SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16 of

The Securities Exchange Act of 1934

For the month of April, 2011

TEFRON LTD.

(Translation of registrant's name into English)

Ind. Center Teradyon, P.O. Box 1365, Misgav 20179, Israel

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F x Form 40-F o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____

Indicate by check mark whether the registrant by furnishing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o No x

If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- N/A

Attached hereto and incorporated by reference herein is an unofficial translation from Hebrew of the Registrant's audited consolidated financial statements as of December 31, 2010, which have been filed with the Israeli Securities Authority.

This Form 6-K is hereby incorporated by reference into Tefron Ltd.’s Registration Statement on Form F-3 (Registration No. 333-128847) and its Registration Statements on Form S-8 (Registration Nos. 333-139021 and 333-111932).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TEFRON LTD.
	(Registrant)


	By:	/s/ Eran Rotem
		Name: Eran Rotem
		Title: Chief Financial Officer


	By:	/s/ Hanoch Zlotnik
		Name: Hanoch Zlotnik
		Title: Treasurer

Date: April 4, 2011

Unofficial translation from Hebrew

TEFRON LTD.

Consolidated financial statements

as of December 31, 2010

In U.S. dollars thousands

TEFRON LTD.

Consolidated Financial Statements as of December 31, 2010

In U.S. Dollars Thousands

INDEX

	Page

Auditors’ Report – Internal Control over the Financial Reporting	F-1 - F-2

Auditors’ Report	F-3

Consolidated Balance Sheets	F-4

Consolidated Statements of Income	F-5

Consolidated Statements of Comprehensive Income	F-6

Consolidated Statements of Changes in Equity	F-7

Consolidated Statements of Cash Flows	F-8 - F-10

Notes to Consolidated Financial Statements	F-11 - F-75

Appendix to Consolidated Financial Statements – List of subsidiaries	F-76

Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Auditors Report to the Shareholders of Tefron Ltd.

Regarding the Audit of Components of Internal Control over Financial Reporting

Pursuant to Section 9b(c) of the Securities Regulations

(Periodic and Immediate Reports) - 1970

We have audited the components of the internal control over financial reporting of Tefron Ltd. (hereinafter: "the Company") as of December 31, 2010. These control components have been determined as explained in the following paragraph. The Company's Board of Directors and Management are responsible for maintaining effective internal control over financial reporting, and evaluating the effectiveness of the components of the internal control over the financial reporting are attached to the period report for the above date. Our responsibility is to express an opinion on the component of the internal control over the financial reporting of the Company, based on out Audit.

Components of the internal control over the financial reporting were determined in accordance with Audit Standard 104 of the Institute of Certified Public Accountants in Israel "Audit of Components of Internal Control over Financial Reporting" (hereinafter: "Audit Standard 104"). These components are: (1) controls at the organizational level, including control over the process of preparing and closing the financial reporting, and general controls over the information systems; (2) controls over the sales process; (3) controls over the inventory process; (4) controls over the purchasing process (all of these jointly are hereinafter called: "Audited Control Components").

We conducted our Audit in accordance with generally accepted Audit Standard 104. According to this Standard, we are required to plan and perform the Audit in order to identify the components of internal control and to obtain reasonable assurance as to whether these control components are effective from all significant aspects. Our Audit included achieving understanding regarding internal control of the financial reporting, identifying audited Control Components, evaluating the risk existing in significant weaknesses in the Audited Control Components, and examining the evaluation of effectiveness of the planning and operation of those control components based on the considered risk. Regarding those Audited Control Components, our Audit is to distinguish from internal control over all the significant processes in connection with financial reporting; therefore, our opinion relates to the Audited Control Components only. Moreover, our Audit did not relate to the mutual effects between the Audited Control Components and those which were not audited and, therefore, our opinion does not take into account such possible effects. We believe that our Audit provides reasonable basis for our opinion in connection with the above.

F - 1

Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Due to obvious limitations, the internal controls of financial reporting in general, and components of them in particular, are likely not to prevent or disclose a misleading presentation. In addition, reaching conclusions regarding the future on the basis of an evaluation of any present effectiveness, is exposed to the risk that controls will become unsuitable due to the change in circumstances or the level of the existence of policy or procedures were detrimentally changed.

In our opinion, the Company effectively maintains, from all significant aspects, the Audited Control Components, as of December 31, 2010.

We have also audited, in accordance with generally accepted Auditing Standards in Israel, the consolidated financial statements of the Company as of December 31, 2010 and 2009, and for each of the three years for the period ended December 31, 2010, and our report dated March 30, 2011 included an unqualified opinion on those financial statements including an emphasis paragraph regarding the Company's business and its losses and the financial covenants with the banks.

Kost Forer Gabbay & Kasierer

Certified Public Accountant

Haifa,

March 30, 2011

F - 2

Kost Forer Gabbay & Kasierer

2 Pal-Yam Ave.

Haifa 33095, Israel

Auditor's Report

To the Shareholders and Board of Directors of Tefron Ltd.

We have audited the accompanying consolidated balance sheets of Tefron Ltd. ("the Company”) as of December 31, 2010 and 2009 and the consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years ended December 31, 2010, 2009 and 2008. These financial statements are the responsibility of the Company's Board of Directors and Management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards in Israel, including those prescribed by the Auditor's Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2010 and 2009, and the results of their operations, changes in equity and cash flows for each of the years ended December 31, 2010, 2009 and 2008, in conformity with International Financial Reporting Standards ("IFRS") and with the provisions of the Israeli Securities Regulations (Annual Financial Statements), 2010.

Without qualifying our opinion, we draw attention to Note 1d to the financial statements about the Company's business and its losses, and the financial covenants with the banks. Regarding Management’s plans see Note 1d.

We also audited, pursuant to Auditing Standard 104 of the Institute of Certified Public Accountants in Israel “Auditing of Internal Control Components over Financial Reporting”, internal control components over financial reporting of the Company as of December 31, 2010, and our report of March 31, 2011 included an unqualified opinion on the effective existence of those components.

Kost Forer Gabbay & Kasierer

Certified Public Accountants

Haifa,

March 30, 2011

F - 3

Tefron Ltd.

Consolidated Balance Sheets

			As of December 31,
			2010			2009
	Note		$ 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 portion 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

Capital attributable to the Company's shareholders		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 capital				82,752			99,197

The accompanying notes are an integral part of the consolidated financial statements

March 30, 2011
Date of approval of the financial statements		Arnon Tieberg Chairman of the Board		Amit Meridor CEO		Eran Rotem CFO

F - 4

Tefron Ltd.

Consolidated Statements of Income

			For the year ended December 31,
			2010			2009			2008
	Note		$ thousands (excluding loss 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

Loss				(22,686	)		(17,393	)		(17,579	)

Loss per share attributable to owners of the parent (in $)

Basic and diluted loss per share				(7.7	)		(6.6	)		(6.7	)

The accompanying notes are an integral part of the consolidated financial statements

F - 5

Tefron Ltd.

Consolidated Statements of Comprehensive Income

	For the year ended December 31,
	2010			2009			2008
	$ thousands

Loss		(22,686	)		(17,393	)		(17,579	)

Other comprehensive income (loss) (net of tax effect) *):

Realized gain on cash flow hedges, net		(115	)		(23	)		(445	)
Realized loss (gain) on available-for-sale securities		-			-			77
Unrealized gain from cash flow hedges, net		-			115			23
Unrealized loss on available for sale securities		(5	)		(86	)		-
Actuarial gain (loss) on defined-benefit plans, net		(451	)		466			(198	)

Other comprehensive income (loss)		(571	)		472			(543	)

Total comprehensive income (loss)		(23,257	)		(16,921	)		(18,122	)

Total comprehensive income (loss) attributed to owners of the parent		(23,257	)		(16,921	)		(18,122	)

*) See Note 16e

The accompanying notes are an integral part of the consolidated financial statements

F - 6

Tefron Ltd.

