United States and Europe, respectively) as a treatment for Parkinson’s disease, as initial monotherapy in early Parkinson’s disease patients and as adjunct therapy to levodopa in moderate-to-advanced stages of the disease, were submitted to regulatory authorities in the U.S., the European Union (EU) and Canada. In July 2004, approximately ten months after submission of the file, an approvable letter from the FDA containing certain questions and requests for clarifications was received. Since then, Teva has been working closely with the FDA, and a written response was sent during early November 2004 to address all outstanding issues. The FDA has up to six months to review Teva’s response.

On November 18, 2004, the Committee for Medicinal Products in Human use (“CHMP”) of the EMEA issued a positive opinion recommending approval of Azilect ^® for the treatment of Parkinson’s disease both as initial monotherapy in patients with early Parkinson’s disease and as adjunct treatment to levodopa in moderate-to-advanced stages of the disease. Following this recommendation, final marketing authorization covering EU countries was granted by the European Commission on February 22, 2005. Teva and its marketing partner Lundbeck expect to launch the product in various European countries during the second quarter of 2005.

In 2004, applications for marketing authorizations of Azilect ^® were submitted in a number of additional countries including Switzerland, Turkey, and Australia. In January 2005, Azilect ^® was granted marketing authorization in Israel and is expected to be launched in March 2005.

Agilect ^® /Azilect ^® is a potent, second-generation, irreversible monoamine oxidase type B (MAO-B) inhibitor with neuroprotective activities demonstrated in various in vitro and in vivo studies. Its beneficial clinical effect, seen in the entire spectrum of the disease, combined with its once-daily dosing, lack of need for titration and high tolerability, allow Agilect ^® /Azilect ^® to address significant unmet needs in the treatment of Parkinson’s disease. Although many therapies are available, there is still a high level of dissatisfaction with many of these treatments, both in terms of their efficacy and tolerability. An estimated four million patients are affected by this chronic disease worldwide, which typically occurs at a late age, affecting approximately 1% of the population over the age of 65.

Agilect ^® /Azilect ^® has demonstrated efficacy and safety in three pivotal studies which included over 1,500 patients with Parkinson’s disease at different stages of the disease. In the first Phase III study (TEMPO), Agilect ^® /Azilect ^® demonstrated efficacy and safety as monotherapy in early-stage patients. This clinical trial, which used an innovative delayed start design, showed a highly statistically significant effect on the primary endpoint – progression of Parkinsonian symptoms. Agilect ^® /Azilect ^® was well-tolerated in this patient population. Moreover, the one year results of this study, which were published in the April 2004 issue of Archives of Neurology, suggest a possible effect on disease progression. In an open extension of the TEMPO trial, approximately half of the patients who were still in the study after two years (121 out of 266) were adequately maintained on monotherapy with Agilect ^® /Azilect ^® (without additional dopaminergic treatment).

In two following Phase III studies with Agilect ^® /Azilect ^® as adjunctive therapy to levodopa in more advanced patients – the LARGO study conducted in Europe, Israel and Argentina and the PRESTO study in North America – Agilect ^® /Azilect ^® demonstrated beneficial effects in the two categories defined as the goals for adjunctive therapy on Parkinson’s disease: symptomatic control of Parkinsonian symptoms and treatment of levodopa-induced motor complications. In these advanced patients as well, Agilect ^® /Azilect ^® was found to be well-tolerated.

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The development of Agilect ^® /Azilect ^® is part of a long-term strategic alliance with Lundbeck for global co-development and marketing of Agilect ^® /Azilect ^® mainly in Europe for the treatment of Parkinson’s disease. Under this agreement, Lundbeck and Teva, in a joint effort, will market the product in certain European countries and Lundbeck will be the exclusive marketer in the remaining European countries and certain other overseas markets.

In May 2003, Teva entered into a strategic alliance with Eisai Inc., a U.S. leader in the field of Alzheimer’s disease, for the global co-development of rasagiline for several additional indications and its co-promotion of Agilect ^® /Azilect ^® in the U.S. market. The parties agreed to initially develop rasagiline for the treatment of Alzheimer’s disease, and, assuming its approval by the FDA, the parties will also co-promote the product in the U. S. for the treatment of Parkinson’s disease. In 2004, a phase II clinical study of potential uses of rasagiline in the treatment of Alzheimer’s disease was initiated.

Other Projects

Teva has innovative research projects in early clinical stages, in the areas of Alzheimer’s disease, epilepsy, stroke and systemic lupus erythematosus, as well as several projects in the pre-clinical stage.

