----

----

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

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

|   | For the fiscal year ended December 31, 2010 |
|--------|---------------------------------------------|

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

| Eran RotemChief Financial OfficerIndustrial Center Teradyon, P.O. Box 1365,Misgav 20179, IsraelTel:  972-4-990-0881 |
|-------------------------------------------------------------------------------------------------------------------------------|
| (Name, Telephone, E-mail and/or Facsimile number and Address of Registrant's Contact Person)                                  |

| Title of each class                          | Name of each exchange on which registered |
|----------------------------------------------|-------------------------------------------|
| Ordinary Shares,NIS 10.0 par value per share | Over-The-Counter Bulletin Board           |

----

| Large Accelerated filer o | Accelerated filer o | Non-accelerated filerx |
|---------------------------|---------------------|------------------------|

----

|   | ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 3  |   |
|--------|-----------|------------------------------------------------------------------------------|----|--------|
|   | ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 3  |   |
|   | ITEM 3.   | KEY INFORMATION                                                              | 3  |   |
|   | 3A.       | Selected Financial Data                                                      | 3  |   |
|   | 3B.       | Capitalization and Indebtedness                                              | 6  |   |
|   | 3C.       | Reasons for the Offer and Use of Proceeds                                    | 6  |   |
|   | 3D.       | Risk Factors                                                                 | 6  |   |
|   | ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 19 |   |
|   | 4A.       | History and Development of the Company                                       | 19 |   |
|   | 4D.       | Property, Plants and Equipment                                               | 34 |   |
|   | ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 36 |   |
|   | ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 36 |   |
|   | ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 53 |   |
|   | 6A.       | Directors and Senior Management                                              | 53 |   |
|   | 6B.       | Compensation                                                                 | 56 |   |
|   | 6C.       | Board Practices                                                              | 58 |   |
|   | 6D.       | Employees                                                                    | 61 |   |
|   | 6E.       | Share Ownership                                                              | 62 |   |
|   | ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 64 |   |
|   | 7A.       | Major Shareholders                                                           | 64 |   |
|   | 7B.       | Related Party Transactions                                                   | 67 |   |
|   | 7C.       | Interests of Experts and Counsel.                                            | 71 |   |
|   | ITEM 8.   | FINANCIAL INFORMATION                                                        | 71 |   |
|   | ITEM 9    | THE OFFER AND LISTING                                                        | 72 |   |
|   | ITEM 10.  | ADDITIONAL INFORMATION                                                       | 74 |   |
|   | 10A.      | Share Capital                                                                | 74 |   |
|   | 10B.      | Memorandum and Articles of Association                                       | 74 |   |
|   | 10C.      | Material Contracts                                                           | 76 |   |
|   | 10D.      | Exchange Controls                                                            | 86 |   |
|   | 10E.      | Taxation                                                                     | 86 |   |
|   | 10F.      | Dividends and Payment Agents                                                 | 90 |   |
|   | 10G.      | Statements by Experts                                                        | 90 |   |
|   | 10H.      | Documents on Display                                                         | 90 |   |
|   | 10I.      | Subsidiary Information                                                       | 90 |   |
|   | ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 91 |   |
|   | ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 92 |   |
|   | ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 92 |   |
|   | ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 92 |   |
|   | ITEM 15T. | CONTROLS AND PROCEDURES                                                      | 92 |   |
|   | ITEM 16.  | [RESERVED]                                                                   | 93 |   |
|   | 16A.      | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 93 |   |
|   | 16B.      | CODE OF ETHICS                                                               | 94 |   |
|   | 16C.      | ACCOUNTANTS' FEES AND SERVICES                                               | 94 |   |
|   | 16D.      | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 95 |   |
|   | 16E.      | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 95 |   |
|   | 16F.      | CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.                               | 95 |   |
|   | 16G.      | CORPORATE GOVERNANCE.                                                        | 95 |   |
|   | ITEM 17.  | FINANCIAL STATEMENTS                                                         | 96 |   |
|   | ITEM 18.  | FINANCIAL STATEMENTS                                                         | 96 |   |

----

|   | · | the liquidity challenges that we face; |
|--------|--------|----------------------------------------|

|   | · | our dependence on a small number of principal customers and on their continued purchase of our products in the same volumes or on the same terms and their ability to meet their payment obligations to us; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the effect of the worldwide recession on our target markets and  the cyclical nature of the clothing retail industry and the ongoing changes in fashion preferences; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | our failure to generate sufficient cash from our operations to pay our debt and our failure to meet our financial covenants in our bank loan agreements; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | the competitive nature of the markets in which we operate, including the ability of our competitors to enter into and compete in the seamless market in which we operate; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the potential adverse effect on our future operating efficiency resulting from our expansion into new product lines with more complicated products, different raw materials and changes in market trends; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | fluctuations in inflation and currency exchange rates; |
|--------|--------|--------------------------------------------------------|

|   | · | cost increase in the purchase of finished products or production services; |
|--------|--------|----------------------------------------------------------------------------|

|   | · | the limitations and restrictions imposed by our substantial debt obligations; |
|--------|--------|-------------------------------------------------------------------------------|

|   | · | the potential adverse effect on our business resulting from our international operations, including increased custom duties and import quotas (e.g., in China, where we manufacture for our swimwear division); |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | political, economic and social risks associated with international business and relating to operations in Israel. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------|

|   | · | the purchase of new equipment that may be necessary as a result of our expansion into new product lines; |
|--------|--------|----------------------------------------------------------------------------------------------------------|

|   | · | our dependence on subcontractors in connection with our manufacturing process, in particular the sewing, dyeing and finishing process; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|

|   | · | the fluctuating costs of raw materials; and |
|--------|--------|---------------------------------------------|

|   | · | dependence on our suppliers for our machinery and the maintenance of our machinery. |
|--------|--------|-------------------------------------------------------------------------------------|

----

| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
|---------|-------------------------------------------------------|

| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
|---------|-----------------------------------------|

| ITEM 3. | KEY INFORMATION |
|---------|-----------------|

| 3A. | Selected Financial Data |
|-----|-------------------------|

----

|                                                                                     |   | For the year endedDecember 31                     |      |
|------------------------------------------------------------------------------------------|--------|---------------------------------------------------|-----------|
|                                                                                     |   | 2007                                              |      |   | 2008 |   |   | 2009 |   |   | 2010 |   |
|                                                                                     |   | U.S. dollars in thousands (except per share data) |      |
| Statement of Income Data:                                                                |   |                                              |      |   |   |   |   |   |   |   |   |   |
| In accordance with IFRS                                                                  |   |                                              |      |   |   |   |   |   |   |   |   |   |
|                                                                                     |   |                                              |      |   |   |   |   |   |   |   |   |   |
| Sales                                                                                    |   | $                                                 | 158,614   |   |   | $ | 173,829 |   |   | $ | 115,538 |   |   | $ | 86,044 |   |
| Cost of sales, net                                                                       |   |                                              | 139,145   |   |   |   | 167,557 |   |   |   | 119,339 |   |   |   | 86,717 |   |
|                                                                                     |   |                                              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                                                                      |   |                                              | 19,469    |   |   |   | 6,272 |   |   |   | (3,801 | ) |   |   | (673 | ) |
| Selling and marketing expenses                                                           |   |                                              | 12,443    |   |   |   | 16,959 |   |   |   | 13,842 |   |   |   | 11,850 |   |
| General and administrative expenses                                                      |   |                                              | 5,190     |   |   |   | 6,406 |   |   |   | 3,779 |   |   |   | 4,050 |   |
| Other expenses (income)                                                                  |   |                                              | -         |   |   |   | 2,135 |   |   |   | (496 | ) |   |   | 6,233 |   |
|                                                                                     |   |                                              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                                  |   |                                              | 1,836     |   |   |   | (19,228 | ) |   |   | (20,926 | ) |   |   | (22,806 | ) |
| Loss from early repayment of subordinated note receivable                                |   |                                              | -         |   |   |   | - |   |   |   | 1,285 |   |   |   | - |   |
| Financial income                                                                         |   |                                              | 1,401     |   |   |   | 319 |   |   |   | 1,747 |   |   |   | 30 |   |
| Financial expenses                                                                       |   |                                              | (2,690    | ) |   |   | (3,347 | ) |   |   | (2,259 | ) |   |   | (2,379 | ) |
|                                                                                     |   |                                              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss before taxes on income                                                              |   |                                              | 547       |   |   |   | (22,256 | ) |   |   | (22,723 | ) |   |   | (25,155 | ) |
| Tax benefit                                                                              |   |                                              | 35        |   |   |   | 4,677 |   |   |   | 5,330 |   |   |   | 2,469 |   |
| Net income (loss)                                                                        |   | $                                                 | 582       |   |   | $ | (17,579 | )    |   | $ | (17,393 | ) |   | $ | (22,686 | ) |
| Basic and diluted net earnings (losses) per share                                        |   |                                              | 0.2       |   |   |   | (6.7 | ) |   |   | (6.6 | ) |   |   | (7.7 | ) |
|                                                                                     |   |                                              |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average number of shares used for computing basic earnings (losses) per share   |   |                                              | 2,118,816 |   |   |   | 2,120,298 |   |   |   | 2,120,298 |   |   |   | 6,441,996 |   |
| Weighted average number of shares used for computing diluted earnings (losses) per share |   |                                              | 2,118,816 |   |   |   | 2,120,298 |   |   |   | 2,120,298 |   |   |   | 6,441,996 |   |

----

|                                                                            |   | For the year endedDecember 31                    |      |
|---------------------------------------------------------------------------------|--------|--------------------------------------------------|-----------|
|                                                                            |   | 2006                                             |      |
|                                                                            |   | U.S. dollars in thousands(except per share data) |      |
| Statement of Income Data:                                                       |   |                                             |      |
| In accordance with U.S. GAAP                                                    |   |                                             |      |
|                                                                            |   |                                             |      |
| Sales                                                                           |   | $                                                | 188,104   |   |
| Cost of sales                                                                   |   |                                             | 145,144   |   |
|                                                                            |   |                                             |      |   |
| Gross profit                                                                    |   |                                             | 42,960    |   |
| Selling and marketing expenses                                                  |   |                                             | 11,573    |   |
| General and administrative expenses                                             |   |                                             | 5,504     |   |
|                                                                            |   |                                             |      |   |
| Operating income                                                                |   |                                             | 25,883    |   |
| Financial expenses, net                                                    |   |                                             | 1,912     |   |
|                                                                            |   |                                             |      |   |
| Income before taxes on income                                                   |   |                                             | 23,971    |   |
| Tax expenses                                                                    |   |                                             | 5,711     |   |
| Income from continuing operations                                               |   |                                             | 18,260    |   |
| Income (loss) from discontinued operations                                      |   |                                             | 120       |   |
| Net income                                                                      |   | $                                                | 18,380    |   |
|                                                                            |   |                                             |      |   |
| Basic and diluted net earnings per share from continuing operations:            |   |                                             |      |   |
| Basic net earnings per share                                                    |   |                                             | 9.0       |   |
| Diluted net earnings per share                                                  |   |                                             | 8.8       |   |
| Basic and diluted net earnings (losses) per share from discontinued operations: |   |                                             |      |   |
| Basic net earnings (losses) per share                                           |   |                                             | 0.1       |   |
| Diluted net earnings (losses) per share                                         |   |                                             | 0.1       |   |
| Basic and diluted net earnings per share:                                       |   |                                             |      |   |
| Basic net earnings per share                                                    |   |                                             | 9.1       |   |
| Diluted net earnings per share                                                  |   |                                             | 8.9       |   |
| Weighted average number of shares used for computing basic earnings per share   |   |                                             | 2,021,072 |   |
| Weighted average number of shares used for computing diluted earnings per share |   |                                             | 2,075,457 |   |

| Balance Sheet Data                                                                                                                                                                                                                                            |   | As of December 31,        |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|
| In accordance with IFRS                                                                                                                                                                                                                                       |   | 2007                      |    |   |   | 2008* |   |   |   | 2009 |   |   |   | 2010 |   |
|                                                                                                                                                                                                                                                          |   | (US Dollars in thousands) |    |
| Cash and cash equivalents                                                                                                                                                                                                                                |   | $                         | 2,384   |   |   | $ | 1,566 |   |   | $ | 1,904 |   |   | $ | 9,361 |   |
| Working capital  (deficit)                                                                                                                                                                                                                          |   |                      | 38,578  |   |   |   | 4,930 |   |   |   | (6,647 | ) |   |   | 11,465 |   |
| Total assets                                          |   |                      | 160,740 |   |   |   | 131,732 |   |   |   | 99,197 |   |   |   | 82,752 |   |
| Total debt(1)                                         |   |                      | 19,322  |   |   |   | 24,809 |   |   |   | 25,847 |   |   |   | 26,012 |   |
| Total equity                                          |   |                      | 89,380  |   |   |   | 63,745 |   |   |   | 46,995 |   |   |   | 35,910 |   |
|                                                                                                                                                                                                                                                          |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Share Capital                                         |   |                      | 7,518   |   |   |   | 7,518 |   |   |   | 7,518 |   |   |   |  19,818 |   |
|                                                                                                                                                                                                                                                          |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additional paid in capital                                                                                                                                                                                                                                    |   |                      | 106,864 |   |   |   | 107,104 |   |   |   | 107,522 |   |   |   | 107,204 |   |

----

| Balance Sheet Data                                                                                                                                                                                                                                                   |   | As of December 31,   |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|---------|
| In accordance with US GAAP                                                                                                                                                                                                                                           |   |                      | 2006*   |   |
|                                                                                                                                                                                                                                                                 |   | (US Dollars in thousands) |    |
| Cash and cash equivalents                                                                                                                                                                                                                                            |   | $                         | 3,966   |   |
| Working capital                                              |   |                      | 35,270  |   |
| Total assets                                                 |   |                      | 164,656 |   |
| Total debt(1)                                                |   |                      | 25,270  |   |
| Shareholders' equity                                         |   |                      | 82,230  |   |
|                                                                                                                                                                                                                                                                 |   |                      |    |   |
| Share Capital                                                |   |                      | 7,411   |   |
|                                                                                                                                                                                                                                                                 |   |                      |    |   |
| Additional paid-in capital                                                                                                                                                                                                                                           |   |                      | 101,684 |   |

| 3B. | Capitalization and Indebtedness |
|-----|---------------------------------|

| 3C. | Reasons for the Offer and Use of Proceeds |
|-----|-------------------------------------------|

| 3D. | Risk Factors |
|-----|--------------|

----

----

----

|   | · | our financial condition at the time; |
|--------|--------|--------------------------------------|

|   | · | restrictions in agreements governing our debt; and |
|--------|--------|----------------------------------------------------|

|   | · | other factors, including market conditions. |
|--------|--------|---------------------------------------------|

----

----

----

|   | · | changes in regulatory requirements or tax laws; |
|--------|--------|-------------------------------------------------|

|   | · | export restrictions, tariffs and other trade barriers; |
|--------|--------|--------------------------------------------------------|

|   | · | quotas imposed by international agreements between the United States and certain foreign countries; |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | currency fluctuations; |
|--------|--------|------------------------|

|   | · | longer payment cycles; |
|--------|--------|------------------------|

|   | · | difficulties in collecting accounts receivable; |
|--------|--------|-------------------------------------------------|

|   | · | political instability, hostility and seasonal reductions in business activities; and |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | strikes and general economic problems. |
|--------|--------|----------------------------------------|

----

----

----

----

|   | · | the timing, size and composition of orders from customers; |
|--------|--------|------------------------------------------------------------|

|   | · | varying levels of market acceptance of our products; |
|--------|--------|------------------------------------------------------|

|   | · | the timing of new product introductions by us, our customers or their competitors; |
|--------|--------|------------------------------------------------------------------------------------|

|   | · | fluctuations in the exchange rate between the NIS, the U.S. dollar and the Euro; |
|--------|--------|----------------------------------------------------------------------------------|

|   | · | economic conditions in the geographical areas in which we operate or sell products; and |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | · | operating efficiencies. |
|--------|--------|-------------------------|

----

----

----

| ITEM 4. | INFORMATION ON THE COMPANY |
|---------|----------------------------|

| 4A. | History and Development of the Company |
|-----|----------------------------------------|

| 1990   | First body size cotton panty with elastics adjustable to body size.                                                                                                                                                                                                |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1997   | Formation of Hi-Tex Founded by Tefron Ltd. ("Hi-Tex") and production of first Seamless products.                                                                                                                                                                   |
|   | Initial public offering of our Ordinary Shares on the NYSE.                                                                                                                                                                                                        |
| 2001   | Initial significant shifting of sewing production to Jordan.                                                                                                                                                                                                       |
| 2003   | Acquisition of Macro Clothing Ltd., an entity that develops, manufactures, markets and sells swimsuits and beachwear. Implementation of strategic steps to expand our product line, including active-wear products, to diversify our product line and client base. |

----

| 2004                                           | Closing of equity investments with two groups of investors in the aggregate amount of $20 million.                                                                                                                                                                                                                                                                                                                                                                    |
|------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2005                                      | Listing of our Ordinary Shares for trading on the Tel-Aviv Stock Exchange ("TASE") (in addition to the listing on the NYSE).                                                                                                                                                                                                                                                                                                                                          |
| 2006                                           | Closing of a public offering of Ordinary Shares and option certificates on the TASE for aggregate net proceeds of $13.8 million. We subsequently received approximately $5.7 million from the exercise of the option certificates, primarily in 2007.                                                                                                                                                                                                                 |
| December 2008                                  | Delisting of our Ordinary Shares from the NYSE due to failure to meet certain quantitative listing standards and quotation of our Ordinary Shares on the Over the Counter Bulletin Board.                                                                                                                                                                                                                                                                             |
| January 2010 March 2010    | Implementation of a turnaround plan to return the Company to profitability. Execution of agreement with our bank lenders, among other things, re-organizing our credit arrangements with our bank lenders. Closing of a rights offering which raised approximately $2.9 million and subsequent private placement to Mivtach Shamir Holdings, Ltd. and Ta-Top Limited Partnership, which raised approximately $1.1 million.                                       |
| December 2010                                  | Acquisition of the operations of Intimes Nouvelle Seamless Inc., a company operating in the women's intimate apparel field, manufactured with seamless technology, in exchange for the issuance to Nouvelle of 600,000 of the Company's ordinary shares . In addition, a concurrent investment of $5,813,000 in the Company by various investors. Execution of amendment to the agreement with our bank lenders for the provision of an additional $5 million credit. |

----

----

| 4B. | Business Overview |
|-----|-------------------|

----

----

|   | · | Product Design - Traditionally, manufacturers produce several samples of a garment from which apparel marketers can select.  In contrast, our sophisticated technology enables us to collaborate with our customers earlier in the design process to develop customized garments.  In addition, we work independently to develop new products, increase sales to existing customers and exploit market opportunities and increase penetration where we can establish a competitive advantage. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Raw Material Development - After a design is developed, raw materials for the production of the product are purchased.  Our raw materials include cotton yarns, blends of cotton and synthetic yarn (e.g., cotton-spandex, cotton lycra, and cotton-viscose), micro-fiber nylons and blends of micro-fiber nylon with spandex, elastic, polyester, lace and other innovative natural materials, some of which are developed by us or by suppliers for us, which are sold in a broad price range. We purchase our raw materials from several international and domestic Israeli suppliers, and historically we have generally not experienced difficulty in obtaining raw materials to meet our production requirements. Raw materials are generally purchased against actual orders or customers' firm commitments, although we have a policy of maintaining a minimum level of those raw materials that are in repeated demand. From time to time, when market conditions are favorable, we have entered into contracts with various suppliers of basic yarns for delivery over a period of three to six months. The costs of our raw materials are subject to fluctuations. See "Item 3. Key Information - 3D. Risk Factors – We are subject to fluctuating costs of raw materials." |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Knitting (only Cut & Sew) - The knitting needs of our Cut & Sew Division are provided by a subcontractor in Israel that currently supply substantially all of our fabric needs in Israel.  Our subcontractors utilize advanced and automated technology to knit tubular fabric, including bodysize fabrics. Bodysize fabrics, which are required for bodysize garments, enable maximum use of fabric and minimize waste during cutting. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | · | Dyeing and Finishing - All of our dyeing activity in our Cut & Sew Division is conducted by a subcontractor located in Israel. All of the dyeing and finishing needs of our Hi-Tex Division are provided by a different subcontractor in Israel.  Most of the dyeing machines used by the subcontractor for the purpose of providing dyeing services are owned by us. In addition, the subcontractor applies unique technologies and production methods for us, which have been developed by us, by the subcontractor for itself, or by us and the subcontractor jointly for us. We are dependent on this subcontractor for our dyeing and finishing needs at our Hi-Tex Division. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Cutting(only Cut & Sew) - Traditionally, manufacturers manually cut multiple layers of fabric on a cutting table.  To modernize the production process, manufacturers have used computerized, automatic cutting equipment.  Our employees and subcontractors use both this equipment and highly advanced machines that automatically and continuously lay and cut tubular knitted fabric to specified sizes, minimizing fabric waste and the amount of sewing required, which results in a more consistent and comfortable garment. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sewing(only Cut & Sew) - Cut fabrics are sewn to complete the garment, including the addition of accessories such as elastic waist and leg bands as well as labels. Working with computerized equipment and robotics, our employees and subcontractors sew garments with far greater precision than if sewn entirely by hand. Our Cut & Sew Division operates sewing facilities in Jordan, and also subcontracts sewing in Jordan. In addition, our Cut & Sew Division subcontracts a vertical manufacturing process in China, India and Cambodia. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Testing and Quality Control - We place significant emphasis on quality control and use quality assurance teams at each stage of the manufacturing process. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| Customer              |   | 2008   |   |   | 2009   |   |   | 2010                  |   |
|-----------------------|--------|--------|--------|--------|--------|--------|--------|-----------------------|--------|
|                  |   |   |   |   |   |   |   | (Dollars in millions) |   |   |   |   |   |   |   |
| Victoria's Secret (1) |   | $      | 56.9   |   |   |   | 32.7   | %                     |   | $ | 37.8 |   |   |   | 32.7 | % |   | $ | 33.3 |   |   |   | 38.7 | % |
| Calvin Klein          |   | $      | 3.9    |   |   |   | 2.3    | %                     |   | $ | 7.2 |   |   |   | 6.2 | % |   | $ | 8.1 |   |   |   | 9.4 | % |
| Wal-Mart              |   | $      | 0.8    |   |   |   | 0.5    | %                     |   | $ | 4.5 |   |   |   | 3.9 | % |   | $ | 7.0 |   |   |   | 8.2 | % |
| lululemon athletica   |   | $      | 3.4    |   |   |   | 2.0    | %                     |   | $ | 5.8 |   |   |   | 5.0 | % |   | $ | 4.3 |   |   |   | 5.0 | % |
| Nike                  |   | $      | 40.3   |   |   |   | 23.2   | %                     |   | $ | 6.7 |   |   |   | 5.8 | % |   |   | - |   |   |   | - |   |
| Others                |   | $      | 68.5   |   |   |   | 39.3   | %                     |   | $ | 53.5 |   |   |   | 46.4 | % |   | $ | 33.3 |   |   |   | 38.7 | % |
| Total                 |   | $      | 173.8  |   |   |   | 100    | %                     |   | $ | 115.5 |   |   |   | 100 | % |   | $ | 86.0 |   |   |   | 100 | % |

----

----

----

| The value of productiveassets before the expansion(NIS in millions) |   | The new proportion that the required investment bears to the value of productive assets |
|---------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|                                                                |   |                                                                                    |
| Up to NIS 140                                                       |   | 12%                                                                                     |
| NIS 140 - NIS 500                                                   |   | 7%                                                                                      |
| More than NIS 500                                                   |   | 5%                                                                                      |

----

----

----

----

| 4C. | Organizational Structure |
|-----|--------------------------|

| 4D. | Property, Plants and Equipment |
|-----|--------------------------------|

|  Facility in Israel                                                                                                                                                                                                                                                                 |   | Approx. Square Footage |    |   | Number of Employees |   |   | Lease Expiration |   |  Function |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|---------|--------|---------------------|--------|--------|------------------|--------|----------------|
|                                                                                                                                                                                                                                                                                     |   |                   |    |   |                |   |   |             |   |           |
| Petach Tikva (1)                                             |   |                   | 1,900   |   |                |   | 2      |             |   |           | 2011 |   | Management offices, partly sublease |
|                                                                                                                                                                                                                                                                                     |   |                   |    |   |                |   |   |             |   |           |   |   |   |
| Misgav:  Central Factory -   Hi-Tex  ("Hi-Tex Building 1") (2)                                                                                                                                                                                        |   |                   | 143,000 |   |                |   | 69     |             |   |           | 2019 |   | Knitting, storage and administrative functions |
| Misgav:  Central Factory -   Hi-Tex ("Hi-Tex Building 2")  (2)                                                                                                                                                                                             |   |                   | 178,000 |   |                |   | 447    |             |   |           | 2019 |   | Development, Knitting, packaging and storage and administrative functions |
| Rishon Le'Zion – Macro Center (3)                                                                                                                                                                                                                                                  |   |                   | 4,720   |   |                |   | 53     |             |   |           | 2015 |   | Design, development and administrative functions |
| Facility in Jordan                                                                                                                                                                                                                                                                       |   |                   |    |   |                |   |   |             |   |           |   |   |   |
| Irbid                                                        |   |                   | 152,600 |   |                |   | 419    |             |   |           | 2011 | (4) | Pressing, Sewing and packaging factory and logistic and some other manufacturing processes |

----

| Facility in United States,  England and China                                                                                                                                                                                                                       |   | Approx.Square Footage |    |   | Number ofPersonnel |   | Function |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|---------|--------|--------------------|--------|----------|
| Valdese, NC - Warehouse                                                                                                                                                                                                                                                       |   |                  | 163,610 |   |               |   | 10       |   | Warehouse and distributionLogistical center and stitching headquarters USA |
| Valdese, NC                                            |   |                  | 52,644  |   |               |   | -        |   | Subleased |
| New York City – Offices                                                                                                                                                                                                                                                 |   |                  | 1,500   |   |               |   | 3        |   | Sales Offices and Showroom |
| Los Angeles, CA – Offices                                                                                                                                                                                                                                               |   |                  | 1,652   |   |               |   | 5        |   |  Sales Offices and Showroom |
| Dong Guan, China – Office                                                                                                                                                                                                                                               |   |                  | 10,500  |   |               |   | 69       |   |  Sourcing and development |