Consolidated Statement of Changes in Equity

	Relating to the Company's shareholders
	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
	$ 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
Issue of rights (less issue costs of $240 thousand)		2,833		927			-			-			-			-			-		3,760
Private placement (less issue costs of $297 thousand)		9,467		(1,735	)		-			-			-			-			-		7,732
Capital 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

	Relating to the Company's shareholders
	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

	Relating to the Company's shareholders
	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

The accompanying notes are an integral part of the consolidated financial statements

F - 7

Tefron Ltd.

Consolidated Statement of Cash Flows

	For the year ended December 31,
	2010			2009			2008
	$ thousands
Cash flows from operating activities
Loss		(22,686	)		(17,393	)		(17,579	)

Adjustments to reconcile loss to net cash used in operating activities:
Adjustments to reconcile loss to net cash provided used in operating activities:
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	)

The accompanying notes are an integral part of the consolidated financial statements

F - 8

Tefron Ltd.

Consolidated Statement of Cash Flows

	For the year ended December 31,
	2010			2009			2008
	$ 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

The accompanying notes are an integral part of the consolidated financial statements

F - 9

Tefron Ltd.

Consolidated Statement of Cash Flows

	For the year ended December 31,
	2010		2009		2008
	$ thousands
(A) Purchase of operations (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) Significant non cash transactions

Purchase of operations (see Note 3a)

Operation’s assets on the acquisition date:

Inventory		1,896
Customer base		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		-

The accompanying notes are an integral part of the consolidated financial statements

F - 10

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 1: General

Tefron Ltd. ("the Company") 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.

The Company’s shares are traded on the Tel Aviv Stock Exchange as well as on the OTC Bulletin Board in the USA. For additional details see also Note 18f.

The Company's headquarters are located at Misgav Industrial Zone.

Definitions

In these financial statements:

	The Company	Tefron Ltd.

	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.

	Interested parties and controlling shareholder	As defined in the Securities Regulations (Annual Financial Statements) - 2010

During the first quarter, the Company started a turnaround program to improve its business results (hereinafter: the Turnaround Program). Correct as the date of signing this report, there were operating improvements identified with the production floor, such as: shortening the supply date to customers and a drop in waste in the production process, a decline in the Company's cost basis, such as: the manpower clause, rent and transport. Up to the date of signing this report, significant improvements were achieved in these items, in the framework of the turnaround program.

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 a final 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. In the Company's opinion, as of the date of signing the financial statements, it is reasonable, although it is not certain, that the financial covenants will be met.

On December 30, 2010, the Company signed a number of agreements, in the framework of which it acquired, inter alia, the operations in the seamless field 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 in the Company – as detailed in Note 18a.

F - 11

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies

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 benefit s. The Company chose to present the statement of income by a method which characterizes its operations.

The preparation format of the financial statements

These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"). These Standards comprise:

International Financial Reporting Standards (IFRS).

International Accounting Standards (IAS).

Interpretations to the IFRIC issued by the (IFRIC) and by the (SIC).

In addition, the financial statements have been prepared in accordance with the provisions of the Securities Regulations (Annual Financial Statements) – 2010.

Consistent accounting policies

The accounting policies adopted in the financial statements are consistent with those of all periods presented.

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

IFRS 3 (Revised) - Business Combinations and IAS 27 (Revised) - Consolidated and Separate Financial Statements

According to the 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.

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 on their accrual 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 minority has not guarantors or have no contractual obligation to support the subsidiary or to invest further amounts.

F - 12

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Basis of preparation of the financial statements (Cont.)

Changes in accounting policies in view of the adoption of new standards: (Cont.)

IFRS 3 (Revised) - Business Combinations and IAS 27 (Revised) - Consolidated and Separate Financial Statements (Cont.)

A transaction with the non-controlling interests - whether a sale or a purchase - is handled as a capital transaction. Therefore, the acquisition of rights by the Group which does not give control is recognized as an increase or decrease in capital and calculated as the difference between the proceeds paid by the Group and the amount of that part of the rights purchased in the non-controlling interest which is deducted on the acquisition date. Realizing a holding in a subsidiary without losing control is recognized as an increase or decrease in capital (reserve for transactions with holders of non-controlling interests / retained earnings). being the amount of the difference between the proceeds received in the Group and the balance in the financial statements of the non-controlling interests in the subsidiary, which were added to the Company's capital (while 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 rights which do not give control).

On the acquisition date, a reclassification and restatement of assets and liabilities was made in accordance with the contractual terms, the economic terms and the other relevant terms 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 changing the status) are classified in the statement of cash flows, only if the framework of cash flows from financing activities (and can no longer be classified in the framework of cash flows from investing activities).

The Standards are applied 'from here on' as from January 1, 2010.

This amendment does not have a significant effect on the financial statements.

IFRS 5 – Non current assets held for sale and discontinued operations

According to amendment to IFRS 5, when the parent company decides to realize part of its holdings in a subsidiary, so that after the realization the parent company will have a holding which does not give control; for example rights that give a significant effect, all the assets and liabilities relating to the subsidiary will be classified as held for sale and the relevant directives of IFRS will apply, including presentation of discontinued operations.

An additional amendment clarifies which are the disclosures required regarding non current assets (or realization 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 given. The disclosure requirements appearing in the other IFRS Standards will apply to these assets only if they relate specifically to those non current assets or to those realization groups.

The amendment is implemented 'from here as from January 1, 2010.

IAS 7 – Statement of cash flows

The amendment to IAS 7 stipulates that only cash flows which result in the recognition of assets can be classified as cash flows from investing activities. The amendment is applied retrospectively as from January 1, 2010. The amendment did not have a significant effect on the financial statements.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Basis of preparation of the financial statements (Cont.)

IAS 36 – Impairment of assets

The amendment to IAS 36 clarifies what an accounting unit is required to which goodwill will be allocated so as to examine any impairment in goodwill. According to the amendment, the highest possible level of allocating goodwill recognized in a business combination is the segment of operations defined in IFRS 8 – Operating segments, before aggregation for reporting purposes.

The amendment is applied 'from here on' as from January 1, 2010.

In the Company's opinion, the amendment does not have a significant effect on the financial statements.

The main considerations, estimates and assumptions used in the preparation of the financial statements:

Estimates and assumptions

Preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The basis of the estimates and assumptions is reviewed regularly. The changes in accounting estimates are reported in the period of the change in estimate.

The following are the key assumptions made in the financial statements concerning uncertainties on the balance sheet date, and the critical estimates computed by the Group that may cause a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

- 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.

-Provision for doubtful accounts

The Company’s management regularly reviews trade receivables and assesses their collectability. Accordingly, the Company makes a provision for trade receivables whose collection is in doubt.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

The main considerations, estimates and assumptions used in the preparation of the financial statements: (Cont.)

Slow-moving inventory

The Company reviews in each period the state and age of inventories and records a provision for slow-moving inventories accordingly. In assessing whether the inventory is obsolete or slow moving, the Company relies on technical data and on assumptions with regard to anticipated order backlog - see Note 6.

Determining the fair value of a non negotiable financial instruments

The fair value of non negotiable securities available for sale is determined by an external expert while using the most reliable assumptions and estimates at his disposal. These securities are classified to Level 3 in the hierarchy of fair value rating in accordance with IFRS 7.

Provision for impairment of fixed assets

The provision for an impairment of fixed assets 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

The fair value of share-based payment transactions is determined using the options costing model. The assumptions of the model include the price of the share, its realization price, expected fluctuations, expected lifespan, expected dividends, and the zero rate of interest.

Consolidated financial statements:

The consolidated financial statements include the statements of companies that are controlled by the Company (wholly-owned subsidiaries: Hi-Tex founded by Tefron, Ltd. (hereinafter: "Hi-Tex"), Macro Clothing Ltd. (hereinafter: "Macro"), Tefron USA Inc. (hereinafter: "Tefron USA"), Tefron UK Ltd. (hereinafter: "Tefron UK") and El-Masira Textile Co. (hereinafter: (hereinafter: "El-Masira")). Control exists when the Company has the power, directly or indirectly, to direct the financial and operating policies of a controlled company. The effects of potential voting rights that are exercisable on the balance sheet date are considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases.