In connection with Teva’s efforts to expand the use of glatiramer acetate to new indications, Teva has a collaboration agreement with Proneuron Biotechnologies to develop glatiramer acetate as a neuroprotective agent for the treatment of multiple acute and chronic neurological diseases, excluding multiple sclerosis. On February 15, 2005, Proneuron announced the granting of U.S. patents for the use of glatiramer acetate for protection from neuronal degeneration.

Recently, Teva and Gamida-Cell Ltd. announced that Teva exercised an option to enter into a joint venture with Gamida-Cell to develop and commercialize StemEx ^® for the treatment of leukemia and lymphoma. As part of its investment in Gamida-Cell in 2003, Teva held an option to jointly complete the development and globally commercialize StemEx ^® . Teva will invest up to $25 million in the joint venture under certain conditions.

Teva has also entered various other start-up and early stage ventures primarily with the goal of leveraging Israeli expertise and scientific initiatives.

Intellectual Property and Other Protections

Teva relies on a combination of intellectual property protections and regulatory exclusivities to protect its innovative products. Teva seeks to obtain, where possible, product, process and use patents on its innovative products. Teva also relies on trade secrets, unpatented proprietary know-how and confidentiality agreements, as well as FDA exclusivities, trademark and copyright protection, for its innovative products. Similar laws and regulations in Europe provide for six to ten years of data exclusivity. New European legislation provides for a uniform period of European data exclusivity for newly registered products for a period of ten years which, under certain circumstances, can be extended to 11 years.

The market exclusivity protections afforded Copaxone ^® in the United States due to its status as an “orphan drug” expired on December 20, 2003. Teva has outstanding patents relating to Copaxone ^® with terms expiring in 2014 in the U.S. and in 2015 in most of the rest of the world. In Europe, Copaxone ^® is also protected by data exclusivity protections in most European countries, which remain in effect for a period of ten years from the 2001 market authorization date.

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Teva also relies on patent protection and trade secret protection to protect generic processes, products and formulations for its API and final dosage forms.

Active Pharmaceutical Ingredients

In addition to its production and sale of pharmaceutical products, Teva manufactures and sells active pharmaceutical products. With a leading global market share in the production of many major chemicals for generic pharmaceuticals, Teva’s active pharmaceutical ingredients (“API”) division facilitates Teva’s entry into new drug markets and offers a high quality and cost-effective source of raw materials. Teva’s API division provides Teva with the benefits of vertical integration while pursuing its strategy of continuing to grow its significant third party business. Teva’s acquisition of Sicor complemented Teva’s existing API capabilities by adding anti-inflammatories, oncolytics, immunosuppressants, muscle relaxants and custom-manufactured APIs for a variety of proprietary drug manufacturers.

The active pharmaceutical ingredients business sells products to Teva’s finished pharmaceutical product businesses and to third parties in a competitive market for APIs intended for generic products. Sales to other Teva units are on an arm’s-length basis, fulfilling Teva’s generic and proprietary manufacturing needs. Teva’s API sales are affected by the pharmaceutical trends and are directly related to the ability of its API customers, both Teva itself and third party customers, to launch new products and maintain market share.

Teva offers approximately 190 different active pharmaceutical ingredients, using synthetic, semi-synthetic, fermentation and high-potent technologies (compounds that have a therapeutic effect at very low dosages, typically at microgram levels), for use in pharmaceuticals. Teva believes it is among the world’s principal suppliers of many of these chemicals. The products are sold, subject to the patent position, to formulators of pharmaceutical products mainly in the United States and Europe, but also in Asia, Far East and Latin America. The API division portfolio of products is a combination of high volume products as well as low volume – high value products.

The production of API is the most complex and costly step in the production of finished drugs and requires a high level of technical and regulatory skills. During 2004, the API division further strengthened its regulatory affairs, customer service and technical and operational departments. In order for chemicals to be approved for use as active pharmaceutical ingredients sold in the United States, the facilities and production procedures utilized at such facilities must meet FDA standards. Teva’s chemical plants meet such standards and are regularly inspected by the FDA. Many of the products are produced in dedicated computer-controlled automated facilities, facilitating optimization of the production processes and high quality.

Teva’s API division has developed an expertise in specialized technologies, such as fermentation processes and the production of peptide active pharmaceutical ingredients. Teva has established a leading position in the sale of fermentation products such as lovastatin, simvastatin, pravastatin and tobramycin. In addition, through the establishment of joint ventures, Teva has taken initial steps towards supplying various peptides such as calcitonin, octreotide and others to its customers. With the acquisition of Sicor, Teva’s API division gained Sicor’s API expertise business in the chemistry of steroids and high-potent production, which supplemented its existing capabilities. This expertise gives Teva’s API business access to new therapeutic and formulations segments.

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During 2004, API sales to Teva’s various pharmaceutical units were approximately 47% of the division’s total sales as compared with 43% during 2003. Teva believes that its ability to produce these chemicals is a strategic advantage for its production of finished pharmaceuticals.