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| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
|----------|---------------------------|

| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
|---------|----------------------------------------------|

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|   | · | Working to improve our ability to meet deadlines for supplying customers' orders by focusing on the planning processes, management focus on customer targets, addressing basic problems in the quality of products and addressing operative bottlenecks. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Continued reduction in the level of production waste, including identifying the basic problems in the fields of knitting, fixation, dyeing and sewing, improving quality control in the early stages of production, measuring and managing waste on the production floor level and in the various work stations and improving optimization of planning quantities to reduce logistic waste. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Taking efficiency steps on the Company's production floor by improving levels of efficiency and output mainly in the stages of knitting and sewing, including by changing work processes, training employees and increasing control over the production process. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Reducing purchasing costs, mainly in the purchasing of raw materials and auxiliary materials, through locating additional alternative suppliers to increase competition between the suppliers, and through the development of products with cheaper alternative raw materials. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Taking saving and efficiency measures in general as well as in regard to administrative expenses. In this context, the Company signed agreements with its landlord, RIET 1 Ltd., regarding the property on which the Company's plant is located, as described below in " – 4D. Property, Plants and Equipment - Israel."  The total amount saved as a result of the agreement with RIET 1 Ltd. is more than $1 million per year. |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

|   | · | Examining and improving the costing process and the mix of products and customers in order to prevent erosion in selling prices, and eliminating small customers and production of products with low profitability. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | · | Taking steps to expand our customer base and to increase our sales to existing customers by offering new product collections and improving our operating efficiency in order that we can offer a better cost structure. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Recruiting key personnel in the fields of textile and clothing to expand the Company's know-how basis. In this context, the Company hired Mr. Amit Meridor as the Company's CEO, Mr. Arnon Tiberg as the Company's Chairman of the Board of Directors, Mr. Guy Zimmerman as the Company's VP, Sales and Business Development, and Ms. Osnat Kaplan as the Company's Innovation manager and rehired Mr. Ilan Gilboa as the Company's EVP Operations and Customer Support. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Reorganization of the Company's debt structure with the banks, as described in "Item 10. Additional Information – C. Material Contracts – Agreement with Our Bank Lenders." |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                    |   | Year Ended December 31, |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                    |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
| Sales                                                                                                                                                                                                                                                                                                                                                                                                              |   |                    | 100    | % |   |   | 100 | % |   |   | 100 | % |
| Cost of sales                                                                                     |   |                    | 100.8  |   |   |   | 103.3 |   |   |   | 96.4 |   |
| Gross profit (loss)                                                                               |   |                    | (0.8   | ) |   |   | (3.3 | ) |   |   | 3.6 |   |
| Selling and marketing expenses                                                                    |   |                    | 13.8   |   |   |   | 11.9 |   |   |   | 9.7 |   |
| General and administrative expenses                                                               |   |                    | 4.7    |   |   |   | 3.3 |   |   |   | 3.7 |   |
| Other expenses (income)                                                                           |   |                    | 7.2    |   |   |   | (0.4 | ) |   |   | 1.3 |   |
| Operating loss                                                                                    |   |                    | (26.5  | ) |   |   | (18.1 | ) |   |   | (11.1 | ) |
| Loss from early repayment of subordinated note receivable                                                                                                                                                                                                                                                                                                                                                               |   |                    | -      |   |   |   | (1.1 | ) |   |   | - |   |
| Financial expenses, net                                                                           |   |                    | (2.7   | ) |   |   | (0.5 | ) |   |   | (1.7 | ) |
| Loss before taxes on income                                                                                                                                                                                                                                                                                                                                                                                             |   |                    | (29.2  | ) |   |   | (19.7 | ) |   |   | (12.8 | ) |
| Tax benefit                                                                                                                                                                                                                                                                                                                                                                                                             |   |                    | 2.9    |   |   |   | 4.6 |   |   |   | 2.7 |   |
| Net loss                                                                                                                                                                                                                                                                                                                                                                                                                |   |                    | (26.4  | ) |   |   | (15.1 | ) |   |   | (10.1 | ) |

----

|             |   | Sales                  |   |
|------------------|--------|------------------------|--------|
|             |   | 2010                   |   |   | 2009 |   |
|             |   | (Dollars in thousands) |   |
|             |   | Cut & Sew          |   |   | Seamless |   |   | Total |   |   | Cut & Sew |   |   | Seamless |   |   | Total |   |
| Intimate Apparel |   | $                      | 7,286  |   |   | $ | 44,469 |   |   | $ | 51,755 |   |   | $ | 19,152 |   |   | $ | 44,991 |   |   | $ | 64,143 |   |
| Active-wear      |   |                   | 1,808  |   |   |   | 8,381 |   |   |   | 10,189 |   |   |   | 4,218 |   |   |   | 17,315 |   |   |   | 21,533 |   |
| Swimwear         |   |                   | 24,100 |   |   |   | — |   |   |   | 24,100 |   |   |   | 29,862 |   |   |   | — |   |   |   | 29,862 |   |
| Total            |   |                   | 33,194 |   |   |   | 52,850 |   |   |   | 86,044 |   |   |   | 53,232 |   |   |   | 62,306 |   |   |   | 115,538 |   |

----

----

|             |   | Sales                  |   |
|------------------|--------|------------------------|--------|
|             |   | 2009                   |   |   | 2008 |   |
|             |   | (Dollars in thousands) |   |
|             |   | Cut & Sew          |   |   | Seamless |   |   | Total |   |   | Cut & Sew |   |   | Seamless |   |   | Total |   |
| Intimate Apparel |   | $                      | 19,152 |   |   | $ | 44,991 |   |   | $ | 64,143 |   |   | $ | 35,969 |   |   | $ | 57,714 |   |   | $ | 93,683 |   |
| Active-wear      |   |                   | 4,218  |   |   |   | 17,315 |   |   |   | 21,533 |   |   |   | 18,638 |   |   |   | 28,551 |   |   |   | 47,189 |   |
| Swimwear         |   |                   | 29,862 |   |   |   | — |   |   |   | 29,862 |   |   |   | 32,957 |   |   |   | — |   |   |   | 32,957 |   |
| Total            |   |                   | 53,232 |   |   |   | 62,306 |   |   |   | 115,538 |   |   |   | 87,564 |   |   |   | 86,265 |   |   |   | 173,829 |   |

----

----

----

| Contractual Obligations(1) (2)        |   | Total  |   |   | 2011   |   |   | 2012   |   |   | 2013   |   |   | 2014   |   |   | 2015   |   |   | 2016   |   |   |   | 2017+  |   |
|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Long-Term Bank Debt (3)               |   | $      | 20.0   |   |   |   | -      |   |   |   | -      |   |   | $      | 1.3    |   |   | $      | 1.3    |   |   | $      | 1.3    |   |   | $ | 1.3 |   |   | $ | 15.0 |   |
| Operating Lease Obligations           |   | $      | 16.1   |   |   | $      | 2.0    |   |   | $      | 1.9    |   |   | $      | 1.8    |   |   | $      | 1.8    |   |   | $      | 1.8    |   |   | $ | 1.8 |   |   | $ | 5.0 |   |
| Employee Benefit Liabilities, net (4) |   | $      | 0.5    |   |   | $      | 0.5    |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | - |   |   |   | - |   |
| Other Long-Term Obligations (5)       |   |   | --     |   |   |   | --     |   |   |   | --     |   |   |   | --     |   |   |   | --     |   |   |   | --     |   |   |   | -- |   |   |   | -- |   |
| Total Contractual Cash Obligations    |   | $      | 36.6   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

| Other Commercial Commitments |   | Total Amounts Available as of December 31, 2010 |   |   | Total credit lines as of December 31, 2010 (5) |   |
|------------------------------|--------|-------------------------------------------------|--------|--------|------------------------------------------------|--------|
|                         |
| Lines of Credit              |   | $                                               | 13.7   |   |                                           | $      | 6.2 |   |
| Guarantees/Letters of Credit |   | $                                               | 1.3    |   |                                           | $      | 2.4 |   |
| Total Commercial Commitments |   | $                                               | 15.0   |   |                                           | $      | 8.6 |   |

----

----

----

----

|   | 1. | Similar to the tax benefits under the Investment Law prior to the Amendment, an exemption from corporate tax may be available on undistributed income for a period of two to ten years, depending on the location of the Benefited Enterprise within Israel, as well as a reduced corporate tax rate of 10% to 25% for the remainder of the benefit period, depending on the level of foreign investment in each year. Benefits are generally granted for a term of seven to ten years, depending on the location of the enterprise within Israel and the level of foreign investment in the company. However, a company that pays a dividend out of income generated from the Benefited Enterprise during the tax exemption period is subject to deferred corporate tax with respect to the amount distributed (grossed up with the effective corporate tax rate which would have applied had the company not enjoyed the exemption) at the rate which would have applied had such company had the status of an Approved Enterprise. The company is required to withhold tax on such distribution at a rate of 15%; or |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | 2. | A special track which enables companies owning facilities in certain locations within Israel to pay corporate tax at the flat rate of 11.5% on the income of the Benefited Enterprise. The benefit period is for ten years. Upon payment of a dividend, the company is required to withhold tax on such dividend at a rate of 15% for Israeli residents and at a rate of 4% for foreign residents. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Year Ended December 31, |   | Average Rate    |   |   | High   |   |   | Low    |   |   | Period End |   |
|-------------------------|--------|-----------------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|
|                    |   | (NIS per $1.00) |   |
|                    |   |            |   |   |   |   |   |   |   |   |       |   |
| 2006                    |   |            | 4.46   |   |   |   | 4.73   |   |   |   | 4.18       |   |   |   | 4.23 |   |
| 2007                    |   |            | 4.11   |   |   |   | 4.34   |   |   |   | 3.83       |   |   |   | 3.85 |   |
| 2008                    |   |            | 3.59   |   |   |   | 4.02   |   |   |   | 3.23       |   |   |   | 3.80 |   |
| 2009                    |   |            | 3.93   |   |   |   | 4.26   |   |   |   | 3.69       |   |   |   | 3.78 |   |
| 2010                    |   |            | 3.73   |   |   |   | 3.89   |   |   |   | 3.55       |   |   |   | 3.55 |   |

| Month         |   | Average Rate    |   |   | High   |   |   | Low    |   |   | Period End |   |
|---------------|--------|-----------------|--------|--------|--------|--------|--------|--------|--------|--------|------------|--------|
|          |   | (NIS per $1.00) |   |
| December 2010 |   |            | 3.60   |   |   |   | 3.67   |   |   |   | 3.55       |   |   |   | 3.55 |   |
| January 2011  |   |            | 3.58   |   |   |   | 3.71   |   |   |   | 3.53       |   |   |   | 3.71 |   |
| February 2011 |   |            | 3.66   |   |   |   | 3.71   |   |   |   | 3.53       |   |   |   | 3.71 |   |
| March 2011    |   |            | 3.56   |   |   |   | 3.64   |   |   |   | 3.48       |   |   |   | 3.48 |   |
| April 2011    |   |            | 3.43   |   |   |   | 3.47   |   |   |   | 3.40       |   |   |   | 3.40 |   |
| May 2011      |   |            | 3.47   |   |   |   | 3.54   |   |   |   | 3.38       |   |   |   | 3.44 |   |

----

----

| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
|---------|--------------------------------------------|

| 6A. | Directors and Senior Management |
|-----|---------------------------------|

| Name                                                                                                                                                                                                                                                                                                                                             |   | Age    |   | Position                                                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                             |   |   |   |                                                          |
| Arnon Tiberg                                                                                                                                                                                                                                                                                                                                     |   | 67     |   | Chairman of the Board ( commencing July 5, 2010)              |
| Amit Meridor                                                       |   | 50     |   | Chief Executive Officer                                       |
| Zvi Limon                                                                                                                                                                                                                                                                                                                                        |   | 52     |   | Director                                                      |
| Avi Zigelman                                                       |   | 54     |   | Director                                                      |
| Eli Admoni                                                                                                                                                                                                                                                                                                                                       |   | 71     |   | External Director                                             |
| Aviram Lahav                                                                                                                                                                                                                                                                                                                                     |   | 52     |   | External Director (commencing August 26, 2010)                |
| Brahm M. Gelfand                                                                                                                                                                                                                                                                                                                                 |   | 74     |   | Director (commencing December 29, 2010)                       |
| Yossi Shachak                                                                                                                                                                                                                                                                                                                                    |   | 66     |   | Director (commencing December 29, 2010)                       |
| Guy Shamir                                                                                                                                                                                                                                                                                                                                       |   | 33     |   | Director (commencing December 29, 2010)                       |
| Eran Rotem                                                         |   | 43     |   | Chief Financial Officer                                       |
| Ilan Gilboa                                                                                                                                                                                                                                                                                                                                      |   | 43     |   | EVP Operations and Customer Support                           |
| Osnat Kaplan                                                                                                                                                                                                                                                                                                                                     |   | 46     |   | Innovation Manager                                            |
| Guy Zimmerman                                                                                                                                                                                                                                                                                                                                    |   | 44     |   | VP Sales and Business Development                             |
| David Piller                                                                                                                                                                                                                                                                                                                                     |   | 51     |   | Swimwear Division Manager                                     |
| Orna Marom                                                                                                                                                                                                                                                                                                              |   | 54     |   | Company Secretary and General Counsel (through June 30, 2011) |

----

----

----

| 6B. | Compensation |
|-----|--------------|

----

----

| 6C. | Board Practices |
|-----|-----------------|

----

----

----

| 6D. | Employees |
|-----|-----------|

----

| 6E. | Share Ownership |
|-----|-----------------|

| Name                                                  |   | Number ofOrdinary Shares |    |   | % of Ordinary Shares Outstanding** |   |
|-------------------------------------------------------|--------|--------------------------|---------|--------|------------------------------------|--------|
|                                                  |   |                     |    |   |                               |   |
| Arnon Tiberg                                          |   |                     | *       |   |                               |   | * |   |
| Avi Zigelman                                          |   |                     | -       |   |                               |   | - |   |
| Eli Admoni                                            |   |                     | -       |   |                               |   | - |   |
| Zvi Limon                                             |   |                     | 458,752 | (1)    |                               |   | 7 | % |
| Aviram Lahav                                          |   |                     | -       |   |                               |   | - |   |
| Yossi Shachak                                         |   |                     | -       |   |                               |   | - |   |
| Guy Shamir (the son of Meir Shamir)                   |   |                     | -       |   |                               |   | - |   |
| Brahm M. Gelfand                                      |   |                     | -       |   |                               |   | - |   |
| Amit Meridor                                          |   |                     | *       |   |                               |   | * |   |
| Eran Rotem                                            |   |                     | *       |   |                               |   | * |   |
| Ilan Gilboa                                           |   |                     | *       |   |                               |   | * |   |
| Guy Zimmerman                                         |   |                     | *       |   |                               |   | * |   |
| Osnat Kaplan                                          |   |                     | *       |   |                               |   | * |   |
| David Piller                                          |   |                     | *       |   |                               |   | * |   |
| Orna Goldner - Marom                                  |   |                     | -       |   |                               |   | - |   |
|                                                  |   |                     |    |   |                               |   |   |   |
| Directors and senior managers as a group (15 persons) |   |                     | 683,862 | (2)    |                               |   | 10.61 | % |

| ___________________*         Less than 1% of the outstanding Ordinary Shares.**       Does not take into account 99,740 Ordinary Shares held by a wholly owned subsidiary of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) Consists of (i) 458,752 Ordinary Shares held by Rimon Investment Master Fund, LP ("Rimon"), which Mr. Zvi Limon may be deemed to beneficially own under the U.S. securities laws since he serves as a partner in the management company of Rimon. (2) Consists of (i) 458,752 Ordinary Shares held by Rimon which Mr. Zvi Limon may be deemed to beneficially own under U.S. securities laws since he serves as a partner in the management company of Rimon; (ii) 120 Ordinary Shares held by one executive; and (iii) options to purchase 225,110 Ordinary Shares. The exercise prices of these options range from $2.1 to $15 per share. These options will expire between 2010 and 2020. |

----

----

| ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
|---------|---------------------------------------------------|

| 7A. | Major Shareholders |
|-----|--------------------|

----

| Name                                                                                                |   | Number of Shares Owned |      |   | Percent of Ordinary Shares * |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------|-----------|--------|------------------------------|--------|
| Litef Holdings Inc9500 Meilleur St.Montreal Quebec Canada                                           |   |                   | 1,577,619 | (1)    |                         |   | 24.1 | %     |
|                                                                                                |   |                   |      |   |                         |   |   |   |
| Intimes Nouvelle Seamless Inc9500 Meilleur St.Montreal Quebec Canada                                |   |                   | 600,000   | (2)    |                         |   | 9.2 | % |
|                                                                                                |   |                   |      |   |                         |   |   |   |
| Norfet, Limited Partnership c/o Fimi 2001 Ltd."Rubinstein House"37 Begin Rd.Tel Aviv, Israel        |   |                   | 461,308   | (3)    |                         |   | 7.1 | % |
|                                                                                                |   |                   |      |   |                         |   |   |   |
| Ta – Top Limited Partnership.c/o Fimi 2001 Ltd."Rubinstein House"37 Begin Rd.Tel Aviv, Israel |   |                   | 149,124   | (3)(4) |                         |   | 2.3 | % |
|                                                                                                |   |                   |      |   |                         |   |   |   |
| Mivtach Shamir Holdings, Ltd. 27 Habarzel StTel Aviv, Israel                                        |   |                   | 768,171   | (3)(5) |                         |   | 11.7 | % |
|                                                                                                |   |                   |      |   |                         |   |   |   |
| Rimon Investment Master Fund L.P.1 Azrieli Center, Round Building,Tel Aviv, Israel                  |   |                   | 458,752   | (6)    |                         |   | 7.0 | % |

| * | Does not take into account 99,740 Ordinary Shares held by a wholly-owned subsidiary of the Company. |
|---|-----------------------------------------------------------------------------------------------------|

|   | (1) | To the best of the Company's knowledge, Litef Holdings Inc. is a private company incorporated in Canada and controlled by Mr. Martin Lieberman (one of the shareholders in Nouvelle). The number of shares above reflects the 1,577,619 ordinary shares beneficially owned by Litef Holdings, Inc.  In addition, because Nouvelle, Mivtach Shamir, Litef Holdings Inc., Benny Lieberman and Martin Lieberman are all parties to a shareholders' agreement (described below in " – 7B. Related Party Transactions."), Litef Holdings may be deemed to beneficially own all of the shares held by the other parties to the agreement, and the number of shares in this table also reflects this deemed beneficial ownership by Litef Holdings of the ordinary shares held by all of the parties to this agreement. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | To the best of the Company's knowledge, the shareholders in Nouvelle are Manufacture de Bas Culottes Lamour Inc. and Yyad Holdings Ltd., in equal parts. To the best of the Company's knowledge, the shares of Yyad Holdings Ltd. are held in whole by Mr Willy Lieberman (who currently serves as the Company's Director of Sales of the North America mass market), and the shares of Manufacture de Bas Culottes Lamour Inc. are held as follows: (i) 75% by Aaron Lieberman in trust by the Aharon Lieberman Family and through his holdings in Litef Holdings Inc; and (ii) 25% by the late Sam Lieberman in trust by the Sam Lieberman Family and through Sam Lieberman's holdings in Samlieb Holdings Inc. To the best of the Company's knowledge, Aaron Lieberman and the late Sam Lieberman were brothers and Willy Lieberman is the son of the late Sam Lieberman. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | (3) | Norfet L.P is an Israeli partnership. As of May 31, 2011, 7.76% of Norfet was held by FIMI Opportunity Fund, LP, approximately 40.15% of Norfet was held by FIMI Israel Opportunity Fund, Limited Partnership, approximately 42.29% was held by Mivtach Shamir Holdings Ltd., approximately 6.06% was held by Yashir Provident Funds Ltd. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (4) | As described in footnote (3) above, FIMI 2001 Ltd. may be deemed to beneficially own all of the 461,308 Ordinary Shares held directly by Norfet. FIMI 2001 Ltd. may also be deemed to beneficially own  149,124 shares held by Ta-Top, Limited Partnership, due to FIMI 2001 Ltd.'s position as the managing general partner of FIMI Delaware, which is the sole shareholder of TA-TEK Ltd., the general partner of Ta-Top, Limited Partnership. Mr. Ishay Davidi may be deemed to beneficially own the shares held by FIMI 2001 Ltd. due to his position as CEO of FIMI 2001. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   |   |
|--------|--------|

|   |  (5) | Mivtach Shamir Holdings, Ltd. is an Israeli public company traded on the Tel Aviv Stock Exchange.  Mivtach-Shamir directly owns 768,171 Ordinary Shares. |
|--------|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   |  (6) | To the best of the Company's knowledge, the following are interested parties in Rimon Investment Master Fund L.P.: Zvi Limon, director in the company, is the managing partner in the management company that manages this partnership, Rimon Management Z.T. (2005) Ltd. (Private Company No. 513738831) and holds 33% of the voting rights; Dan Tocatly owns 33% of the voting rights, and Ziv Gil owns 33% of the voting rights in the company. |
|--------|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 7B. | Related Party Transactions |
|-----|----------------------------|

----

----

----

----

| 7C. | Interests of Experts and Counsel. |
|-----|-----------------------------------|

| ITEM 8. | FINANCIAL INFORMATION |
|---------|-----------------------|

----

| ITEM 9 | THE OFFER AND LISTING |
|--------|-----------------------|

| 9A. | Offer and Listing Details |
|-----|---------------------------|

|   |   | High   |   |   | Low    |   |
|--------|--------|--------|--------|--------|--------|--------|
|   |   |   |   |   |   |   |
| 2006   |   | $      | 130.5  |   |   | $      | 83.0 |   |
| 2007   |   | $      | 109.5  |   |   | $      | 40.5 |   |
| 2008   |   | $      | 56.5   |   |   | $      | 2.5 |   |
| 2009   |   | $      | 6.4    |   |   | $      | 2.2 |   |
| 2010   |   | $      | 4.6    |   |   | $      | 1.5 |   |

| 2009                                                                                                                       |   | High   |   |   | Low    |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| First quarter                                                                                                              |   | $      | 4.0    |   |   | $      | 2.2 |   |
| Second quarter                                                                                                             |   | $      | 4.4    |   |   | $      | 3.2 |   |
| Third quarter                                                                                                              |   | $      | 6.1    |   |   | $      | 3.5 |   |
| Fourth quarter                                                                                                             |   | $      | 6.35   |   |   | $      | 2.7 |   |
| 2010                                                                                                                       |   |   |   |   |   |   |   |   |
| First quarter                                                                                                              |   | $      | 4.6    |   |   | $      | 3.5 |   |
| Second quarter                                                                                                             |   | $      | 4.0    |   |   | $      | 1.5 |   |
| Third quarter                                                                                               |   | $      | 1.8    |   |   | $      | 1.5 |   |
| Fourth quarter                                                                                                             |   | $      | 4.0    |   |   | $      | 2.6 |   |
| 2011                                                                                                                       |   |   |   |   |   |   |   |   |
| First quarter                                                                                          |   | $      | 4.2    |   |   | $      | 3.3 |   |
| Second quarter (through June 15, 2011)               |   | $      | 3.4    |   |   | $      | 2.0 |   |

----

| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| January                                                                                      |   | $      | 4.2    |   |   | $      | 3.7 |   |
| February                                                                                     |   | $      | 4.1    |   |   | $      | 3.6 |   |
| March                                                                                        |   | $      | 3.6    |   |   | $      | 3.3 |   |
| April                                                                                        |   | $      | 3.4    |   |   | $      | 3.0 |   |
| May                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $      | 3.0    |   |   | $      | 2.7 |   |
| June (through June 15, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $      | 2.7    |   |   | $      | 2.0 |   |

|   |   | High   |                 |   | Low    |   |
|--------|--------|--------|----------------------|--------|--------|--------|
|   |   |   |                 |   |   |   |
| 2008   |   |   | NIS 205.0            |   |   |   | NIS  12.0 |   |
| 2009   |   |   | NIS   25.5 |   |   |   | NIS  10.5 |   |
| 2010   |   |   | NIS   16.3 |   |   |   | NIS    5.2 |   |

| 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | High   |            |   | Low    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-----------------|--------|--------|--------|
| First quarter                                                                                      |   |   | NIS   16.3 |   |   |   | NIS  12.1 |   |
| Second quarter                                                                                     |   |   | NIS   19.8 |   |   |   | NIS  13.4 |   |
| Third quarter                                                                                      |   |   | NIS   25.5 |   |   |   | NIS  13.4 |   |
| Fourth quarter                                                                                     |   |   | NIS   21.9 |   |   |   | NIS  10.5 |   |
| 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |            |   |   |   |   |   |
| First quarter                                                                                      |   |   | NIS   16.3 |   |   |   | NIS  12.9 |   |
| Second quarter                                                                                     |   |   | NIS   15.1 |   |   |   | NIS    5.6 |   |
| Third quarter                                                                                      |   |   | NIS   14.6 |   |   |   | NIS    5.2 |   |
| Fourth quarter                                                                                     |   |   | NIS   15.2 |   |   |   | NIS    9.8 |   |
| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |            |   |   |   |   |   |
| First quarter                                                                                      |   |   | NIS   15.6 |   |   |   | NIS  12.1 |   |
| Second quarter (through June 15, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   | NIS   12.2 |   |   |   | NIS    7.2 |   |

| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |                       |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------|--------|--------|--------|
| January                                                                                      |   |   | NIS   15.6            |   |   |   | NIS  12.1 |   |
| February                                                                                     |   |   | NIS   15.2            |   |   |   | NIS  13.2 |   |
| March                                                                                        |   |   | NIS   13.5            |   |   |   | NIS  12.1 |   |
| April                                                                                        |   |   | NIS   12.2            |   |   |   | NIS  10.2 |   |
| May                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   | NIS   10.5            |   |   |   | NIS    8.4 |   |
| June (through June 15, 2011)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   | NIS     8.2 |   |   |   | NIS    7.2 |   |