All intra-group balances, transactions and gains and losses resulting from intra-group transactions are eliminated in full in the consolidated financial statements.

The financial statements of the Company and its subsidiaries are prepared for identical dates and periods. The Company's policies in the financial statements and its subsidiaries are implemented uniformly and consistently with those implemented in the Company’s financial statements.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Functional and foreign currency:

‎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.

Transactions assets and liabilities in foreign currency

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.

Allowance for doubtful accounts

The allowance for doubtful accounts is determined in respect of specific trade receivables whose collection, in the opinion of the Company's management, is doubtful. Impaired trade receivables are withdrawn when they are assessed as uncollectible.

Inventories

Inventories are measured at the lower of cost or net realizable value. The cost of inventories comprises costs of purchase and costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

The cost of inventories is determined as follows:

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.

The Company periodically evaluates the condition and age of inventories and records a provision for slow-moving inventories.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Financial instruments

Financial assets:

Financial assets within the scope of IAS 39 are initially recognized at fair value plus directly attributable transaction costs, except for investments at fair value through the statement of income, for which transaction costs are recorded to the statement of income.

After initial recognition, the accounting treatment of investments in financial assets is based on their classification to one of the following four groups:

Financial assets at fair value through the statement of income.

Investments held-to-maturity.

Loans and receivables.

Financial assets available for sale.

The Company has classified its financial assets as follows:

Financial assets available for sale

The has financial assets Group available for sale that are financial assets (non-derivative) that are designated as available for sale or are not classified in any of the three preceding categories. After initial recognition, available for sale financial assets are measured at fair value. Gains or losses from fair value adjustments, except exchange differences that relate to monetary debt instruments that are carried to the statement of income in the financing item, are recognized directly to equity as unrealized gains, net. When the investment is disposed of or in case of impairment, the accumulated gain or loss is recognized to the statement of income. Interest revenues on investments in debt instruments are recognized in the statement of income using the effective interest method.

Fair Value

The fair value of investments that are traded in an active market is determined by reference to the market prices on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm's length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow or other valuation models. The valuator, in his work, took into consideration interest and credit components that are derived from the risk.

Loans and receivables

The Group has loans and receivables which are not financial assets (which are not derivates) with fixed payments or payments which can be determined and which are not traded in an active market. After initial recognition, the loans are presented at amortized cost. Short-term credits (such as credit to customers and other receivables) are presented according to their terms, generally at their nominal value. Profits and losses are recognized in the statement of income when the loans and receivables are withdrawn or if any impairment is recognized for them, as well as the result of methodical amortization.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Financial instruments (Cont.)

Financial liabilities

Financial liabilities measured at amortized cost:

Interest-bearing loans and credit are initially recognized at fair value less directly attributable transaction costs. After initial recognition, loans and credit are measured at amortized cost. Gains and losses are recognized to the statement of income when the loan is withdrawn.

Treasury shares

Company shares held by the Company’s subsidiary are presented at cost and deducted from shareholders’ equity. Gains or losses from the purchase, sale, issue or cancellation of treasury shares are carried to shareholders' equity.

Withdrawal of financial assets

A financial asset is withdrawn when the contractual rights to the cash flows from the financial asset expire or the Company has transferred its contractual rights to receive cash flows from the financial asset or assumes an obligation to pay the received cash flows in full without significant delay to a third party and in fact has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially with all the risks and rewards of the asset, but has transferred control of the asset.

A factoring transaction and credit vouchers of customers are handled as a withdrawal when the above conditions exist.

When the Company transfers its rights to receive cash flows from an asset and did not transfer or did not really maintain the risks and benefits connected with the asset, and did not even transfer control of the asset, this is recognized as a new asset according to the extent of the Company's continuing involvement in the asset. Involvement continues by way of a guarantee for the asset transferred and is measured at the lower of the written balance in the financial statements of the assets, and the maximum amount of the consideration that the Company is likely to be required to pay in return.

A financial liability is withdrawn when it is settled, i.e. when the obligation is discharged, cancelled or expires. A financial liability is withdrawn when the debtor (the Group):

Pays the liability by paying in cash, other financial assets, goods or services; or

Is legally released from the liability.

Where an existing financial liability is replaced by another liability from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is accounted for as a withdrawal of the original liability and the recognition of a new liability. The difference between the carrying amounts of the above liabilities is recognized in the statement of income. If the exchange or modification is immaterial, it is accounted for as a change in the terms of the original liability and no gain or loss is recognized from the exchange.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Financial instruments (Cont.)

Impairment of financial assets:

On each balance sheet date, the Group assesses whether there is any objective evidence that the following financial asset or group of financial assets is impaired.

Financial assets available for sale

For debt instruments classified as available for sale financial assets, objective evidence of impairment may arise as a result of one or more events that have a negative impact on the estimated future cash flows of the asset since the recognition of the asset. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. Where there is evidence of impairment, the cumulative loss carried to equity, is measured as the difference between the acquisition cost (less amortizations using the effective interest method and previous impairment losses) and the fair value is removed from equity and recognized as an impairment loss in the statement of income. In subsequent periods, the amount of the impairment loss is reversed if the increase in fair value can be related objectively to an event occurring after the impairment was recognized. Such a reversal amount is credited to the statement of income up to the amount of the loss recognized.

Leases:

The tests for classifying leases as financial or operating leases depend on the substance of the agreements and are made at the inception of the lease in accordance with the principles below as set out in IAS 17:

The Group as a lessee:

Operating leases:

The Group has lease agreements in which all the risks and benefits inherent in the ownership of the leased asset are not really transferred, and therefore they are classified as operative leasing. The lease fees are recognized as an expense in the statement of income currently by the straight line method over the lease period.

The Group as Lessor:

Operating leases:

Lease agreements where the Group does not actually transfer substantially all the risks and benefits incidental to ownership of the leased asset are classified as operating leases. Lease income is recognized as revenue in the statement of income on a straight-line basis over the lease period.

Business combinations and goodwill

Business combinations are handled through implementing the acquisition method. In this method, assets and liabilities of the acquired company are identified at their fair value on the acquisition date. The cost of acquisition is the aggregate fair value on the acquisition date of the assets given, the liabilities taken on and the capital rights issued by the acquirer. For business combination which occurred from January 1, 2010, the direct costs connected with the acquisition are immediately recorded as an expense in the statement of income, excluding costs of raising funds handled in accordance with IAS 32. For business combinations which occurred up to December 31, 2009, these costs are recognized as part of the acquisition cost.

On the acquisition date, a reclassification and re-designation of assets and liabilities are made according to the contractual terms, the economic terms and other relevant terms existing on the acquisition date, excluding for leasing contracts whose conditions were not changed on the acquisition date and, therefore, their classification as financial leasing or operative leasing are not reexamined.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Business combinations and goodwill (Cont.)

Goodwill is first measured at cost, which is surplus consideration of the acquisition and the non-controlling interests (if such exist) over the net amount of the assets acquired which can be identified, and the liabilities taken on as measured on the acquisition date. If the goodwill amount received is negative, then this relates to a bargain price acquisition and the acquirer must recognize the profit created as a result in the statement of income on the acquisition date.

After the initial recognition, goodwill is measured at cost less the accumulated loss from the impairment, should there be any. Goodwill is not amortized methodically.

Up to December 31, 2009, the contingent proceeds were recognized if and only if the Company had an existing liability, a cost of the economic benefits was expected, and the amount could be reliably estimated. Following updates relating to estimating the amount of contingent proceeds was updated against goodwill created in the acquisition until it reaches zero, and the balance was recorded to the statement of income.

Fixed assets

Items of fixed assets are measured at cost plus direct acquisition costs less any accumulated depreciation, less accumulated impairment losses and less related investment grants and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment that can be used only in connection with the machinery and equipment.