Marketing and Sales.

In North America, the API division has marketed its products for over 20 years through its U.S. subsidiary – Plantex USA. Most of Plantex’s customers are generic dosage form manufacturers located in the United States and Canada. Additionally, Plantex has been able to make significant inroads into the emerging drug delivery segments and is venturing into selected custom synthesis projects for new drug applications. The direct contact with the customers enables the API division to establish long-term relationships.

In Europe, a Teva European subsidiary, Plantex Chemicals BV, is responsible for marketing to western European customers. In Japan, the Far East, Australia, New Zealand and Latin America, chemical products are sold through Teva’s local subsidiaries as well as through local distributors. During 2004, Teva’s API division established local marketing offices in Australia and India, in addition to the Japanese marketing office established in 2003.

Production. Teva produces active pharmaceutical ingredients worldwide through fourteen production sites located in the United States, Israel, Hungary, Italy, Mexico and India. The plants manufacture active pharmaceutical ingredients through synthetic and fermentation processes, process control, a variety of milling equipment, and its expertise in the field of physical properties, enabling tailoring of the product physical characteristics for the customer’s needs. In addition, through the Sicor acquisition, Teva added two API manufacturing sites in the vicinity of Milan, Italy, which are major producers of oncolytic agents, steroids and certain other products manufactured through fermentation or chemical synthesis processes, and one in Toluca, Mexico that principally produces steroid products for export.

The Global Generic R&D Division is in charge of product formulation, bioequivalence testing registration and approval of a growing list of generic drugs for all of the markets where Teva operates. It also focuses on the development of complex drug delivery systems and a growing variety of dosage form types for generic drugs. The division operates from eight development centers located in the United States, Canada, Israel, Hungary, Mexico and The Netherlands, enabling optimization of both human resources and the prevailing patent law situation.

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The Global Innovative R&D Division employs researchers in Israel, the United States, Canada, Hungary and several Western European countries. The division conducts all research activities required for the identification of lead compounds as well as all pre-clinical development, clinical testing and regulatory submissions for Teva’s growing pipeline of proprietary products. The division is deeply involved in supporting Teva’s effort to achieve and maintain a leading position in the treatment of multiple sclerosis and to establish a franchise in Parkinson’s disease. Teva collaborates intensively with Israel’s major universities, medical institutions and research institutes in order to source and derive the benefits of and leverage the extensive, first-class research activities conducted in Israel, specifically in the areas of neurodegeneration/neuroprotection, autoimmunity and cancer.

In addition to the funding received through collaborations with third parties such as Lundbeck, Sanofi-Aventis and most recently Eisai, Teva avails itself of government funding for research conducted in Israel. The Israeli government offers grants, which are repayable as royalties from the sale of products resulting from funded research, with the aggregate amount of such royalties limited to the amount of the original grant (in respect of grants since 1999, with the addition of LIBOR interest). The royalties are at rates between 2% and 3.5% (depending on the number of years elapsed since the commencement of the royalty payments) of sales relating to a product or a development resulting from the funded research. The maximum amount of the contingent liability in respect of royalties to the Israeli government at December 31, 2004 amounted to $36 million. In recent years, however, Israeli government grants have played a reduced role in the overall funding of Teva’s innovative R&D efforts.

The Global API Division R&D researchers from the API division focus on the development of chemical and biological (fermentation) processes and on the production of active ingredients of interest to the generic drug industry, as well as for Teva’s proprietary drugs. This group’s facilities include a large center in Israel (chemical processes and peptides), a large center in Hungary (fermentation and downstream processing) and a facility in India (intermediates) and additional locations in Italy, Mexico and the United States. The process research groups also seek to find ways to continuously reduce API production costs, enabling Teva to remain a supplier of key API products after other competitors cease to be able to produce these products economically.

Biopharmaceutical R&D Teva has R&D operations specifically dedicated to the development of biopharmaceutical products located in Lithuania, China and recently supplemented by the addition of a group based in Israel. These groups’ expertise covers aspects related to recombinant protein expression and production including genetic engineering, recombinant bacteria fermentation, mammalian tissue culture, protein purification and the development of analytical methods and formulation.

Competition

In the United States, Teva is subject to intense competition in the generic drug market from other generic drug manufacturers, brand-name pharmaceutical companies through authorized generics, manufacturers of branded drug products that continue to produce those products after patent expirations and manufacturers of therapeutically similar drugs. Teva believes that the primary competitive factors playing a role in the United States are the ability to continually introduce the generic equivalents for brand-name drug products in sufficient volume soon after their relevant patents expire, are invalidated or circumvented, as well as price, product quality, prompt delivery, efficiency, breadth of product line, customer service and reputation.