----

| 9B. | Plan of Distribution |
|-----|----------------------|

| 9C. | Markets |
|-----|---------|

| 9D. | Selling Shareholders |
|-----|----------------------|

| 9E. | Dilution |
|-----|----------|

| 9F. | Expenses of the Issue |
|-----|-----------------------|

| ITEM 10. | ADDITIONAL INFORMATION |
|----------|------------------------|

| 10A. | Share Capital |
|------|---------------|

| 10B. | Memorandum and Articles of Association |
|------|----------------------------------------|

----

----

| 10C. | Material Contracts. |
|------|---------------------|

----

----

| · | the loan of $3.8 million is for a period of 4 years. |
|--------|------------------------------------------------------|

----

| · | the principal of Loan 1 bears annual interest at a rate agreed to by the Company and each of the bank. |
|--------|--------------------------------------------------------------------------------------------------------|

| · | the interest on Loan 1 is payable by the Company in consecutive monthly installments commencing from the date on which Loan 1 is provided; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

| · | the principal of Loan 1 is payable in equal consecutive monthly installments, commencing from the conclusion of 12 months from the date of execution of the Amendment (the "Grace Period") until the final and full repayment of Loan 1. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | An additional loan of $1.2 million was provided by the bank lenders and bears annual interest at a rate agreed upon by the Company and each of the banks. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The interest on Loan 2 will be paid by the Company in consecutive monthly installments, commencing from the date on which Loan 2 is provided |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------|

| · | A precondition for the provision of the aforementioned loans was that shareholders equity, of not less than $5 million and not more than $5.9 million (the "Infusion of Capital"), be invested in the Company. An additional precondition was the submission of letters of undertaking by the controlling shareholders of the Company, whose content had to be to the bank lenders satisfaction, and had to include, inter alia, an undertaking not to effect a change of ownership and/or control in the Company without obtaining the bank lenders' consent and an undertaking not to compete with the Company's business. The infusion of such capital was made, and the letters of undertaking were sent to the banks as required. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Notwithstanding the contents of the Agreement with the bank lenders, dated March 2, 2010, the Infusion of Capital shall not be used for the purpose of settling credit previously provided by the bank lenders to the Company. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The ratio between the tangible shareholders' equity and the total balance shall not, at any time, fall short of 30%; but in any event, the tangible shareholders' equity shall not fall short of the following amounts: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | m | In 2010 – $28,000,000 |
|--------|---|-----------------------------|

|   | m | In 2011 –$29,500,000 |
|--------|---|----------------------------|

|   | m | In 2012 – $32,000,000 |
|--------|---|-----------------------------|

|   | m | From 2013 onwards – $35,000,000. |
|--------|---|----------------------------------------|

----

| · | The net trade receivables of the Company shall not fall short, at any time, of the following amounts: |
|--------|-------------------------------------------------------------------------------------------------------|

|   | m | In 2010 – $9,000,000 |
|--------|---|----------------------------|

|   | m | In 2011 – $12,500,000 |
|--------|---|-----------------------------|

|   | m | From 2012 onwards – $14,000,000 |
|--------|---|---------------------------------------|

| · | By December 31, 2011, the Company is entitled to perform factoring transactions (lien and/or sale of customers' notes in favor of third parties in order to provide financing), subject to the proviso that the consideration from such transaction shall be at least 80% of the amount of the note or invoice, which shall be used to finance operating capital needs, and that the total amount in respect to which factoring transactions shall be performed shall not exceed, at any time, $5,000,000. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The total amount of the Company's inventory and customer capital balances shall not fall short, at any time, of $33,000,000, except with regard to the financial statements of the third quarter of every calendar year, in which the total amount of inventory and accounts receivable shall not fall short of $29,000,000. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The ratio between the total amount of the Company's debts and liabilities towards the banking corporations and other financial organizations and the Company's annual EBITDA, according to the annual consolidated financial reports shall be as follows: |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | m | In 2011 – shall not exceed 9.5. |
|--------|---|---------------------------------------|

|   | m | In 2012 – shall not exceed 8.5. |
|--------|---|---------------------------------------|

|   | m | In 2013 – shall not exceed 7.5. |
|--------|---|---------------------------------------|

|   | m | In 2014 – shall not exceed 6.5. |
|--------|---|---------------------------------------|

|   | m | From 2015 onwards – shall not exceed 5.5. |
|--------|---|-------------------------------------------------|

| · | In any event in which part of the Company's fixed assets are sold and the amount to be received from such sale does not exceed $2,000,000 cumulatively – 50% of the consideration must be used on the date of receipt thereof for the purpose of settling credits and loans under the Agreement and the Amendment thereof, and 50% must be used as part of the Company's operating capital.  For any amount above $2,000,000 cumulatively – such amount shall be used on the date of receipt thereof for the purpose of repayment of loan A. The provisions of the Agreement will apply regarding the sale of any other asset which is not Equipment. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | To allot to the bank lenders, following the Infusion of Capital, gratis, a total amount of 200,000 non negotiable option warrants, exercisable into 200,000 shares of the Company, with a nominal value of NIS 10 each, with an exercise price of $3 per share. The option warrants shall be exercisable for a period of 72 months from the date of execution of the Amendment. The allotment of the option warrants is subject to receiving all of the approvals required by law (including the approval of the stock exchange regarding the registering of the shares as a result of exercising the option warrants). |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Not to effect any change in ownership and/or in the control of the Company (by Intimes Nouvelle Seamless Inc., Litef Holdings Inc., Mivtach Shamir Holdings Ltd., Ben Lieberman and Martin Lieberman) without obtaining the bank lenders' prior written consent with regard to the ownership and control structure which will exist immediately after the completion of the transaction. Notwithstanding the aforesaid, a cumulative change of up to 5% of the holdings of the abovementioned entities shall not constitute a breach of the Company's obligation, provided that the holdings of all of the abovementioned entities shall not fall short, at any time, of 45% of the Company's issued and paid up share capital. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| · | Not to have holdings in subsidiaries or other associated companies, unless such companies sign letters of undertaking towards the bank lenders. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

| 10D. | Exchange Controls |
|------|-------------------|

| 10E. | Taxation  |
|------|----------------|

|   | ● | a citizen or resident of the United States; |
|--------|---------|---------------------------------------------|

|   | ● | a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof; |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | ● | an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
|--------|---------|---------------------------------------------------------------------------------------------------|

|   | ● | a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or, if it was in existence on August 20, 1996, was treated as a U.S. person on the previous day and has validly elected to continue to be so treated, |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

| 10F.  | Dividends and Payment Agents |
|------------|------------------------------|

| 10G. | Statements by Experts |
|------|-----------------------|

| 10H. | Documents on Display |
|------|----------------------|

| 10I. | Subsidiary Information |
|------|------------------------|

----

| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|----------|------------------------------------------------------------|

| ● | offset against changes in the fair value of the hedged assets or liabilities through earnings, or |
|---------|---------------------------------------------------------------------------------------------------|

| ● | recognized in other comprehensive income until the hedged item is recognized in earnings. |
|---------|-------------------------------------------------------------------------------------------|

----

| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
|----------|--------------------------------------------------------|

| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
|----------|-------------------------------------------------|

| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
|----------|------------------------------------------------------------------------------|

| 14A. to E. | Not Applicable. |
|------------|-----------------|

| ITEM 15T. | CONTROLS AND PROCEDURES |
|-----------|-------------------------|

----

|   | · | pertain to the maintenance of our records that in reasonable detail accurately and fairly reflect our transactions and asset dispositions; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance that our transactions are recorded as necessary to permit the preparation of our financial statements in accordance with generally accepted accounting principles; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance that our receipts and expenditures are made only in accordance with authorizations of our management and Board of Directors (as appropriate); and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ITEM 16. | [RESERVED] |
|----------|------------|

| 16A. | AUDIT COMMITTEE FINANCIAL EXPERT |
|------|----------------------------------|

----

| 16B. | CODE OF ETHICS |
|------|----------------|

|   | 1. | From our main web page, first click on the "Investor Relations" can be found on the right side of the bar menu. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|   | 2. | Next, click on "company information", can be found on the left side of the sub bar menu. |
|--------|----|------------------------------------------------------------------------------------------|

|   | 3. | Next, click on "code of business ethics". |
|--------|----|-------------------------------------------|

| 16C. | ACCOUNTANTS' FEES AND SERVICES |
|------|--------------------------------|

|               |   | US$ 2010 |    |   | US$ 2009 |   |
|--------------------|--------|----------|---------|--------|----------|--------|
| Audit Fees         |   | $        | 229,000 |   |     | $      | 300,000 |   |
| Audit-related Fees |   | $        | 43,000  |   |     | $      | 32,000 |   |
| Tax Fees           |   | $        | 15,000  |   |     | $      | 15,000 |   |
| All Other Fees     |   |     | -       |   |     |   | - |   |
| TOTAL              |   | $        | 287,000 |   |     | $      | 347,000 |   |

----

| 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. |
|------|-------------------------------------------------------------|

| 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. |
|------|-------------------------------------------------------------------------|

| 16F. | CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT. |
|------|------------------------------------------------|

| 16G. | CORPORATE GOVERNANCE. |
|------|-----------------------|

----

| ITEM 17. | FINANCIAL STATEMENTS |
|----------|----------------------|

| ITEM 18. | FINANCIAL STATEMENTS |
|----------|----------------------|

| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | Page |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| Index to Consolidated Financial Statements                                                                                                    | F-1 |
| Reports of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | F-2 |
| Consolidated Balance Sheets                                                                                                                   | F-3 |
| Consolidated Statements of income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | F-4 |
| Consolidated Statements of Comprehensive income                                                                                               | F-5 |
| Consolidated Statements of changes in Equity                                                                                                  | F-6 |
| Consolidated Statements of Cash Flows                                                                                                         | F-7 – F-9 |
| Notes to the Consolidated Financial Statements                                                                                                | F-10 – F-75 |
| Appendix to Consolidated Financial statements-List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | F-76 |

| ITEM 19. | EXHIBITS  |
|----------|----------------|

| 1.1 | Amended and Restated Memorandum of Association of the Company (incorporated by reference to Exhibit 1.1 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 1.2 | Amended and Restated Articles of Association of the Company (incorporated by reference to Annex A to the Registrant's Report on Form 6-K, dated January 20, 2009). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.1 | Form of Credit Agreement, dated as of December 13, 1999, among AWS Acquisition Corp., Israel Discount Bank of New York and Bank Hapoalim B.M., New York Branch as Administrative Agent (incorporated by reference to Exhibit 99(b)(2) to Amendment No. 2 to Schedule 14D-1 in respect of Alba-Waldensian, Inc. filed by the Company on December 13, 1999). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.2 | Letter, dated March 2, 2004, from Israel Discount Bank Ltd. to the Company regarding shareholders' equity requirements under the Credit Agreement (incorporated by reference to Exhibit 2.8 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.3 | Letter, dated March 2, 2004, from Bank Hapoalim to the Company regarding shareholders' equity requirements under the Credit Agreement (incorporated by reference to Exhibit 2.9 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.4 | Letter, dated February 16, 2004, from Israel Discount Bank to the Company regarding revised repayment schedule and revised shareholders' equity requirements under the Credit Agreement (incorporated by reference to Exhibit 2.10 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 2.5 | Letter, dated February 15, 2004, from Bank Hapoalim to the Company regarding revised repayment schedule under the Credit Agreement (incorporated by reference to Exhibit 2.11 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.6 | Letter, dated March 31, 2004, from Bank Hapoalim to the Company regarding revised shareholders' equity requirements under the Credit Agreement (incorporated by reference to Exhibit 2.12 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.7 | Sixth Amendment to Credit Agreement, dated December 15, 2004, among Alba-Waldensian, Inc. and Bank Hapoalim, as Agent and Lender, together with Term B Notes (incorporated by reference to Exhibit 2.7 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.8 | Loan Agreement, dated as of December 21, 2004, between Israel Discount Bank and Hi-Tex  Founded by Tefron Ltd (incorporated by reference to Exhibit 2.12 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.9 | Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and Hi-Tex  Founded by Tefron Ltd (incorporated by reference to Exhibit 2.13 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.10 | Loan Agreement, dated as of December 25, 2004, between Israel Discount Bank and the Company (incorporated by reference to Exhibit 2.14 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.11 | Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and the Company (incorporated by reference to Exhibit 2.15 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.12 | Letter, dated March 24, 2009, from Bank Hapoalim to the Company regarding covenant waiver (incorporated by reference to Exhibit 2.12 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.13 | Letter, dated March 25, 2009, from Israel Discount Bank to the Company regarding covenant waiver (incorporated by reference to Exhibit 2.13 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2.14 | Letter, dated March 31, 2009, from Bank Leumi to the Company regarding covenant waiver (incorporated by reference to Exhibit 2.14 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.1 | Membership Interest Redemption Agreement, dated April 26, 2006, by and between AlbaHealth, LLC and Tefron USA, Inc. (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.2 | Subordination Agreement, dated April 26, 2006, by Tefron USA, Inc. in favor of Suntrust Bank, in its capacity as administrative agent for the lenders from time to time party to the Senior Credit Agreement (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.3 | Subordination Agreement, dated December 31, 2008, by Tefron USA, Inc. in favor of Branch Banking and Trust Company (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| 4.4 | Amended and Restated Unsecured Subordinated Promissory Note in the principal amount of US $3 million, dated December 31, 2008, by AlbaHealth LLC. in favor of Tefron USA, Inc. (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2008). |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.5 | Share Purchase Agreement dated February 17, 2004, by and between the Company and Norfet Limited Partnership, including related Registration Rights Agreement attached as a schedule (incorporated by reference to Exhibit 4.9 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.6 | Amendment to Purchase Agreement, dated March 31, 2005, by and between the Company and Norfet Limited Partnership (incorporated by reference to Exhibit 4.11 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.7 | Share Purchase Agreement, made as of March 3, 2004, by and between Tefron and Leber Partners, L.P, including related Registration Rights Agreement attached as a schedule (incorporated by reference to Exhibit 4.10 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2003). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.8 | Agreement, dated March 2, 2010, among Tefron Ltd., Hi-Tex Founded by Tefron Ltd., Macro Clothing Ltd., Bank Leumi L'Israel Ltd., Bank HaPoalim Ltd. and Israel Discount Bank Ltd. (incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 4 to its Registration Statement on Form F-1 (No. 333-161466) filed on March 10, 2010). |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.9 | Letter, dated July 11, 2010, from Bank Hapoalim to the Company regarding covenant waiver (incorporated by reference to Exhibit 4.12 to the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009). |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.10 |    Letter, dated July 11, 2010, from Israel Discount Bank to the Company regarding covenant waiver (incorporated by reference to Exhibit 4.13 to the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.11 | Letter, dated July 11, 2010, from Bank Leumi to the Company regarding covenant waiver (incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009). |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.12 | Subscription Agreement, dated March 2010, between Tefron Ltd. and TA-TOP, Limited Partnership and Mivtach Shamir Holdings Ltd (incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 2009). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.13 | Asset Purchase Agreement dated November 16, 2010, by and between the Company and Intimes Nouvelle Seamless Inc. |
|------|-----------------------------------------------------------------------------------------------------------------|

| 4.14 | Share Purchase Agreement dated November 16, 2010, by and between the Company and Litef Holdings Inc. |
|------|------------------------------------------------------------------------------------------------------|

| 4.15 | Share Purchase Agreement dated November 16, 2010, by and between the Company and Mivtach Shamir Holdings Ltd. |
|------|---------------------------------------------------------------------------------------------------------------|

| 4.16 | Share Purchase Agreement dated November 16, 2010, by and between the Company and Zilkha Partners Limited Partner, Fima Trust and Rimon Investments Master Fund L.P. |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.17 | Consulting Agreement dated December 30, 2010, by and between Tefron USA Inc. and Intimes Nouvelle Seamless Inc. (or any other company on behalf of Mr. Willy Lieberman). |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.18 | Option Agreement dated December 30, 2010, by and between the Company and Benny Lieberman. |
|------|-------------------------------------------------------------------------------------------|

| 4.19 | Option Agreement dated December 30, 2010, by and between the Company and Martin Lieberman. |
|------|--------------------------------------------------------------------------------------------|

----

| 4.20 | Registration Rights Agreement dated December 30, 2010, by and between the Company and Intimes Nouvelle Seamless Inc., Litef Holdings Inc., Mivtach Shamir Holdings Ltd., Zilkha Partners Limited Partner, Fima Trust, Rimon Investments Master Fund L.P., TA-TOP Limited Partnership and Benny and Martin Lieberman. |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 4.21 | Services Agreement dated December 30, 2010, by and between the Company and Lamour Global Inc. Limited. |
|------|--------------------------------------------------------------------------------------------------------|

| 8.1 | List of subsidiaries of the Company. |
|-----|--------------------------------------|

| 12.(a).1 | Certification by CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 12.(a).2 | Certification by CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 13.(a).1 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|----------|----------------------------------------------------------------------------------------------------------------------------------------|

| 14.(a).1 | Consent of Kost, Forer Gabbay & Kasierer, a member of Ernst & Young Global. |
|----------|-------------------------------------------------------------------------------------|

| 14.(a).2 | Consent of an Expert dated June 22, 2011. |
|----------|-------------------------------------------|

----

----

----

|                                                                       | Page                          |
|----------------------------------------------------------------------------|-------------------------------|
|                                                                       |                          |
| Report of Independent Registered Public Accounting Firm                    | F - 2                    |
|                                                                       |                          |
| Consolidated Balance Sheets                                                | F - 3                    |
|                                                                       |                          |
| Consolidated Statements of Income                                          | F - 4                    |
|                                                                       |                          |
| Consolidated Statements of Comprehensive Income                            | F - 5                    |
|                                                                       |                          |
| Consolidated Statements of Changes in Equity                               | F - 6                    |
|                                                                       |                          |
| Consolidated Statements of Cash Flows                                      | F - 7 -  F - 9 |
|                                                                       |                          |
| Notes to Consolidated Financial Statements                                 | F - 10 - F - 75          |
|                                                                       |                          |
| Appendix to Consolidated Financial Statements – List of subsidiaries | F - 76                        |

----

|   | Kost Forer Gabbay & Kasierer2 Pal-Yam Ave.Haifa 33095, Israel |
|--------|-------------------------------------------------------------------|

REP

| Haifa, Israel            | KOST FORER GABBAY & KASIERER     |
|--------------------------|--------------------------------------|
| June  23, 2011 | A Member of Ernst & Young Global |

----

NC

----

|                                                            |   |   |   |   | As of December 31, |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|--------------------|--------|
|                                                            |   |   |   |   | 2010               |   |   | 2009 |   |
|                                                            |   | Note   |   |   | $ in thousands     |   |
| Current assets                                                  |   |   |   |   |               |   |   |   |   |
| Cash                                                            |   |   |   |   | $                  | 9,361  |   |   | $ | 1,904 |   |
| Investment in securities available for sale                     |   |   |   |   |               | 731    |   |   |   | 737 |   |
| Trade receivables                                               |   |   | 4      |   |               |   | 9,339 |   |   |   | 14,597 |   |
| Other receivables                                               |   |   | 5      |   |               |   | 1,878 |   |   |   | 2,892 |   |
| Inventory                                                       |   |   | 6      |   |               |   | 16,664 |   |   |   | 19,778 |   |
|                                                            |   |   |   |   |               |   | 37,973 |   |   |   | 39,908 |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
| Non current assets held for sale                                |   |   | 7      |   |               |   | 2,088 |   |   |   | - |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
|                                                            |   |   |   |   |               |   | 40,061 |   |   |   | 39,908 |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
| Non-current assets                                              |   |   |   |   |               |   |   |   |   |   |   |   |
| Deferred taxes, net                                             |   |   | 16     |   |               |   | 972 |   |   |   | 1,409 |   |
| Property, plant and equipment, net                              |   |   | 7      |   |               |   | 38,936 |   |   |   | 56,920 |   |
| Goodwill and intangible assets                                  |   |   | 8      |   |               |   | 2,783 |   |   |   | 960 |   |
|                                                            |   |   |   |   |               |   | 42,691 |   |   |   | 59,289 |   |
|                                                            |   |   |   |   |               | $      | 82,752 |   |   | $ | 99,197 |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
| Current liabilities                                             |   |   |   |   |               |   |   |   |   |   |   |   |
| Bank credit (including current maturities of long-term loans)   |   |   | 10     |   |               | $      | 6,194 |   |   | $ | 25,847 |   |
| Trade payables                                                  |   |   | 11     |   |               |   | 11,864 |   |   |   | 15,042 |   |
| Other current liabilities                                       |   |   | 12     |   |               |   | 8,450 |   |   |   | 5,666 |   |
|                                                            |   |   |   |   |               |   | 26,508 |   |   |   | 46,555 |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
| Non-current liabilities                                         |   |   |   |   |               |   |   |   |   |   |   |   |
| Long-term bank loans                                            |   |   | 10,13  |   |               |   | 19,818 |   |   |   | - |   |
| Employee benefits, net                                          |   |   | 15     |   |               |   | 516 |   |   |   | 729 |   |
| Other non-current liabilities                                   |   |   |   |   |               |   | - |   |   |   | 1,838 |   |
| Deferred taxes, net                                             |   |   | 16     |   |               |   | - |   |   |   | 3,080 |   |
|                                                            |   |   |   |   |               |   | 20,334 |   |   |   | 5,647 |   |
|                                                            |   |   |   |   |               |   |   |   |   |   |   |   |
| Equity attributable to the equity holders of the Company        |   |   | 18     |   |               |   |   |   |   |   |   |   |
| Share capital                                                   |   |   |   |   |               |   | 19,818 |   |   |   | 7,518 |   |
| Additional paid-in capital                                      |   |   |   |   |               |   | 107,204 |   |   |   | 107,522 |   |
| Accumulated deficit                                             |   |   |   |   |               |   | (83,803 | ) |   |   | (60,666 | ) |
| Treasury shares                                                 |   |   |   |   |               |   | (7,408 | ) |   |   | (7,408 | ) |
| Capital reserve for transactions with a controlling shareholder |   |   |   |   |               |   | 190 |   |   |   | - |   |
| Other capital reserves                                          |   |   |   |   |               |   | (91 | ) |   |   | 29 |   |
|                                                            |   |   |   |   |               |   | 35,910 |   |   |   | 46,995 |   |
| Total equity                                                    |   |   |   |   |               | $      | 82,752 |   |   | $ | 99,197 |   |

----

STATEMENTS OF 

----

|                                                                    |   |   |   |   | For the year ended December 31,           |   |
|-------------------------------------------------------------------------|--------|--------|--------|--------|-------------------------------------------|--------|
|                                                                    |   |   |   |   | 2010                                      |   |   | 2009 |   |   | 2008 |   |
|                                                                    |   | Note   |   |   | $ in thousands(except for per share data) |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |
| Sales                                                                   |   |   |   |   | $                                         | 86,044 |   |   | $ | 115,538 |   |   | $ | 173,829 |   |
| Cost of sales, net                                                      |   |   | 20a    |   |                                      |   | 86,717 |   |   |   | 119,339 |   |   |   | 167,557 |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit (loss)                                                     |   |   |   |   |                                      |   | (673 | ) |   |   | (3,801 | ) |   |   | 6,272 |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Selling and marketing expenses                                          |   |   | 20b    |   |                                      |   | 11,850 |   |   |   | 13,842 |   |   |   | 16,959 |   |
| General and administrative expenses                                     |   |   | 20c    |   |                                      |   | 4,050 |   |   |   | 3,779 |   |   |   | 6,406 |   |
| Other expenses (income)                                                 |   |   | 20d    |   |                                      |   | 6,233 |   |   |   | (496 | ) |   |   | 2,135 |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Operating loss                                                          |   |   |   |   |                                      |   | (22,806 | ) |   |   | (20,926 | ) |   |   | (19,228 | ) |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Loss from early repayment of subordinated note receivable               |   |   | 9      |   |                                      |   | - |   |   |   | (1,285 | ) |   |   | - |   |
| Financial income                                                        |   |   | 20h    |   |                                      |   | 30 |   |   |   | 1,747 |   |   |   | 319 |   |
| Financial expenses                                                      |   |   | 20h    |   |                                      |   | (2,379 | ) |   |   | (2,259 | ) |   |   | (3,347 | ) |
| Financial expenses, net                                                 |   |   |   |   |                                      |   | (2,349 | ) |   |   | (512 | ) |   |   | (3,028 | ) |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Loss before taxes on income                                             |   |   |   |   |                                      |   | (25,155 | ) |   |   | (22,723 | ) |   |   | (22,256 | ) |
| Tax benefit                                                             |   |   | 16     |   |                                      |   | 2,469 |   |   |   | 5,330 |   |   |   | 4,677 |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net loss for the year                                                   |   |   |   |   |                                      | $      | (22,686 | ) |   | $ | (17,393 | ) |   |   | (17,579 | ) |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net loss per share attributable to equity holders of the Company (in $) |   |   | 21     |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
|                                                                    |   |   |   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per share                                        |   |   |   |   |                                      | $      | (7.7 | )        |   | $ | (6.6 | )        |   | $ | (6.7 | )      |