Deprecation is calculated at equal annual rates based on the straight line method over the useful life of the asset, as follows:

	%	% 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	See below

Leasehold improvements are depreciated using the straight line method over the lease period (including any optional extension term available to the Company which it intends to exercise), or over the expected useful life of the assets, whichever is shorter.

The useful life, depreciation method and residual value of an asset are reviewed at least each year end and the changes are accounted for as a prospective change in accounting estimate. As for testing the impairment of fixed assets, see l below.

An asset is withdrawn on disposal or when no further economic benefits are expected from its use. The gain or loss arising from the withdrawal of the asset (determined as the difference between the net disposal proceeds and the carrying amount in the financial statements) is included in the statement of income when the asset is withdrawn. See note 7.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Intangible assets

Separately acquired intangible assets are measured on initial recognition at cost with the addition of costs directly attributable to the acquisition. Intangible assets acquired in a business combination are included at the fair value at the acquisition date. After initial recognition, intangible assets are carried at their cost less any accumulated amortization and any accumulated impairment losses.

According to management's assessment, intangible assets have a finite useful life. The assets are amortized over their useful life and reviewed for impairment whenever there is an indication that the asset may be impaired. The period of amortization and method of amortization of an intangible asset with a useful lifespan is defined and examined at least at the end of each year. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for as prospective changes in accounting estimates. The amortization charge on intangible assets with finite useful lives is recognized in the statements of income.

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

Gains or losses arising from the withdrawal of an intangible asset are determined as the difference between the net disposal proceeds and the carrying amount of the asset and are recorded to the statement of income.

(*)

In accordance with Accounting Standard IAS 38 and IFRS 3R, customer relations 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 done in accordance with the abandonment of existing customers over the years.

Software:

The Group's assets include computer systems comprising hardware and software. Software forming an integral part of the hardware to the extent that the hardware cannot function without the programs installed in it, is classified as fixed assets. In contrast, software that adds functionality to the hardware is classified as an intangible asset.

Impairment of non-financial assets

The Company has intangible assets which belong to the following five cash generating units: Cut & Sew – including the design, production and marketing of intimate apparel and sportswear by the Cut & Sew method; Seamless – including the design, production and marketing of intimate apparel, and sportswear by the seamless method; Macro – including production in the Far East by sub-contractors. Swimwear is mainly sold in the U.S. and Europe; building in the U.S. – the Company has cash flows from rent in an office building in the U.S. Thus building creates independent cash flows; knitting machines leased in the U.S. - the Company has cash flows of revenues from leasing knitting machines in operative leasing.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Impairment of non-financial assets (Cont.)

The Company evaluates the need to record an impairment of the carrying amount of non-financial assets (except of inventories and deferred taxes, see clause n) whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds its recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of the selling price, net, and the value of its use. In evaluating the use, the expected cash flows are discounted according to the discounting rate before tax, which reflect the specific risks of every asset. For an asset that does not create independent cash flows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recorded to the statement of income in accordance with the nature of the item whose value declines.

An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, will be limited to the lower of the amount of impairment recognized in the past (less depreciation or amortization) and its recoverable amount. A reversal of that impairment loss is recognized in the statement of income in the same section in which the impairment was written. See note 7.

The following unique criteria are applied in assessing impairment of the goodwill:

Goodwill:

In order to test impairment, goodwill acquired in a business combination is allocated, on the acquisition date, to each of the Group’s cash generating units that is expected to benefit from the synergies of the combination.

The Company reviews goodwill for impairment once a year on December 31 or more frequently if events or changes in circumstances indicate that there is impairment.

Impairment is recognized for goodwill by comparing the recoverable amount of the cash-generating unit(s) to the carrying amount of the cash generating unit(s), including goodwill. When the recoverable amount of the cash-generating unit (or a group of cash-generating units) is lower than the carrying amount of the cash-generating unit (or a group of cash-generating units), to which the goodwill was allocated, it is recognized as a loss from an impairment first relating to goodwill. Losses recognized for goodwill cannot be reversed.

Government grants

Government grants from the Office of the Chief Scientist in Israel for supporting research and development activities do not include the payment of royalties to the State, and therefore are reduced from the cost of sales. The grants are recognized when there is reasonable assurance that the grant will be received and the Company will meet with all the relevant conditions. The Company’s government grants relating to assets such as fixed assets and have been recorded as a reduction in the carrying amount of the fixed asset.

Taxes on income

Taxes on income in the statement of income comprise current and deferred taxes. The tax results in respect of current or deferred taxes are recorded to the statement of income except to the extent that the tax arises from items which are recognized directly to equity. In such cases, the tax effect is also recorded to the relevant item in shareholders' equity.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Taxes on income (Cont.)

Deferred taxes:

Deferred income taxes are computed for temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes, except for a limited number of exceptions. Deferred taxes related to items recorded directly to equity are also recorded to the relative item in equity.

Deferred tax balances are measured at the tax rates that are expected to apply to the period when these taxes are recorded to the statement of income or to equity, based on tax laws that have been enacted or substantively enacted by the balance sheet date. The amount for deferred taxes in the statement of income represents the changes in said balances during the period of report, excluding in respect of changes attributable to items recorded directly to shareholders' equity.

Deferred tax assets are reviewed on each balance sheet date and reduced to the extent that it is not probable that they will be utilized. Simultaneously, temporary differences (such as losses transferred for tax purposes) for which deferred tax assets have not been recognized are reassessed and deferred tax assets are recognized to the extent that their recoverability has become probable. Any resulting reduction or reversal is recognized in the taxes on income item.

Taxes that would apply in the event of the sale of investments in subsidiaries have not been taken into account in computing the deferred taxes, as long as it is probable that the sale of the investments in subsidiaries is not expected in the foreseeable future. Equally, deferred taxes that would apply in the event of distribution of earnings by investee companies as dividends have not been taken into account in computing the deferred taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Company's policy not to initiate distribution of dividends that triggers an additional tax liability.

Deferred tax assets and deferred tax liabilities are presented in the balance sheet as non-current assets and non-current liabilities, respectively. Deferred taxes are offset if there is a legally enforceable right to set off a current tax asset against a current tax liability and the deferred taxes relate to the same taxpayer and the same tax authority.

Share-based payment transactions

The Company's employees and directors are entitled to remuneration in the form of share-based payment transactions whereby employees and directors render service as consideration for equity instruments ("equity-settled transactions").

Transactions settled with capital instruments;:

The cost of transactions settled with capital instruments with employees and directors is measured at the fair value of the equity instruments granted on the granting date. The fair value is determined using an accepted pricing model, see Note 19.

The cost of transactions settled with capital instruments is recognized in the statement of income, together with a corresponding increase in equity, during the period which the performance and service conditions exist, and end on the date on which the relevant employees and directors become entitled to the benefit ("the vesting period"). The cumulative expense recognized for transactions settled with capital instruments on each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The charge or credit to the statement of income represents the movement in cumulative expense recognized at the beginning and end of that reported period.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Share-based payment transactions (Cont.)

No expense is recognized for benefits that do not ultimately vest. Except for benefits where vesting is conditional upon a market condition, which are treated as benefits which vested irrespective of whether the market condition is met, provided that all other vesting conditions (service and/or performance) are satisfied.

When the Company modifies the conditions on which equity-instruments were granted, the minimum expense recognized is the expense as if the conditions had not been modified. An additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee on the modification date.

Liability for benefits to employees

The Group has several employee benefit plans:

Short-term employee benefits:

Short-term employee benefits include salaries, leave pay, paid sick leave, vacation pay and social security contributions and are recognized as expenses as the services are rendered.

Post-employment benefits

The plans are normally financed by deposits in insurance companies and classified as defined contribution plans or as defined benefit plans.

The Group has defined contribution plans pursuant to Section 14 of the Israeli Severance Pay Law under which the Group pays fixed contributions and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods. Contributions in the defined contribution plan in respect of severance pay or compensation are recognized as an expense when contributed simultaneously with receiving the employee's services and no additional provision is required in the financial statements.