Price competition from additional generic versions of the same product as well as potential price competition from the original branded product may result in significant reductions in sales and profit margins over time. In addition, Teva’s competitors may also develop their products more

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rapidly or complete the regulatory approval process sooner, and therefore market their products earlier. New drugs and future developments in improved and/or advanced drug delivery technologies or other therapeutic techniques may provide therapeutic or cost advantages to competing products.

Many brand-name competitors try to prevent, discourage or delay the use of generic equivalents through several activities including, legislative initiatives (e.g. pediatric exclusivity), changing dosage form or dosing regimen just prior to introduction of generic equivalent, regulatory processes, filing new patents, patent extensions, litigation, including citizens’ petitions, and negative public relations campaigns. In addition, the brand name companies sometimes launch, either through an affiliate or through licensing arrangements with another company, an authorized generic at the same time that the first generic product is launched, so that the patent challenger no longer has the exclusivity intended by the Hatch-Waxman Act.

Teva’s customers continue to consolidate as chain drug stores, hospitals and hospital systems, wholesalers and group purchasing organizations merge or consolidate. In addition, a number of its customers have instituted source programs limiting the number of suppliers of generic pharmaceutical products carried by that customer. As a result of these developments, there is heightened competition among generic drug producers for the business in this smaller and more selective customer base.

In Western Europe, the various Teva companies compete with other generic drug product manufacturers (several major multinational generic drug companies and various local generic drug companies), original manufacturers of branded drug products that continue to produce those products after patent expirations and manufacturers of therapeutically similar drugs. As in the United States, the generic market in Western Europe is very competitive, with the main competitive factor being price, but competition is also based on name, reputation and customer service.

In Hungary, the Teva companies compete with local Hungarian manufacturers but also face increasing competition from multinational pharmaceutical companies. In recent years, the Hungarian pharmaceutical industry has been substantially privatized, resulting in foreign ownership of most major Hungarian pharmaceutical manufacturers. In addition, many multinational pharmaceutical companies have established Hungarian marketing companies for their products, further intensifying the competition. Teva’s Hungarian subsidiaries continue to strengthen Teva’s position and presence in Hungary, while creating a more diversified products and service portfolio, including wholesaling services through its Humantrade subsidiary.

In Canada, Novopharm is the second largest generic company in terms of prescriptions. Three of the five major generic drug manufacturers are subsidiaries or divisions of global manufacturers, and two of which are privately owned. Novopharm, together with these competitors, satisfies a very substantial amount of the Canadian demand for generic pharmaceuticals.

The Canadian regulatory and customer landscape for generic manufacturers continues to evolve. The federal government and several provincial governments are studying possible improvements to Canada’s publicly funded Medicare system. Many of these governments acknowledge the need to limit brand patent extensions, and speed the approval process for generic drugs. In 2004, Ontario – the largest province in the country – implemented a streamlined approval process, which now adds generics to the Provincial Formulary within 30 days of approval. Branded pharmaceutical companies continue to lobby against such changes, which would enhance generic drug sales at the expense of the brands.

The customer base for Novopharm continues to change as the number of independent community pharmacies shrinks at the expense of chain drug and banner aligned store groups, which work

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closely with selected suppliers for specific products. This trend is expected to continue, resulting in increased competition for generic drug manufacturers at the chain and banner buying offices. These larger customers look to generic suppliers to timely launch cost effective generic products, maintain high levels of product availability and provide increased levels of overall customer value and service.

In Israel, Teva, with a market share (including distribution, on behalf of third parties) of approximately one quarter of the total pharmaceutical market, is the largest supplier of health care products. Teva’s success is based primarily on its ability to market products within the medical community, combined with its ability to provide clients with a broad line of products at competitive prices and with prompt service. Teva’s products compete with those of other local manufacturers as well as with imported products. Generic competition has increased in recent years in Israel, and this trend is expected to continue, with additional price pressure coming from the health care funds and other institutional purchasers. Teva participates in the Israeli pharmaceutical market in generic, over-the-counter products (“OTC”) and branded drugs. Commencing in May 2005, new regulations regarding OTC sales are expected to enable such sales in an increased number of retail locations in addition to the present sales limited to pharmacies.

Copaxone ^® competes with three other therapies for the treatment of multiple sclerosis, Biogen Idec Inc.’s Avonex ^® , Schering AG/Berlex Laboratories’ Betaseron ^® and Serono SA’s Rebif ^® , all of which are forms of beta-interferon. On February 28, 2005, Biogen and Elan announced the voluntary suspension of the marketing of Tysabri ^® , a new MS therapy which was launched in December 2004 in the United States.

