annual report 2010 1

Delta Galil Industries Ltd.

2010 Annual Report

February 16, 2011


2010 Annual Report

Table of Contents:

1. Chapter A – Description of the Corporation’s Business

2. Chapter B – Board of Directors' Report on the State of

Corporate Affairs

3. Chapter C – Financial Statements

4. Chapter D – Additional Information Regarding the

Corporation

5. Chapter E – Report on Effectiveness of Internal Control of

Financial Reporting and Disclosure


Chapter A

Description of the Corporation’s

Business

As of December 31, 2010

Table of Contents

Page

Part A – Description of the Corporation’s Business 3

1.1. The Corporation’s Activity and Description of the Development of its Business – Introduction ......................

3

1.2. Changes in the Corporation’s Business.............................. 11

1.3. Areas of Activity ................................................................ 12

1.4. Investments in the Corporations Capital and Transactions with its Shares ....................................................................

15

1.5. Investments in the Corporations Capital and Other Material Transactions by Interested Parties .......................

17

1.6. Dividend Distribution......................................................... 18

Part B – Other Information 19

1.7. Financial Information Regarding the Corporation’s Segment..............................................................................

19

1.8. General Environment and Impact of External Factors on the Company ......................................................................

22

Part C – Description of the Corporation’s Business by Segment 24

1.9. General Information on Areas of Activity: Delta U.S.A. – mass market, and Global Division Upper Market Segment..............................................................................

24

1.10. Operating Segment: Delta Israel ........................................ 46

Part D – Additional Information at the Corporate Level 53

1.11. The Company’s Products ................................................... 53

1.12. General Information on Areas of Activity ......................... 54

1.13. Seasonal Factors................................................................. 54

1.14. Fixed Assets and Facilities................................................. 55

1.15. Research and Development................................................ 58

1.16. Human Capital ................................................................... 59

17. Material Agreements.......................................................... 65

1.18. Legal Proceedings .............................................................. 68

1.19. Working Capital ................................................................. 68

1.20. Finance ............................................................................... 71

1.21. Goals and Business Strategy .............................................. 75

1.22. Projected Developments in the Coming Year.................... 78

1.23. Financial Information Regarding Geographical Segments 78

1.24. Taxation.............................................................................. 79

1.25. Discussion of Risk Factors................................................. 82

1

Introduction

The Company, Delta Galil Industries Ltd., hereby submits a report describing the corporation's

business for December 31 2010, which reviews the description of the corporation and the

development of its business, as they occurred in 2010 (“the Reported Period”). This report

was prepare in accordance with the Securities Regulations (Periodic and Immediate Reports),

1970.

The materiality of the information included in this periodic report including the description of

material transactions was considered from the point of view of the Company, with additional

descriptions provided in some of the cases in order to provide a more comprehensive view of

the subjects described.

This chapter, which deals with the description of the Company, its subsidiaries, their

development, their business and the areas of their activity, also contains forward-looking

information, as defined in the Securities Law, 1968. Forward-looking information is uncertain

information regarding the future, based mainly on information existing at the Company on the

report date and includes Company estimates, assumptions or intents as of the report as well as

estimates and projections by third parties that may not be realized or may be realized in a

partial fashion only. Therefore, actual results in whole or in part, may be materially different,

for better or for worse, than the results estimated, derived or implied by this information. The

Securities Law imposes reduced liability rules on the forward-looking information featured,

inter alia, in this report, if three cumulative conditions noted in Section 23a of the Securities

Law are met: (a) the information expressly states that it is forward-looking; (b) the key facts

and data at the basis of the information are detailed along the information in question; (c) the

main factors that must be referred to as potentially causing the information not to be realized

are clearly emphasized.

2

Glossary

For the sake of convenience, in this periodic report, the following abbreviations shall be

assigned the meaning listed alongside them:

“The Company” or

“Delta”


“The Group” or “the

Delta Group”

Delta Galil Industries Ltd. and its subsidiaries

“Delta USA” Delta Galil USA Inc.

"Burlen" Burlen Corp.

"Auburn" Auburn Hosiery Mills (merged into Delta Galil USA Inc. starting

January 2010)

“Tag Li” Tag Li Ltd. (merged with Delta on January 1 2008)

“Delta Textiles” Delta Textiles Ltd. (merged with Delta on January 1 2008)

“Gibor” Gibor Active Wear

“The Companies Law“ The Companies Law, 1999

“The Authority” The Securities Authority

“The Stock Exchange“ The Tel Aviv Stock Exchange Ltd.

“The Securities Law“ The Securities Law, 1968

“Periodic and

Immediate Report

Regulations”

Securities Regulations (Periodic and Immediate Reports), 1970

“Business Licensing

Law”

The Business Licensing Law, 1968

“Dollar” U.S. Dollar

“The State” The State of Israel

3

Description of the Corporation’s Business

Part A – Description of the General Development of the Corporation’s Business

1.1. The Corporation’s Activity and Description of the Development of its Business –

Introduction

The following is information pertaining to the corporation's business, as of February 16

2011.

1.1.1. The Company was incorporated in Israel in 1975 as a private company in

accordance with the Companies Order [New Version], 1983. In 1982 the Company

went public on the Tel Aviv Stock Exchange Ltd. (hereinafter: “the Stock

Exchange”). On March 25 1999 the Company issued American Depositary Shares

(hereinafter: “ADS”) on the Nasdaq National Market (today the Nasdaq Global

Market) (hereinafter: “NASDAQ”) in such a manner that each ADS represents a

single ordinary 1 NIS NV Company share (hereinafter: “Ordinary Share”).

1.1.2. On January 25 2001 the Company began reporting in a dual company format, in

accordance with Chapter E3 of the Securities Law and therefore starting from that

date, its reports were in English and prepared according to the U.S. Securities

Exchange Act of 1934. On March 27 2008 the Company removed the ADS from

trade on the NASDAQ, and returned to reporting in accordance with Chapter F of

the Securities Law. Starting from the transition date, March 27 2008, Company

ADS may also be traded on the Tel Aviv Sock Exchange, after conversion to

ordinary Company shares. In addition, Company ADS may also be traded on the

U.S. "OTCQX International Prime“.

1.1.3. The Company is engaged in the design, development, production, marketing and

sales of undergarments and socks for men, women and children. As a rule, the

Company markets its products in three ways (a) manufacturing for leading

international private labels (such as Hugo Boss, Calvin Klein, Tommy Hilfiger and

more) and for in-house labels of leading retail chains (such as Wal-Mart, Target,

Victoria’s Secret, Marks & Spencer, J.C. Penny, Kohl’s and more); (b)

manufacturing and marketing as part of franchise agreements for which the

Company has acquired a license (such as Converse®, Wilson®, Maidenform® ,

Tommy Hilfiger® Daisy Fuentas®, MLB® Lucky® etc.), and (c) marketing in

Israel under the "Delta" label.

4

Delta designs and develops its products primarily in Israel and in the US whereas

production is mostly done via sub-contractors and in its facilities in the Middle East

and in the Far East.

1.1.4. Agreement to Purchase Assets and Activity in the Socks Segment

1.1.4.1. On April 2, 2009 the transaction of purchasing assets and part of the

activity of Gibor sports active wear (GSAW) Ltd ("Gibor") in the

design, development marketing and selling of socks was completed,

after the stipulations posited in the agreement (which were detailed

in the immediate report published by the company on February 16

2009, ref. no. 2009-01-038259), were met.

1.1.4.2. The purchase of Gibor's assets is synergic with the Company's

activity in the socks segment and designated to expand and leverage

its activity in this area. The purchase of Gibor's activity is in line

with the Company's growth strategy in the field of socks in the last

few years, the key points of which are:

(1) Focusing on market leaders – strengthening our position as

strategic partners with Nike.