The Group also operates a defined benefit plan in respect of severance pay pursuant to the Israeli Severance Pay Law. According to the Law, employees are entitled to severance pay upon dismissal or retirement. The cost of providing benefits under this plan is determined using the actuarial value of the projected unit entitlement method. The actuarial calculation takes into account future salary increases and rates of employee turnover based on the estimated timing of payment. The amounts are presented based on discounted expected future cash flows using a discount rate on Government bonds with maturity dates that are close to the liability period of the severance pay.

The Company makes current deposits in respect of its liabilities to pay severance pay to certain of its employees in pension funds and insurance companies ("the plan’s assets").

The plan’s assets comprise assets held in eligible insurance policies. The plan’s assets are not available to the Group's own creditors and can not be returned directly to the Group.

Actuarial gains and losses are recorded as other comprehensive income (loss) in the period in which they occur.

The liability for employee benefits presented in the balance sheet represents the present value of the defined benefit obligation less the fair value of the plan’s assets.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Revenue recognition

Revenues are recognized in the statements of income when the amount of revenues can be reliably measured, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred can be reliably measured. Revenues are measured at the fair value of the consideration received excluding any fines or volume rebates.

The following specific recognition criteria must also be met before revenue is recognized:

Revenues from the sale of goods

Revenues from the sale of goods are recognized when all the significant risks and rewards of ownership of the goods have passed to the buyer and the seller no longer retains managerial involvement. The delivery date is usually the date on which ownership passes.

Cost of sales

Cost of sales includes expenses for storage and transportation of inventories to the end point of sale. Cost of sales also includes losses from impairment of inventories and provisions for slow-moving inventories.

Operating segments

According to IFRS 8, the Company adopted the "management approach" in reporting on the financial performance of the operating segments.

An operating segment is defined as a component of an entity when:

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);

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

There is separate financial information is available.

The decision on the allocation of resources and the financial reporting that the CODM makes are on the basis of two operating segments of the Company: Seamless and Cut & Sew, as detailed in Note 22 below and not beyond that. Furthermore, the Company did not identity other operating segments.

Earnings (loss) per share

Earnings (loss) per share are calculated by dividing the net income (loss) attributable to equity holders of the parent by the weighted average number of ordinary shares outstanding during the period. Basic earnings (loss) per share only include shares that were actually outstanding during the period. Potential ordinary shares (employee options) are included in the computation of diluted earnings (loss) per share only when their conversion decreases earnings per share or increases loss per share. Furthermore, potential ordinary shares that are converted during the period are included in diluted earnings (loss) per share only until the conversion date and from that date in basic earnings (loss) per share.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Provisions

A provision in accordance with IAS 37 is recognized when the Group has a present legal obligation or an implied obligation as a result of a past event and it is probable that economic resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect is material, the provisions are measured according to the estimated future cash flows discounted using a pre-tax interest rate that reflects the market assessments of the time value of money and, where appropriate, those risks specific to the liability.

Asset held for sale

A non current asset or a group of assets are classified as held for sale when their return will be done mainly through a sale transaction and not through continuing use. This exists when the asset is immediately available for sale in their present condition, the Company has an obligation to sell, there is a plan to locate a buyer and it is highly probable that it will be completed within a year from the date of the classification (correct as of the balance sheet date, these conditions must exist). These assets are not depreciated from the date of their first classification as such and are presented as separate current assets in the consolidated balance sheet, at the lower of their carrying value and fair value less selling expenses. When the balance in the financial statements is higher than the fair value less selling cost, the loss from the impairment relating to the asset (or the group of assets) is recognized up to the amount of the difference. Concurrently, the liabilities relating to these items are presented separately in the consolidated balance sheet in a similar way. In addition, balances for other comprehensive profit (loss) are presented separately in the statement of changes in capital. For additional information see Note 7c

Disclosure to new IFRS during the period prior to their implementation

IFRS 7 – Financial Instruments: Disclosure

The amendments to IFRS 7 deal with a number of subjects:

Clarification of the disclosure requirements presented in the Standard: in this context, the connection between quantitative and qualitative disclosure is emphasized and the nature and extent of the risks resulting from financial instruments. In addition, in the context of the amendment, disclosure requirements regarding collateral that the Company holds were reduced and the disclosure requirements amended regarding credit. The amendment will be implemented retrospectively from the financial statements for periods starting January 1, 2011. Early implementation is possible.

The new and extended disclosure requirements regarding withdrawals of financial assets and the requirement of disclosure in cases where exceptional transfers are made close before the reporting date. The purpose of the amendment is to assist users of financial statements to estimate the risk exposure to transfer of financial assets and the effect of these risks on the Company's financial provision. The amendment will increase the reporting transparency of transfer transactions, particularly securitization transactions of financial assets. The amendment will be implemented 'from here on' as from the financial statements for periods starting January 1, 2012. Early implementation is possible. The relative disclosures will be included in the Company's financial statements.

F - 26

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

IFRS 9 - Financial Instruments:

In November 2009, the first stage of phase 1 of IFRS 9 was published - "Financial Instruments", as part of the 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.

The Standard stipulates that upon initial recognition, all the financial assets (including hybrid contracts in which the hosting contract is a financial asset) will be measured at fair value. In subsequent periods, debt instruments can be measured at amortized cost if both of the following conditions accumulative are met:

The asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows resulting from them.

According to the contractual terms of the financial asset, the Company is entitled, on specified dates, to receive cash flows that are solely payments of principal and interest on the principal amount outstanding.

Despite the aforesaid, the Company may, at the time of first recognition, designate a debt instrument which meets the above two conditions to fair value through the statement of income, if so doing cancels or significantly reduces the asymmetry in measurement or recognition (accounting mismatch) which would have occurred had it not done so.

Subsequent measurement of all other debt instruments and financial assets will be at fair value.

Financial assets that are equity instruments will be measured in subsequent periods at fair value and the changes will be recognized to the statement of income or to other comprehensive income (loss), in accordance with the choice of the accounting policy in an instrument-by-instrument basis (amounts recognized in other comprehensive income will not be transferred thereafter to the statement of income). If this relates to capital instruments held for trading purposes, it is obligatory to measure them at fair value through the statement of income. This choice is final and irrevocable. Nevertheless, when a company changes its business model for managing financial assets, it must reclassify all affected financial instruments from the change of the business model so as to reflect this change. In all other circumstances, reclassification of financial instrument is not permitted.

The Standard will be effective starting January 1, 2013. Earlier application is permitted. Early adoption will be made with a retrospective restatement of comparative figures, subject to the relief set out in the Standard.

In October 2010, amendments were published to IFRS 9 on the subject of withdrawals and the subject of financial liabilities. According to the amendments, the Company must continue to implement the provisions of IAS 39 regarding a withdrawal and regarding financial liabilities for which the fair value alternative was not chosen (the designation of fair value through the statement of income). I.e.: the provisions of classification and measurement of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at reduced cost.

F - 27

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 2: Significant accounting policies (Cont.)

Disclosure to new IFRS during the period prior to the implementation (Cont.)

The changes resulting from these amendments affect the measurement of liabilities for which the fair value alternative was chosen. According to these amendments, the amount of change in fair value of the liability, which relates to changes in the credit risk, will be recorded to other comprehensive income. All other changes in the fair value will be recorded to the statement of income. If the recording of a change in fair value of the liability was caused as a result of changes in the credit risk, to other comprehensive income, it will create an accounting mismatch in the statement of income; and then also the same change will be recorded to the statement of income and not to other comprehensive income.

In addition, according to the amendments, liabilities for certain derivatives of capital instruments will no longer be measured at cost, but only at fair value.

Date of the start of the amendment is January 1, 2013. Early adoption is possible, on condition that the Company also adopts the provision of IFRS 9 relating to classification and measurement of financial assets (the assets stage). First adoption of the amendments will be done retrospectively while restating the comparative figures, subject to certain exemptions in the amendment.