In 2003, Schering AG initiated a trial which compares the efficacy of the current dose Betaseron ^® with a higher dose Betaseron ^® and the current dose of Copaxone ^® . Serono has also announced the initiation of a head-to-head comparison between Rebif ^® and Copaxone ^® . Both studies are ongoing. In 2004, Teva initiated a comparative trial in which patients who are about to fail on high dose beta interferon (Betaseron ^® or Rebif ^® 44 mcg) are randomly switched to Copaxone ^® or remain on the high dose interferon for the duration of the trial. The trial is being conducted in the U.S. only, with results expected in 2007.

In the sale of active pharmaceutical ingredients, Teva competes in all of its markets with specialty chemical producers, mainly located in Europe, particularly in Italy and Spain, in India and in the Far East. Teva competes based on price, quality, timely delivery and its ability to meet the stringent FDA requirements for approved suppliers of active pharmaceutical ingredients. Many of its competitors are smaller than Teva, in terms of sales and breadth of offerings of active pharmaceutical ingredients. Teva believes that its extensive portfolio (one of the broadest available in the industry), combined with its financial resources, make its active pharmaceutical ingredients division a leader in the industry.

Regulation

United States. All pharmaceutical manufacturers selling products in the United States are subject to extensive regulation by the U.S. federal government, principally by the FDA and the Drug Enforcement Administration, and, to a lesser extent, by state and local governments. The Federal Food, Drug, and Cosmetic Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the development, manufacture, testing, safety, efficacy, labeling, approval, storage, distribution, recordkeeping, advertising, promotion and sale of Teva’s products. Teva’s major facilities and products are periodically inspected by the FDA, which has extensive enforcement powers over the activities of pharmaceutical manufacturers. Non-compliance with applicable requirements may result in fines; criminal penalties; civil injunction against shipment of products; recall and seizure of products;

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total or partial suspension of production, sale or import of products; refusal of the government to enter into supply contracts or to approve new drug applications and criminal prosecution. The FDA also has the authority to deny or revoke approvals of drug active ingredients and dosage forms and the power to halt the operations of non-complying manufacturers. Any failure by Teva to comply with applicable FDA policies and regulations could have a material adverse effect on the operations of Teva.

FDA approval is required before any “new drug” (including generic versions of previously approved drugs) may be marketed, including new strengths, dosage forms and formulations of previously approved drugs. Applications for FDA approval must contain information relating to bioequivalence (for generics), safety, toxicity and efficacy (for new drugs), product formulation, raw material suppliers, stability, manufacturing processes, packaging, labeling and quality control. FDA procedures require that commercial manufacturing equipment be used to produce test batches for FDA approval. The FDA also requires validation of manufacturing processes before a company may market new products. The FDA conducts pre-approval and post-approval reviews and plant inspections to implement these requirements. Generally the generic drug development and the ANDA review processes can take two to five years.

The Hatch-Waxman Act of 1984 established the procedures for obtaining FDA approval for generic forms of brand-name drugs. This Act also provides market exclusivity provisions that can delay the submission and/or the approval of ANDAs. One such provision allows a five-year market exclusivity period for new drug applications (“NDAs”) involving new chemical entities, a three-year market exclusivity period for NDAs (including different dosage forms) containing new clinical trial data essential to the approval of the application and a seven-year market exclusivity period for drugs used for the treatment of orphan diseases. Market exclusivity provisions are separate from patent protections and apply equally to patented and non-patented drug products. Another provision of the Hatch-Waxman Act extends certain patents for up to five years as compensation for the reduction of effective life of the patent which resulted from time spent in clinical trials and time spent by the FDA reviewing a drug application. Patent term extension and non-patent market exclusivity may delay the submission and approval of generic drug applications.

Under the terms of the Hatch-Waxman Act, a generic applicant must make certain certifications with respect to the patent status of the drug for which it is seeking approval. In the event that such applicant plans to challenge the validity, enforceability of an existing listed patent or asserts that the proposed product does not infringe an existing listed patent, it files a so-called “Paragraph IV” certification. If successful, the Hatch-Waxman Act provides for a potential 180-day period of generic exclusivity. Through this provision, the first company to submit an ANDA with a Paragraph IV certification challenging a brand product patent may trigger a regulatory process in which the FDA is required to delay the final approval of subsequently filed ANDAs for 180 days after the earlier of the first commercial marketing of the drug by the first applicant or a final court decision in the generics company’s favor regarding the patent that was the subject of the Paragraph IV certification. Submission of an ANDA challenging a brand patent can result in protracted and expensive patent litigation. When this occurs, the FDA generally may not approve the ANDA until the earlier of thirty months or a relevant court decision finding the patent invalid, not infringed or unenforceable.