----

ENS

----

|                                                                          |   | For the year ended December 31, |    |
|-------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                          |   | 2010                            |    |   | 2009 |   |   | 2008 |   |
|                                                                          |   | $ in thousands                  |    |
|                                                                          |   |                            |    |   |   |   |   |   |   |
| Net loss for the year                                                         |   | $                               | (22,686 | ) |   | $ | (17,393 | ) |   | $ | (17,579 | ) |
|                                                                          |   |                            |    |   |   |   |   |   |   |   |   |   |
| Other comprehensive income (loss) (net of tax effect) *):                     |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                          |   |                            |    |   |   |   |   |   |   |   |   |   |
| Realized gain on cash flow hedges                                             |   |                            | (115    | ) |   |   | (23 | ) |   |   | (445 | ) |
| Realized loss (gain) on available-for-sale securities                         |   |                            | -       |   |   |   | - |   |   |   | 77 |   |
| Unrealized gain from cash flow hedges                                         |   |                            | -       |   |   |   | 115 |   |   |   | 23 |   |
| Unrealized loss on available for sale securities                              |   |                            | (5      | ) |   |   | (86 | ) |   |   | - |   |
| Actuarial gain (loss) on defined-benefit plans                                |   |                            | (451    | ) |   |   | 466 |   |   |   | (198 | ) |
|                                                                          |   |                            |    |   |   |   |   |   |   |   |   |   |
| Total other comprehensive income (loss) for the year                          |   |                            | (571    | ) |   |   | 472 |   |   |   | (543 | ) |
|                                                                          |   |                            |    |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss) for the year                                |   |                            | (23,257 | ) |   |   | (16,921 | ) |   |   | (18,122 | ) |
|                                                                          |   |                            |    |   |   |   |   |   |   |   |   |   |
| Total comprehensive income (loss) attributed to equity holders of the Company |   | $                               | (23,257 | ) |   | $ | (16,921 | ) |   | $ | (18,122 | ) |

----

CHANGES IN EQUITY

----

|                                                                 |   | attributed to equity holders of the Company |   |   |                       |   |
|----------------------------------------------------------------------|--------|---------------------------------------------|--------|--------|----------------------------|--------|
|                                                                 |   | Share capital                               |   |   | Additional paid in capital |   |   | Retained deficit |   |   | Treasury shares |   |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for cash flow hedges |   |   | Capital reserve for transactions with a controlling shareholder |   |   | Total equity |   |
|                                                                 |   | $ in thousands                              |   |
|                                                                 |   |                                        |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2010                                        |   | $                                           | 7,518  |   |                       | $      | 107,522 |   |   | $ | (60,666 | ) |   | $ | (7,408 | ) |   | $ | (86 | ) |   | $ | 115 |   |   | $ | - |   |   | $ | 46,995 |   |
| Total comprehensive loss                                             |   |                                        | -      |   |                       |   | - |   |   |   | (23,137 | ) |   |   | - |   |   |   | (5 | ) |   |   | (115 | ) |   |   | - |   |   |   | (23,257 | ) |
| Share-based payment to employees                                     |   |                                        | -      |   |                       |   | 490 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 490 |   |
| Rights offering (less issue expenses   of $240 thousand)   |   |                                        | 2,833  |   |                       |   | 927 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 3,760 |   |
| Private placement (less issue  expenses of $297 thousand)  |   |                                        | 9,467  |   |                       |   | (1,735 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 7,732 |   |
| Benefit from a transaction  with a controlling shareholder |   |                                        | -      |   |                       |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 190 |   |   |   | 190 |   |
| Balance as of December 31, 2010                                      |   | $                                           | 19,818 |   |                       | $      | 107,204 |   |   | $ | (83,803 | ) |   | $ | (7,408 | ) |   | $ | (91 | ) |   | $ | - |   |   | $ | 190 |   |   | $ | 35,910 |   |

|                                                              |   | attributed to equity holders of the Company |   |
|-------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                              |   | Share capital                               |   |   | Additional paid in capital |   |   | Retained deficit |   |   | Treasury shares |   |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for cash flow hedges |   |   | Total |   |   | Share options in consolidated company |   |   | Total equity |   |
|                                                              |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                                     |   | $                                           | 7,518  |   |   | $ | 107,104 |   |   | $ | (43,739 | ) |   | $ | (7,408 | ) |   | $ | - |   |   | $ | 23 |   |   | $ | 63,498 |   |   | $ | 247 |   |   | $ | 63,745 |   |
| Total comprehensive income (loss)                                 |   |                                        | -      |   |   |   | - |   |   |   | (16,927 | ) |   |   | - |   |   |   | (86 | ) |   |   | 92 |   |   |   | (16,921 | ) |   |   | - |   |   |   | (16,921 | ) |
| Share-based payment to employees                                  |   |                                        | -      |   |   |   | 171 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 171 |   |   |   | - |   |   |   | 171 |   |
| Cancelation of stock options in    consolidated company |   |                                        | -      |   |   |   | 247 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 247 |   |   |   | (247 | ) |   |   | - |   |
| Balance as of December 31, 2009                                   |   | $                                           | 7,518  |   |   | $ | 107,522 |   |   | $ | (60,666 | ) |   | $ | (7,408 | ) |   | $ | (86 | ) |   | $ | 115 |   |   | $ | 46,995 |   |   | $ | - |   |   | $ | 46,995 |   |

|                                                   |   | attributed to equity holders of the Company |   |
|--------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                   |   | Share capital                               |   |   | Additional paid in capital |   |   | Retained deficit |   |   | Treasury shares |   |   | Capital reserve for available for sale financial assets |   |   | Capital reserve for cash flow hedges |   |   | Total |   |   | Share options in consolidated company |   |   | Total equity |   |
|                                                   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2008                          |   | $                                           | 7,518  |   |   | $ | 106,864 |   |   | $ | (17,962 | ) |   | $ | (7,408 | ) |   | $ | (77 | ) |   | $ | 445 |   |   | $ | 89,380 |   |   | $ | - |   |   | $ | 89,380 |   |
| Total comprehensive income (loss)                      |   |                                        | -      |   |   |   | - |   |   |   | (17,777 | ) |   |   | - |   |   |   | 77 |   |   |   | (422 | ) |   |   | (18,122 | ) |   |   | - |   |   |   | (18,122 | ) |
| Share-based payment to employees                       |   |                                        | -      |   |   |   | 240 |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 240 |   |   |   | - |   |   |   | 240 |   |
| Share-based payment in  consolidated company |   |                                        | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 247 |   |   |   | 247 |   |
| Dividend                                               |   |                                        | -      |   |   |   | - |   |   |   | (8,000 | ) |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (8,000 | ) |   |   | - |   |   |   | (8,000 | ) |
| Balance as of December 31, 2008                        |   | $                                           | 7,518  |   |   | $ | 107,104 |   |   | $ | (43,739 | ) |   | $ | (7,408 | ) |   | $ | - |   |   | $ | 23 |   |   | $ | 63,498 |   |   | $ | 247 |   |   | $ | 63,745 |   |

----

 FLOWS

----

|                                                                                                  |   | For the year ended December 31, |    |
|-------------------------------------------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                                                  |   | 2010                            |    |   | 2009 |   |   | 2008 |   |
|                                                                                                  |   | $ in thousands                  |    |
| Cash flows from operating activities                                                                  |   |                            |    |   |   |   |   |   |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |
| Loss                                                                                                  |   | $                               | (22,686 | ) |   | $ | (17,393 | ) |   | $ | (17,579 | ) |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
|   Adjustments to reconcile loss to net cash provided by (used in) operating activities |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Adjustments to the profit or loss items:                                                              |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                         |   |                            | 9,503   |   |   |   | 9,256 |   |   |   | 8,925 |   |
| Impairment (reversal of impairment) of property, plant and equipment and intangible assets            |   |                            | 6,260   |   |   |   | (496 | ) |   |   | 2,135 |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Inventories write-off                                                                                 |   |                            | 3,065   |   |   |   | 2,808 |   |   |   | 4,523 |   |
| Extinguishment of contingent consideration (b)                                                        |   |                            | -       |   |   |   | (399 | ) |   |   | - |   |
| Impairment of available-for-sale securities                                                           |   |                            | -       |   |   |   | - |   |   |   | 553 |   |
| Share-based payments                                                                                  |   |                            | 280     |   |   |   | 171 |   |   |   | 487 |   |
| Loss (gain) on sale of property, plant and equipment                                                  |   |                            | 142     |   |   |   | (17 | ) |   |   | 188 |   |
| Gain on sale of available-for-sale securities                                                         |   |                            | -       |   |   |   | - |   |   |   | (22 | ) |
| Deferred taxes, net                                                                                   |   |                            | (2,643  | ) |   |   | (5,364 | ) |   |   | (5,558 | ) |
| Change in employee benefits, net                                                                      |   |                            | (664    | ) |   |   | (850 | ) |   |   | 420 |   |
| Loss on early repayment of subordinated note receivable                                               |   |                            | -       |   |   |   | 1,285 |   |   |   | - |   |
| Accrued interest and amortization of available-for-sale securities                                    |   |                            | -       |   |   |   | - |   |   |   | (263 | ) |
| Accrued interest on deposits                                                                          |   |                            | -       |   |   |   | - |   |   |   | (75 | ) |
| Taxes on income                                                                                       |   |                            | (20     | ) |   |   | 1,427 |   |   |   | (468 | ) |
| Finance expenses                                                                                      |   |                            | 1,452   |   |   |   | 723 |   |   |   | 1,363 |   |
|                                                                                                  |   |                            | 17,375  |   |   |   |  8,544 |   |   |   |  12,208 |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Changes in items of operating assets and liabilities:                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Decrease in trade receivables                                                                         |   |                            | 5,258   |   |   |   | 8,849 |   |   |   | 5,587 |   |
| Decrease in other receivables                                                                         |   |                            | 924     |   |   |   | 1,497 |   |   |   | 488 |   |
| Decrease (increase) in inventory                                                                      |   |                            | 1,950   |   |   |   | 9,730 |   |   |   | (3,051 | ) |
| Decrease in trade payables                                                                            |   |                            | (3,178  | ) |   |   | (10,125 | ) |   |   | (4,553 | ) |
| Increase (decrease) in other current liabilities                                                      |   |                            | (631    | ) |   |   | (428 | ) |   |   | 77 |   |
|                                                                                                  |   |                            | 4,323   |   |   |   |  9,523 |   |   |   | (1,452 | ) |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Cash paid and received during the year for:                                                           |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Interest paid                                                                                         |   |                            | (1,482  | ) |   |   | (878 | ) |   |   | (1,528 | ) |
| Interest received                                                                                     |   |                            | 30      |   |   |   | 155 |   |   |   | 165 |   |
| Taxes paid                                                                                            |   |                            | (171    | ) |   |   | (1,427 | ) |   |   | - |   |
| Taxes received                                                                                        |   |                            | 191     |   |   |   | - |   |   |   | 468 |   |
|                                                                                                  |   | $                               | (1,432  | )     |   | $ | (2,150 | )       |   | $ | (895 | )       |
|                                                                                                  |   |                            |    |   |   |   |   |   |   |   |   |   |
| Net cash used in operating activities                                                                 |   | $                               | (2,420  | ) |   | $ | (1,476 | ) |   | $ | (7,718 | ) |

----

----

|                                                                 |   | For the year ended December 31, |    |
|----------------------------------------------------------------------|--------|---------------------------------|---------|
|                                                                 |   | 2010                            |    |   | 2009 |   |   | 2008 |   |
|                                                                 |   | $ in thousands                  |    |
| Cash flows from investing activities                                 |   |                            |    |   |   |   |   |   |   |
|                                                                 |   |                            |    |   |   |   |   |   |   |
| Purchase of property, plant and equipment                            |   | $                               | (111    | ) |   | $ | (611 | ) |   | $ | (3,151 | ) |
| Purchase of intangible assets                                        |   |                            | (2      | ) |   |   | (75 | ) |   |   | (224 | ) |
| Acquisition of business (a)                                          |   |                            | -       |   |   |   | - |   |   |   | (300 | ) |
| Contingent consideration paid                                   |   |                            | -       |   |   |   | (271 | ) |   |   | - |   |
| Proceeds from sale of property, plant and equipment                  |   |                            | 367     |   |   |   | 18 |   |   |   | 35 |   |
| Proceeds from early repayment loss from subordinated note receivable |   |                            | -       |   |   |   | 1,715 |   |   |   | - |   |
| Proceeds from sale of available-for-sale securities                  |   |                            | -       |   |   |   | - |   |   |   | 5,914 |   |
| Proceeds from maturity of short - term investments                   |   |                            | -       |   |   |   | - |   |   |   | 7,139 |   |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by investing activities                            |   |                            | 254     |   |   |   | 776 |   |   |   | 9,413 |   |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Cash flows from financial activities                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Short-term bank credit from banks, net                               |   |                            | (8,052  | ) |   |   | 4,923 |   |   |   | 9,323 |   |
| Repayment of long-term loans                                         |   |                            | (11,601 | ) |   |   | (3,885 | ) |   |   | (9,836 | ) |
| Proceeds from long-term loans                                        |   |                            | 20,000  |   |   |   | - |   |   |   | 6,000 |   |
| Proceeds from a private placement, net                               |   |                            | 5,516   |   |   |   | - |   |   |   | - |   |
| Proceeds from a rights offering, net                                 |   |                            | 3,760   |   |   |   | - |   |   |   | - |   |
| Dividend paid to shareholders                                        |   |                            | -       |   |   |   | - |   |   |   | (8,000 | ) |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Net cash provided by (used in) financing activities                  |   |                            | 9,623   |   |   |   | 1,038 |   |   |   | (2,513 | ) |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in cash and cash equivalents                     |   |                            | 7,457   |   |   |   | 338 |   |   |   | (818 | ) |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalent at the beginning of the year                |   |                            | 1,904   |   |   |   | 1,566 |   |   |   | 2,384 |   |
|                                                                 |   |                            |    |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalent at the end of the year                      |   | $                               | 9,361   |   |   | $ | 1,904 |   |   | $ | 1,566 |   |

----

----

|                                                         |   | For the year ended December 31, |   |
|--------------------------------------------------------------|--------|---------------------------------|--------|
|                                                         |   | 2010                            |   |   | 2009 |   |   | 2008 |   |
|                                                         |   | $ in thousands                  |   |
| (A) Acquisition of business (see Note 3b)                    |   |                            |   |   |   |   |   |   |   |
|                                                         |   |                            |   |   |   |   |   |   |   |
| Assets and liabilities as of acquisition date:               |   |                            |   |   |   |   |   |   |   |
|                                                         |   |                            |   |   |   |   |   |   |   |
| Order backlog                                                |   |                            | -      |   |   |   | - |   |   | $ | 264 |   |
| Customer relationships                                       |   |                            | -      |   |   |   | - |   |   |   | 1,029 |   |
| Goodwill                                                     |   |                            | -      |   |   |   | - |   |   |   | 344 |   |
| Deferred tax liability                                       |   |                            | -      |   |   |   | - |   |   |   | (323 | ) |
| Contingent consideration                                     |   |                            | -      |   |   |   | - |   |   |   | (1,014 | ) |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                            | -      |   |   |   | - |   |   | $ | 300 |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| (B) Supplemental disclosure of non-cash investing activities |   |                            |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| Purchase of operations (see Note 3a)                         |   |                            |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| Acquisition of assets                                        |   |                            |   |   |   |   |   |   |   |   |   |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| Inventory                                                    |   | $                               | 1,896  |   |   |   |   |   |   |   |   |   |
| Customer relationships                                       |   |                            | 1,551  |   |   |   | - |   |   |   | - |   |
| Order backlog                                                |   |                            | 408    |   |   |   | - |   |   |   | - |   |
| NB brand license                                             |   |                            | 78     |   |   |   | - |   |   |   | - |   |
| Goodwill                                                     |   |                            | 49     |   |   |   | - |   |   |   | - |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
|                                                         |   | $                               | 3,982  |   |   |   | - |   |   |   | - |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| Purchase of other assets for contingent consideration        |   |                            | -      |   |   |   | - |   |   | $ | 1,014 |   |
|                                                         |   |                            |   |   |   |   |   |   |   |   |   |   |
| Extinguishment of contingent consideration against goodwill  |   |                            | -      |   |   | $ | 344 |   |   |   | - |   |

----

NA

----

| NOTE 1: |  GENERAL |
|---------|---------------|

|   | a. | Tefron Ltd. is a company registered in Israel. The Company is engaged, through subsidiaries in the design, development, production and sale of intimate apparel, swimwear and active wear which are manufactured using two different methods (the "Seamless" method and the "Cut & Sew" method). The Company's principal markets are the United States and Europe. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Definitions In these financial statements: |
|--------|----|-------------------------------------------------|

|  The Company / The Group | Tefron Ltd. and its subsidiaries, as detailed in the accompanying list.                                                                                                |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                                                   |
|  Subsidiaries            | Companies in which the Company has a controlling interest (as defined in IAS 27) and whose financial statements are consolidated with those of the  Company. |
|                          |                                                                                                                                                                   |
|  Related parties         | As defined in IAS 24.                                                                                                                                                  |

|   | c. | During the first quarter, the Company started a turnaround plan to improve its business results (hereinafter: the Turnaround Plan). The turnaround Plan achieved operating improvements identified on the production floor, such as: high performance for on time delivery to customers, a decrease in waste in the production process and a decline in the Company's cost structure, such as: human resource, rent and transport. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | The Company had losses of $22,686 thousand for the year ended December 31, 2010. Furthermore, during this period, the Company had negative cash flows from operating activities of $2,420 thousand. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Due to the global economic crisis, the decline in demand and the continuing losses, at the end of 2009 the Company required additional sources of financing. During March 2010, the Company raised, through a rights offering to its shareholders and a private placement – as mentioned in Note 18b – a gross amount of $4 million. In addition, on March 2, 2010, the Company signed an agreement with the banks regarding the reorganization of its credit lines and new undertakings to the banks, and on December 24, an amendment to the final agreement as detailed in Notes 13b and 13c, respectively. According to the amendment of the agreement with the banks, the Company must meet the new financial covenants agreed with the banks. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On December 30, 2010, the Company acquired  the seamless operations of Intimes Nouvelle Seamless Inc. (hereinafter: "Nouvelle"), and an amount of US$5.8 million was invested in the Company by related parties of Nouvelle and by related parties of the Company – as detailed in Note 18a. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 1: |  GENERAL (Cont.) |
|---------|-----------------------|

|   | Management’s plans include absorbing Nouvelle's operations, strengthening the relationships with the new customers which were transferred to the Company in the framework of the Nouvelle transaction, and additional steps to expand the customer base in Europe and the US, and this with a view to increase sales. In addition, there are continuing efforts for efficiency of the production floor and to expand business with suppliers in the Far East |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | According to the amendment to the agreement with the banks the Company must meet new financial covenants agreed with the banks. The Company's management estimates, as of the date of the report, that the Company will meet the financial covenants in the coming year, although there is no certainty that it will meet the financial covenants as meeting them relates to events that will occur in the future. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES |
|---------|---------------------------------|

|   | a. | Basis of presentation of the financial statements |
|--------|----|---------------------------------------------------|

|   | The Company's financial statements have been prepared on a historical cost basis, except for derivatives, financial assets available for sale measured according to their fair value, and except for liabilities for employee benefits. The Company chose to present the statement of income by using the "function of expense" method. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Basis of preparation of the financial statements |
|--------|--------------------------------------------------|

|   | These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the IASB. These Standards comprise: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 1. | International Financial Reporting Standards (IFRS). |
|--------|----|-----------------------------------------------------|

|   | 2. | International Accounting Standards (IAS). |
|--------|----|-------------------------------------------|

|   | 3. | Interpretations issued by the IFRS Interpretations Committee (IFRIC) and by the Standing Interpretations Committee (SIC). |
|--------|----|---------------------------------------------------------------------------------------------------------------------------|

|   | Consistent accounting policies |
|--------|--------------------------------|

|   | The accounting policies adopted in the financial statements are consistent with those of all periods presented, except as described below. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | Changes in accounting policies in view of the adoption of new standards: |
|--------|--------------------------------------------------------------------------|

|   | - | The definition of a business was broadened so that it contains also activities and assets that are not managed as a business as long as the market  participant is capable of operating them as a business. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | For every business combination, the following can be chosen separately: whether to measure the rights which do not give control, and as a result, the goodwill, on the basis of the full fair value or according to the proportional share purchased of the fair value of the identified assets, net, on the acquisition date. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | - | Contingent consideration in business combinations is measured at fair value and changes in the fair value of the contingent consideration, which do not comprise adjustments to the acquisition cost in the measurement period, are not recognized as goodwill adjustments. If the contingent consideration is classified as a financial derivative to which IAS 39 relates, it will be measured at fair value through the statement of income. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Direct acquisition costs attributed to a business combination transaction are recognized in the statement of income as incurred and not as part of the cost of the acquisition. (Excluding direct costs of raising capital or debt handled in accordance with IAS 32 or IAS 39, respectively). |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Subsequent measurement of a deferred tax asset for acquired temporary differences and which did not meet the recognition criteria on the acquisition date will be recorded to the statement of income and not as an adjustment to goodwill. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | A subsidiary's losses, even if resulting in a capital deficiency in a subsidiary, will be allocated between the parent company and non-controlling interests, even if the non-controlling interests have not guarantee or have no contractual obligation to support the subsidiary or to invest further amounts. |
|--------|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | A transaction with the non-controlling interests - whether a sale or a purchase that does not result in control - is handled as a capital transaction. Therefore, the acquisition of non-controlling interests by the Group is recognized as an increase or decrease in equity (capital reserve for transactions with non-controlling interests) and calculated as the difference between the proceeds paid by the Group and the proportionate amount of the non-controlling interests acquired and derecognized on the acquisition date. Disposal of a holding in a subsidiary without losing control is recognized as an increase or decrease in equity (capital reserve for transactions with non-controlling interests), being the amount of the difference between the proceeds received by the Group and the carrying amount of the non-controlling interests in the subsidiary, which were added to the Company's equity (if the non-controlling interests included part of other comprehensive income, the Company reclassifies the accumulated amounts accrued recognized in other comprehensive income between the Company's owners and the non-controlling interests). |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | On the acquisition date, a reclassification and redesignation of assets and liabilities is made in accordance with the contractual terms, the economic circumstances and any other relevant conditions existing on the acquisition, excluding leasing and insurance contracts. |
|--------|---|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | In a business combination achieved in stages, the capital rights in the purchased entity held by the purchasers prior to achieving control, are measured at fair value on the acquisition date and included in the proceeds of the acquisition, while recognizing a profit or loss when measurement its fair value, including realizing amounts recorded as other comprehensive income. On the date of losing control in the subsidiary, the balance of holding – if any – is revalued at fair value against the statement of income from realization, and this fair value is the basis of costs for the purpose of later handling. |
|--------|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Cash flows for transactions with non-controlling interests (without change in status) are classified in the statement of cash flows, as cash flows from financing activities (and can no longer be classified as cash flows from investing activities). |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The Standards are applied prospectively as from January 1, 2010. |
|--------|------------------------------------------------------------------|

----

----

|   | These amendments does not have a significant effect on the financial statements for business combinations and transactions with non-controlling interests carried out prior to January 1, 2010. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | According to amendment to IFRS 5, when the parent company decides to realize part of its holdings in a subsidiary, so that after the sale the parent company retains a non-controlling interest, such as rights that embody a significant effect, all the assets and liabilities relating to the subsidiary will be classified as held for sale if the relevant directives of IFRS are met, including presentation as discontinued operations. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | An additional amendment clarifies which are the disclosures required regarding non current assets (or disposal groups) classified as held for sale or as discontinued operations. In accordance with the amendment, only the disclosures required pursuant to IFRS 5 are to be provided. The disclosure requirements appearing in other IFRS Standards will apply to these assets only if they relate specifically to those non current assets or to those disposal groups. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The amendment is implemented prospectively as from January 1, 2010. |
|--------|---------------------------------------------------------------------|

|   | The amendment is applied prospectively  as from January 1, 2010. |
|--------|----------------------------------------------------------------------------|

|   | b. | The main considerations, estimates and assumptions used in the preparation of the financial statements: |
|--------|----|---------------------------------------------------------------------------------------------------------|

----

----

|   | - | Legal claims |
|--------|---|--------------|

|   | When estimating the provision for legal claims filed against the Company and its subsidiaries, the Company has relied on the opinion of its legal advisors. The opinion of the Company’s legal advisors is based on their professional judgment, taking into account the stage of proceedings and experience with respect to that claim. Since the outcome of any legal claims will generally be determined in the court, actual results could differ from these estimates. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Deferred tax assets |
|--------|---|---------------------|

|   | Deferred tax assets are recognized for carry forward tax losses and deductible temporary differences to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. For further information, see Note 16. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Pension and other post-employment benefits |
|--------|---|--------------------------------------------|

|   | The liability in respect of defined post-employment benefit plans is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases and mortality rates. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. For further information, see Note 15. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | Allowance for doubtful debts |
|--------|---|------------------------------|

|   | - | Slow-moving inventory |
|--------|---|-----------------------|

|   | - | Fair value of financial instruments not traded in an active market |
|--------|---|--------------------------------------------------------------------|

|   | - | Provision for impairment of property, plant and equipment  |
|--------|---|-----------------------------------------------------------------|

|   | The provision for impairment of property, plant and equipment is recorded if the recoverable amount is less than the asset’s carrying amount. The recoverable amount is the higher of its fair value less selling costs, and value of use based on discounted cash flows. A provision for an impairment of fixed assets is determined for every cash-generating unit separately. The Company has five cash generating units, as detailed in Note 7b below. In order to determine the recoverable amount of its fixed assets, the Company has engaged a qualified independent valuator. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | - | Evaluating the fair value of share-based payment transactions |
|--------|---|---------------------------------------------------------------|

|   | c. | Consolidated financial statements: |
|--------|----|------------------------------------|

|   | d. | Functional and foreign currency |
|--------|----|---------------------------------|

|   | 1‎.    Functional and presentation currencies |
|--------|-------------------------------------------------------------------------|

|   | The presentation currency of the financial statements is the US dollar. |
|--------|-------------------------------------------------------------------------|

|   | The functional currency is the currency that best reflects the economic environment in which the Company operates and conducts its transactions. Each entity in the Group determines its functional currency which is used to measure its financial position and operating results. The functional currency of the Company is the US dollar. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2‎.    Foreign currency transactions |
|--------|----------------------------------------------------------------|

|   | Transactions denominated in a foreign currency (i.e., a currency other than the functional currency) are recorded initially at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities are translated on each balance sheet date into the functional currency, at the exchange rate on that date. Exchange rate differences are recognized in the statement of income. Non-monetary assets and liabilities denominated in foreign currency are presented at fair value and retranslated to the functional currency, in accordance with the rates of exchange on the date on which the fair value is determined. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | Allowance for doubtful debts |
|--------|----|------------------------------|