(2) Strengthening and widening the Company's technological

advantage – getting into a technological niche with

significant growth potential.

1.1.4.3. The activity purchased was in conjunction with Nike, which is an

anchor customer, a market leader.

Purchase of the activity will allowed quick and high-level entrance

into the soccer socks niche, which is characterized by a relatively

low offering of high-quality suppliers with above-average profit

margins.

1.1.4.4. Due to the fact that most of the activity purchased was from Nike, it

will allow synergy on a number of levels:

(1) Reliance on the Company’s existing marketing and sales array,

with marginal reinforcement.

(2) The manufacturing activity of Gibor focused on the Israeli,

Jordanian and Turkish sites in which the Company has

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significant presence. This fact helps the operations array absorb

the activity in a relevantly short time and also allows operational

flexibility in transferring manufacturing orders between the

various sites.

(3) Improving purchasing power with other materials suppliers and

service providers.

(4) Integrating part of the development array of the purchased

activity within the Company's existing development array.

1.1.4.5. Implementation of the above synergies while reducing overhead in

the purchased activity led to improvement in gross and operational

profit margins of sock activity. The transaction significantly

increased sock sales to Nike and constituted a major step in

reinforcing the Company's relations with its customer, in that sock

sales increased by $20 million on a yearly basis – 85% of that in

sales in Europe and the balance in the US; and made the Company a

major socks supplier for Nike, in general, and in the special sports

socks niche (Performance and Sport Culture) in particular. In

addition, the agreement allowed the Company to penetrate new

customers in the Segment and area in the field of soccer socks, a

new category in which the Company had no activity.

1.1.4.6. The sales of the purchased activity in 2007 and 2008 amounted to

$32.7 and $32.6, respectively.

1.1.4.7. The sales of purchased activity in the nine-month period from its

purchase in 2009 amounted to $18.2 million, while the contribution

to operating profit in the same period created by this activity

amounted to $0.9 million.

1.1.4.8. For details regarding exemptions granted the Company by the

Securities Authority from the presentation of pro forma data for the

purchase of the activity and alternate disclosure reported by the

Company, see the immediate report from August 24 2009

(reference no. 2009-01-207663) and the Q2 2009 Board of

Directors’ Report published August 20 2010 (reference no. 2009-

01-203892).

6

1.1.5. On October 27, 2009 4 the Company published a shelf offering report, by virtue of

the Company's shelf prospectus from May 29, 2008, to offer by a way of rights to

the Company's ordinary shareholders, who were listed in the Company's

shareholders book at the end of the November 2 2009 trading day, in such a manner

that each holder of 4 ordinary shares was entitled to purchase one right consisting of

one ordinary company share at 17 NIS per share. The trading day for the rights was

November 12 2009 (for details see immediate reports from October 21 2009 ref:

2009-01-261918 and from October 27 2009 ref: 2009-01-266835).

On November 16, the Company announced that it completed its rights issue in

which it issued 4,638,487 shares in return for 78 million NIS (for details see the

November 16 2009 immediate report, ref: 209-01-286155, presented by way of

referral).

1.1.6. On December 11, 2009 the Company published that it was in negotiations to

purchase international branded apparel assets activity in the field of clothing. For

details see immediate reports from December 11, 2009, ref: 2009-01-345972 and

June, 3 2010, ref: 2010-01-509061. On June 29, 2010 the Company announced that

the seller had decided to discontinue sales efforts and therefore negotiations

between the parties were brought to a conclusion (see June 29 2010 immediate

report, ref: 2010-01-535980).

1.1.7. On December 31, 2009 Midroog Ltd. informed the Company that its rating

committee had assigned an (A3)stable rating for its debentures of up to $30 million.

The rating report was published on the distribution site of the Securities Authority

(MAGNA), on the Stock Exchange site (MAYA) and on the Midroog site. On

December 19, 2010 Midroog Ltd. announced that it would be ratifying an A3/Stable

rating for the debentures (Series K) issued by the Company and grant an A3/Stable

rating for the debentures the Company would issue by way of expanding the series,

at 105,000,000 NIS NV. For more details see immediate report from December 19

2010, reference no. 2010-01-721767.

1.1.8. On January 2010 the Company published the results of the debentures offering

carried out by virtue of the shelf offering from January 18 2010 (in this paragraph

“the Shelf Offer Report"), which was published by virtue to the Company's May

29 2008 shelf prospectus.

7

In accordance with the shelf prospectus, the public was offered 113 million NIS

NV debentures (Series K), registered in the owner's name, worth 1 NIS NV each,

all as detailed in the Shelf Offer Report.

The debentures were offered to the public in 113,000 units worth 1,000 NIS NV

each, by way of a tender on the annual interest rate borne by the debentures (Series

K) that will not exceed 7.25% per annum. The debentures (Series K) were offered

at a price equal to 100% of their notational value.

The immediate (gross) proceeds from the debentures (Series K) issued as per the

Shelf Offer Report amounted to 113,000,000 NIS.

For further information regarding the issue as per the Shelf Offering Report, an

early tender carried out for institutional investors and the results of the issue; see

referenced immediate reports from January 19 2010, ref. 2010-01-359094, January

17, 2010, ref. 2010-01-355935 and January 20 2010 ref. 2010-01-362040.

1.1.9. Entry Into an Agreement to Grant option to Purchase Real Estate Property in

Nahariya

On March 2, 2010, the Company announced it had signed an option agreement,

whereby it granted a group of buyers an option to acquire real estate in Nahariya

owned by the Company - 25.8 hectares, before expropriation, known as Block

18206 Lot 18 (hereinafter: “the Real Estate”), over the course of a period of four

months form the signing of the option agreement (hereinafter: “the Option

Agreement”). On June 22, 2010, the Company signed a revision to the Option

Agreement, according to which the option exercise period was extended by an

additional month (see report from June 23, 2010, ref. 2010-01-529776). On July 27,

2010, the Company signed an additional revision to the Option Agreement,

according to which the option exercise period was extended by an additional two

months, meaning up to October 3, 2010. This additional extension was requested by

the option recipients so that they could study the influence - if any - of a regional

outline plan from 2007 on the Real Estate’s construction rights (see report from

July 28, 2010, ref. 2010-01-567957).

In return for the option in question, the purchasers paid the Company a total of

2,000,000 NIS (plus VAT), which may not be refunded the purchasers even if they

choose not to exercise the option. In addition, the purchasers deposited an

additional 3,000,000 NIS (plus VAT) with a Company representative as a good

8

faith deposit. The option agreement states that if the option is exercised, the good

faith deposit shall be used for payment as part of the proceeds and if the purchasers

decide not to exercise the options, the purchasers shall have the good faith deposit

returned, with interest.

In return for the Company’s agreement to extend the option, the Company received

an additional sum of 500,000 NIS (plus VAT) to be deducted from the good faith

deposit; so that if the option is not exercised, the Company shall receive a total of

2,500,000 NIS (plus VAT). At the same time it was agreed that if the purchasers

choose to exercise the option and sign a full purchase agreement by the end of the

option period, the proceeds owed the Company for the Real Estate would be

reduced by said 500,000 NIS.

1.1.10. Entry into Sales Agreement for the Sale of the Nahariya Real Estate

On October 3, 2010, the Company received written notice from the option holders

of their intent to exercise the option and sign an agreement to purchase the Real

Estate in Nahariya - some 25.8 hectares, before expropriation, known as Block

18206 Lot 18 (hereinafter: “the Nahariya Land”). According to the option

agreement, the parties must sign a sales agreement within 15 days of receiving the

exercise notice and if the option holders refuse to sign the agreement in question,

this shall be seen as reneging on the option notice – which shall award the

Company with the proceeds given for the option (2.5 million NIS plus VAT).