In the Company's opinion, the amendments are not expected to have a significant effect on the financial statements.

IAS 24 – Disclosures in connection with a related party

The amendment to IAS 24 clarifies the definition of a related party so as to simplify the identification of the relationship with a related party and prevent a lack of consistency in implementing this definition. In addition, the companies related to the government are given, in the framework of the amendment, a partial exemption in providing disclosure regarding transactions with the government and other such companies. The amendment will be implemented retrospectively as from the financial statements for annual periods starting January 1, 2011. Early implementation is possible.

The suitable disclosures will be included in the Company's financial statements.

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

The amendment to IAS 32 states that rights, options or option warrants to acquire a fixed number of the Company's equity instruments for a fixed amount of any currency, will be classified as equity instruments if the entity offers the rights, options or share options pro rata to all of its existing owners of the same class of its non-derivative equity instruments. The amendment will be implemented retrospectively as from the financial statements for annual periods starting January 1, 2011. Early implementation is possible.

In the Company's opinion, the Standards are not expected to have a significant effect on the financial statements.

F - 28

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 3: Business combinations

(a)

Acquisition of Intimes Nouvelle Seamless operations

On December 30, 2010, a transaction was completed in the framework of which, inter alia, the Company acquired operations in the field of women intimate apparel products of Intimes Nouvelle Seamless Inc. (hereinafter: "Nouvelle") which are manufactured using the seamless technology, and this against the private placement to Nouvelle of 600,000 ordinary of the Company at a value of $2,216 thousand. The value of the proceeds was calculated according to the quoted price of the Company's share on the stock exchange on the date of completing the transaction, and less issue costs relating to the above transaction. In addition, the Company realized the right it had to purchase inventory with a value of $1,896 thousand. The proceeds value was calculated according to the value of the Company's share on the stock exchange on the date of completing the transaction and less issue costs relating to the above transaction.

Moreover, a total amount of $5,813 thousand was invested by (i) Litef Holdings Inc.; (ii) Mivtach Shamir Holdings Ltd.; (iii) Zilkha Partners, L.P.; (iv) Fima Trust; and (v) Rimon Investment Master Fund L.P. (hereinafter jointly: "the Investors"), and all this against a private placement of 3,368,094 ordinary shares of the Company comprising, immediately after the allotment, 51.5% of the Company's issued capital and voting rights in it (44.4% fully diluted), and an allotment to Ben and Martin Lieberman of 450,000 option warrants which can be exercised up to 450,000 ordinary shares of the Company. For further details see Note 18a below.

The goodwill created in the acquisition relates to expected benefits, resulting from the synergy of the Company and of the acquired operation.

Issue costs in the amount of $297 thousand, which can be related to capital instruments, are recorded directly to capital and were deducted from the 'additional paid-in capital' item. Other direct acquisition costs were recorded to general and administrative expenses.

The fair value of the identified assets and identified liabilities of Nouvelle and the balance in the financial statements on the acquisition are as follows:

	Fair value
	$ thousands
Inventory		1,896
Customer relations		1,551
Order backlog		408
License to use the New Balance brand		78
Net assets		3,933
Goodwill created by the acquisition		49
Total		3,982

Regarding the period of amortization of the intangible assets see Note 8a below.

(b)

Acquisition of Excelsior Inc. operations

On September 17, 2008, the Company acquired the entire business operations of Excelsior Inc. ("Excelsior"), a private company operating in the USA that specializes in the design and distribution of swimwear in the USA. The transaction was accounted for as a business combination under IFRS 3.

The total cost of this business combination amounted to $1,314 thousand, which included a cash payment of $300 thousand and a contingent consideration payable of $1,014 thousand. The contingent consideration payable is an estimate of 10% of future sales of Excelsior in each of the two years following the acquisition.

The Company has allocated the acquisition cost to the fair value of assets acquired and liabilities assumed. Any changes in the contingent consideration payable will be recorded as an adjustment to goodwill.

F - 29

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 3: Business combinations

(b)

Acquisition of Excelsior Inc. operations (Cont.)

The financial statements include the operating results of Excelsior from the date of acquisition.

On November 23, 2009, the subsidiary and Excelsior signed an amendment to the selling agreement according to which, the period for royalty payments will be due immediately upon transfer of a final commission to excelsior in the amount of $200 thousand. On that date, the contingent consideration was extinguished against the zeroing of goodwill balance and the remainder was cancelled against a decrease in selling and marketing expenses.

The fair value of the assets acquired and liabilities assume of Excelsior as of the date of acquisition is as follows:

	Fair value			Balance in the financial statements
	$ thousands
Customer relations		1,029			931
Order backlog		264			176
Deferred taxes liabilities		(323	)		(277	)

Net assets		970			830
Goodwill created on the acquisition		344
Total		1,314

Acquisition cost:	$ 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

The goodwill created on the acquisition is allocated to the forecasted benefits derived from the synergy of activities combining of the Company and the purchased company. See above goodwill update against contingent consideration.

F - 30

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 4 : Trade receivables

	As of December 31,
	2010		2009
	$ 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

Trade receivables whose collection is in doubt are accounted for through recording a provision for doubtful debts.

The movement in the provision for doubtful accounts is as follows:

	$ thousands

Balance as of January 1, 2009		986
Provision during the year		33
Cancellation of accumulated doubtful debt		(29	)

Balance as of December 31, 2009		990

Provision during the year		87
Cancellation of accumulated doubtful debt		(16	)

Balance as of December 31, 2010		1,061

On December 31, 2009, the aging analysis of the trade receivables is as follows:

	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
	$ thousands

December 31, 2010		8,152		1,065		105		-		-		17		9,339

December 31, 2009		14,199		101		259		-		-		38		14,597

F - 31

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 5: Other receivables

	As of December 31,
	2010		2009
	$ thousands

Prepaid expenses		265		358
Advances to suppliers		152		995
Institutions		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
	$ thousands

Raw Materials		5,473		7,148
Work in process		5,917		7,650
Finished goods		5,274		4,980

		16,664		19,778

* Inventories write-off recorded in cost of sales aggregated $3,065 thousand (2009 - $2,808 thousand, 2008 – $4,523 thousand).

F - 32

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 7: Fixed assets

Composition and movement:

2010

	Land and buildings			Machinery and equipment			Motor vehicles		Office furniture and equipment			Leasehold improvements		Total
	$ 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
Transfer to assets available 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
Transfer to assets available 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

Provision for impairment
Balance as of January 1, 2010		510			330			-		360			-		1,200
Impairment charge, net		-			6,129			-		-			204		6,333
Transfer to assets available for sale		-			(1,267	)		-		-			-		(1,267	)
Reduction during the year		(10	)		(98	)		-		(59	)		-		(167	)
Balance as of December 31, 2010		500			5,094			-		301			204		6,099

Depreciated cost as of December 31, 2010		2,357			28,203			3		955			7,418		38,936

F - 33

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 7: Fixed assets (Cont.)

Composition and movement:

2009

	Land and buildings			Machinery and equipment			Motor vehicles		Office furniture and equipment			Leasehold improvements			Total
	$ 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	)
Withdrawals – depreciation of 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	)
Withdrawals – depreciation of asset		-			-			-		(2,230	)		(148	)		(2,378	)
Balance as of December 31, 2009		913			99,929			418		4,700			3,358			109,318

Provision for impairment
Balance as of January 1, 2009		445			1,344			-		346			-			2,135
Impairment charge (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

Depreciated cost as of December 31, 2009		2,432			44,762			4		1,120			8,602			56,920

Impairment of fixed assets

The Company has five cash-generating units:

Cut & Sew – including design, production and marketing of intimate apparel and sportswear by the Cut & Sew method.

Seamless – including design, production and marketing of intimate apparel and sportswear by the Seamless method.

Macro – including production in the Far East through sub-contractors. Swimwear is mostly sold to the USA and Europe.

A building in the United States – the Company has cash flows from rent of offices in the United States. This building produces independent cash flows.

Sewing machines leased in the United States – the Company has cash flows from revenues from leasing sewing machines in an operating lease.