----

----

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

|                          Raw materials | -      | Based on cost.                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
|                                                                                                                                                           |   |                                                                                        |
|                     Work in progress                            | -      | Based on cost including material, labor and other direct and indirect manufacturing costs.  |
|                                                                                                                                                           |   |                                                                                        |
|                     Finished goods                              | -      | Based on cost including materials, labor and other direct and indirect manufacturing costs. |

|   | g. | Financial instruments |
|--------|----|-----------------------|

|   | · | Financial assets at fair value through the profit or loss. |
|--------|--------|------------------------------------------------------------|

|   | · | Investments held-to-maturity. |
|--------|--------|-------------------------------|

|   | · | Loans and receivables. |
|--------|--------|------------------------|

|   | · | Available for sale financial assets. |
|--------|--------|--------------------------------------|

|   | 1. | Financial assets  available for sale |
|--------|----|------------------------------------------------|

----

----

|   | 2. | Fair Value |
|--------|----|------------|

|   | 3. | Loans and receivables |
|--------|----|-----------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | A financial liability is derecognized when it is extinguished, i.e. when the obligation is discharged, cancelled or expires. A financial liability is extinguished when the debtor (the Group): |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Discharge the liability by paying in cash, other financial assets, goods or services; or |
|--------|--------|------------------------------------------------------------------------------------------|

|   | · | Is legally released from the liability. |
|--------|--------|-----------------------------------------|

|   | Impairment of financial assets: |
|--------|---------------------------------|

|   | Financial assets available for sale |
|--------|-------------------------------------|

|   | h. | Leases: |
|--------|----|---------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | i. | Business combinations and goodwill |
|--------|----|------------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | j. | Property, plant and equipment |
|--------|----|-------------------------------|

|                           |   | %                                  |   |   | % mainly |                                |
|--------------------------------|--------|------------------------------------|--------|--------|----------|-------------------------------------|
|                           |   |                               |   |   |     |                                |
| Buildings                      |   |                               | 2      |   |     |                                | 2 |   |
| Machinery and equipment        |   |                               | 7      |   |     |                                | 7 |   |
| Motor vehicles                 |   |                               | 15     |   |     |                                | 15 |   |
| Office furniture and equipment |   |                               | 6-25   |   |     | Furniture – 6, computers - 25 |   |
| Leasehold improvements         |   |      See below |   |   |     |                                |   |

|   | k. | Intangible assets |
|--------|----|-------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | The useful life of intangible assets is as follows: |
|--------|-----------------------------------------------------|

|                   |   | Years                     |
|------------------------|--------|---------------------------|
| Computer software      |   | 4                         |
| Customer relations (*) |   | 8                         |
| Brand license          |   | 2.75                      |
| Order backlog          |   | Period of delivery orders |

|   | (*) | In accordance with Accounting Standard IAS 38 and IFRS 3R, customer relationships are part of intangible assets due to the fact that they arise from contractual legal rights and maintain the principle of identification. Amortization of customer relationships is recognized in accordance with the accelerated method. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | l. | Impairment of non-financial assets |
|--------|----|------------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | m. | Government grants |
|--------|----|-------------------|

|   | n. | Taxes on income |
|--------|----|-----------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | o. | Share-based payment transactions |
|--------|----|----------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | p. | Pensions and other post employee benefits |
|--------|----|-------------------------------------------|

|   | 1. | Short-term employee benefits: |
|--------|----|-------------------------------|

|   | 2. | Post-employment benefits |
|--------|----|--------------------------|

|   | q. | Revenue recognition |
|--------|----|---------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | r. | Cost of sales |
|--------|----|---------------|

|   | s. | Operating segments |
|--------|----|--------------------|

|   | 1. | It is engaged in business activities from which are likely to generate revenues and expenses are likely to accrue (including revenues and expenses relating to transactions with other component of that entity); |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Whose operating results are regularly reviewed by the Group's chief operating decision maker of the entity (CODM) – CEO of the Company), in order to make decisions about resources to be allocated to a segment and in order to assess its performance; and |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | There is separate financial information available. |
|--------|----|----------------------------------------------------|

|   | t. | Earnings (losses) per share |
|--------|----|-----------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | u. | Provisions |
|--------|----|------------|

|   | v. | Asset held for sale |
|--------|----|---------------------|

|   | w. | Disclosure to new IFRS during the period prior to their implementation |
|--------|----|------------------------------------------------------------------------|

|   | 1. | Clarification of the Standard's disclosure requirements. In this context, emphasis is placed on the interaction between the quantitative disclosures and the qualitative disclosures about the nature and extent of risks arising from financial instruments. The Standard also reduces the disclosure requirements for collateral held by the Company and revises the disclosure requirements for credit risk. The amendment should be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2011. Earlier application is permitted.  |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | New disclosure requirements about transferred financial assets including disclosures regarding unusual transfer activity near the end of a reporting period. The objective of the amendment is to assist users of financial statements to assess the risks to which the Company may remain exposed from transfers of financial assets and the effect of these risks on the Company's financial position. The amendment is designed to enhance the reporting transparency of transactions involving asset transfers, specifically securitization of financial assets. The amendment should be applied prospectively commencing from the financial statements for periods beginning on January 1, 2012. Earlier application is permitted. The relevant disclosures will be included in the Company's financial statements. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | IFRS 9 - Financial Instruments: |
|--------|---------------------------------|

|   | 1. | In November 2009, the IASB issued IFRS 9, "Financial Instruments", the first part of Phase 1 of a project to replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | According to IFRS 9, all financial assets (including hybrid contracts with financial asset hosts) should be measured at fair value upon initial recognition. In subsequent periods, debt instruments should be measured at amortized cost if both of the following conditions are met: |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | - | the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows. |
|--------|---|-----------------------------------------------------------------------------------------------------------------------------|

|   | - | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
|--------|---|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | In October 2010, the IASB issued certain amendments to IFRS 9 regarding derecognition and financial liabilities. According to those amendments, the provisions of IAS 39 will continue to apply to derecognition and to financial liabilities for which the fair value option has not been elected (designated as measured at fair value through profit or loss); that is, the classification and measurement provisions of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at amortized cost. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 2: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
|---------|-----------------------------------------|

|   | IAS 24 – Related Party Disclosures |
|--------|------------------------------------------|

|   | IAS 32 - Financial Instruments: Presentation - Classification of a Rights offering: |
|--------|-------------------------------------------------------------------------------------|

----

----

| NOTE 3:- | BUSINESS COMBINATIONS |
|----------|-----------------------|

|   | (a) | Acquisition of Intimes Nouvelle Seamless operations: |
|--------|-----|------------------------------------------------------|

|                                   |   | Fair value recognized on acquisition |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | $ in thousands                            |   |
|                                   |   |                                      |   |
| Inventory                              |   | $                                         | 1,896  |   |
| Customer relations                     |   |                                      | 1,551  |   |
| Order backlog                          |   |                                      | 408    |   |
| License to use the "New Balance brand" |   |                                      | 78     |   |
| Net assets                             |   |                                      | 3,933  |   |
| Goodwill                               |   |                                      | 49     |   |
| Total                                  |   | $                                         | 3,982  |   |

|   | (b) | Acquisition of Excelsior Inc. operations |
|--------|-----|------------------------------------------|

----

----

| NOTE 3:- | BUSINESS COMBINATIONS (Cont.) |
|----------|-------------------------------|

|                       |   | Fairvalue      |   |   | Balance in thefinancial statements |   |
|----------------------------|--------|----------------|--------|--------|-----------------------------------------|--------|
|                       |   | $ in thousands |   |
|                       |   |           |   |   |                                    |   |
| Customer relations         |   | $              | 1,029  |   |                                    | $      | 931 |   |
| Order backlog              |   |           | 264    |   |                                    |   | 176 |   |
| Deferred taxes liabilities |   |           | (323   | )      |                                    |   | (277 | ) |
|                       |   |           |   |   |                                    |   |   |   |
| Net assets                 |   |           | 970    |   |                                    | $      | 830 |   |
| Goodwill                   |   |           | 344    |   |                                    |   |   |   |
| Total                      |   | $              | 1,314  |   |                                    |   |   |   |

| Acquisition cost:             |   |           |   |
|-------------------------------|--------|----------------|--------|
|                          |   | $ in thousands |   |
|                          |   |           |   |
| Cash paid                     |   | $              | 300    |   |
| Creditors for the acquisition |   |           | 1,014  |   |
| Total                         |   | $              | 1,314  |   |

| Cash outflow/inflow on the acquisition                                    |   |   |   |
|---------------------------------------------------------------------------|--------|--------|--------|
|                                                                      |   |   |   |
| Cash and cash equivalents in the acquired company on the acquisition date |   | $      | -      |   |
| Cash paid                                                                 |   |   | 300    |   |
| Net cash flow                                                             |   | $      | 300    |   |

----

----

| NOTE 4:- | TRADE RECEIVABLES |
|----------|-------------------|

|                                                           |   | As of December 31, |   |
|----------------------------------------------------------------|--------|--------------------|--------|
|                                                           |   | 2010               |   |   | 2009 |   |
|                                                           |   | $ in thousands     |   |
|                                                           |   |               |   |   |   |   |
| Open receivables (1)                                           |   | $                  | 8,554  |   |   | $ | 14,523 |   |
| Checks for collection                                          |   |               | 785    |   |   |   | 74 |   |
|                                                           |   |               |   |   |   |   |   |   |
|                                                           |   | $                  | 9,339  |   |   | $ | 14,597 |   |
|                                                           |   |               |   |   |   |   |   |   |
| (1)  After deduction of provision for doubtful debts |   | $                  | 1,061  |   |   | $ | 990 |   |

|                                    |   | $ in thousands |   |
|-----------------------------------------|--------|----------------|--------|
|                                    |   |           |   |
| Balance as of January 1, 2009           |   | $              | 986    |   |
| Provision during the year               |   |           | 33     |   |
| Reversal of collected doubtful accounts |   |           | (29    | ) |
|                                    |   |           |   |   |
| Balance as of December 31, 2009         |   |           | 990    |   |
|                                    |   |           |   |   |
| Provision during the year               |   |           | 87     |   |
| Reversal of collected doubtful accounts |   |           | (16    | ) |
|                                    |   |           |   |   |
| Balance as of December 31, 2010         |   | $              | 1,061  |   |

|              |   |  Customer whose debts has not yet fallen due (not in arrears) |   |                 | Past due trade receivables of |   |
|-------------------|--------|--------------------------------------------------------------------|--------|----------------------|-------------------------------|--------|
|              |   |                                                               |   |   Under 30 days |                          |   |   30 – 60 days |   |   |   60 – 90 days |   |   |   90 – 120 days |   |   |   Over 120 days |   |   |   Total |   |
|              |   | $ in thousands                                                     |   |
|              |   |                                                               |   |                 |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2010 |   | $                                                                  | 8,152  |                 |                          |   | 1,065 |   |   |   | 105 |   |   |   | - |   |   |   | - |   |   |   | 17 |   |   | $ | 9,339 |   |
|              |   |                                                               |   |                 |                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009 |   | $                                                                  | 14,199 |                 |                          |   | 101 |   |   |   | 259 |   |   |   | - |   |   |   | - |   |   |   | 38 |   |   | $ | 14,597 |   |

----

----

| NOTE 5:- | OTHER RECEIVABLES |
|----------|-------------------|

|                   |   | As of December 31, |   |
|------------------------|--------|--------------------|--------|
|                   |   | 2010               |   |   | 2009 |   |
|                   |   | $ in thousands     |   |
|                   |   |               |   |   |   |   |
| Prepaid expenses       |   | $                  | 265    |   |   | $ | 358 |   |
| Advances to suppliers  |   |               | 152    |   |   |   | 995 |   |
| Government authorities |   |               | 990    |   |   |   | 1,063 |   |
| Accrued income         |   |               | 140    |   |   |   | 123 |   |
| Derivatives            |   |               | -      |   |   |   | 195 |   |
| Other receivables      |   |               | 331    |   |   |   | 158 |   |
|                   |   |               |   |   |   |   |   |   |
|                   |   | $                  | 1,878  |   |   | $ | 2,892 |   |

| NOTE 6:- | INVENTORIES |
|----------|-------------|

|            |   | As of December 31, |   |
|-----------------|--------|--------------------|--------|
|            |   | 2010               |   |   | 2009 |   |
|            |   | $ in thousands     |   |
|            |   |               |   |   |   |   |
| Raw Materials   |   | $                  | 5,473  |   |   | $ | 7,148 |   |
| Work in process |   |               | 5,917  |   |   |   | 7,650 |   |
| Finished goods  |   |               | 5,274  |   |   |   | 4,980 |   |
|            |   |               |   |   |   |   |   |   |
|            |   | $                  | 16,664 |   |   | $ | 19,778 |   |

----

----

| a.   Composition and movement:      2010 |
|---------------------------------------------------------------------------------------|

|                                             |   | Land andbuildings |   |   | Machinery and equipment |   |    | Motorvehicles |   |   | Office furniture and equipment |   |   | Leasehold improvements |   |   | Total  |   |
|--------------------------------------------------|--------|-------------------|--------|--------|-------------------------|--------|---------|---------------|--------|--------|--------------------------------|--------|--------|------------------------|--------|--------|--------|--------|
|                                             |   | $ in thousands    |   |
|                                             |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |
| Cost                                             |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |
| Balance as of January 1, 2010                    |   | $                 | 3,855  |   |                    | $      | 145,021 |          |   | $      | 422                            |   |   | $                      | 6,180  |   |   | $      | 11,960 |   |   | $ | 167,438 |   |
| Additions during the year                        |   |              | -      |   |                    |   | 8       |          |   |   | -                              |   |   |                   | 15     |   |   |   | 88 |   |   |   | 111 |   |
| Classified to assets held for sale               |   |              | -      |   |                    |   | (10,784 | )             |   |   | -                              |   |   |                   | -      |   |   |   | - |   |   |   | (10,784 | ) |
| Disposals during the year (through sale)         |   |              | -      |   |                    |   | (1,779  | )             |   |   | -                              |   |   |                   | (3     | )      |   |   | - |   |   |   | (1,782 | ) |
| Balance as of December 31, 2010                  |   | $                 | 3,855  |   |                    | $      | 132,466 |          |   | $      | 422                            |   |   | $                      | 6,192  |   |   | $      | 12,048 |   |   | $ | 154,983 |   |
|                                             |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Accumulated depreciation                         |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2010                    |   | $                 | 913    |   |                    | $      | 99,929  |          |   | $      | 418                            |   |   | $                      | 4,700  |   |   | $      | 3,358 |   |   |   | 109,318 |   |
| Additions during the year                        |   |              | 85     |   |                    |   | 7,941   |          |   |   | 1                              |   |   |                   | 237    |   |   |   | 1,068 |   |   |   | 9,332 |   |
| Classified to assets held for sale               |   |              | -      |   |                    |   | (7,430  | )             |   |   | -                              |   |   |                   | -      |   |   |   | - |   |   |   | (7,430 | ) |
| Disposals during the year (through sale)         |   |              | -      |   |                    |   | (1,271  | )             |   |   | -                              |   |   |                   | (1     | )      |   |   | - |   |   |   | (1,272 | ) |
| Balance as of December 31, 2010                  |   | $                 | 998    |   |                    |   | 99,169  |          |   | $      | 419                            |   |   | $                      | 4,936  |   |   | $      | 4,426 |   |   | $ | 109,948 |   |
|                                             |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Impairment                                       |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2010                    |   | $                 | 510    |   |                    | $      | 330     |          |   |   | -                              |   |   | $                      | 360    |   |   |   | - |   |   | $ | 1,200 |   |
| Impairment of property, plant and equipment, net |   |              | -      |   |                    |   | 6,129   |          |   |   | -                              |   |   |                   | -      |   |   |   | 204 |   |   |   | 6,333 |   |
| Classified to assets held for sale               |   |              | -      |   |                    |   | (1,266  | )             |   |   | -                              |   |   |                   | -      |   |   |   | - |   |   |   | (1,266 | ) |
| Amortization during the year                     |   |              | (10    | )      |                    |   | (99     | )             |   |   | -                              |   |   |                   | (59    | )      |   |   | - |   |   |   | (168 | ) |
| Balance as of December 31, 2010                  |   | $                 | 500    |   |                    | $      | 5,094   |          |   |   | -                              |   |   | $                      | 301    |   |   | $      | 204 |   |   | $ | 6,099 |   |
|                                             |   |              |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net book value as of December 31, 2010           |   | $                 | 2,357  |   |                    | $      | 28,203  |          |   | $      | 3                              |   |   | $                      | 955    |   |   | $      | 7,418 |   |   | $ | 38,936 |   |

----

----

| NOTE 7:- | PROPERTY, PLANT AND EQUIPMENT (Cont.) |
|----------|---------------------------------------|

| a.   Composition and movement (Cont.)            2009 |
|------------------------------------------------------------------------------------------------------------------------|

|                                                                                                   |   | Land and buildings |   |   | Machinery and equipment |   |    | Motorvehicles |   |   | Office furniture and equipment |   |   | Leasehold improvements |   |   | Total  |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------|-------------------------|--------|---------|---------------|--------|--------|--------------------------------|--------|--------|------------------------|--------|--------|--------|--------|
|                                                                                                   |   | $ in thousands     |   |
|                                                                                                   |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |
| Cost                                                                                                   |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |
| Balance as of January 1, 2009                                                                          |   | $                  | 3,846  |   |                    | $      | 144,866 |          |   | $      | 422                            |   |   | $                      | 8,315  |   |   | $      | 11,775 |   |   | $ | 169,224 |   |
| Additions during the year                                                                              |   |               | 9      |   |                    |   | 174     |          |   |   | -                              |   |   |                   | 95     |   |   |   | 333 |   |   |   | 611 |   |
| Disposals during the year (through sale)                                                               |   |               | -      |   |                    |   | (19     | )             |   |   | -                              |   |   |                   | -      |   |   |   | - |   |   |   | (19 | ) |
| Disposals (fully depreciated assets)                                                                   |   |               | -      |   |                    |   | -       |          |   |   | -                              |   |   |                   | (2,230 | )      |   |   | (148 | ) |   |   | (2,378 | ) |
| Balance as of December 31, 2009                                                                        |   | $                  | 3,855  |   |                    | $      | 145,021 |          |   | $      | 422                            |   |   | $                      | 6,180  |   |   | $      | 11,960 |   |   | $ | 167,438 |   |
|                                                                                                   |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Accumulated depreciation                                                                               |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                                                                          |   | $                  | 706    |   |                    | $      | 92,036  |          |   | $      | 412                            |   |   | $                      | 6,544  |   |   | $      | 3,113 |   |   | $ | 102,811 |   |
| Additions during the year                                                                              |   |               | 207    |   |                    |   | 7,911   |          |   |   | 6                              |   |   |                   | 386    |   |   |   | 393 |   |   |   | 8,903 |   |
| Disposals during the year (through  sale)                                                    |   |               | -      |   |                    |   | (18     | )             |   |   | -                              |   |   |                   | -      |   |   |   | - |   |   |   | (18 | ) |
| Disposals (fully depreciated assets)                                                                   |   |               | -      |   |                    |   | -       |          |   |   | -                              |   |   |                   | (2,230 | )      |   |   | (148 | ) |   |   | (2,378 | ) |
| Balance as of December 31, 2009                                                                        |   | $                  | 913    |   |                    | $      | 99,929  |          |   | $      | 418                            |   |   | $                      | 4,700  |   |   | $      | 3,358 |   |   | $ | 109,318 |   |
|                                                                                                   |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Impairment                                                                                             |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                                                                          |   | $                  | 445    |   |                    | $      | 1,344   |          |   |   | -                              |   |   | $                      | 346    |   |   |   | - |   |   | $ | 2,135 |   |
| Impairment of property, plant and equipment    (Reversal of  impairment loss), net |   |               | 82     |   |                    |   | (738    | )             |   |   | -                              |   |   |                   | 63     |   |   |   | - |   |   |   | (593 | ) |
| Reduction during the year                                                                              |   |               | (17    | )      |                    |   | (276    | )             |   |   | -                              |   |   |                   | (49    | )      |   |   | - |   |   |   | (342 | ) |
| Balance as of December 31, 2009                                                                        |   | $                  | 510    |   |                    | $      | 330     |          |   |   | -                              |   |   | $                      | 360    |   |   |   | - |   |   | $ | 1,200 |   |
|                                                                                                   |   |               |   |   |                    |   |    |          |   |   |                           |   |   |                   |   |   |   |   |   |   |   |   |   |   |
| Net book value as of December 31, 2009                                                                 |   | $                  | 2,432  |   |                    | $      | 44,762  |          |   | $      | 4                              |   |   | $                      | 1,120  |   |   | $      | 8,602 |   |   | $ | 56,920 |   |

| b. | Impairment of property, plant and equipment |
|----|---------------------------------------------|

|   - | Cut and sew (C&S) – Includes design, manufacturing and sale of intimate apparel and active wear using the "cut & sew" method; |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------|

|   - | Seamless – Includes design, manufacturing and sale of intimate apparel and active wear using the "seamless" method; |
|----------|---------------------------------------------------------------------------------------------------------------------------|

|   - | Macro – Includes manufacturing of swimwear in the Far East by sub-contractors. Finished goods are mostly sold in the USA and Europe; |
|----------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   - | Real Estate in the USA – The Company generating cash flow from leasing its head office in the USA. This building generates an independent cash flow on its own; and |
|----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   - | Machines in the USA (operation lease); the Company generates cash flow from leasing the machines in operational lease. |
|----------|------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 7:- | PROPERTY, PLANT AND EQUIPMENT (Cont.) |
|----------|---------------------------------------|

| c. | For liens, see Note 17c. |
|----|--------------------------|

| d. | Non-current assets held for sale |
|----|----------------------------------|

|   | In November 2010, the Company formulated a plan for the replacement of old knitting machines of the Santoni type in consideration for new knitting machines. During December 2010, the Company located a potential buyer for these machines; it met with him to discuss the subject and formulated the details of the transaction. Such a replacement serves the Company's needs for new technology so as to meet existing market needs. Accordingly, the Company carried out a classification of these knitting machines from the fixed assets item to the non-current assets held for sale. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 8:- | GOODWILL AND INTANGIBLE ASSETS |
|----------|--------------------------------|

|   | a. | Composition and movement |
|--------|----|--------------------------|

|                                               |   | Computer software |   |   | Customer relationships, order backlog and brand license |   |   |  Goodwill |   |   | Total  |   |
|----------------------------------------------------|--------|-------------------|--------|--------|--------------------------------------------------------------|--------|--------|----------------|--------|--------|--------|--------|
|                                               |   | $ in thousands    |   |
| Cost                                               |   |              |   |   |                                                         |   |   |           |   |   |   |   |
| Balance as of January 1, 2010                      |   | $                 | 1,679  |   |                                                         | $      | 1,293  |           |   | $      | -      |   |   | $ | 2,972 |   |
| Additions – purchased separately             |   |              | 2      |   |                                                         |   | 2,037  |           |   |   | 49     |   |   |   | 2,088 |   |
| Balance as of December 31, 2010                    |   | $                 | 1,681  |   |                                                         | $      | 3,330  |           |   | $      | 49     |   |   | $ | 5,060 |   |
|                                               |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| Accumulated amortization                           |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2010                      |   | $                 | 1,261  |   |                                                         | $      | 654    |           |   | $      | -      |   |   | $ | 1,915 |   |
| Amortization  recognized during the year |   |              | 140    |   |                                                         |   | 222    |           |   |   | -      |   |   |   | 362 |   |
| Balance as of December 31, 2010                    |   | $                 | 1,401  |   |                                                         | $      | 876    |           |   | $      | -      |   |   |   | 2,277 |   |
|                                               |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| Impairment                                         |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2010                      |   | $                 | 97     |   |                                                         | $      | -      |           |   | $      | -      |   |   |   | 97 |   |
| Reversal of  impairment loss, net        |   |              | (73    | )      |                                                         |   | -      |           |   |   | -      |   |   |   | (73 | ) |
| Reduction recognized during the year               |   |              | (24    | )      |                                                         |   | -      |           |   |   | -      |   |   |   | (24 | ) |
| Balance as of December 31, 2010                    |   | $                 | -      |   |                                                         | $      | -      |           |   | $      | -      |   |   | $ | - |   |
|                                               |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| Net balance                                        |   |              |   |   |                                                         |   |   |           |   |   |   |   |   |   |   |   |
| As of December 31, 2010                            |   | $                 | 280    |   |                                                         | $      | 2,454  |           |   | $      | 49     |   |   | $ | 2,783 |   |