On October 6, the Company announced that on October 2010 5 it had signed a sales

agreement, in which it sold the Nahariya Land to a buyer’s group (4 private

companies). According to the sales agreement, the purchasers shall pay the

Company $23,972,602 US (plus VAT) for the Nahariya Land, of which the

Company has received $7.4 million, with the balance to be paid in installments

according to a number of milestones spread out across a period of up to 39 months

from the signing date of the sales agreement; it was agreed that total compensation

in NIS shall be no less than 91 million NIS.

As part of the agreement the Company assigned the rights (and obligations) to the

purchasers according to a claim submitted by the Company to the Nahariya Design

and Construction Local Council as per Section 197 of the Design and Construction

Law for the Real Estate (as stated in the Company's July 28 2010 report). The

capital gains expected for the Company are estimated at between $18 and $21

million US before tax and $17 to $19 million after tax.

9

In accordance with the preliminary decision (pre-rolling) the Company received

from the Securities Authority, capital gains from the transaction will be recognized

upon completing the terms included in the sales agreement which precede the third

payment from the purchasers and include the removal of sludge and evacuation of

tenants from the property. Accordingly, the Company continued to classify the

property as real estate available for sale in its Financial Statements.

For further details see immediate report dated January 4 2010 (ref. 2010-01-

633762), February 3 2010 (ref. 2010-01-400428), June 23 2010 (ref. 2010-01-

529776) and July 28 2010 (ref. 2010-01-567957), dated October 4 2010 (ref. 200-

01-633762) and dated October 6 2010 (ref. 2010-01-637704), presented by way of

referral.

1.1.11. Entry into Sales Agreement for the Sale of the Daliyat al-Carmel Real Estate

On October 13, 2010, the Company signed an agreement to sell 1 hectare of land in

Daliyat al-Carmel, which it had leased from the Israel Land Administration, to a

private company. On the land are structures with a total area of 3,600 square

meters, which were used by the Company's rubber and elastic band plant until its

closing in 2007.

According to the agreement, the Company received, in return for the leasing rights,

a total of $1.6 million according to the representative rate of exchange on the date

of payment (but no less than 5.9 million NIS), with the first payment (to the amount

of $0.3 million) to be paid in return for the listing of a warning notice in the buyer’s

favor (after signing the sales agreement), and the balance was transferred by the end

of January 2011. Possession was transferred to the purchaser in January 2011.

1.1.12. Publication of Shelf Prospectus

On November 22, 2010 the Company submitted a shelf prospectus on the basis of

its December 31, 2009 and June 30 2010 Financial Statements. For further details

see immediate reports dated December 21 2010 (ref. 2010-01-687153).

1.1.13. On January 27, 2010,the Company announced the results of the issue of debentures

by way of the expansion of Series T, carried out as per the shelf offering by the

Company dated December 23 2010 (hereinafter – "the Shelf Offering Report"),

published pursuant to the Company's shelf prospectus dated November 22 2008.

10

For further information regarding the issue as per the Shelf Offering Report, an

early tender carried out for institutional investors and the results of the issue; see

referenced immediate reports from December 23 2010, ref. 2010-01-729624,

December 23, 2010, ref. 2010-01-728115, and December 27 2010 ref. 2010-01-

731286.

The immediate (gross) proceeds from the 92,632,000 debentures (Series T) issued

according to the Shelf Offer Report amounted to 98,189,000 NIS.

1.1.14. On January 30, 2011 the Company announced that in light of the current situation

in Egypt and the difficulty in conducting routine activity, Company management

has decided, at its own initiative, not to open the gates of its Egyptian factory. The

activity in Egypt, which is intended largely for the operations of the Global

Division, Upper Market Share, is responsible for supplying 11% of the Company's

sales, of which 9% is manufactured at the Company's plant, and the balance is

provided by local subcontractors.

On February 6, 2010 the Company announced that its Egyptian plant had reopened

and that work was continuing as usual. Furthermore, it announced that due to the

curfew in place, work at the factory would end an hour and a half before the regular

closing time upon the postponement of the regular closing time, work will resume

ending at its usual hour. The factory resumed working normal hours this week in

light of the change in curfew hours.

The Company estimates that a work stoppage of up to two weeks will have no

material impact on its activities. Work at the plant depends on the situation in Egypt

and Company management continues to keep a close eye on events. If necessary,

the Company shall, in conjunction with its customers, consider finding alternatives

for producing its products.

For further details see immediate reports dated January 31 2011 and February 6

2011 ref. 2011-01-032037, 2011-01-039138.

1.1.15. The following is the structure of the Company's holdings in material subsidiaries as

of December 31 2010:

11

(*) 50% stake.

1.2. Changes in the Corporation’s Business

1.2.1. Restructuring Plans

1.2.1.1. 2010 Restructuring Plan

In the first quarter of 2010, the Company decided to terminate its

socks finishing operations in Jordan. The cost of this termination of

operations amounted to $0.5 million, consisting primarily of

impairment of fixed assets and severance pay to 90 terminated

employees.


In Q3 2009 the Company decided to merge the distribution center

and operational and administrative support arrays in sock activity in

its subsidiary Auburn with existing Delta Galil USA Inc. arrays. This

merger was possible after the completion of the transfer to a new

ERP system on both subsidiaries. The cost of the aforementioned

merger, to the amount of $0.5 million, was included in the Q3 2009

Thai Progress Garment

Century Wear Corporation (*)

(WLL)

Delta Textile Bulgaria Ltd.

Delta Textile

Egypt S.A.E

Delta Galil Industries Ltd,

Delta Galil Holland B.V.

Delta Galil

USA Inc. Delta Galil Europe Ltd.

Auburn Hosiery Mills Inc.

Burlen Corp.

12

results as part of the restructuring costs and included compensation

payments to 40 dismissed employees. Implementation of this plan

was concluded in Q1 2010.


Discontinuation of the Activity of the Business Unit in Britain in its

Previous Format

Over the course of 2008 the Company decided to discontinue the

activities of the UK unit in its previous format, and to make changes

in work methods with customers and to take additional streamlining

measures in order to improve its performance and competitive ability

(for further details see also the November 19 2008 immediate report,

reference no. 2008-01-322572).

In its Q4 2008 reports, the Company included restructuring costs to

the amount of $9.2 million, $8.1 million of which was in cash for

employee compensation and future payment for minimal usage fees

in a storage and distribution agreement in the UK, and $1.1 million

not in cash for the reduction of fixed assets used for the UK activity.

The Company completed implementation of the plan over the course

of Q4 2009. Over the course of December 2009 the Company signed

an amendment to the agreement with the Company operating the

distribution center in the UK. As a result of this amendment, a $1.8

million liability due to the aforementioned minimal usage fees was

written off. The cancelation of the liability in question was listed in

the Company’s Q4 2009 reports as restructuring revenue.

1.2.2. Realization of Investment in Subsidiary

The Company has signed an agreement to sell a subsidiary in India engaged in the

manufacture of socks. The capital loss from this sale amounted to $0.7 million and

was included in the results for the first quarter of 2010. The transaction was

completed in Q2 2010.

1.3. The Corporation’s Segment

1.3.1. The Company has three main areas of activity reported as business segments in its

December 31 2010 Consolidated Financial Statements: (a) Delta USA – Mass

13

Market; (b) Global Upper Market (formerly “Delta Israel”); (c) Delta Israel

(formerly “Delta Marketing Israel)..