F - 34

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 7: Fixed assets (Cont.)

Impairment of fixed assets: (Cont.)

In 2010 and 2009, the Company engaged a qualified independent appraiser in order to determine the fair value of buildings, machinery and equipment, office furniture and equipment and leasehold improvements owned by it for the purpose of an impairment examination. As a result of the aforementioned valuation, in 2010 the Company recorded a loss from an impairment of $6,333 thousand: Due to the Seamless cash generating unit the Company recorded a loss from impairment of $4,104 thousand, for the Cut & Sew cash generating unit the Company recorded a loss from an impairment of $2,039 thousand, and for the leased knitting machine cash generating unit the Company recorded a loss from an impairment of $190 thousand. In 2009 the Company recorded a reversal of an impairment loss amounting to $496 thousand for the Cut &Sew cash generating unit, the company recorded a loss from an impairment of $237 thousand and for the Seamless cash generating unit the Company recorded a cancellation of a loss impairment of $394 thousand, and for the leased knitting machine generating unit, the Company recorded a cancellation of a loss impairment of $339 thousand.

For liens, see Note 17c.

Non-current assets held for sale

In November 2010, the Company formulated a plan for the replacement of old sewing machines of the Santoni type in consideration for new sewing 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 sewing machines from the fixed assets item to the non-current assets held for sale.

F - 35

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 8: Goodwill and intangible assets

Composition and movement

2010

	Computer software			Customer list, order backlog and brand license		Goodwill		Total
	$ 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

Provision for 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

F - 36

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 8: Goodwill and intangible assets

2009

	Computer software			Customer relations and order backlog		Goodwill			Total
Cost
Balance as of January 1, 2009		3,165			1,293		344			4,802
Additions – purchased separately		75			-		-			75
Withdrawals – amortization of assets		(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
Withdrawals – cancellation of contingent proceeds		(1,561	)		-		-			(1,561	)
Balance as of December 31, 2009		1,261			654		-			1,915

Provision for 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

Customer list, order backlog and license to manufacture and market a brand name were acquired in the framework of business combinations. Customer relations are amortized over an 8-year period, order backlog is amortized over the period of supplying the orders and license to manufacture and market a brand is amortized over a period of 2.75 years.

Amortization expense

Amortization expense for intangible assets is classified in the statements of income as follows:

	For the year ended December 31
	2010		2009		2008
	$ thousands

Cost of sales		140		227		251
Selling and marketing expenses		222		468		186

		362		695		437

F - 37

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 9: - Subordinated note receivable

In 2006, the Company exercised its option to sell its holdings in AlbaHealth (“Alba"). The sale was made for consideration amounting to $13 million, of which $10 million was paid to the Company in cash and $3 million is payable to the Company on August 31, 2009 in accordance with an agreement for the issuance of a subordinated note bearing market interest at LIBOR + 3%, subject to repayment of Alba's debt to a bank in the USA. The agreement was signed by Alba, Suntrast (Alba's main creditor) and Tefron USA. In accordance with the agreement, Tefron USA is entitled to receive interest on the note for as long as Alba is in compliance with its credit commitments to Suntrast, as set forth in the agreement between Alba and Suntrast. In 2008, Alba failed to comply with one of the financial covenants. Therefore it was in breach of its credit commitment, and acted to replace its sources of financing.

On December 31, 2008, Alba signed a new loan agreement with BB&T Bank. Suntrast and Tefron USA are also parties to this agreement, and have consented for the note to be paid in ten equal installments of $300 thousand each. Payments will be made quarterly starting on October 1, 2009 and will bear an interest at LIBOR + 3%.

On September 24, 2009 the Company signed, with Alba, an agreement for an early repayment of the subordinated note. According to the agreement Alba paid Tefron $1,715 thousand and settled all the interest payments that were in arrears. Due to the aforesaid early repayment, the Company recorded a $1,285 thousand capital loss.

Note 10: - Credit from banks

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

In 2009 the Company classified its current loans and 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.

Correct as of December 31, 2010 the Company is meeting the financial covenants and, therefore, is classifying the loans as long-term.

Regarding collaterals and liens see Note 17c.

F - 38

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 11: - Trade payables

	As of December 31,
	2010		2009
	$ 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
	$ thousands

Payroll accruals		4,271		3,812
Accrued expenses		747		533
Institutions		1,823		293
Other current liabilities		1,609		1,028

		8,450		5,666

Note 13: - Long-term loans from banks

Composition:

As of December 31, 2010

	Weighted average interest rate	Balance		Balance net of current maturities
	%	$ thousands

Loans from banks	LIBOR + 2.15-2.85		19,818		19,818

Final agreement with the banks

On March 2, 2010, the Company signed a final agreement with the banks which includes a reorganization of credit financing that the banks provide the Company. The Company had adopted the provisions of IAS 39 (while examining the quantitative and qualitative criteria) and handled the new arrangement as an insignificant change in conditions).

The credit line provided to the Company will be divided into the following loans and credit lines:

Loan A

The principal of Loan A of a total of $15,000,000 will be provided by the banks for a period of one year. The interest on Loan A will be paid quarterly. The principal of Loan A will be paid in three equal installments of $1,250,000 each, as from the end of the 7th, 8th and 9th year, from the date of providing Loan A.

The balance for a total amount of $11,250,000 will be repaid at the end of the 10th year after the date of providing Loan A.

F - 39

Tefron Ltd.

Notes to Consolidated Financial Statements

Note 13: - Long-term loans from banks (Cont.)

Final agreement with the banks (Cont.)

Early repayment of Loan A

The Company will repay, in an early repayment, the unpaid balance of Loan A, fully or partly, in the situations and dates detailed below:

(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.

"Surplus cash flows" – the total EBIDA of the Company according to its financial statements, in every calendar year, less: (a) total interest costs of the companies for that calendar year; and (b) total investments that the Company made in the framework of the operations and current maintenance for that calendar year (hereinafter: "the current investments"). The companies will not make current investments, including in the normal course of business, in an annual aggregate amount, to all the companies, exceeding $2,000 thousand.

Loan B

The principal of Loan B of a total amount of $5,000,000 will be provided by the banks for a period of six years. The interest will be paid quarterly and the principal will be paid in three equal installments of $1,250,000 each, as from the end of each of the 3rd, 4th and 5th and 6th years, after the date of the provision of Loan B by the banks.

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

The banks will provide the Company with short-term credit lines of up to one year for a total amount of $8,950,000 under the following conditions.

Capital infusion

The Company undertook to make a rights offering and/or private placement of shares, in the framework of which an amount of not less than $4,000,000 (less expenses) will be invested in the Company's shareholders' equity, and this by March 31, 2010.

Correct as of March 28, 2010, the Company completed the rights offering to the public and the private placement to Norfet, in the framework of which it raised an amount of $4 million. For further details see Note 18b below.

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.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 13: - Long-term loans from banks (Cont.)

Final agreement with the banks (Cont.)

Additional undertakings

In addition to the collateral and undertakings in the agreement, the Company undertook, inter alia, as long as Loan A and Loan B are not fully repaid to the banks, not to undertake to pay dividends to shareholders without the banks’ prior written consent.

Capital benefit

The Company allotted to the banks, gratis, a total quantity of 100,000 option warrants which can be exercised to 100,000 shares of NIS 10 par value each of the Company, against payment of an exercise price of $4.5 per share. The banks have the possibility to exercise the options with a 'non cash' mechanism. The option warrants can be exercised, fully or partly, over a period of 48 months from the date of signing the agreement. A benefit in the amount of $210 thousand was presented in the financial statements. The allotment of these option warrants was completed on August 17, 2010.

Financial covenants

The banks gave their agreement not to activate their rights vis-à-vis the Company as a result of the Company being expected not to meet the financial covenants it undertook to meet in 2009, according to Tefron's financial statements as of December 31, 2009 only.