----

----

| NOTE 8: | GOODWILL AND INTANGIBLE ASSETS (Cont.) |
|---------|----------------------------------------|

|                                                    |   | Computer software |   |   | Customer relations and order backlog |   |   | Goodwill |   |   | Total  |   |
|---------------------------------------------------------|--------|-------------------|--------|--------|-------------------------------------------|--------|--------|----------|--------|--------|--------|--------|
|                                                    |   | $ in thousands    |   |
| Cost                                                    |   |              |   |   |                                      |   |   |     |   |   |   |   |
| Balance as of January 1, 2009                           |   | $                 | 3,165  |   |                                      | $      | 1,293  |     |   | $      | 344    |   |   | $ | 4,802 |   |
| Additions – purchased separately                  |   |              | 75     |   |                                      |   | -      |     |   |   | -      |   |   |   | 75 |   |
| Disposals (fully amortized)                             |   |              | (1,561 | )      |                                      |   | -      |     |   |   | -      |   |   |   | (1,561 | ) |
| Withdrawals – cancellation of contingent proceeds |   |              | -      |   |                                      |   | -      |     |   |   | (344   | )      |   |   | (344 | ) |
| Balance as of December 31, 2009                         |   | $                 | 1,679  |   |                                      | $      | 1,293  |     |   | $      | -      |   |   | $ | 2,972 |   |
|                                                    |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| Accumulated amortization                                |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                           |   | $                 | 2,595  |   |                                      | $      | 186    |     |   | $      | -      |   |   | $ | 2,781 |   |
| Amortization  recognized during the year      |   |              | 227    |   |                                      |   | 468    |     |   |   | -      |   |   |   | 695 |   |
| Disposals (fully amortized)                             |   |              | (1,561 | )      |                                      |   | -      |     |   |   | -      |   |   |   | (1,561 | ) |
| Balance as of December 31, 2009                         |   | $                 | 1,261  |   |                                      | $      | 654    |     |   | $      | -      |   |   | $ | 1,915 |   |
|                                                    |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| Impairment                                              |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| Balance as of January 1, 2009                           |   | $                 | -      |   |                                      | $      | -      |     |   | $      | -      |   |   | $ | - |   |
| Impairment charge, net                                  |   |              | 97     |   |                                      |   | -      |     |   |   | -      |   |   |   | 97 |   |
| Balance as of December 31, 2009                         |   | $                 | 97     |   |                                      | $      | -      |     |   | $      | -      |   |   | $ | 97 |   |
|                                                    |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| Net balance                                             |   |              |   |   |                                      |   |   |     |   |   |   |   |   |   |   |   |
| As of December 31, 2009                                 |   | $                 | 321    |   |                                      | $      | 639    |     |   | $      | -      |   |   | $ | 960 |   |

|   | b. | Amortization expense |
|--------|----|----------------------|

|                           |   | For the year ended December 31 |   |
|--------------------------------|--------|--------------------------------|--------|
|                           |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|                           |   | $ in thousands                 |   |
|                           |   |                           |   |   |   |   |   |   |   |
| Cost of sales                  |   | $                              | 140    |   |   | $ | 227 |   |   | $ | 251 |   |
| Selling and marketing expenses |   |                           | 222    |   |   |   | 468 |   |   |   | 186 |   |
|                           |   |                           |   |   |   |   |   |   |   |   |   |   |
|                           |   | $                              | 362    |   |   | $ | 695 |   |   | $ | 437 |   |

----

----

| NOTE 9: - | SUBORDINATED NOTE RECEIVABLE |
|-----------|------------------------------|

| NOTE 10: - | CREDIT FROM BANKS |
|------------|-------------------|

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

|                                      | Weighted Average Interest Rate |   | As of December 31, 2010 |   |   | As of December 31, 2009 |   |
|-------------------------------------------|--------------------------------|--------|-------------------------|--------|--------|-------------------------|--------|
|                                      | December 31, 2010              |   | In NIS                  |   |   | Unlinked                |   |   | Total |   |   | Total |   |
|                                      | %                              |   | $ in thousands          |   |
|                                      |                           |   |                    |   |   |                    |   |   |   |   |   |   |   |
| Short-term credit from banks              | LIBOR+1.7                      |   | $                       | 385    |   |                    | $      | 5,809 |   |   | $ | 6,194 |   |   | $ | 14,246 |   |
| Current maturities of long-term loans     |                           |   |                    | -      |   |                    |   | - |   |   |   | - |   |   |   | 4,151 |   |
| Long-term loans classified as current (b) | LIBOR + 1                      |   |                    | -      |   |                    |   | - |   |   |   | - |   |   |   | 7,450 |   |
|                                      |                           |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |
|                                      |                           |   | $                       | 385    |   |                    | $      | 5,809 |   |   | $ | 6,194 |   |   | $ | 25,847 |   |

|   | b. | In 2009 the Company classified its long-terms loans to current liabilities in accordance with the provisions of Standard IAS 1 due to the Company's not meeting the terms of receiving credits from banks. The aforementioned classification was made in spite of the Company's new agreement with the banks as of March 2, 2010, as detailed in Note 13b below, and despite the waivers granted to the Company as a result of its failure to comply with the financial covenants in 2009. As of December 31, 2010 the Company is meeting the financial covenants and, therefore, the loans are classified as long-term. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Regarding collaterals and liens see Note 17c. |
|--------|----|-----------------------------------------------|

----

----

| NOTE 11:- | TRADE PAYABLES |
|-----------|----------------|

|          |   | As of December 31, |   |
|---------------|--------|--------------------|--------|
|          |   | 2010               |   |   | 2009 |   |
|          |   | $ in thousands     |   |
|          |   |               |   |   |   |   |
| Open accounts |   | $                  | 8,978  |   |   | $ | 14,826 |   |
| Notes payable |   |               | 2,886  |   |   |   | 216 |   |
|          |   |               |   |   |   |   |   |   |
|          |   | $                  | 11,864 |   |   | $ | 15,042 |   |

| NOTE 12:- | OTHER CURRENT LIABILITIES |
|-----------|---------------------------|

|                      |   | As of December 31, |   |
|---------------------------|--------|--------------------|--------|
|                      |   | 2010               |   |   | 2009 |   |
|                      |   | $ in thousands     |   |
|                      |   |               |   |   |   |   |
| Payroll accruals          |   | $                  | 4,271  |   |   | $ | 3,812 |   |
| Accrued expenses          |   |               | 747    |   |   |   | 533 |   |
| Government authorities    |   |               | 1,823  |   |   |   | 293 |   |
| Other current liabilities |   |               | 1,609  |   |   |   | 1,028 |   |
|                      |   |               |   |   |   |   |   |   |
|                      |   | $                  | 8,450  |   |   | $ | 5,666 |   |

| NOTE 13:- | LONG-TERM LOANS FROM BANKS |
|-----------|----------------------------|

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

|             | Weighted average interest rate |   | Balance        |   |   | Balance net of current maturities |   |
|------------------|--------------------------------|--------|----------------|--------|--------|-----------------------------------|--------|
|             | %                              |   | $ in thousands |   |
|             |                           |   |           |   |   |                              |   |
| Loans from banks | LIBOR + 2.15-2.85              |   |           | 19,818 |   |                              |   | 19,818 |   |

|   | b. | Final agreement with the banks |
|--------|----|--------------------------------|

----

----

|   | 1. | Loan A |
|--------|----|--------|

|   | (1) | Raising future capital – in every case in which the Company will raise capital, then the total equal to 50% (fifty percent) of the net consideration of the raising of capital will serve to make an early repayment. In this regard, it should be mentioned, that in the Nouvelle Agreement described in Note 18a below, the banks agreed to deviate from applying this clause. i.e.: in this clause, with the banks’ agreement this will not apply to the Nouvelle Transaction. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (2) | The sale of assets – in every case in which the Company will make a sale of an asset, not in the normal course of business, then the full net consideration of the sale of the asset will be used for early repayment. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (3) | Cash flows surpluses - in every case in which total cash flows surpluses, in accordance with the financial statements, will exceed the determining amount set at $8,000,000, then a total comprising 50% of the total difference between the surplus cash flows and the determining total will be used as early repayment, according to the determining ratio, on account of the last payment of the principal of Loan A. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Loan B |
|--------|----|--------|

|   | 3. | Short-term credit lines (in addition to Loans A and B) |
|--------|----|--------------------------------------------------------|

----

----

|   | 4. | Capital infusion |
|--------|----|------------------|

|   | 5. | Providing additional credit lines |
|--------|----|-----------------------------------|

|   | Subject to an investment in capital, fully and in due time, the banks will provide the Company, in the framework of additional short-term credit lines, a total amount of $1,800,000. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 6. | Additional undertakings |
|--------|----|-------------------------|

----

----

| NOTE 13:      LONG-TERM LOANS FROM BANKS (Cont.) |
|---------------------------------------------------------------------------|

|   | c. | Amendment to the agreement with the banks |
|--------|----|-------------------------------------------|

|   | 1. | Loan 1 |
|--------|----|--------|

|   | a) | The loan of $3.8 million is for a period of 4 years; |
|--------|----|------------------------------------------------------|

|   | b) | The principal of Loan 1 bears annual interest at a rate agreed by the Company and each of the bank loan documents. The loan was executed for such purpose by the Company with of the banks; |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | The interest on Loan 1 is payable by the Company in consecutive monthly installments commencing from the date on which Loan 1 is provided; |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | The principal of Loan is payable in equal consecutive monthly installments commencing from the conclusion of 12 months from the date of execution of the Amendment (the "Grace Period") until the final and full repayment of Loan 1. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 2. | Loan 2 |
|--------|----|--------|

|   | a) | An additional loan of $1.2 million was provided by the bank lenders and bears annual interest at a rate to be agreed upon by the Company and of the banks; |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | The interest on Loan 2 will be paid by the Company in consecutive monthly installments, commencing from the date on which Loan 2 is provided. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Infusion of capital |
|--------|----|---------------------|

|   | a) | A precondition for providing the loans, as detailed in clauses 1 and 2 above, is that shareholders' equity of not less than $5 million and not more than $5.9 million (hereinafter: "the infusion of capital") will be invested in the Company. In addition, letters of undertaking of the controlling shareholder in the Company, to the satisfaction of the banks will be submitted and will include, inter alia, an undertaking not to make any change in ownership and/or control in the Company without receiving the banks' permission and an undertaking of not competing with the Company's business. The infusion of such capital was made, and the letters of undertaking were sent to the banks as required. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b) | Notwithstanding the aforesaid in the agreements with the banks of March 2, 2010, infusion of capital mentioned in clause 4 of Note 13b above was not used to repay the credit that the banks provided the Company in the past. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 4‎.     Financial covenants |
|--------|-------------------------------------------------------|

|   | 1. | The rate of tangible shareholders' equity to the total balance sheet will not be less than 30%; but in any case, the tangible shareholders' equity as defined in the agreement will not be less – at any time – then the amounts stated below: |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | In 2010 – $28,000,000 |
|--------|----|-----------------------------|

|   | b) | In 2011 –$29,500,000 |
|--------|----|----------------------------|

|   | c) | In 2012 – $32,000,000 |
|--------|----|-----------------------------|

|   | d) | As from 2013 and thereafter – $35,000,000. |
|--------|----|--------------------------------------------------|

|   | 2. | The trade receivables (less balances of trade receivables which have been factored) by the Company will not be less at any time then the following amounts: |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | In 2010 – $9,000,000 |
|--------|----|----------------------------|

|   | b) | In 2011 – $12,500,000 |
|--------|----|-----------------------------|

|   | c) | As from 2012 and thereafter – $14,000,000 |
|--------|----|-------------------------------------------------|

|   | 3. | Up to December 31, 2011, the Company will be entitled to carry out factoring transactions (factoring transactions and/or sale of customers' notes in favor of third parties to provide financing), subject that the consideration from the transaction will be at least a rate of 80% of the amount of the note or the invoice, which will serve to finance working capital needs; and that the total amount for which factoring transactions will be carried out will not exceed at any time $5 million. |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   | 4. | The total amount of the balances of the Company's cash, inventory and trade receivables will not be less at any time than $33,000,000, excluding relating to the financial statements of the third quarter of every calendar year, where the total amount of the balance of the Company's cash, inventory and receivables will not be less than $29,000,000. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | The ratio between the Company's total debts and liabilities to the banks and other financial organizations and the Company's annual EBITDA according to the annual consolidated statements: |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | a) | In 2011 – will not exceed 9.5. |
|--------|----|--------------------------------------|

|   | b) | In 2012 – will not exceed 8.5. |
|--------|----|--------------------------------------|

|   | c) | In 2013 – will not exceed 7.5. |
|--------|----|--------------------------------------|

|   | d) | In 2014 – will not exceed 6.5. |
|--------|----|--------------------------------------|

|   | e) | As from 2015 and thereafter – will not exceed 5.5. |
|--------|----|----------------------------------------------------------|

|   | 6. | The provisions of the agreement will apply regarding the sale of any other asset which is not equipment. |
|--------|----|----------------------------------------------------------------------------------------------------------|

|   | 7. | Not to carry out any change in ownership and/or in the Company's control (by Intimes Nouvelle Seamless Inc., Litef Holdings Inc., Mivtach Shamir Holdings Ltd. and Lieberman and Martin Lieberman) without receiving the banks' prior written consent, and this relating to the structure in ownership and control which will be created immediately after completing the transaction. Notwithstanding the aforesaid, an accumulated change of up to 5% from the holding rate of the above bodies will not constitute a breach of the Company's undertaking, provided that the holdings rate of all of the above bodies will not be less at any time from 45% of the Company's issued and paid up share capital. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 8. | Not to hold subsidiaries or additional related companies, unless these companies sign a letter of undertaking with the banks. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------|

|   |   | As of December 31, 2010 the Company met all the financial covenants as stated in the amendment to the agreement with the banks. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------|

|   | 5. | Warrants options to the banks |
|--------|----|-------------------------------|

|   |   | Allotment to the banks after carrying out an infusion of capital, gratis, a total of 200,000 not traded in an active market option warrants, which can be exercised to 200,000 shares of NIS 10 par value each of the Company, with an exercise price of $3 per share. The option warrants can be exercised for a period of 72 months from the date of signing the amendment. The allotment of the option warrants is subject to receiving all the approvals required by law (including the approval of the Stock Exchange to listing of the shares resulting from exercising the option warrants) The options were granted to the banks on May 12, 2011. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS |
|-----------|-----------------------|

|   | a. | Classification of financial assets and financial liabilities |
|--------|----|--------------------------------------------------------------|

|                                                            |   | December 31, |   |
|-----------------------------------------------------------------|--------|--------------|--------|
|                                                            |   | 2010         |   |   | 2009 |   |
| Financial assets:                                               |   |         |   |   |   |   |
|                                                            |   |         |   |   |   |   |
| Financial assets at fair value through the statement of income: |   |         |   |   |   |   |
| Derivatives                                                     |   |         | -      |   |   |   | 195 |   |
|                                                            |   |         |   |   |   |   |   |   |
| Financial assets available-for-sale                             |   | $            | 731    |   |   | $ | 737 |   |
|                                                            |   |         |   |   |   |   |   |   |
| Financial liabilities:                                          |   |         |   |   |   |   |   |   |
|                                                            |   |         |   |   |   |   |   |   |
| Financial liabilities measured at amortized cost                |   | $            | 26,012 |   |   | $ | 25,847 |   |

|   | b. | Financial risks factors |
|--------|----|-------------------------|

|   | 1. | Market risks: |
|--------|----|---------------|

|   | Foreign currency risk: |
|--------|------------------------|

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS (Cont.) |
|-----------|-------------------------------|

|   | 2. | Credit risk: |
|--------|----|--------------|

|   | The Group's revenues are mainly from customer in the USA and Europe. On a current basis, the Group follows customers' receivable and the financial statements include provisions for doubtful debt which properly reflect, in the Group's opinion, the loss inherent in the debts whose collection is in doubt. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 3. | Interest risk: |
|--------|----|----------------|

|   | 4. | Liquidity risk: |
|--------|----|-----------------|

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS (Cont.) |
|-----------|-------------------------------|

|             |   | Up to one year |   |   | 1 to 2 years |   |   | 2 to 3 years |   |   | Total  |   |
|------------------|--------|----------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------|--------|
|             |   | $ in thousands |   |
|             |   |           |   |   |         |   |   |         |   |   |   |   |
| Loans from banks |   | $              | 6,194  |   |         | $      | -      |         |   | $      | 19,818 |   |   | $ | 26,012 |   |
| Trade payables   |   |           | 11,864 |   |         |   | -      |         |   |   | -      |   |   |   | 11,864 |   |
| Other payables   |   |           | 8,309  |   |         |   | -      |         |   |   | -      |   |   |   | 8,309 |   |
|             |   | $              | 26,367 |   |         | $      | -      |         |   | $      | 19,818 |   |   | $ | 46,185 |   |

|              |   | Up to one year |   |   | 1 to 2 years |   |   | 2 to 3 years |   |   | Total  |   |
|-------------------|--------|----------------|--------|--------|--------------|--------|--------|--------------|--------|--------|--------|--------|
|              |   | $ in thousands |   |
|              |   |           |   |   |         |   |   |         |   |   |   |   |
| Loans from banks  |   | $              | 18,397 |   |         | $      | 4,151  |         |   | $      | 3,299  |   |   | $ | 25,847 |   |
| Trade payables    |   |           | 15,042 |   |         |   | -      |         |   |   | -      |   |   |   | 15,042 |   |
| Other payable     |   |           | 5,374  |   |         |   | -      |         |   |   | -      |   |   |   | 5,374 |   |
| Other liabilities |   |           | 292    |   |         |   | 1,838  |         |   |   | -      |   |   |   | 2,130 |   |
|              |   | $              | 39,105 |   |         | $      | 5,989  |         |   | $      | 3,299  |   |   | $ | 48,393 |   |

|   | c. | Fair Value |
|--------|----|------------|

|   | d. | Classification of Financial Instruments by Fair Value Hierarchy: |
|--------|----|------------------------------------------------------------------|

| Level 1 | - | Quoted prices (unadjusted) in active markets for identical assets or liabilities.                                                       |
|---------|---|-----------------------------------------------------------------------------------------------------------------------------------------|
| Level 2 | - | Data other than quoted prices included within Level 1 that are observable either directly or indirectly.                                |
| Level 3 | - | Data that are not based on observable market data (valuation techniques which use inputs that are not based on observable market data). |

|   | Financial liabilities measured at fair value: |
|--------|-----------------------------------------------|

|   | December 31, 2010: |
|--------|--------------------|

|                                        |   | Level 1        |   |   | Level 2 |   |   | Level 3 |   |
|---------------------------------------------|--------|----------------|--------|--------|---------|--------|--------|---------|--------|
|                                        |   | $ in thousands |   |
| Financial assets Available for sale:        |   |           |   |   |    |   |   |    |   |
| Investment in securities available for sale |   |           | -      |   |    |   | -      |    |   |   | 731 |   |

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS (Cont.) |
|-----------|-------------------------------|

|                                        |   | Level 1        |   |   | Level 2 |   |   | Level 3 |   |
|---------------------------------------------|--------|----------------|--------|--------|---------|--------|--------|---------|--------|
|                                        |   | $ in thousands |   |
|                                        |   |           |   |   |    |   |   |    |   |
| Defined foreign currency forward contract   |   |           | -      |   |    |   | 195    |    |   |   | - |   |
|                                        |   |           |   |   |    |   |   |    |   |   |   |   |
| Financial assets available for sale:        |   |           |   |   |    |   |   |    |   |   |   |   |
| Investment in securities available for sale |   |           | -      |   |    |   | -      |    |   |   | 737 |   |

|   | Changes in financial assets classified to Level 3: |
|--------|----------------------------------------------------|

|                                                                                                                                     |   | Financial assets available-for-sale |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                                                                                                     |   | $ in thousands                      |   |
| Balance as of January 1, 2010                                                                                                            |   |                                | 737    |   |
|                                                                                                                                     |   |                                |   |   |
| Total recognized loss:                                                                                                                   |   |                                |   |   |
| In other comprehensive income (loss)                                                                                                     |   |                                | (6     | ) |
|                                                                                                                                     |   |                                |   |   |
| Balance as of December 31, 2010                                                                                                          |   |                                | 731    |   |
|                                                                                                                                     |   |                                |   |   |
| Total gain (loss) for the year recognized in the statement of income  relating to assets held at the end of the year of report |   |                                | -      |   |

|   | e. | Derivatives and cash flow hedging |
|--------|----|-----------------------------------|

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS (Cont.) |
|-----------|-------------------------------|

|                                | Exercise / Expiry date |   | Par value($thousands) |   |   | Fair value$ in thousands |   |
|-------------------------------------|-----------------------------|--------|-----------------------|--------|--------|--------------------------|--------|
| December 31, 2010                   |                        |   |                  |   |   |                     |   |
| Forward transactions purchased, net |                        |   |                  | -      |   |                     |   | - |   |
|                                |                        |   |                  |   |   |                     |   |   |   |
| December 31, 2009                   |                        |   |                  |   |   |                     |   |   |   |
| Forward transactions purchased, net | Jan. – May 2010       |   |                  | 6,692  |   |                     |   | 6,887 |   |

|   | According to the agreement with the banks, described above, the Company closed all its open positions of forward transactions. But the Company may use the existing credit lines in order to carry out forward transactions. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | f. | Sensitivity analyses relating to changes in market factors |
|--------|----|------------------------------------------------------------|

|   |   | Sensitivity analyses to changes in interest rates |   |
|--------|--------|---------------------------------------------------|--------|
|   |   | Gain (loss) from change                           |   |
|   |   | 10% increase in interest                          |   |   | 10% decrease in interest |   |
|   |   | $ in thousands                                    |   |
|   |   |                                              |   |   |   |   |
| 2010   |   |                                              | (475   | ) |   |   | 475 |   |
|   |   |                                              |   |   |   |   |   |   |
| 2009   |   |                                              | (430   | ) |   |   | 430 |   |

|   |   | Sensitivity analyses to fluctuations in NIS exchange rate |   |
|--------|--------|-----------------------------------------------------------|--------|
|   |   | Gain (loss) from change                                   |   |
|   |   | 10% increase in exchange rate                             |   |   | 10% decrease in exchange rate |   |
|   |   | $ in thousands                                            |   |
|   |   |                                                      |   |   |   |   |
| 2010   |   |                                                      | 1,309  |   |   |   | (1,309 | ) |
|   |   |                                                      |   |   |   |   |   |   |
| 2009   |   |                                                      | 1,420  |   |   |   | (1,420 | ) |

----

----

| NOTE 14:- | FINANCIAL INSTRUMENTS (Cont.) |
|-----------|-------------------------------|

|                                                             |   | Gain (loss) from change       |   |
|------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                             |   | 10% increase in market factor |   |   | 10% decrease in market factor |   |
| Foreign Currency                                                 |   | $ in thousands                |   |
| US Dollar                                                        |   |                          |   |   |   |   |
|                                                             |   |                          |   |   |   |   |
| 2010 -  In respect of forward transactions and options |   |                          | -      |   |   |   | - |   |
| 2009 -In respect of forward transactions and options             |   |                          | (300   | ) |   |   | 300 |   |
|                                                             |   |                          |   |   |   |   |   |   |
| Euro                                                             |   |                          |   |   |   |   |   |   |
| 2010 -  In respect of forward transactions             |   |                          | -      |   |   |   | - |   |
| 2009 -In respect of forward transactions                         |   |                          | (290   | ) |   |   | 290 |   |

|   | Employee benefits consist of short-term benefits and post-employment benefits. |
|--------|--------------------------------------------------------------------------------|

|   | a. | Post-Employment benefits |
|--------|----|--------------------------|

----

----

|   | b. | Defined contribution plans |
|--------|----|----------------------------|

|                                              |   | For the year ended December 31 |   |
|---------------------------------------------------|--------|--------------------------------|--------|
|                                              |   | 2010                           |   |   | 2009 |   | 2008 |   |
|                                              |   | $ in thousands                 |   |
|                                              |   |                           |   |   |   |   |   |   |   |
| Expenses in respect of defined contribution plans |   | $                              | 929    |   |   | $ | 1,072 |   |   | $ | 1,170 |   |

|   | c. | Defined benefit plans |
|--------|----|-----------------------|

|   | 1‎.     Expenses charged to the statements of income: |
|--------|---------------------------------------------------------------------------------|

|                                                           |   | For the year ended December 31 |   |
|----------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                           |   | 2010                                |   |   | 2009 |   |   | 2008 |   |
|                                                           |   | $ in thousands                      |   |
|                                                           |   |                                |   |   |   |   |   |   |   |
| Current servicing cost                                         |   | $                                   | 144    |   |   | $ | 147 |   |   | $ | 382 |   |
| Interest cost on benefit liabilities                           |   |                                | 55     |   |   |   | 95 |   |   |   | 143 |   |
| Expected return on plan assets                                 |   |                                | (22    | ) |   |   | (35 | ) |   |   | (55 | ) |
| Other                                                          |   |                                | 149    |   |   |   | 40 |   |   |   | (121 | ) |
| Total expenses in respect of employee benefits                 |   | $                                   | 326    |   |   | $ | 247 |   |   | $    | 349 |   |
|                                                           |   |                                |   |   |   |   |   |   |   |   |   |   |
| Actual return on plan assets                                   |   | $                                   | 8      |   |   | $ | 37 |   |   | $ | 10 |   |
|                                                           |   |                                |   |   |   |   |   |   |   |   |   |   |
| Expenses presented in the statements of income are as follows: |   |                                |   |   |   |   |   |   |   |   |   |   |
|                                                           |   |                                |   |   |   |   |   |   |   |   |   |   |
| Cost of sales                                                  |   | $                                   | 277    |   |   | $ | 199 |   |   | $ | 100 |   |
| Selling and marketing expenses                                 |   |                                | 27     |   |   |   | 44 |   |   |   | 115 |   |
| General and administrative expenses                            |   |                                | 22     |   |   |   | 4 |   |   |   | 134 |   |
|                                                           |   | $                                   | 326    |   |   | $ | 247 |   |   | $ | 349 |   |