1.3.2. Group Management has set these operating segments based on the reports reviewed

on a regular basis by the Company CEO and Board of Directors. The CEO and the

Board of Directors have been identified as the strategic steering committee, acting

as the Company’s chief operating decision maker (hereinafter: “CODM”).

The change in reporting analyzed by the CODM, which was first implemented in

the December 31 2009 Financial Statements, was influenced by a structural change

in the reported areas of activity, as follows:

1.3.2.1. Sock activity in the U.S. (Auburn) which was included under sock

activity, is now included under Delta USA Mass Market. This change

was made possible due to the merge of the distribution centers and

operating support functions, as detailed in paragraph 1.2.1.1.

Note that Auburn customers are part of Delta USA Mass Market

operating segment. Also note that the sales, distribution, purchasing

and support systems supporting Auburn and Delta Galil USA have

similar characteristics.

On January 1 2010 Auburn Hosiery Mills was merged with and into

Delta Galil USA.

1.3.2.2. Sock activity (without Auburn) and the seamless sewing activity were

merged with the upper market undergarment activity in the U.S. and

Europe, which was named Global Division Upper Market Segment

(formerly Delta Israel).

1.3.3. The following considerations led the Company to decide to make the change in

question; as approved by the CODM:

1.3.3.1. Sales markets – while Delta USA’s Segment concentrates the

Company's activity mainly in with customers in the U.S. and UK mass

market sectors, the activities of the Global Upper Market segment are

mainly with upper market customers in the U.S. and Europe.

1.3.3.2. Production array – while Delta USA’s Segment, mainly product

purchases, is from East Asian subcontractors, in the Global Upper

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Market's Segment, roughly one half of product purchases is based on

the Company's independent production capabilities in Israel, Egypt,

Jordan and Bulgaria.

1.3.3.3. Location of management and supporting systems – while for Delta

USA all management, support arrays, distribution, design and

development are in the U.S., these arrays are supervised by the Global

Upper Market, in Israel

1.3.3.4. Changes in company management – over the course of November

2009 Mr. Shlomo Doron began serving as Chief Operations Officer

(COO) and Deputy CEO. As such, Mr. Doron is responsible for the

Global Division Upper Market Segment. For details regarding the

appointment and the terms of his employment, see the July 23 2009

immediate report (reference no. 2009-01-177156).

The Segment of Delta Israel (formerly Delta Marketing Israel) remains independent

and is represented separately due to it being retail and branded activity, unlike other

operating segments, which are mainly private labels.

1.3.4. The following is a short description of each of the areas of activity in question:

1.3.4.1. Delta USA – Mass Market Segment

As part of this Segment, the Company deals mainly in the design,

development, manufacture and marketing of undergarments and

socks for women, men and children mainly to large U.S. retail

chains as well as for brand names in accordance to franchises

purchased such as Converse®, Wilson®, Maidenform®, Tommy

Hilfiger® Daisy Fuentas®, MLB®, Lucky®. Sales for this

Segment are for private labels.

Furthermore, this Segment concentrates the UK under garment

activity.

1.3.4.2. Global Upper Market Segment

As part of this Segment, the Company mainly deals in the design,

development, manufacture and marketing of undergarments, socks

and seamless items of clothing for women, men and children for

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retail chains and leading labels in Europe and the U.S. Most of the

sales for this Segment are for private labels.

For more details regarding these areas of activity see Section 1.9.

1.3.4.3. Delta Israel

As part of this Segment the Company deals in the design,

development, manufacture and marketing of branded

undergarments for women, men and children purchased mainly

from East Asian subcontractors and distributed through the

Company's Israeli retail outlets, as well as in wholesale activity for

Israeli retail chains. For additional details regarding these areas of

activity see Section 1.10.

1.4. Investments in the Corporation’s Capital and Transactions with its Shares

The following are details regarding investments in the corporation’s capital and

investment in its shares over the past two years:

1.4.1. Stock Sale Agreement between Mr. Dov Lautman and GMM Capital LLC

1.4.1.1. On July 1 2001 N.D.R.L. Investments (1998) Ltd. and Adinoam

Properties Ltd., two companies through which Mr. Lautman holds

Company shares (hereinafter, together: “the Lautman Group”)

and GMM Capital (hereinafter: “GMM”), a private company

registered in Delaware, U.S.A., controlled by Mr. Isaac Dabah and

through which Mr. Dabah holds Company shares (hereinafter

together: “the Dabah Group”) signed an agreement to sell

2,500,000 ordinary Company shares, which constitute 13.3% of the

Company’s stock capital as of the date of the agreement, held until

that date by the Lautmann Group (hereinafter in this section: “the

Shares”) to the Dabah Group, at a price of no less than $8.5 per

share and no more than $10 per share (hereinafter: “the Share Sale

Agreement”). The share price was set at $8.5 per share.

The proceeds of the shares were paid in the following manner:

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(1) GMM paid the Lautman Group a sum of $16,250,000 on the

deal's closing date, July 12 2007, in return for the transfer of

the shares.

(2) GMM undertook to pay the Lautman Group the balance of

the proceeds, which shall not exceed $8,750,000, no later

than December 31 2008. The balance of the proceeds in

question consisted of two parts: (1) the minimal balance of

the proceeds to the amount of $5,000,000; (2) and the

balance of the additional proceeds (if any) that were

supposed to have been established in the following manner:

if within a period of 60 consecutive calendar days between

the signing of the agreement and December 31 2008, the

closing price of the Company's stock on the Tel Aviv

Securities Exchange exceeds $8.5 per share on each stock

exchange trading day within those 60 days, the balance of the

additional proceeds shall be calculated by multiplying 2.5

million by the difference between the lowest closing price on

those 60 days and $8.5; if more than one 60-day period exists

in which the stock’s closing price exceeds $8.5, then the

balance of the additional proceeds shall be the highest sum

deriving from the aforementioned formula. The Company

was informed that in February 2009, the Lautman Group and

GMM decided to defer the minimal balance payments ($5

million) and that they would be paid, in installments, over the

course of 2009. To the best of the Company's knowledge,

this balance was paid the Lautman Group at the end of 2009.

1.4.1.2. The transaction was completed on July 12 2007. At the same time,

on July 5 2007 a new shareholders’ agreement was signed between

the Lautman Group and the Dabah Group that replaced the previous

shareholders’ agreement between the parties from August 30 2005;

for further details regarding the shareholders’ agreement, see

Section 1.19 below.

1.4.1.3. As of this periodic report, the Lautman Group holds 2,443,117

shares, which constitutes 10.4% of the Company’s issued and paid-

up capital, and Isaac Dabah holds (through GMM) 12,730,873

17

shares, which represent 54.4% of the Company's issued and paid-up

stock capital, and is the Company's controlling shareholder.

1.4.2. As of this periodic report, the Company has three active option plans for its

employees and senior executives which, assuming their full exercise, together

constitute as of February 16 2011, 8% of the Company’s fully-diluted share

capital.1 For details regarding the option plans in question see Note 14b to the

Financial Statements.