In addition, the Company undertook to meet at all times in 2010 the financial covenants and undertakings which were later cancelled in an amendment to the final agreement and in their place new covenants were set, all as mentioned in Note 13c below.

Prior to signing the final agreement, on December 2, 2009, the Company's chairman and Board of Directors and the Company's Chief Financial Officer received verbal notices from the three banks with whom the Company is engaged in financing agreements, according to which each of the banks decided to stop the use of the Company's credit lines.

To the best of the Company's knowledge, the banks' decision regarding stopping the use of the Company's credit lines is as a result of the banks' evaluation that the Company will continue to present losses in the coming periods. The banks' decision was taken suddenly despite the fact that for the purpose of the Company's financial statements as of December 31, 2008 and March 31, 2009 and June 30, 2009, the banks again issued to the Company a waiver of their rights for immediate payment of the credit lines provided to the Company, and despite the Company's losses and not meeting one of the financial covenants (regarding the EBITDA) which were stipulated in the financing agreements between the Company and the banks.

According to the provisions of IAS 39, the Company examined whether the terms of the new debt arrangements are significantly different from the original financial undertakings. The change in these terms was not significant and, therefore, the Company did not make a change in the value of its financial liabilities on the books on the date of the change.

On February 26, 2010, the Company published a rights offering prospectus to the SEC (American Securities Exchange Commission) and a rights offering prospectus to the Securities Authority and the Tel Aviv Stock exchange. In the context of the rights offering and the private placement to Norfet, the Company raised another $4 (four) million. For further details see Note 18b below.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 13: - Long-tem loans from banks (Cont.)

Amendment to the agreement with the banks

On December 24, 2010, the Company signed an amendment to the agreement with the banks (hereinafter: "the Amendment") which includes providing additional credit of $5 million in favor of the Company. This credit includes a loan of $3.8 million for a period of three years which will be repaid in 36 equal monthly installments from the date of signature on the amendment and an additional loan of $1.2 million which will be repaid in one payment on June 30, 2011. Correct as of December 31, 2010, the loans have not yet been provided to the Company.

The following are the main amendments to the agreement:

Loan 1

The loans will provide to the Company with a new loan in accordance with the terms detailed below (hereinafter: "Loan 1"):

The loan of $3.8 million is for a period of 36 months provided that it will be used within 30 days from the date of signing the amendment. Alternatively, should the Company request to provide in its favor Loan 1 after 30 days from signing the amendment, then the grace period will be shortened accordingly – "such a 12-month "grace period" in the course of which there is no repayment of the principal of the loan - and in every case Loan 1 will be fully repaid after 48 months from signing the amendment;

The principal of Loan 1 will bear an annual interest at a rate to be agreed by the Company and any of the banks in agreements and/or separate loans, documents, which will be signed for this purpose by the Company with any of the banks;

Interest on Loan 1 will be paid by the Company in consecutive monthly installments as from the date of provision of Loan 1;

The principal of Loan 1 will be paid in equal consecutive monthly installments as from the end of 12 months from the date of signing the amendment (hereinafter and below: "the Grace Period"), and this until the final and full repayment of Loan 1.

Loan 2

An additional loan of $1.2 million will bear an annual interest at an agreed rate between the Company and any of the banks. The interest will be paid by the Company in consecutive monthly payments as from the date of providing the loan.

Infusion of capital

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.

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.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 13: - Loans from banks (Cont.)

Financial covenants

The financial covenants determined in the original agreement were cancelled, and in their place the following financial covenants were applied (which will be calculated in accordance with the interim and annual financial statements {consolidated} of the Company, audited or reviewed):

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 defined in the agreement will not be less – at any time – then the amounts stated below:

In 2010 – $28,000,000

In 2011 –$29,500,000

In 2012 – $32,000,000

As from 2013 and thereafter – $35,000,000.

The trade receivables (less balances of trade receivables which have been factored) by the Company will not be less at any time from the following amount:

In 2010 – $9,000,000

In 2011 – $12,500,000

As from 2012 and thereafter – $14,000,000

A deviation of up to 5% of amounts stated in clauses b and c will not be a violation of the Company's undertakings regarding the trade receivables balances, as mentioned above.

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.

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.

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:

In 2011 – will not exceed 9.5.

In 2012 – will not exceed 8.5.

In 2013 – will not exceed 7.5.

In 2014 – will not exceed 6.5.

As from 2015 and thereafter – will not exceed 5.5.

The breach of each of the undertakings to maintain the financial ratios detailed in clauses 4.1 up to 4.5 above (hereinafter: "the financial ratios"), will be considered a breach of the financial ratios.

The banks may inform of a change in the financial covenants in the event of a change in accounting standards, and this without requiring the Company's consent.

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

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 13: - Long-term loans from banks (Cont.)

Financial covenants (Cont).

To allot to the banks after carrying out an infusion of capital (in accordance with the determining ratio), gratis, a total quantity of 200,000 non negotiable option warrants, which can be exercised to 200,000 shares of NIS 10 par value each of the Company, against payment of 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. Excluding the aforesaid, the other terms of the option warrants have not yet been determined. 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, up to and not later than April 30, 2011.

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.

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

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

Note 14: - Financial instruments

(a)

Classification of financial assets and financial liabilities

The financial assets and financial liabilities in the balance sheet are classified by groups of financial instruments pursuant to IAS 39:

	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

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 14: Financial instruments (Cont.)

Financial risks factors

The Group's activities expose it to various financial risks such as market risk (including foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Group's comprehensive risk management plan focuses on activities that reduce to a minimum any possible adverse effects on the Group's financial performance. The Group utilizes derivatives in order to hedge certain exposures to risks.

The Board discussed the principles of overall risk management activities as well as specific policies with respect to certain exposures to risks such as currency risk, interest rate risk, credit risk, the use of derivative financial instruments and non-derivative financial instruments.

Market risks:

Foreign currency risk:

The Group operates in a large number of countries and is exposed to foreign currency risk resulting from the exposure to different currencies, mainly the NIS. Foreign exchange risk arises from forward commercial transactions, recognized assets and liabilities denominated in a different currency from the functional and the reporting currency (US Dollars). The finance department is responsible for managing the net position of each foreign currency by the use of forward exchange contracts, according to the Company's hedging policy.

Management's policy is to hedge forecasted payroll expenses denominated in NIS, payments to suppliers in NIS and sales in Euro. The hedging level is examined from time to time, according to market condition.

Credit risk:

The Group has no significant concentrations of credit risk. The Group has a policy to ensure collection through sales of its products to wholesalers with an appropriate credit history.

Credit risk may arise from the exposure of holding several financial instruments with a single entity or from entering into transactions with several groups of debtors with similar economic characteristics whose ability to discharge their obligations will likely be similarly affected by changes in economic or other conditions. Factors that have the potential of creating concentrations of risks consist of the nature of the debtors' activities, such as their business sector, the geographical area of their operations and the financial strength of groups of borrowers.

Terms of sale to customers

The Company makes provisions for doubtful debts based on factors which affect the credit risk of certain customers, past experience and other information.

The Company holds cash and other financial instruments with various financial institutions in Israel and in additional countries in which the Company operates. The Company’s policy is to spread its investments between various institutions.

Correct as of December 31, 2010 cash aggregated an amount of $9,361 thousand.

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.

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Tefron Ltd.

Notes to Consolidated Financial Statements

Note 14: Financial instruments (Cont.)

Financial risks factors

3. Interest risk:

The Group is exposed to the risk of change in market interest rates on short-term and long-term loans from banks which bear adjustable interest rates (the long-term loans are linked to the LIBOR and PRIME base interest rate.

4. Liquidity risk:

Liquidity risk is the risk that the Company will not be able to pay its financial liabilities on due dates. The responsibility for managing liquidity risk is handled by the Company's management, and it manages a plan of managing financial risks and liquidity for the short, medium and long ranges according to the Company's needs. The Company manages liquidity risk by preparing updated financial forecasts.

The table below presents the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:

As of December 31, 2010

Up to one year

1 to 2 years

TEFRON LTD 6-K