----

----

|   | 2. | Plan assets (liabilities), net |
|--------|----|--------------------------------|

|                              |   | As of December 31, |   |
|-----------------------------------|--------|--------------------|--------|
|                              |   | 2010               |   |   | 2009 |   |
|                              |   | $ in thousands     |   |
|                              |   |               |   |   |   |   |
| Defined benefit obligation        |   | $                  | (1,261 | ) |   | $ | (1,468 | )  |
| Fair value of plan’s assets |   |               | 745    |   |   |   | 739 |   |
| Total liabilities, net            |   | $                  | (516   | ) |   | $ | (729 | )   |

|   | 3. | Changes in present value of defined benefit obligation |
|--------|----|--------------------------------------------------------|

|                      |   | As of December 31, |   |
|---------------------------|--------|--------------------|--------|
|                      |   | 2010               |   |   | 2009 |   |
|                      |   | $ in thousands     |   |
|                      |   |               |   |   |   |   |
| Balance as of January 1   |   | $                  | 1,468  |   |   | $ | 3,098 |   |
|                      |   |               |   |   |   |   |   |   |
| Interest expenses         |   |               | 55     |   |   |   | 95 |   |
| Current servicing cost    |   |               | 144    |   |   |   | 147 |   |
| Benefits paid             |   |               | (932   | ) |   |   | (770 | ) |
| Net actuarial loss (gain) |   |               | 485    |   |   |   | (588 | ) |
| Exchange rate differences |   |               | 41     |   |   |   | (514 | ) |
|                      |   |               |   |   |   |   |   |   |
| Balance as of December 31 |   | $                  | 1,261  |   |   | $ | 1,468 |   |

|   | 4. | Plan assets |
|--------|----|-------------|

|   | a) | Plan’s assets |
|--------|----|---------------------|

|   | b) | Movement in fair value of plan assets |
|--------|----|---------------------------------------|

|                                     |   | As of December 31 |   |
|------------------------------------------|--------|-------------------|--------|
|                                     |   | 2010              |   |   | 2009 |   |
|                                     |   | $ in thousands    |   |
|                                     |   |              |   |   |   |   |
| Balance as of January 1                  |   | $                 | 739    |   |   | $ | 929 |   |
|                                     |   |              |   |   |   |   |   |   |
| Expected return                          |   |              | 22     |   |   |   | 35 |   |
| Employer’s provisions for the plan |   |              | 66     |   |   |   | 72 |   |
| Benefits paid                            |   |              | (113   | ) |   |   | (216 | ) |
| Net actuarial loss                       |   |              | (14    | ) |   |   | (20 | ) |
| Exchange rate differences                |   |              | 45     |   |   |   | (61 | ) |
|                                     |   |              |   |   |   |   |   |   |
| Balance as of December 31                |   | $                 | 745    |   |   | $ | 739 |   |

----

----

|   | 5. | Principal assumptions used in determining the defined benefit plan |
|--------|----|--------------------------------------------------------------------|

|                                           |   | 2010   |    |   | 2009   |   |    | 2008   |   |
|------------------------------------------------|--------|--------|---------|--------|--------|--------|---------|--------|--------|
|                                           |   | %      |    |
|                                           |   |   |    |   |   |   |    |   |   |
| Discount rate                                  |   |   | 5.08    |   |   |   | 5.4     |   |   |   | 3.9-4.6 |   |
| Expected rate of return on plan’s assets |   |   | 2.6-7.3 |   |   |   | 3.6-5.4 |   |   |   | 5-6.7 |   |
| Expected salary increase rate                  |   |   | 0       |   |   |   | 0       |   |   |   | 0 |   |
|                                           |   |   |    |   |   |   |    |   |   |   |   |   |

|   | 6. | The amounts for the current and previous years: |
|--------|----|-------------------------------------------------|

|                                        |   | Year ended December 31, |   |
|---------------------------------------------|--------|-------------------------|--------|
|                                        |   | 2010                    |   |   | 2009 |   |   | 2008 |   |
|                                        |   | $ in thousands          |   |
| Present value of defined benefit obligation |   |                    | 1,261  |   |   |   | 1,468 |   |   |   | 3,098 |   |
|                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
| Fair value of plan assets                   |   |                    | 745    |   |   |   | 739 |   |   |   | 929 |   |
|                                        |   |                    |   |   |   |   |   |   |   |   |   |   |
| Surplus in the plan                         |   |                    | 516    |   |   |   | 729 |   |   |   | 2,169 |   |

| NOTE 16:- | TAXES ON INCOME |
|-----------|-----------------|

|   | a. | Tax laws applicable to Group companies |
|--------|----|----------------------------------------|

----

----

| NOTE 16:- | TAXES ON INCOME (Cont.) |
|-----------|-------------------------|

| The value of productive assets before the expansion(NIS in millions) |   | The new proportion that the required investment bears to the value of productive assets |
|----------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|                                                                 |   |                                                                                    |
| Up to 140                                                            |   | 12%                                                                                     |
| 140 - 500                                                            |   | 7%                                                                                      |
| Over 500                                                             |   | 5%                                                                                      |

----

----

| NOTE 16:- | TAXES ON INCOME (Cont.) |
|-----------|-------------------------|

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

----

----

| NOTE 16:- | TAXES ON INCOME (Cont.) |
|-----------|-------------------------|

|   | c. | Final tax assessments |
|--------|----|-----------------------|

|   | d. | Carry- forward losses for tax purposes and other temporary differences |
|--------|----|------------------------------------------------------------------------|

----

----

| NOTE 16:- | TAXES ON INCOME (Cont.) |
|-----------|-------------------------|

|   | e. | Deferred taxes |
|--------|----|----------------|

|                                                 |   | Balance sheets |   |   | Statements of income                |   |
|------------------------------------------------------|--------|----------------|--------|--------|-------------------------------------|--------|
|                                                 |   | December 31    |   |   | For the year ended December 31 |   |
|                                                 |   | 2010           |   |   | 2009                                |   |   | 2010 |   |   | 2009 |   |   | 2008 |   |
|                                                 |   | $ in thousands |   |   | $ in thousands                      |   |
| Deferred tax liabilities                             |   |           |   |   |                                |   |   |   |   |   |   |   |   |   |   |
|                                                 |   |           |   |   |                                |   |   |   |   |   |   |   |   |   |   |
| Property, plant and equipment                        |   | $              | (7,069 | )      |                                | $      | (10,649 | ) |   | $ | 3,580 |   |   | $ | 2,520 |   |   | $ | (274 | ) |
| Cash flow from hedging transactions                  |   |           | -      |   |                                |   | (38 | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Actuarial profit for defined benefit plan            |   |           | -      |   |                                |   | (42 | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Surplus cost for acquisition of operations           |   |           | (117   | )      |                                |   | (158 | ) |   |   | 41 |   |   |   | 119 |   |   |   | 48 |   |
|                                                 |   |           | (7,186 | )      |                                |   | (10,887 | ) |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred tax assets                                  |   |           |   |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                 |   |           |   |   |                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Carry forward tax  losses                  |   |           | 7,633  |   |                                |   | 8,528 |   |   |   | (976 | ) |   |   | 3,138 |   |   |   | 5,021 |   |
| Provision for doubtful debts                         |   |           | 201    |   |                                |   | 230 |   |   |   | (29 | ) |   |   | (11 | ) |   |   | 216 |   |
| Employee benefits                                    |   |           | 284    |   |                                |   | 431 |   |   |   | (147 | ) |   |   | (436 | ) |   |   | 242 |   |
| Financial assets available for sale                  |   |           | -      |   |                                |   | 27 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Actuarial loss for a defined  benefit plan |   |           | 40     |   |                                |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                 |   |           | 8,158  |   |                                |   | 9,216 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred tax income                                  |   |           |   |   |                                |   |   |   |   | $ | 2,469 |   |   | $ | 5,330 |   |   | $ | 5,253 |   |
| Deferred tax assets (liabilities), net               |   | $              | 972    |   |                                | $      | (1,671 | ) |   |   |   |   |   |   |   |   |   |   |   |   |

|                          |   | December 31    |   |
|-------------------------------|--------|----------------|--------|
|                          |   | 2010           |   |   | 2009 |   |
|                          |   | $ in thousands |   |
|                          |   |           |   |   |   |   |
|  Non-current assets      |   | $              | 972    |   |   | $ | 1,409 |   |
|  Non-current liabilities |   |           | -      |   |   | $ | (3,080 | ) |
|                          |   | $              | 972    |   |   | $ | (1,671 | ) |

----

----

| NOTE 16:- | TAXES ON INCOME (Cont.) |
|-----------|-------------------------|

|                                                             |   | December 31    |   |
|------------------------------------------------------------------|--------|----------------|--------|
|                                                             |   | 2010           |   |   | 2009 |   |   | 2008 |   |
|                                                             |   | $ in thousands |   |
|                                                             |   |           |   |   |   |   |   |   |   |
| Loss from  investment in securities available for sale |   | $              | -      |   |   | $ | (27 | ) |   | $ | - |   |
| Actuarial gain (loss from a defined benefit plan                 |   |           | 40     |   |   |   | 108 |   |   |   | (66 | ) |
| Gain from cash flow hedging transactions                         |   |           | -      |   |   |   | 38 |   |   |   | 8 |   |
|                                                             |   | $              | 40     |   |   | $ | 119 |   |   | $ | (58 | ) |

|   | f. | Tax benefits (expenses) included in statements of income |
|--------|----|----------------------------------------------------------|

|                               |   | December 31    |   |
|------------------------------------|--------|----------------|--------|
|                               |   | 2010           |   |   | 2009 |   |   | 2008 |   |
|                               |   | $ in thousands |   |
|                               |   |           |   |   |   |   |   |   |   |
| Deferred taxes, see also (e) above |   | $              | 2,469  |   |   | $ | 5,330 |   |   | $ | 5,253 |   |
| Taxes in respect of previous years |   |           | -      |   |   |   | - |   |   |   | (576 | ) |
|                               |   | $              | 2,469  |   |   | $ | 5,330 |   |   | $ | 4,677 |   |

|   | g. | Theoretical tax |
|--------|----|-----------------|

|                                                                         |   | Year ended December 31 |    |
|------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                         |   | 2010                   |    |   | 2009 |   |   | 2008 |   |
|                                                                         |   | $ in thousands         |    |
|                                                                         |   |                   |    |   |   |   |   |   |   |
| Loss before taxes on income                                                  |   | $                      | (25,155 | ) |   | $ | (22,723 | ) |   | $ | (22,256 | ) |
|                                                                         |   |                   |    |   |   |   |   |   |   |   |   |   |
| Statutory tax rate                                                           |   |                   | 25      | % |   |   | 26 | % |   |   | 27 | % |
|                                                                         |   |                   |    |   |   |   |   |   |   |   |   |   |
| Tax benefit computed at the statutory tax rate                               |   |                   | (6,289  | ) |   |   | (5,908 | ) |   |   | (6,009 | ) |
|                                                                         |   |                   |    |   |   |   |   |   |   |   |   |   |
| Increase (decrease) in taxes on income resulting from the following factors: |   |                   |    |   |   |   |   |   |   |   |   |   |
| Non-deductible expenses for tax purposes                                     |   |                   | 55      |   |   |   | 155 |   |   |   | 379 |   |
| Losses for which no deferred taxes were recorded                             |   |                   | 3,788   |   |   |   | 192 |   |   |   | 146 |   |
| Update of deferred tax balances due to changes in tax rates                  |   |                   | -       |   |   |   | 500 |   |   |   | - |   |
| Taxes in respect of previous years                                           |   |                   | -       |   |   |   | - |   |   |   | 576 |   |
| Other                                                                        |   |                   | (23     | ) |   |   | (269 | ) |   |   | 231 |   |
| Taxes benefit                                                                |   | $                      | (2,469  | ) |   | $ | (5,330 | ) |   | $ | (4,677 | ) |
|                                                                         |   |                   |    |   |   |   |   |   |   |   |   |   |
| Average effective tax rate                                                   |   |                   | 9.8     | % |   |   | 23.5 | % |   |   | 21.0 | % |

----

----

| NOTE 17:- |  CONTINGENT LIABILITIES, CONTRACTS AND LIENS |
|-----------|---------------------------------------------------|

|   | a. | Contingent liabilities |
|--------|----|------------------------|

|   | 1. | According to the law for the Encouragement of Capital Investments, 1959, the Company and its subsidiaries received grants according to their investments in enterprises. The receiving of the grants is conditioned on applying all of the conditions in the application for a pre-ruling and also that at least 30% of the investments will be financed by the outstanding share capital. Lack of applying the conditions in the application for a pre-ruling will result in the return of the grants with an addition of interest and linkage differences from the date of the grant. In the Company's and its subsidiaries' opinion, they apply the conditions regarding receiving the grant. In order to fulfill the conditions related to receiving the investment grants, the Company and its subsidiaries recorded floating liens on their entire assets, in favor of the State of Israel. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Legal proceedings |
|--------|----|-------------------|

|   | a. | On November 15, 2006, a former employee of the Company filed claims with the District Court and with the Labor Court against the Company, a serving Board member of the Company and two former Board members of the Company. The plaintiff was convicted and jailed in Egypt in November 1996 on charges of spying, while in Egypt on Company business. The plaintiff claims a direct link exists between his arrest in Egypt and his employment by the Company in Egypt. The claim filed with the District Court and with the Labor Court amounts to $2,000 thousand. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Two legal claims were filed against the Company by two former employees. The total amount of the claims amounted to $318 thousand. The claims were filed due to claims regarding the termination of the working relations. At this stage, the claims are in their preliminary stages. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | A claim has been filed against the Company by a former supplier for 280 thousand euros for materials whose production the Company ordered did not pay the consideration and cancelled one order after the production was completed. In January 2011, the Company signed a compromise agreement with the former supplier. According to the agreement, the Company will pay the former supplier 150 thousand Euros. The Company recorded this compromise in its financial statements in the general and administrative expenses item in the statement of income. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d. | A claim was filed against the Company by a former supplier for $185 thousand due to the Company's debts, the former supplier claims, for work carried out by the former supplier. At this stage, the parties are waiting for a court hearing due to the early stage of the claim and based on the opinion of the legal counsel, it is not possible to estimate the chances of the claim. The provisions included in the financial statements are sufficient to cover any possible damage caused to it, if any, from this claim. These provisions are recorded in the general and administrative expenses in the statement of income. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 17:- | CONTINGENT LIABILITIES, CONTRACTS AND LIENS (Cont.) |
|-----------|-----------------------------------------------------|

|   | b. | Commitments |
|--------|----|-------------|

|                   |   | 2010           |   |   | 2009   |   |
|------------------------|--------|----------------|--------|--------|--------|--------|
|                   |   | $ in thousands |   |
|                   |   |           |   |   |   |   |
| Year 1                 |   | $              | 2,038  |   |   | $      | 2,172 |   |
| Year 2                 |   |           | 1,923  |   |   |   | 1,970 |   |
| Year 3                 |   |           | 1,816  |   |   |   | 1,875 |   |
| Year 4                 |   |           | 1,816  |   |   |   | 1,875 |   |
| Years 5 and thereafter |   |           | 8,490  |   |   |   | 9,758 |   |
|                   |   | $              | 16,083 |   |   | $      | 17,650 |   |

|   | c. | Liens |
|--------|----|-------|

|   | 1. | All liabilities to banks are secured by a floating lien on the Company's and the subsidiaries' existing and future assets, which permits the Company to dispose of assets in the normal course of business. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | To secure compliance with conditions of the "approved enterprise" status granted to the Company and its subsidiaries pursuant to the Capital Investment Promotion Act, 1959, the Company and its subsidiaries have pledged floating liens for an unlimited amount on all their assets in favor of the State of Israel. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| NOTE 18:- | EQUITY |
|-----------|--------|

|   | a. | Nouvelle Transaction |
|--------|----|----------------------|

|   | a) | An agreement between the Company and Nouvelle according to which the Company will acquire from Nouvelle its operations in the field of women’s intimate apparel products manufactured using the seamless technology in consideration for an allotment of 600,000 ordinary shares of the Company, which will comprise immediately after the allotment (subject to fully completing the transaction) 9.2% of the Company's issued capital and voting rights in it (7.9% on a fully diluted basis). |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 18:- | EQUITY (Cont.) |
|-----------|----------------|

|   | b) | An agreement between the Company and the Nouvelle investors, according to which the Nouvelle investors will invest an amount of $ 3,313,000 in consideration for an allotment of 1,577,619 ordinary shares of the Company (at a price of $ 2.1 per share) which will comprise immediately after the allotment (subject to fully completing the transaction) 24.1% of the Company's issued capital and voting rights in it (20.8% on a fully diluted basis). |
|--------|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c) | An agreement between the Company and Mivtach Shamir, according to which Mivtach Shamir will invest in the Company an amount of $1,300,000 in consideration for an allotment of 619,047 ordinary shares of the Company (at a price of $ 2.1 per share) which will comprise immediately after the allotment (subject to fully completing the transaction) 9.5% of the Company's issued capital and voting rights in it (8.2% on a fully diluted basis). |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | d) | An agreement between the Company and Rimon, according to which the Rimon Group will invest an amount of $1,200,000 in consideration for an allotment of 571,428 ordinary shares of the Company (at a price of $ 2.1 per share) which will comprise immediately after the allotment (subject to fully completing the transaction) 8.7% of the Company's issued capital and voting rights in it (7.5% on a fully diluted basis). |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e) | A consulting agreement between Tefron USA Inc., a subsidiary of the Company (hereinafter: "the Subsidiary") and Nouvelle (or any other company on behalf of Mr. Willy Lieberman) that will grant to the subsidiary sales, marketing and management services in North America through Mr. Willy Lieberman, who today serves as the Senior Vice President in Nouvelle. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | f) | An option agreement between Ben and Martin Lieberman according to which they will be allotted (or a company on their behalf) 450,000 option warrants (225,000 option warrants each) which can be exercised to up to 450,000 ordinary shares of the Company, which will comprise immediately after the allotment (subject to fully completing the transaction) 6.4% of the Company's issued capital and voting rights in it on the assumption of exercising these option warrants only for the Company’s  shares (6% on a fully diluted basis). The option warrants will vest subject to the Company meeting the sales targets. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | g) | An agreement to grant registration rights according to which the Company will undertook to submit to the Securities and Exchange Commission of the United States (hereinafter: "the SEC") a document to register in the US the shares to be allotted to the investors in the framework of the transaction, and of the shares allotted to Ta Top Limited Partnership and to Mivtach Shamir, according to a decision of the General Meeting of shareholders of the Company on February 24, 2010, and as reported on the actual allotment on March 28, 2010. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | h. | A mutual agreement to provide and receive services was signed between the Company and Lamour Global Inc. Limited (hereinafter: "Lamour")  a private company incorporated in Hong Kong and connected to the Lieberman Family which holds Nouvelle's issued and paid-up share capital, according to which the Company and Lamour will assist one another in locating new customers and locating suppliers, including sub-contractors and supervising them, and all in consideration for a commission which will be calculated as a percentage of the relevant service components determined in the service agreement. This agreement was signed on the date of completing the transaction and its implementation is subject to the approval of the Company's lending banks. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 18:- | EQUITY (Cont.) |
|-----------|----------------|

|   | i. | As part of the transaction, three additional directors will be appointed to the Company, when one of these directors is Mr. Guy Shamir, the son of Meir Shamir (the indirect controlling shareholder in Mivtach Shamir). Each of these directors will be entitled to direct compensation, indemnity and insurance for serving as directors in the Company. In addition, in the framework of the transaction, the Company will purchase a run-off insurance policy (a policy for a 7-year period) to cover the responsibility of directors and officers as a result of the Nouvelle transaction which constitutes as a transaction-ending event. Moreover, as part of the transaction, the responsibility of Messrs Ishay Davidi, Meir Shamir and Guy Shamir, as directors of the Company, will be covered in the framework of the Company's directors and officers' insurance policy, and in the framework of the run-off insurance policy. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On December 30, 2010, the transaction was completed and accordingly the Company issued ordinary shares of the Company to the investors comprising 51.5% of the Company's issued and paid up share capital and voting rights in it (50.4% on a fully diluted basis) in consideration for a total amount of $5,813,000  transferred to the Company. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | Prospectus for issuing rights, shelf prospectus and private placement |
|--------|----|-----------------------------------------------------------------------|

|   | (a) | Up to 3,000,000 ordinary shares of NIS 10 par value each of the Company. |
|--------|-----|--------------------------------------------------------------------------|

|   | (b) | Up to 10 series of convertible bonds, when each of the series of the bonds will have a total par value of up to NIS 500,000,000 and is repayable in one payment or in a number of equal installments. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (c) | Up to 10 series of option warrants, when each of the series of the option warrants will include not more than 3,000,000 option warrants which can be exercised in such a way that every option warrant can be exercised to 1 ordinary share of NIS 10 par value of the Company, against payment in cash of the exercise price linked to the index. |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (d) | Up to 10 series of option warrants, when each of the series of the option warrants will include not more than 200,000,000 option warrants which can be exercised in such a way that every option warrant can be exercised to 1 ordinary share of NIS 100 par value of bonds from Series A up to Series T of the Company, against payment in cash of the exercise price linked to the index and – |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 18:- | EQUITY (Cont.) |
|-----------|----------------|

|   | (e) | Up to 10 series of commercial securities (Series 1 to 10), when each of the series of these commercial securities will have a par value of NIS 500,000,000 and are for repayable in one or more installments. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | c. | Increasing the authorized capital |
|--------|----|-----------------------------------|

|   | d. | Reverse splite of the Company's shares |
|--------|----|----------------------------------------|

|   | On January 20, 2009, a Special General Meeting of the Company approved a reverse split of Company shares, such that 10 ordinary shares of NIS 1 par value each would be converted into 1 ordinary share of NIS 10 par value each. The effective date for the purpose of this split was January 22, 2009 on the start of trading on the Tel Aviv Stock Exchange. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | Earnings (loss) per share were retrospectively adjusted in the Company's financial statements.  Furthermore, the General Meeting of shareholders approved an increase in the Company's authorized share capital, from 49,995,500 shares of NIS 1 par value each to 69,995,500 shares of NIS 1 par value each, at values prior to the consolidation of share capital, or from 4,999,550 shares of NIS 10 par value each to 6,999,550 ordinary shares of NIS 10 par value each in values subsequent to the consolidation of the shares. The Company's Memorandum and Articles of Association were amended accordingly. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | Share capital composition |
|--------|----|---------------------------|

|                                     |   | December 31, 2010 |       |   | December 31, 2009 |   |
|------------------------------------------|--------|-------------------|------------|--------|-------------------|--------|
|                                     |   | Authorized        |       |   | Issued            |   |   | Outstanding |   |   | Authorized |   |   | Issued |   |   | Outstanding |   |
|                                     |   | Number of shares  |       |   | Number of shares  |   |
| Ordinary shares of NIS 10 par value each |   |              | 10,000,000 |   |              |   | 6,541,736 |   |   |   | 6,441,996 |   |   |   | 6,999,550 |   |   |   | 2,220,039 |   |   |   | 2,120,299 |   |

|   | f. | Rights conferred by shares Ordinary shares |
|--------|----|-------------------------------------------------|

|   | 1. | Voting rights at the General Meeting, right to dividends, rights upon liquidation of the Company and right to appoint directors in the Company. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Traded on the Tel Aviv Stock Exchange. |
|--------|----|----------------------------------------|

|   | On December 22, 2008, Company shares were suspended from trading on the New York Stock Exchange (NYSE) for failure to meet quantitative listing conditions, which include a requirement of average market capitalization of no less than $25 million over a period of 30 trading days.  Shortly afterwards, Company shares started being traded on the OTC. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 18:- | EQUITY (Cont.) |
|-----------|----------------|

|   | g. | Treasury shares |
|--------|----|-----------------|

|   | As of the balance sheet date, Tefron Holdings (98) Ltd., a wholly-owned subsidiary of the Company, holds 99,740 Company shares, which constitute 4.49% of Company shares and whose cost is $7,408 thousand. The investment in these shares is recorded according to the "treasury shares" method in the equity. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | The shares are pledged to a bank to secure a loan received. |
|--------|-------------------------------------------------------------|

|   | Other capital reserves |
|--------|------------------------|

|   | Capital reserve for hedges |
|--------|----------------------------|

|   | h. | Equity management in the Company: |
|--------|----|-----------------------------------|

|   | The Company's capital management objectives are: |
|--------|--------------------------------------------------|

|   | 1. | To preserve the Group's ability to ensure business continuity thereby creating a return for the shareholders, investors and other interested parties. |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | To ensure adequate return for the shareholders by pricing of products and services adjusted to the level of risk in the Group's business activity. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 19:- |  SHARE-BASED PAYMENT |
|-----------|---------------------------|

|   | a. | Expense recognized in financial statements |
|--------|----|--------------------------------------------|

|                                                                           |   | For the year ended December 31 |   |
|--------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                           |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|                                                                           |   | $ in thousands                 |   |
| Compensation relating to options granted to employees  and directors |   | $                              | 280    |   |   | $ | 171 |   |   | $ | 240 |   |
| Compensation related to options granted to an employee in a subsidiary         |   |                           | -      |   |   |   | - |   |   |   | 247 |   |
| Total expense arising from share-based payment transactions                    |   | $                              | 280    |   |   | $ | 171 |   |   | $ | 487 |   |

|   | b. | Share-based payment plan to Company's employees and executives |
|--------|----|----------------------------------------------------------------|

|   | 1. | Option plan to managers and employees of the Company |
|--------|----|------------------------------------------------------|

|   | In September 1997, the Company's Board of Directors adopted a share option plan in which options to acquire ordinary shares would be granted to Board members, executives, employees and consultants of the Company.  Entitlement to exercise most of the options vests after a period of three years to four years and will expire after ten years from the date of their granting or on the discontinuation of the employee’s employment. The options plan was originally set for ten years, and in March 2008 was extended for a further ten years – until March 1, 2018. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | On August 17, 2010, the Company's Board of Directors, after the approval of the Audit Committee, approved granting 70,376 option warrants which can be exercised to 70,376 ordinary shares of NIS 10 par value each, to five senior officers in the Company, who are not interested parties in the Company and will not become interested parties in the Company after the grant. The allotment of the option warrants to the Offerees was done in accordance with the employees' options plans. The entitlement to exercise the options will be over a period of 3 years, as from the date of granting, and expires 10 years from the date of the granting. The market value of the Company's shares on the granting date was $1.5. The exercise price for each of the option warrants was set at $3.8. The benefit in accordance with the share price from the trading date on the stock exchange aggregates an amount of $38 thousand. Therefore, the Company recorded an expense of $9 thousand in 2010. This expense was presented in the general and administrative expenses item in the statement of income. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 19:- | SHARE-BASED PAYMENT (Cont.) |
|-----------|-----------------------------|

|   | a. | On November 15, 2009, the Company's Board of Directors approved the granting of 54,000 option warrants (not listed for trading), which can be exercised to 54,000 ordinary shares of NIS 10 par value each, to five senior officers in the Company, who are not interested parties in the Company and will not become interested parties after the grant. The allotment of the option warrants to the Offerees was done in accordance with the employees' options plans. The entitlement for exercising the options will be over a period of 3 years, as from the date of employment of each of the Offerees (excluding regarding one offeree which vesting period starts on the date of granting the option warrants). The exercise price to each of the options will be the higher of: (a) $5.06 which is the closing price of the Company's share on the date in which the Board of Directors' decision was made; (b) average closing prices of the Company's shares on the stock exchange in the 10 days of trading ending on the date of the Board of Directors' decision regarding the granting. |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | b. | As a result of the rights offering mentioned in clause 18b above, the Company's Board of Directors approved crediting the holders of 130,740 option warrants allotted, or that the Company gave an undertaking to allot them in such a way that at the time of exercising the option warrants, the holders of these option warrants will be entitled to one additional exercise share for every 1.406 option warrants being exercised by them subject to paying utilization fee of $3.8. |
|--------|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 2. | Options to the Company's CEO |
|--------|----|------------------------------|

|   | 3. | Options to the Chairman of the Board of Directors |
|--------|----|---------------------------------------------------|