1.5. Investments in the Corporation’s Capital and Other Material Transactions by

Interested Parties

The following are details of material transactions carried out by Delta interested parties

over the past two years (starting January 1 2009):

Sum of Transaction

(In Dollars)

Share Price

(In Dollars)

Number of Ordinary Shares

Purchased Date Name of Interested Party

2,034,926 1.80 1,130,512 January 2009

70,071 1.45 48,325 March 2009

11,900,000 4.53 2,629,931 November 2009 (rights issue)

14,004,997 3,808,768 Total purchased in 2009

157,715 7.10 22,197 June 2010

7,986 7.98 1,000 December 2010

165,701 23,197 Total purchased in 2010

GMM Capital LLC (American fund held by Isaac Dabah and Yvette Dabah (Mr. Dabah’s wife))

329,313 4.53 72,696 November 2009 (rights issue)

106,536 7.34 14,500 June 2010

28,524 7.70 3,700 December 2010

72,028 8.45 8,524 January 2011


Sterling Macro Fund (fund

managed by Isaac Dabah)

56,000 2.80 20,000 May 2009 Gideon Chitayat –

1Not including 1,206,971 ordinary dormant shares held by the Company and 147,106 ordinary shares held in

trust in relation to the Company's option plan.

18

Sum of Transaction

(In Dollars)

Share Price

(In Dollars)

Number of Ordinary Shares

Purchased Date Name of Interested Party

60,690 3.03 20,000 June 2009

45,300 4.53 10,000 November 2009 (rights issue)


Chairman of the Board of Directors

1.6. Dividend Distribution

1.6.1. As of this periodic report, the Company has no dividend distribution policy. From

time to time, the Company’s Board of Directors studies the distribution of

dividends in accordance with the Company’s financial results and financial and

other needs, subject to the law.

1.6.2. In 2010 the Company distributed dividends as follows:

1.6.2.1. On March 2 2010 the Company’s Board of Directors decided to

distribute dividends to the amount of $1,500,000, paid June 16

2010.

1.6.2.2. On August 10 2010 the Company's Board of Directors decided to

distribute dividends to the amount of $1,500,000, paid September 5

2010.

1.6.2.3. On November 28 2010 the Company's Board of Directors decided

to distribute dividends to the amount of $2,000,000, paid December

21 2010.

1.6.2.4. On February 16 2011 the Company’s Board of Directors decided to

distribute dividends to the amount of $2,000,000, paid March 15

2011.

1.6.3. As of the date of the prospectus, the balance of profits eligible for distribution, as

defined in the Companies Law, is $40,269,000.

* Undesignated retained earnings less treasury shares.

19

Part B – Other Information

1.7. Financial Information Regarding the Company’s Areas of Activity

2010

Thousands of Dollars

Delta USA – Mass

Market

Global Upper

Market Segment

Delta Israel Others

Inter-Divisional Write-Offs Total

1. Sales

a. Area sales to externals 298,740 242,645 76,949 1,740 - 620,074

b. Sales to other areas of activity - 14,804 - 403 )15,207( -

c. Total 298,740 257,449 76,949 2,143 )15,207( 620,074

2. Costs

a. Costs constituting revenues by another area in the corporation

5,664 - 585 88 )6,337( -

b. Other costs 287,061 241,484 63,304 3,905 )8,888( 586,865

c. Total 292,725 241,484 63,889 3,993 )15,225( 586,865

3. Operating profit (loss) before restructuring expenses, loss from the sale of subsidiary and impairment of fixed assets

6,015 15,965 13,060 )1,849( 18 33,209

4. Restructuring expenses - 485 - - - 485

5. Loss from the sale of subsidiary

- 666 - - - 666

6. Impairment of fixed assets

- - - 992 - 992

7. Total assets attributed as of December 31 2010

196,786 120,138 36,207 66,479 - 419,611

8. Capital investments in fixed and intangible assets on an accumulated basis (*)

1,005 1,618 1,265 1,240 - 5,128

(*) This data does not include minimum sums for franchise agreements to which the Company is a

party.

20

2009


Delta USA – Mass

Market

Global Upper

Market Segment

Delta Israel

Others


1. Sales


b. Sales to other areas of activity 101 14,772 18 721 )15,612( -

c. Total 268,566 243,576 72,822 3,182 )15,612( 572,534

2. Costs


6,234 91 442 387 )7,875( -

b. Other costs 256,405 242,059 61,916 3,567 )7,577( 556,388

c. Total 262,639 242,149 62,358 3,954 )14,701( 556,368

3. Operating profit (loss) before restructuring expenses (revenues) and impairment of fixed assets

5,927 1,428 10,464

)772(

)881( 16,166

4. Restructuring expenses (income)

474 )1,805( - - - )1,331(

5. Impairment of fixed assets

- 1,945 - - - 1,945

6. Operating income (loss) after re-structuring expenses (revenues) and impairment of fixed assets.

5,453 1,288 10,464 )772( )881( 15,552

7. Total assets attributed as of December 31 2009.

176,437 122,428 30,073 47,488 - 376,426

8. Capital investments in fixed and intangible assets and purchased activity on an accumulated basis (*)

1,302 7,350 642 776 - 10,070

(*) This data does not include minimum sums for franchise agreements to which the Company is

a party.

21

2008


Delta USA – Mass

Market

Global Upper

Market Segment

Delta Israel

Others


1. Sales


b. Sales to other areas of activity - 6,151 49 779 )6,979( -

c. Total 292,512 255,834 77,545 3,922 )6,979( 622,834

2. Costs


5,474 49 98 579 )6,797( -

b. Other costs 279,352 272,731 64,723 5,979 - 622,006

c. Total 284,826 272,780 64,821 6,558 )6,979( 622,006

3. Operating income (loss) before re-structuring expenses and impairment of goodwill.

7,686 )16,946( 12,724 )2,636( - 828

4. Restructuring expenses

- 9,162 - - - 9,162

5. Impairment of goodwill

5,586 1,806 - - - 7,392

6. Operating income (loss) after re-structuring expenses and impairment of goodwill.

2,100 )27,914( 12,724 )2,636( - )15,726(

7. Total assets attributed as of December 31 2008

186,620 137,540 31,676 24,310 - 380,146

8. Capital investments in fixed and intangible assets on an accumulated basis (*)

1,221 3,860 1,098 848 - 7,027

(*) This data does not include minimum sums for franchise agreements to which the Company is

a party.

22

1.7.1. Nature of Others

The others item mainly consist of sales and costs not attributed to any of the other

areas of activity.

1.7.2. Developments Occurring in Financial Results

For explanation regarding developments in financial results, see explanations in the

Board of Directors’ Report, Chapter B of the Periodic Report.

1.8. General Environment and Impact of External Factors on the Company

1.8.1. Parties responsible for the Company’s market risk management:

Market risk management at the Company is conducted in accordance with the risk

management policy set by the Company Board of Directors.

Mr. ISAAC DABAH, Company CEO, is the person responsible for market risk

management at the Company.

Mr. Yossi Hajaj, Company CFO, is responsible for management of market risk

associated with exchange rates and interest.

1.8.2. Description of Market Risks to Which the Group is Exposed

The Group’s activity is exposed to several market risks among them: fluctuations in

exchange rates, changes in the raw material prices (mainly due to the impact of

raising prices of cotton and other materials) transportation costs (due to rising fuel

costs) and changes in the dollar’s interest rate.

1.8.3. Group Policy with Respect to Market Risks Management

Exchange Rate Volatility

It is Company policy to maintain as high an alignment as possible between the

currency in which its products are sold and the currency in which products and/or

raw materials are purchased. The Company regularly reviews its balance sheet

exposure and its economic exposure, in accordance with projected revenues and

expenses for the coming 12 months.

In October 2010 the Company’s Board of Directors decided to increase flexibility

given Company management so that the latter would be able to carry out defensive

23

agreements based on its yearly budget, even if it had not yet been approved and

constitutes an initial indication only of its expected activity in various currencies.

For details regarding hedging agreements carried out by the Company see Section

5.4 of the Board of Directors’ Report, Chapter B of this periodic report.