The Medicare Prescription Drug, Improvement and Modernization Act (the “Medicare Act”) of 2003 modified certain provisions of the Hatch-Waxman Act. Under the Medicare Act, final ANDA approval may be obtained upon the earlier of a favorable district court decision or 30 months from notification to the patent holder of the Paragraph IV filing. Exclusivity rights may be forfeited pursuant to the Medicare Act if the product is not marketed within 75 days of the final court decision and under other specified circumstances. However, some of these changes apply only to ANDAs containing such patent challenges that were filed after enactment of the Medicare Act; previously filed ANDAs generally continue to be governed by the previous law.

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The Best Pharmaceuticals for Children Act, signed into law in 2002, continues the so-called “pediatric exclusivity” program begun in the FDA Modernization Act of 1997. This pediatric exclusivity program provides a six-month extension to certain listed patents and exclusivity for all formulations of an active ingredient, if the sponsor performs and submits adequate pediatric studies on any one single dosage form. The effect of this program has been a delay in the launch of numerous generic products by an additional six months.

The Generic Drug Enforcement Act of 1992 established penalties for wrongdoing in connection with the development or submission of an ANDA by authorizing the FDA to permanently or temporarily debar such companies or individuals from submitting or assisting in the submission of an ANDA, and to temporarily deny approval and suspend applications to market generic drugs. The FDA may suspend the distribution of all drugs approved or developed in connection with wrongful conduct and also has authority to withdraw approval of an ANDA under certain circumstances. The FDA may also significantly delay the approval of a pending NDA or ANDA under its “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities Policy.” Manufacturers of generic drugs must also comply with the FDA’s current Good Manufacturing Practices (“cGMP”) standards or risk sanctions such as the suspension of manufacturing or the seizure of drug products and the FDA’s refusal to approve additional ANDAs.

Products manufactured outside the United States and marketed in the United States are subject to all of the above regulations, as well as to FDA and U.S. customs regulations at the port of entry. Products marketed outside the United States that are manufactured in the United States are additionally subject to various export statutes and regulations, as well as regulation by the country in which the products are to be sold.

The Center for Medicare & Medicaid Services is responsible for enforcing legal requirements governing rebate agreements between the federal government and pharmaceutical manufacturers. Drug manufacturers’ agreements with the Center provide that the drug manufacturer will remit to each state Medicaid agency, on a quarterly basis, the following rebates: for generic drugs marketed under ANDAs covered by a state Medicaid program, manufacturers are required to rebate 11% of the average manufacturer price (net of cash discounts and certain other reductions); for products marketed under NDAs, manufacturers are required to rebate the greater of 15.1% of the average manufacturer price (net of cash discounts and certain other reductions) or the difference between such average manufacturer price and the best price during a specified period. An additional rebate for products marketed under NDAs is payable if the average manufacturer price increases at a rate higher than inflation. Teva USA has such a rebate agreement in effect with the federal government. Federal and/or state governments have and are expected to continue to enact measures aimed at reducing the cost of drugs to the public, including the enactment, in December 2003, of Medicare legislation that expands the scope of Medicare coverage for drugs over the next two years. Teva cannot predict the nature of such measures or their impact on its profitability.

Various state Medicaid programs have in recent years adopted supplemental drug rebate programs that are intended to provide the individual states with additional manufacturer rebates that cover patient populations that are not otherwise included in the traditional Medicaid drug benefit coverage. These supplemental rebate programs are generally designed to mimic the federal drug rebate program in terms of how the manufacturer rebates are calculated, e.g., as a percentage of average manufacturer price. While some of these supplemental rebate programs are significant in size, they are dwarfed, even in the aggregate, by comparison to Teva’s quarterly Medicaid drug rebate obligations.

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Canada. The Canadian federal government, under the Food and Drugs Act and the Controlled Drug and Substances Act, regulates the therapeutic products that may be sold in Canada and the applicable level of control. The Therapeutic Products Directorate is the national authority that evaluates and monitors the safety, effectiveness and quality of drugs, medical devices and other therapeutic products.

Issuance of a Notice of Compliance for generic drug products is also subject to the Patented Medicines (Notice of Compliance) Regulations under the Patent Act. The Therapeutic Products Directorate will not issue a Notice of Compliance if there are any patents registered with the Health Canada Patent Registrar for the relevant drug product. Generic pharmaceutical manufacturers can either wait for the patents to expire or file a patent allegation. Filing a patent allegation often results in patent litigation with the brand company, in which case a Notice of Compliance will not be issued until the earlier of the expiration of a twenty-four month stay or resolution of the litigation in the generic company’s favor.