----

----

| NOTE 19:- | SHARE-BASED PAYMENT (Cont.) |
|-----------|-----------------------------|

|   | 4. | Options granted to controlling shareholders |
|--------|----|---------------------------------------------|

|   | 5. | Stock options granted to a former employee of a subsidiary |
|--------|----|------------------------------------------------------------|

|   | c. | Movement during the year |
|--------|----|--------------------------|

|                                 |   | As of December 31, 2010 |    |   | As of December 31, 2009             |   |
|--------------------------------------|--------|-------------------------|---------|--------|-------------------------------------|--------|
|                                 |   | Number of stock options |    |   | Weighted average exercise price ($) |   |   | Number of stock options |   |   | Weighted average exercise price ($) |   |
| Outstanding at January 1             |   |                    | 220,229 |   |                                |   | 32.7 |   |   |   | 195,857 |   |   |   | 46.1 |   |
| Granted during the year              |   |                    | 827,981 |   |                                |   | 3.4 |   |   |   | 54,000 |   |   |   | 5.3 |   |
| Forfeited or expired during the year |   |                    | (69,000 | )      |                                |   | 23.4 |   |   |   | (29,628 | ) |   |   | 57.5 |   |
| Exercised during the year            |   |                    | -       |   |                                |   | - |   |   |   | - |   |   |   | - |   |
| Outstanding on December 31           |   |                    | 979,210 |   |                                |   | 8.3 |   |   |   | 220,229 |   |   |   | 32.7 |   |
| Exercisable on December 31           |   |                    | 276,502 |   |                                |   | 21.1 |   |   |   | 131,229 |   |   |   | 44.2 |   |

|   | d. | The weighted average remaining contractual term of the share options as of December 31, 2010 is 3.1 years (2009 – 3.4 years). |
|--------|----|-------------------------------------------------------------------------------------------------------------------------------------|

|   | e. | The range of exercise prices of the share options as of December 31, 2010 stands at $2.1-$117.6(2009 $5.3 – $117.6). |
|--------|----|----------------------------------------------------------------------------------------------------------------------------|

----

----

| NOTE 19:- | SHARE-BASED PAYMENT (Cont.) |
|-----------|-----------------------------|

|   | f. | Measurement of the fair value of options settled with capital instruments |
|--------|----|---------------------------------------------------------------------------|

|                                             |   | 2010   |   |
|--------------------------------------------------|--------|--------|--------|
|                                             |   |   |   |
| Dividend yield for the share (%)                 |   |   | 0.0    |   |
| Expected volatility of the share prices (%)      |   |   | 68.0   |   |
| Risk-free interest rate (%)                      |   |   | 1.5    |   |
| Average life expectancy of share options (years) |   |   | 6      |   |
| eighted average share price ($)                  |   |   | 1.75   |   |

----

----

|      |                                                                                                                                     |   | For the year ended December 31 |   |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|      |                                                                                                                                     |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|      |                                                                                                                                     |   | $ in thousands                 |   |
| a‎. | Cost of sales, net (*)                                                                                                                   |   |                           |   |   |   |   |   |   |   |
|      | Materials (**)                                                                                                                           |   | $                              | 45,944 |   |   | $ | 64,649 |   |   | $ | 93,705 |   |
|      | Payroll and benefits                                                                                                                     |   |                           | 13,177 |   |   |   | 17,615 |   |   |   | 26,193 |   |
|      | Sub-contracted work                                                                                                                      |   |                           | 7,993  |   |   |   | 10,733 |   |   |   | 18,432 |   |
|      | Depreciation                                                                                                                             |   |                           | 8,908  |   |   |   | 8,260 |   |   |   | 8,284 |   |
|      | Other production expenses                                                                                                                |   |                           | 9,830  |   |   |   | 13,681 |   |   |   | 20,256 |   |
|      |                                                                                                                                     |   |                           | 85,852 |   |   |   | 114,938 |   |   |   | 166,870 |   |
|      |                                                                                                                                     |   |                           |   |   |   |   |   |   |   |   |   |   |
|      | Increase in work-in-progress and finished goods inventories                                                                              |   |                           | 865    |   |   |   | 4,401 |   |   |   | 687 |   |
|      |                                                                                                                                     |   | $                              | 86,717 |   |   | $ | 119,339 |   |   | $ | 167,557 |   |
|      |     (*) Including development costs, net (less a governmental grant of $1,145 thousand in 2010 and $167 thousand in 2009) |   | $                              | 4,743  |   |   | $ | 8,242 |   |   | $ | 8,058 |   |
|      |                                                                                                                                     |   |                           |   |   |   |   |   |   |   |   |   |   |
|      | (**)  Including provision for inventories writ- off                                                                            |   | $                              | 3,065  |   |   | $ | 2,808 |   |   | $ | 4,523 |   |
|      |                                                                                                                                     |   |                           |   |   |   |   |   |   |   |   |   |   |
| b‎. | Selling and marketing expenses                                                                                                           |   |                           |   |   |   |   |   |   |   |   |   |   |
|      | Salaries and benefits                                                                                                                    |   | $                              | 5,526  |   |   | $ | 5,854 |   |   | $ | 5,831 |   |
|      | Transport, export and distribution                                                                                                       |   |                           | 2,049  |   |   |   | 3,114 |   |   |   | 6,336 |   |
|      | Overseas office maintenance                                                                                                              |   |                           | 1,732  |   |   |   | 1,911 |   |   |   | 1,095 |   |
|      | Other                                                                                                                                    |   |                           | 2,543  |   |   |   | 2,963 |   |   |   | 3,697 |   |
|      |                                                                                                                                     |   | $                              | 11,850 |   |   | $ | 13,842 |   |   | $ | 16,959 |   |
| c‎. | General and administrative expenses                                                                                                      |   |                           |   |   |   |   |   |   |   |   |   |   |
|      | Salaries and benefits                                                                                                                    |   | $                              | 1,790  |   |   | $ | 2,021 |   |   | $ | 3,264 |   |
|      | Office maintenance                                                                                                                       |   |                           | 464    |   |   |   | 384 |   |   |   | 535 |   |
|      | Consulting                                                                                                                               |   |                           | 1,320  |   |   |   | 1,054 |   |   |   | 1,109 |   |
|      | Allowance for bad and doubtful debts                                                                                                     |   |                           | 232    |   |   |   | 4 |   |   |   | 814 |   |
|      | Others                                                                                                                                   |   |                           | 244    |   |   |   | 316 |   |   |   | 684 |   |
|      |                                                                                                                                     |   | $                              | 4,050  |   |   | $ | 3,779 |   |   | $ | 6,406 |   |
|      |                                                                                                                                     |   |                           |   |   |   |   |   |   |   |   |   |   |
| d.        | Other expenses (income)                                                                                                                  |   |                           |   |   |   |   |   |   |   |   |   |   |
|      | Loss (reversal of loss) from impairment of fixed assets, net (see Note 7)                                                                |   | $                              | 6,260  |   |   | $ | (496 | ) |   | $ | 2,135 |   |
|      | Capital loss from the sale of fixed assets                                                                                               |   |                           | 142    |   |   |   | - |   |   |   | - |   |
|      | Restitution of mutual fund to employers (1)                                                                                              |   |                           | (169   | ) |   |   | - |   |   |   | - |   |
|      |                                                                                                                                     |   | $                              | 6,233  |   |   | $ | (496 | ) |   | $ | 2,135 |   |

|   | (1) | On December 21, 2010, the Company received repayment of participation fees of a total amount of $169 thousand from the mutual fund of employers as a refund for participation fees which were paid by it to the fund. The refund was paid subject to the Company's undertaking to return these amounts, or part thereof, in certain cases whose likelihood, in the Company's opinion, is low. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|   |                                                                                    |   | For the year ended December 31 |   |
|--------|-----------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|   |                                                                                    |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|   |                                                                                    |   | $ in thousands                 |   |
| e.     |     Financial income (expenses)                                          |   |                           |   |   |   |   |   |   |   |
|   |                                                                                    |   |                           |   |   |   |   |   |   |   |
|   |     Financial income                                                     |   |                           |   |   |   |   |   |   |   |
|   |     Interest income from bank deposits and securities available for sale |   | $                              | 30     |   |   | $ | 249 |   |   | $ | 102 |   |
|   | Net change in fair value of financial assets available for sale                         |   |                           | -      |   |   |   | - |   |   |   | 200 |   |
|   | Net foreign exchange gain                                                               |   |                           | -      |   |   |   | 1,388 |   |   |   | 17 |   |
|   | Net change in fair value of cash flow hedging transferred from shareholders' equity     |   |                           | -      |   |   |   | 110 |   |   |   | - |   |
|   |                                                                                    |   | $                              | 30     |   |   | $ | 1,747 |   |   | $ | 319 |   |
| f.     |     Financial expenses                                              |   |                           |   |   |   |   |   |   |   |   |   |   |
|   | Financial expenses in respect of short-term credit                                      |   | $                              | 306    |   |   | $ | 62 |   |   | $ | 402 |   |
|   | Interest expense on financial liabilities measured at amortized cost                    |   |                           | 537    |   |   |   | 816 |   |   |   | 1,126 |   |
|   | Net loss from change in foreign exchange rates                                          |   |                           | 573    |   |   |   | - |   |   |   | - |   |
|   | Net change in fair value of financial assets available for sale                         |   |                           | -      |   |   |   | - |   |   |   | 553 |   |
|   | Bank expenses, hedging-related expenses and other expenses                              |   |                           | 963    |   |   |   | 1,381 |   |   |   | 1,266 |   |
|   |                                                                                    |   | $                              | 2,379  |   |   | $ | 2,259 |   |   | $ | 3,347 |   |

|   | a. | Details of number of shares and earnings (losses) used to calculate earnings (losses) per share: |
|--------|----|--------------------------------------------------------------------------------------------------|

|                                                                                                                    |   | For the year ended December 31,   |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                                                    |   | 2010                              |   |   | 2009 |   |   | 2008 |   |
|                                                                                                                    |   | Weighted average number of shares |   |   | Loss attributed to equity holders of the Company |   |   | Weighted average number of shares |   |   | Loss attributed to equity holders of the Company |   |   | Weighted average number of shares |   |   | Lossattributed to equity holders of the Company |   |
|                                                                                                                    |   | Thousands                         |   |   | $ thousands |   |   | Thousands |   |   | $ in thousands |   |   | Thousands |   |   | $ thousands |   |
| Amounts of shares and losses to calculate  basic loss                                                         |   |                              | 2,939  |   |   |   | (22,686 | ) |   |   | 2,629 |   |   |   | (17,393 | ) |   |   | 2,629 |   |   |   | (17,579 | ) |
|                                                                                                                    |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Impact of potentially dilutive ordinary shares  amounts used to calculate diluted earnings (losses) per share |   |                              | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
|                                                                                                                    |   |                              | 2,939  |   |   |   | (22,686 | ) |   |   | 2,629 |   |   |   | (17,393 | )  |   |   | 2,629 |   |   |   | (17,579 | )  |

----

----

| NOTE 22:- | OPERATING SEGMENTS |
|-----------|--------------------|

|   | a. | General |
|--------|----|---------|

|   | Group companies are engaged in two business segments: |
|--------|-------------------------------------------------------|

| Seamless apparel ("Seamless")     | -      | Design, development, manufacturing and sale of intimate apparel, and active wear using the "seamless" method.                                                                                                                                                         |
|-----------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |   |                                                                                                                                                                                                                                                                  |
| Knitted apparel ("Cut & Sew") | -      | Design, development, manufacturing and sale of intimate apparel and active wear using the "cut & sew" method. Design and manufacturing are mostly carried out in Israel, in Jordan and in the far east, and finished goods are mostly sold in the USA and Europe. |

|   | b. | Main reporting on operating segments: |
|--------|----|---------------------------------------|

|                              |   | For the year ended December 31, 2010 |    |
|-----------------------------------|--------|--------------------------------------|---------|
|                              |   | Seamless                             |    |   | Cut & Sew |   |   | Total |   |
|                              |   | $ in thousands                       |    |
| External revenues                 |   | $                                    | 52,850  |   |   | $ | 33,194 |   |   | $ | 86,044 |   |
| Segment results                   |   | $                                    | (16,278 | ) |   | $ | (6,528 | ) |   | $ | (22,806 | ) |
| Financial expenses, net           |   |                                 |    |   |   |   |   |   |   |   | (2,349 | ) |
| Tax benefit                       |   |                                 |    |   |   |   |   |   |   |   | 2,469 |   |
| Loss                              |   |                                 |    |   |   |   |   |   |   | $ | (22,686 | ) |
| Segment assets                    |   | $                                    | 66,142  |   |   | $ | 16,610 |   |   | $ | 82,752 |   |
| Segment liabilities               |   | $                                    | 39,603  |   |   | $ | 7,239 |   |   | $ | 46,842 |   |
| Long-term asset acquisition costs |   | $                                    | 99      |   |   | $ | 14 |   |   | $ | 113 |   |
| Depreciation and amortization     |   | $                                    | 7,204   |   |   | $ | 2,299 |   |   | $ | 9,503 |   |

----

----

|                              |   | For the year ended December 31, 2009 |    |
|-----------------------------------|--------|--------------------------------------|---------|
|                              |   | Seamless                             |    |   | Cut & Sew |   |   | Total |   |
|                              |   | $ in thousands                       |    |
| External revenues                 |   | $                                    | 62,306  |   |   | $ | 53,232 |   |   | $ | 115,538 |   |
| Segment results                   |   | $                                    | (13,197 | ) |   | $ | (7,729 | )    |   | $ | (20,926 | )    |
| Other expenses                    |   |                                 |    |   |   |   |   |   |   |   | (1,285 | ) |
| Financial expenses, net           |   |                                 |    |   |   |   |   |   |   |   | (512 | ) |
| Tax benefit                       |   |                                 |    |   |   |   |   |   |   |   | 5,330 |   |
| Loss                              |   |                                 |    |   |   |   |   |   |   | $ | (17,393 | )    |
| Segment assets                    |   | $                                    | 74,431  |   |   | $ | 24,766 |   |   | $ | 99,197 |   |
| Segment liabilities               |   | $                                    | 35,169  |   |   | $ | 17,033 |   |   | $ | 52,202 |   |
| Long-term asset acquisition costs |   | $                                    | 457     |   |   | $ | 229 |   |   | $ | 686 |   |
| Depreciation and amortization     |   | $                                    | 6,419   |   |   | $ | 2,837 |   |   | $ | 9,256 |   |

|                              |   | For the year ended December 31, 2008 |    |
|-----------------------------------|--------|--------------------------------------|---------|
|                              |   | Seamless                             |    |   | Cut & Sew |   |   | Total |   |
|                              |   | $ in thousands                       |    |
| External revenues                 |   | $                                    | 86,265  |   |   | $ | 87,564 |   |   | $ | 173,829 |   |
| Segment results                   |   | $                                    | (15,804 | )   |   | $ | (3,424 | )   |   | $ | (19,228 | )    |
| Financial expenses, net           |   |                                 |    |   |   |   |   |   |   |   | (3,028 | ) |
| Tax benefit                       |   |                                 |    |   |   |   |   |   |   |   | 4,677 |   |
| Loss                              |   |                                 |    |   |   |   |   |   |   | $ | (17,579 | )    |
| Segment assets                    |   | $                                    | 99,012  |   |   | $ | 32,720 |   |   | $ | 131,732 |   |
| Segment liabilities               |   | $                                    | 40,721  |   |   | $ | 27,266 |   |   | $ | 67,987 |   |
| Long-term asset acquisition costs |   | $                                    | 2,497   |   |   | $ | 877 |   |   | $ | 3,374 |   |
| Depreciation and amortization     |   | $                                    | 6,833   |   |   | $ | 2,092 |   |   | $ | 8,925 |   |

|   | c. | Main reporting on operating segments |
|--------|----|--------------------------------------|

|          |   | For the year ended December 31 |   |
|---------------|--------|--------------------------------|--------|
|          |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|          |   | $ in thousands                 |   |
|          |   |                           |   |   |   |   |   |   |   |
| North America |   | $                              | 72,754 |   |   | $ | 97,975 |   |   | $ | 137,992 |   |
| Europe        |   |                           | 10,443 |   |   |   | 11,259 |   |   |   | 28,038 |   |
| Israel        |   |                           | 2,413  |   |   |   | 5,335 |   |   |   | 3,851 |   |
| Others        |   |                           | 434    |   |   |   | 969 |   |   |   | 3,948 |   |
|          |   | $                              | 86,044 |   |   | $ | 115,538 |   |   | $ | 173,829 |   |

----

----

|          |   | Balance of non-current assets (*) |   |   | Long-term acquisition costs of assets |   |
|---------------|--------|-----------------------------------|--------|--------|---------------------------------------|--------|
|          |   | as of December 31,                |   |   | for the year ended December 31        |   |
|          |   | 2010                              |   |   | 2009                                  |   |   | 2010 |   |   | 2009 |   |   | 2008 |   |
|          |   | $ in thousands                    |   |
|          |   |                              |   |   |                                  |   |   |   |   |   |   |   |   |   |   |
| Israel        |   | $                                 | 37,764 |   |                                  | $      | 52,159 |   |   | $ | 103 |   |   | $ | 640 |   |   | $ | 2,665 |   |
| North America |   |                              | 2,607  |   |                                  |   | 3,126 |   |   |   | 10 |   |   |   | 43 |   |   |   | 17 |   |
| Others        |   |                              | 1,348  |   |                                  |   | 2,595 |   |   |   | - |   |   |   | 3 |   |   |   | 692 |   |
|          |   | $                                 | 41,719 |   |                                  | $      | 57,880 |   |   | $ | 113 |   |   | $ | 686 |   |   | $ | 3,374 |   |

|   | d. | Major customers |
|--------|----|-----------------|

|                          |   | For the year ended December 31 |   |
|-------------------------------|--------|--------------------------------|--------|
|                          |   | 2010                           |   |   | 2009 |   |   | 2008 |   |
|                          |   | $ in thousands                 |   |
|                          |   |                           |   |   |   |   |   |   |   |
| Revenues from major customers |   |                           | 40,354 |   |   |   | 44,482 |   |   |   | 97,170 |   |
|                          |   |                           |   |   |   |   |   |   |   |   |   |   |
|                          |   | % from total revenues          |   |
| Customer A                    |   |                           | 38.7   |   |   |   | 32.7 |   |   |   | 32.7 |   |
| Customer B                    |   |                           | 8.2    |   |   |   | 5.8 |   |   |   | 23.2 |   |
|                          |   |                           | 46.9   |   |   |   | 38.5 |   |   |   | 55.9 |   |

| NOTE 23:      BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES |
|--------------------------------------------------------------------------------------------------------------|

|   | a. | Balances with interested parties and related parties |
|--------|----|------------------------------------------------------|

|   | Composition: |
|--------|--------------|

|   | As of December 31, 2010 |
|--------|-------------------------|

|           | Linkage terms  |   | Related parties |   |   | Key executives |   |
|----------------|----------------|--------|-----------------|--------|--------|----------------|--------|
|           | $ in thousands |   |
|           |           |   |            |   |   |           |   |
| Trade payables |           |   |            |   |   |           |   |
| Other payables | Unlinked       |   |            | 1,819  |   |           |   | 29 |   |

|   | As of December 31, 2009 |
|--------|-------------------------|

|           | Linkage terms  |   | Related parties |   |   | Key executives |   |
|----------------|----------------|--------|-----------------|--------|--------|----------------|--------|
|           | $ in thousands |   |
|           |           |   |            |   |   |           |   |
| Other payables | Unlinked       |   |            | -      |   |           |   | 28 |   |

----

----

| NOTE 23: |  BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES (Cont.): |
|----------|--------------------------------------------------------------------------------------|

|   | a. | Balances to interested parties and related parties |
|--------|----|---------------------------------------------------------|

|                                                                                  |   | For the year ended December 31 |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                  |   | 2009                           |   |   | 2008 |   |   | 2007 |   |
|                                                                                  |   | $ in thousands                 |   |
| Payroll and benefits for employees in the Company or on its behalf, including the CEO |   |                           | 568    |   |   |   | 354 |   |   |   | 461 |   |
| Directors fees not employed by or on behalf of the Company                            |   |                           | 261    |   |   |   | 256 |   |   |   | 346 |   |
| Management fees for those not employed by or on behalf of the Company                 |   |                           | -      |   |   |   | 102 |   |   |   | 119 |   |
|                                                                                  |   |                           |   |   |   |   |   |   |   |   |   |   |
| Number of beneficiaries of payroll and benefits                                       |   |                           |   |   |   |   |   |   |   |   |   |   |
|                                                                                  |   |                           |   |   |   |   |   |   |   |   |   |   |
| Related parties employed by or on behalf of the Company                               |   |                           | 1      |   |   |   | 1 |   |   |   | 2 |   |
| Directors not employed by the Company                                                 |   |                           | 8      |   |   |   | 10 |   |   |   | 10 |   |
|                                                                                  |   |                           | 9      |   |   |   | 11 |   |   |   | 12 |   |

|   | c. | Transactions with related parties |
|--------|----|-----------------------------------|

|                                |   | Related parties |   |   | Party of interest |   |   | Executive officers |   |
|-------------------------------------|--------|-----------------|--------|--------|-------------------|--------|--------|--------------------|--------|
|                                |   |            |   |   | $ in thousands    |   |
| Cost of sales, net                  |   |            | -      |   |              |   | -      |               |   |   | - |   |
| General and administrative expenses |   |            | -      |   |              |   | -      |               |   |   | - |   |

|   | For the year ended December 31, 2009 |
|--------|--------------------------------------|

|                                |   | Related parties |   |   | Party of interest |   |   | Executive officers |   |
|-------------------------------------|--------|-----------------|--------|--------|-------------------|--------|--------|--------------------|--------|
|                                |   |            |   |   | $ in thousands    |   |
|                                |   |            |   |   |              |   |   |               |   |
| General and administrative expenses |   |            | -      |   |              |   | 102    |               |   |   | 611 |   |

|   | For the year ended December 31, 2008 |
|--------|--------------------------------------|

|                                |   | Related parties |   |   | Party of interest |   | Executive officers |   |
|-------------------------------------|--------|-----------------|--------|--------|-------------------|--------|--------------------|--------|
|                                |   |            |   |   | $ in thousands    |   |
|                                |   |            |   |   |              |   |               |   |   |
| General and administrative expenses |   |            | -      |   |              |   | 119                |   |   |   | 807 |   |

----

----

| NOTE 23: |  BALANCES AND TRANSACTIONS WITH INTERESTED PARTIES AND RELATED PARTIES (Cont.): |
|----------|--------------------------------------------------------------------------------------|

|   | d. | Commitments |
|--------|----|-------------|

| NOTE 24:- | EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE |
|-----------|---------------------------------------------|

|   | a. | Discontinuation of production activity in the Cut & Sew field in Israel |
|--------|----|-----------------------------------------------------------------------------|

|   | b. | Issuing options to other officers and employees |
|--------|----|-------------------------------------------------|

|   | c. | Issuing options to the Bank lenders |
|--------|----|-------------------------------------|

|   | d. | Authorization of the financial statements |
|--------|----|-------------------------------------------|

----

BSI

----

|                                                                             |   | Shares conferring votingand dividend rights |   |
|----------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                             |   | December 31, 2010,2009 and 2008             |   |
|                                                                             |   |                                        |   |   |   |   |
| Company name                                                                     |   |                                        |   |   |   |   |
|                                                                             |   |                                        |   |   |   |   |
| Subsidiaries:                                                                    |   |                                        |   |   |   |   |
|                                                                             |   |                                        |   |   |   |   |
| Hi-Tex, founded by Tefron Ltd.                                                   |   |                                        | 100    | % |   |   | 100 | % |
| Macro Clothing Ltd.                                                              |   |                                        | 100    | % |   |   | 100 | % |
| Tefron USA Inc., wholly-owned by Tefron US Holdings                              |   |                                        | 100    | % |   |   | 100 | % |
| Tefron UK Ltd., wholly-owned by Macro Clothing Ltd.                              |   |                                        | 100    | % |   |   | 100 | % |
| El-Masira Textile Co., wholly-owned by Tefron USA Inc.                           |   |                                        | 100    | % |   |   | 100 | % |
| Tefron Holdings (98) Ltd.                                                        |   |                                        | 100    | % |   |   | 100 | % |
| Tefron US Holdings Corp.                                                         |   |                                        | 100    | % |   |   | 100 | % |
| Tefron Holding Netherlands B.V.                                                  |   |                                        | 100    | % |   |   | 100 | % |
|     Tefron Macro HK Ltd., wholly-owned by Macro Clothing Ltd |   |                                        | 100    | % |   |   | 100 | % |

----

|   | TEFRON LTD. |                    |
|--------|-------------|-------------------------|
|   |        |                    |   |
|   | By:         | /s/ Amit Meridor        |   |
|   | Name:       | Amit Meridor            |   |
|   | Title:      | Chief Executive Officer |   |
|   |        |                    |   |
|   | By:         | /s/ Eran Rotem          |   |
|   | Name:       | Eran Rotem              |   |
|   | Title:      | Chief Financial Officer |   |

----

----