The Company acts on several levels to mitigate its exposure to exchange rate

volatility, as follows:

a. Change of sales currency vis-à-vis UK and European customers (from GBP and

EUR to USD). Starting 2010, most sales to a major customer in the UK are

denominated in USD; hence exposure to a surplus or receipts over payments

denominated in GBP is lower.

Furthermore, starting 2011 sales have been made to a large European customer

in USD, which means exposure to the euro is significantly lower, from $40

million a year to $20 million a year; see Section 5.3 of the Board of Directors

Report, Chapter B of this periodic report.

b. The Company significantly reduced its exposure to fluctuations in the

USD/NIS exchange rate to a point of balance, by increasing sales in NIS and

reducing costs denominated in NIS, due to lowered overhead in Israel.

Change in USD Interest Rate

For details the impact of changes in dollar interest rates on the Company’s financial

results see Section 5.6 of the Board of Directors Report, Chapter B of this periodic

report.

Over the course of 2010 the Company raised unlinked NIS debt at 7% interest on the

Israeli stock exchange. The Company has entered into a swap agreement with a

banking corporation to swap NIS cash flows for a dollar cash flow, and this reduced

the effective interest rate to 6.08% on a yearly basis.

The Company's activity is exposed to macroeconomic risks, industry risks and risks

unique to its activity. Full details of these risks factors, to which the Group is

exposed, can be found in Section 1.25 below.

24

Part C – Description of the Corporation’s Business by Segment

The following is a detailed description of the Company’s areas of activity:

Segment: Delta U.S.A. – Mass Market and Global Upper Market Segment

1.9. General Information on the Areas of Activity: Delta U.S.A. – Mass Market and

Global Upper Market Segment

The areas of activity detailed below have similar business characteristics and shall

therefore be described together in this segment and referred to hereinafter in this segment

as “the Areas of Activity”. Subjects specific to a certain Segment shall be clearly noted

separately.

1.9.1. Structure of the Areas of Activity and Changes Occurring Thereof

Over the course of Q4 2009, a change was made in reporting analyzed by the

CODM, which was influenced by a structural change in the reported areas of

activity as noted above:

1.9.1.1. Sock activity in the U.S. (Auburn) which was included under sock

activity, is now included under Delta USA Mass Market. This

change was made possible due to the merging of the distribution

centers and operational support functions, as detailed in Section

1.2.1.1

Note that most Auburn customers belong to the Delta USA Mass

Market operating segment. Also note that the sales, distribution,

purchasing and support systems supporting Auburn and Delta Galil

USA have similar characteristics.

1.9.1.2. Sock activity (without Auburn) and the seamless sewing activity

were merged with the upper market undergarment activity in the

U.S. and Europe, which was named Global Upper Market Segment.

1.9.2. The considerations that led the Company to the change in question are detailed in

Section 1.3.3 above.

1.9.3. The following is a short description of each of the areas of activity in question:

25

1.9.3.1. Operating segment: DELTA USA – Mass Market


development, manufacture and marketing of undergarments and socks for

women, men and children, mainly for large U.S. retail chains. Sales for this

Segment are to private labels as well as brand names in accordance with

franchises purchased such as Converse®, Wilson®, Maidenform®, Tommy

Hilfiger® Daisy Fuentas® Lucky® and MLB®.

The Company's activities in this area are carried out through its subsidiaries,

Delta Galil USA and Burlen. Likewise for this Segment, the Company has a

sales office in the UK operated through subsidiary Delta Galil Europe Ltd.

which serves the undergarment activity.

According to the Company's estimates, based on its experience in the relevant

markets, the scope of the market for undergarment products for women, men

and children for the customers and categories in which the Company is active

is estimated at $6 billion a year.

1.9.3.2. Global Upper Market Segment


development, manufacture and marketing of undergarments, socks and

seamless items for women, men and children for retail chains and leading

labels in Europe and the U.S. as well as for brand names according to the

franchises it purchased. Most of the sales for this Segment are for private

labels.

The marketing and distribution activity for this Segment is carried out by the

Company. Likewise for this Segment, the Company has a sales office in the

UK operated through subsidiary Delta Galil Europe Ltd. which serves the

sock activity, while manufacturing activity is carried out by the Company in

its Israeli plants as well as through subsidiaries operating out of Egypt,

Jordan, Thailand and Bulgaria and through subcontractors in the Middle East

and East Asia.

Over the course of 2009 the Company completed purchase of the assets and

some of the activities of Gibor in the field of socks (see Section 1.1.4 above)

included in this area.

26

According to the Company's estimates, based on its experience in the relevant

markets, the scope of market for undergarments, socks and seamless items for

women, men and children in the Global Division Upper Market for the

customers and categories in which the Company is active is estimated at $5-6

billion a year.

1.9.4. Restrictions, Legislation, Standards and Special Constraints Applying to the

Areas of Activity

1.9.4.1. Legality in the Countries in which the Company is Active

The Company is subject to relevant laws in the countries in which it is active,

including general legal constraints pertaining to imports, customs, consumer

protection, product labeling (when relevant), licensing and labor laws in the

countries in which it employs employees.

1.9.4.2. Free Trade Agreements

Changes to global free trade agreements may lead to changes in customs and

quotas procedures in the countries constituting the Company's chief target

and production countries. The Company currently enjoys free trade

agreements between Israel and the U.S., Canada, the EU and Mexico and the

European Free Trade Association. The trade agreements allow the Company

to sell the products manufactured in Israel to the U.S., Canada, Mexico and

EU and EFTA member states exempt of customs and import quotas. The

U.S. has expanded the benefits covered by the U.S-Israel free trade

agreement to goods processed in the Company’s Jordanian facilities,

exempting these products from customs and quotas as well.

In addition, the trade agreement between Israel and the U.S. was expanded so

that products manufactured at the Company’s Egyptian plants and which

include certain rates of Israeli inputs, are exempt from U.S. customs and

quotas.

Following the free trade agreement between the EU and Egypt, the

Company’s products manufactured in Egypt are exempt of taxes and quotas

required upon entry into EU member states.

27

1.9.4.3. Cancellation of Textile Product Import Quotas

Starting January 1 2005, WTO member states have removed all quotas placed

on textile products. Temporary quotas were placed on various textile products

from China by the U.S. in 2005, these quotas were gradually lifted by 2009.

These changes allow retailers, clothing companies and others to import

unlimited amounts of textile products from member states in which

production costs are low.

1.9.4.4. Regulatory Developments

As the Company is active in the international market, it is exposed to changes

in foreign laws, export restrictions, protective tariffs, trade blocks and

changes in tax laws.

1.9.5. Changes in Scope of Activity and Profitability of Areas

Changes in global trade laws have increased competition in the areas of activity and

have compelled the Company to restructure the Group. The restructuring steps taken

by the Company, including related expenses, have impacted the Company’s

revenues and profitability, as described in the Board of Directors Report, Chapter 2

of the periodic report.

1.9.6. Developments in Markets of the Areas of Activity or Changes in the Customer

Characteristics

The target markets of the Company's products in the aforementioned areas of

activity are the U.S. and Europe. The changes in the economic condition in these

markets as expressed recently, by way of concerns of the recession’s continuation, a

reduction in consumption and constant pressure to reduce prices, may impact

consumers’ consumption habits and levels. In addition, the garment industry is

subject to changes in fashion preferences and consumer fashion trends. These

changes lead to shortenings in production times and increase in the number of

collections of desired items.

1.9.7. Technological Changes that May have a Material Impact on the Fields of

Activities

For details see Section 1.12.1 below.

28

1.9.8. Success Factors in the Areas of Activity and Changes Occurring Thereof

The Company estimates that success in the areas of activity depends on several key

factors, the most prominent of which are as follows:

1.9.8.1. Maintaining long-term relations with customers.

1.9.8.2. Innovation – investing resources in design and development

departments while constantly focusing on local and global

developments in the field of undergarments and customer taste and

developing and designing fashion collections.