Provincial governments control expenditures on therapeutic products by establishing interchangeability formularies and benefit lists and only reimbursing products that are listed in the formulary and benefits lists. Provincial Ministries of Health, through their own review processes, determine the eligibility of the products for interchangeability by evaluating the drug quality, bioequivalence data, drug therapeutics, drug utilization and pharmacoeconomic issues.

Health Canada and Industry Canada have recently proposed amendments that, among other things, provide a market exclusivity period of eight and one half years for new pharmaceutical products. This may delay introduction of generic products. Other features of the amendments are designed to prevent multiple 24 month stays.

Israel. Israel, like other countries with advanced pharmaceutical industries, requires pharmaceutical companies to conform to international developments and standards. To this end and in order to meet the three basic criteria for drug registration: quality, safety and efficacy; regulatory requirements are constantly changing in accordance with scientific advances as well as social and ethical values. Legal requirements prohibit the manufacture, importation and marketing of any medicinal product, unless it is duly approved in accordance with these requirements.

As a result of the 1998 amendments to the patent law, the term of certain pharmaceutical patents may be extended under certain conditions for up to five years. A recent patent office decision interpreted this law to allow for patent term extensions which terminate after the parallel patent term extension in the U.S. In the future, this may impact Teva’s ability to manufacture in Israel for the U.S. market. The government has proposed new legislation, which would ensure that the patent term extension in Israel will terminate not later than the parallel U.S. patent term extension. Additionally the Israeli government has proposed introducing data exclusivity provisions, which may prevent the marketing of a generic product for a period of time after the initial registration of the innovator product. Although both proposals are under consideration by Israel’s parliament, it is uncertain whether either proposal will be passed into law in its current form, or in some other variation.

Europe. A directive of the European Union requires that medicinal products must have a marketing authorization before they are placed on the market in the European Union. Authorizations are granted after the assessment of quality, safety and efficacy. In order to control expenditures on

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pharmaceuticals, most member states in the European Union regulate the pricing of such products and in some cases limit the range of different forms of a drug available for prescription by national health services. These controls can result in considerable price differences among member states.

The term of certain pharmaceutical patents may be extended in Europe by up to five years in order to extend effective patent life to fifteen years. Some older French and Italian patents were extended up to eight and eighteen years, respectively. Additionally, data exclusivity provisions in Europe may prevent launch of a generic product by six or ten years from the date of the first market authorization in the European Union. Legislation has been adopted which lengthens the exclusivity period for new products to 10 years for all members of the EU, with a possibility of extending the period to 11 years under certain circumstances. This legislation also enables the submission of a generic dossier to the health authorities eight years after the first market authorization, and allows for research and development work during the patent term for the purpose of submitting registration dossiers (comparable to the so-called “Bolar Amendment” in the United States).

During the course of 2004, Teva continued to register its products in Europe. As part of the mutual recognition procedure established by the European Union, an attempt was made to simplify registration, although centralized registration for generic products is, as yet, only possible in a few cases in Europe. Due to recent court interpretations of “essential similarity,” it has become possible to register generic drugs containing different salts of the active ingredient. Teva has significantly increased its registration efforts in a number of European countries: Hungary, the United Kingdom, France, Germany, The Netherlands and Poland.

Hungary. Only registered drugs may be marketed in Hungary. OGYI (the National Pharmaceutical Institute), an agency of the Ministry of Health, examines and approves the documents filed for health registration. Standards of approval correspond substantially to European Union standards. On granting marketing authorization, the price and amount of the National Health Authority subsidy are published in the official Health Gazette of the Ministry of Health. A pharmaceutical product may only be placed on the Hungarian market after such price and subsidy amounts have been published.

On January 1, 2003, Hungary joined the European Patent Convention and simultaneously amended its own patent act to conform to this convention. On the whole, the new patent act retained most provisions of the previous act, including the permission to perform research and development work and submission of dossiers during the patent term. This act, however, considers the maintenance of an inventory of such generics prior to the expiration of the patent to be infringement of the patent, while the maintenance of such an inventory was not considered infringement under the previous act.

In May 2004, Hungary joined the EU. As a result: (1) supplementary protection certificates became available in Hungary for products having marketing authorizations dated not earlier than January 1, 2000, which may extend the patent protection period for up to five years; (2) Hungary is able to participate in the EU’s mutual recognition procedure; and (3) from October 2005 the data exclusivity protection period will be extended from the current six years to ten or 11 years in effect in the EU.

Miscellaneous Regulatory Matters.

National, regional and local laws of general applicability, such as laws regulating working conditions, also govern Teva. In addition, Teva is subject, as are manufacturers generally, to various national, regional and local environmental protection laws and regulations, including those governing the discharge of material into the environment. Compliance with such environmental provisions is not expected to have a material effect on the operations of Teva in the foreseeable future.