1.9.8.3. Fabric development – the Company operates in a special fabric

development center in Karmiel, which constitutes added value in

the product development core.

1.9.8.4. Adapting products to changing fashions and to the needs of the

relevant consumers, while taking care to provide constant

innovation.

1.9.8.5. Upholding a marketing and distribution array that allows the

Company to penetrate and establish itself in new markets.

1.9.8.6. Maintaining a broad variety of suppliers providing high-quality raw

materials and high-quality finished products.

1.9.8.7. Upholding a sturdy, reliable and flexible independent

manufacturing infrastructure and manufacturing via subcontractors,

providing competitiveness.

1.9.8.8. Guaranteeing product manufacturing quality and quality control in

accordance with specifications and Company and customer

demand.

1.9.8.9. Making use of the Company’s size advantage, both in the sizes of

purchase orders by customers and in the number of items ordered

from each model manufactured, which helps reduce manufacturing

costs.

29

1.9.8.10. Efficient operational arrays and chain of supply providing full

support for sales needs and meeting supply times, which have

shortened in recent years.

The Company estimates that these success factors have been reinforced in light of

the changes in its business environment which were expressed in increased

competition, the erosion of sales prices and shortened supply times.

1.9.9. Changes in the Supplier Array and Raw Materials for Areas of Activity

For details see Section 1.12.2 below.

1.9.10. Main Entry Blocks for the Areas of Activity and Changes Occurring Thereof

According to the Company's estimates, the main entry blocks for the areas of

activity are as follows:

1.9.10.1. Familiarity with and understanding of the fashion industry’s

requirements and bottom-line consumer tastes.

1.9.10.2. Stable, long-term relations with large customers (retail fashion

outfits and companies owning fashion labels).

1.9.10.3. Innovation in the development and design of fashion products.

1.9.10.4. Large companies mainly require a commitment on behalf of the

manufacturer to uphold the compliance process testing the fitness of

the factory to their needs. In addition, during the commitment

period, these customers often conduct periodic inspections of the

production array. Failure to meet quality requirements and

standards set by customers may lead to an end to the commitment

with them.

1.9.11. Alternatives for the Products of the Areas of Activity and Changes Occurring

Thereof

There are many alternatives for the Company’s products, offered both by

wholesalers and manufacturers marketing products similar in quality to those of the

Company. The Company is acting to reinforce and preserve its products’ advantage

over alternative products, by differentiating itself and making itself more

30

conspicuous in terms of fashionability and quality, developing special fabrics and

increasing the volume of labeled activity.

1.9.12. Structure of Competition in the Areas of Activity and Changes Occurring

Thereof

The garment industry in general, and the field of undergarments in particular, was

characterized in recent years up to 2009 by a high level of competition and in

reduced manufacturing costs and consumer prices due to the transfer of a significant

portion of production to East Asian subcontractors. Many bodies, including

manufacturers and wholesalers, compete with the Group’s activity.

In 2010 production costs began to increase and product prices for consumers started

to rise gradually (see Section 1.12.2 below)

Furthermore, a certain drop in the level of competition was evident, which was

expresses in a reduction in the number of the Company's competitors.

For further information regarding the competitive conditions in the areas of activity

see Section 1.9.18 below.

1.9.13. Customers

1.9.13.1. A material Group customer, sales to which constitutes over 10% of

the Company's total consolidated sales, is:

The U.S. retail chain Wal-Mart constitutes the Group’s largest

customer in the Delta USA – Mass Market field of activity. The

Company has had a business relationship with Wal-Mart for over

40 years through its subsidiaries, Delta Galil USA and Burlen.

The Company provides Wal-Mart with a broad variety of products

for various departments of its network of stores, including products

sold under the chain’s house labels and products sold as part of

franchise agreements.

Sales to Wal-Mart amounted to $108.5 million in 2010 (17.5% of

consolidated sales) compared to $118.9 million in 2009 and $148.7

million in 2008.

31

The decrease in sales in 2010 compared to 2009 derived mainly

from the customer’s decision to stop purchasing socks from the

Company while the decrease in sales in 2009 vs. 008 derived

mainly from the reduction of inventory levels at the customer due to

changes in its inventory management policy.

1.9.13.2. Other important Group customers in the Delta US – Mass Market

field of activity include Target, J.C. Penney, Kohl's, Lane Bryant,

K-Mart, Marks & Spencer and Primark.

Note also that up until 2009, Marks & Spencer was also a material

customer.

1.9.13.3. Other important customers in the Global Upper Market Segment

Segment include: Victoria's Secret, Calvin Klein, Hugo Boss, Nike,

Maidenform, Hema, Under Armour, and Spanx.

1.9.13.4. For a breakdown of sales by geographical attribution see Note 5c. to

the Company’s 2010 Financial Statements, in Chapter C of this

annual report and Chapter 2.3.1 of the Board of Directors report, in

Chapter B of this annual report.

1.9.14. Description of commitment with the Company's material customers:

The Group maintains long-term relationships with its customers. The relationship

between the Group and its material customers is generally outlined by a general

framework agreement and the customer’s purchase orders from the group. The

framework agreement includes general directives on the matter of relations between

the customer and the Group.

Merchandise amounts and supply dates to customers are established in the purchase

order and change from order to order.

In most cases the Company’s agreements with its customers is carried out on the

basis of preparing a product collection for a specific season.

Up to 2009 – the terms of payment used by material Company customers was

between 30 and 70 days from the issue of invoices.

32

Over the course of 2010, working relations with Wal-Mart were altered, in such a

manner that a significant portion of the products are provided the customer based

on orders (ad hoc) and not in the form of replenishment, as was practiced to date.

As part of the change in question, the customer approached strategic suppliers and

proposed joining a discount arrangement through a financial factor, under attractive

commercial conditions (LIBOR + 1%)

The Company chose to joint this arrangement over the course of Q2 2010. As a

result of this change, credit days granted the customer are between 20 and 30 days.

The method of sales to Wal-Mart is expected to change again in 2011 in such a

manner that most products provided the customer shall be in the form of

replenishment.2

1.9.15. Dependence on a Single Customer

The Company believes that a negative reduction in the scope of purchases by Wal-

Mart may have a materially negative impact on its financial results.

1.9.16. Marketing and Distribution

The Company adapts its marketing and sales strategy to its customers based on the

geographic region each operates and according to the market segment it addresses.

Thus, for instance, one marketing and sales group is responsible for customers in

the upper market segment in Europe and the U.S. while a second marketing and

sales group is responsible for customers in the U.S. mass market segment. The

Company has sales departments located, based on the location of its target markets,

in Europe, North America and Israel, which set its marketing strategy, in

coordination with Company HQ. The Company’s sales offices are operated by

professional staffs which maintain long-term relationships with their customers and

provide a direct and immediate response to their customers’ requirements.

2Note that the above constitutes an estimate and forward-looking information, which may or may not

materialize or may differ from Company estimates and forecasts, due to circumstances outside of the

Company's control, and due to being based on information available as of the report date, including Company

estimates as of the report date.

33

The Company distributes its products in the U.S. through (owned) distribution

centers as well as through direct supply to its customers from the various

manufacturing facilities based on purchasing orders. To its European customers,

the Company distributes its products directly from its factories. The Company

takes care to manage a sufficient level of inventory at its distribution centers in

order to satisfy its customers’ demands.