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As discussed above, data exclusivity provisions exist in many countries worldwide and may be introduced by additional countries in the future, although their application is not uniform. In general, these exclusivity provisions prevent the approval and/or submission of generic drug applications to the health authorities for a fixed period of time following the first approval of the brand name product in that country. As these exclusivity provisions operate independently of patent exclusivity, they may prevent the submission of generic drug applications for some products even after the patent protection has expired.

Pharmaceutical Production

Teva operates 19 finished dosage pharmaceutical plants in North America, Europe and Israel. The plants manufacture solid dosage forms, injectables, liquids and semi-solids. During 2004, Teva’s plants produced approximately 20 billion tablets and capsules and approximately 180 million injectable units. Teva is completing the construction of a production facility in Jerusalem, for solid dosage forms. This state-of-the-art plant is expected to be operational in the second half of 2005.

Teva’s two main manufacturing technologies – solid dosage forms and injectables – are available in each of the three above-mentioned geographical areas. Teva USA derives most of its sales from products manufactured outside of the United States mainly by other Teva subsidiaries.

Teva’s plants in the United States and Canada, the Kfar Sava and Cepha plants in Israel and the Haarlem plant in The Netherlands are FDA-inspected. Achieving and maintaining quality standards in compliance with the current Good Manufacturing Practice (cGMP) regulations, as established by the FDA and other regulatory agencies worldwide, require sustained efforts and expenditures. Teva has spent, and will continue to spend, significant funds and dedicate substantial resources for this purpose.

Raw Materials for Pharmaceutical Production

Teva has taken a global approach to manage the commercial relations with its main suppliers. Strategic decisions are made on a global basis, while day-to-day operations are run locally. Most packaging materials are purchased locally.

Teva API division is by far the major raw materials supplier for Teva’s pharmaceutical businesses. The remaining raw materials are purchased from suppliers located mainly in Europe, the Far East and the United States. Most of the purchases from the U.S.-based suppliers are controlled substances.

In order to seek protection for itself from possible supply interruptions, Teva qualifies alternate suppliers for its main products. Teva has implemented a supplier audit program to ensure that its suppliers meet its standards.

In the United States, Teva USA utilizes controlled substances in certain of its products and therefore must meet the requirements of the Controlled Substances Act and the related regulations administered by the Drug Enforcement Administration. These regulations include quotas on procurement of controlled substances and stringent requirements for manufacturing controls and security to prevent pilferage of or unauthorized access to the drugs in each stage of the production and distribution process. Quotas for controlled substances may from time to time limit the ability of Teva USA to meet demand for these products in the short run.

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Organizational Structure

The following table sets forth, by geographic area (alphabetically), as of December 31, 2004, the name and jurisdiction of Teva’s operating subsidiaries. Except as otherwise indicated, Teva owns 100% of the ownership and voting interest in such subsidiaries.

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Teva leases certain of its facilities. The Kfar Sava plant, the Jerusalem pharmaceutical plant, the Netanya chemical plant and the Ramat Hovav plant are operated out of buildings owned by Teva on land leased from the Israel Lands Administration. The leases with respect to the Kfar Sava plant extend until 2032 and 2034, with an option to renew until 2081 and 2083, respectively. The leases with respect to the Netanya plant extend until 2018 and 2022, with an option to renew until 2067 and 2071, respectively. The lease with respect to the Ramat Hovav plant extends until 2043, with an option to renew until 2092. The lease with respect to the Jerusalem pharmaceutical plant extends until 2021, with an option to renew until 2070. All of the above payments due under these leases (other than the options) have been prepaid. The corporate headquarters in Petach Tikva is leased until December 2006, with an option to renew annually until December 2012.

In North America, Teva leases its facility located in North Wales, Pennsylvania, the initial term of which expires in 2011, with a 5-year extension option. Teva leases part of its facilities in Fairfield, New Jersey, expiring in 2008. The leases on the two buildings in which Sicor conducts its manufacturing operations in Irvine, California expire in 2007 and 2008, respectively. Leases on the other Irvine buildings, which are used for warehouse, packaging, research and office purposes, expire at various times from September 2005 through 2007; all but one of those leases (used for office purposes) contain options to renew for up to two additional 5-year periods. Part of Novopharm’s headquarters in Toronto, Ontario is leased through 2010, with an option to renew for one additional 5-year period, while the other part currently is in month-to-month status. Novopharm also leases a manufacturing site on a month-to-month basis and a warehouse in Toronto under a lease that expires in 2006. The lease on Novopharm’s Stoufville facility expires in 2013. Last year, Novopharm purchased a manufacturing facility located in Markham, Ontario. It leases an additional manufacturing facility in Markham, the term of which expires in 2006.

Teva owns all of its other facilities.

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