1.9.17. Accumulated Orders

The Company employs two sales methods, ad hoc (specific) orders and

replenishment. In replenishment, the Company holds inventory for its customers

for a period of 8-12 weeks and the customer withdraws merchandise (call off) and

issues purchase orders near the withdrawal date.

Due to the structure of the industry and the method of commitment characterized

by ad hoc orders and replenishment, the Company has accumulated orders referring

to a relatively short period. Therefore, the Company believes that the accumulated

orders do not provide a full indication of the scope of orders in practice in the field

of garments.

The following is a breakdown of the Company's accumulated orders in its various

areas of activity, in the coming quarters in which recognition of revenues is

expected (in millions of dollars):

(a) Accumulated orders in the Delta USA – Mass Market Segment:

Accumulated Orders as of February 10, 2011

Accumulated Orders as of December 31, 2010


First quarter 16.7 24.7 17.3

Second quarter 7.9 4.7 1.5

Third Quarter 2.3 1.2 0.3

Total 26.9 30.6 19.1

34

(b) Accumulated orders in the Global Upper Market Segment:

Accumulated Orders as of February 10, 2011



First quarter 32.8 49.4 43.8

Second quarter 33.8 16.9 16.5

Third Quarter 2.6 0.2 0.4

Fourth quarter 0.4 0.3

Total 69.6 66.8 60.7

1.9.18. Competition

1.9.18.1. General

The Company operates in areas of activity considered competitive.

Competition in the field of undergarments turns on three main

parameters: product price, product quality and the level of customer

service. The Company believes that it has several advantages over its

competitors, among other reasons due to the factors detailed below:

a. Innovative and high-quality product lines – the Company

manufactures a broad variety of fashionable, high-quality product

lines, and packages its items in attractive containers. The

Company invests significant sums in innovative design and in

developing fabrics and products. For further details see section

1.15 below.

b. Long-term relations with retailers and leading label marketers –

the Company has cultivated long-term relationships with its

customers. Despite the fact that the Company’s agreements with

its customers are largely short-term and do not feature any

minimum sales obligations, the Company maintains business

relations with most of its main customers over a period of greater

than five years. The Company’s design, development and

technology teams work in conjunction with customers with the

goal of providing a comprehensive service package that includes,

among other things, designing, developing, manufacturing and

marketing new product lines.

35

c. Unique status of free trade zones – the Company’s activity in

Israel, Jordan and Egypt allows it to enjoy beneficial trade

agreements.

1.9.18.2. Competitive conditions in the areas of activity:

In recent years, retail chains have been trying to circumvent private

companies designing and developing undergarments and enter into

direct relationships with factories in order for them to manufacture

products directly for them, so as to reduce product costs. For details

see 1.25.3.4 below.

1.9.18.3. Names of primary competitors in the Segment:

Activity in the U.S. and Europe has dozens of competitors, private

companies from the U.S. and East Asia.

a. DELTA USA – Mass Market

To the best of the Company's knowledge and according to its internal

assessments, the size of the market in which Delta US – Mass

Market is active, as regards the customers and categories in which it

is active in the field (including in the UK), is estimated at $6 billion

per year. Company management estimates that the Company's share

of this field is approximately 5%.

The Company’s competitors in this Segment include, among others:

Ariella Intimates, Saramax Apparel Group Inc., Felina, Biflex

Intimates Group Inc., Komar Company, Vanity Fair, Jockey, Fruit of

the Loom, Hanes.

b. Global Upper Market Segment

To the best of the Company's knowledge and according to its internal

assessments, the size of the market in which it is active, as regards

the customers and categories in which it is active in the field, is

between $5 and $6 billion per year. Company management estimates

that the Company's share of this field averages at approximately 6%

of the various categories and various customers in the field.

36

The Company’s competitors in this Segment include, among others:

MAS Holdings, ACE, Clover, Regina, Martins, (Courtaulds) Pacific

Dunlop, Brandix Lanka Limited, Jeweltex, Renfro Corporation,

Gildan Active wear Inc., Interloop and Adria.

1.9.18.4 Methods of dealing with competition:

The Company invests a great deal of resources in the design and

development of its products in order to provide its customers with

innovation and fashionability, with the understanding that this innovation

is what differentiates it from its many competitors. See also Section 1.15

below for further details.

Likewise, in order to differentiate and create a competitive edge the

Company invests a great deal of resources in purchasing new franchise

agreements, in order to expand its branded activity, and is also acting to

increase its brassiere activity with existing customers.

1.9.19. Manufacturing Capabilities

1.9.19.1. The following are details of the scope of sales created by Company

subcontractors in 2010:

In the Delta USA - Mass Market Segment, 98% of sales are of

products purchased from subcontractors.

In the Global Division Upper Market Segment Segment, 44% of the

Company’s sales are of products purchased from subcontractors.

In the event of increased manufacturing needs, the process of

entering into agreements with and preparing existing and additional

subcontractors requires preparations, including approval by the end

customer of the new factory as well as the new factory’s compliance

with quality standards defined by the Company regarding product

quality, timetables and working conditions. To the best of the

Company's estimates, such preparations do not take an extended

amount of time that would limit the ability to increase production

capabilities.

37

1.9.19.2. The production capabilities of the Company’s factories in Egypt,

Thailand, Jordan and Bulgaria which were used by the Global

Division Upper Market Segment Segment, are detailed below:

a. In Egypt the production capability is 1.4 million products a

month, which constitutes 80% of maximum production

capability.

b. In Thailand the Company manufactures 375,000 products a

month, which constitutes 90% of maximum production

capability.

c. In Jordan the maximum production capability for 2010 was 0.5

million seamless products a month.

d. In Bulgaria the factory’s potential production capability is 1.4

million pairs of socks per month, while in practice, an average

of 1.4 million pairs of socks were manufactured per month.

1.9.20. Intangible Assets

1.9.20.1. Goodwill

The Company’s intangible assets in these areas of activity include

goodwill and customer relations created by the Company over the

years, mainly due to the purchase of three American companies

starting 2000, including Burlen.

The Company did not reduce the value of goodwill in 2009 and

2010, in light of the yearly examination conducted. In 2008, the

Company deducted $7.4 million from the value of goodwill included

in its financial statements, as a result of the examination in question.

For further details see Note 9b to the Financial Statements in Chapter

C of this periodic report.

1.9.20.2. Agreements for the Receipt of Usage Rights for Labels

From time to time the Company enters into agreements to receive

usage rights for international labels such as Converse® Wilson®,

38

Tommy Hilfiger® Daisy Fuentas® Lucky®, MLB® and

Maidenform®. The franchise agreements are usually for a period of

3 to 4 years, include the payment of royalties to the franchise owner

of between 5% and 12% of revenues and usually feature a minimal

royalties payment condition set based on the minimal sales levels

over the course of the agreement.

These agreements regulate the obligations of the Company as

recipient of the franchise to manufacture products for labels

(hereinafter in this section” “the Products”), including in the matter

of use of brand names, designing and developing products and

transferring annual and semiannual sales plans.

The agreements generally include commitments on behalf of the Company to

provide the party granting the license a prototype and production forms of the

products prior to their manufacture, and an obligation to constantly uphold the

quality, reputation and image of the license granter’s products. The party

granting the license has the right to inspect and supervise the manufacture of

the products, with advance notice.

Royalty expenses amounted to $10.5, $9.3 and $9.5 million in 2010, 2009 and

2008, respectively. The increase in royalty payments in 2010 vs. 2009 derived

from the expansion in activity in the U.S. label market and mainly from the

signing of a new franchise agreement with Lucky Brands in late 2009.

1.9.21. Raw Materials and Suppliers

1.9.21.1. Chief Raw Materials Used in Areas of Activity

Most purchases of the areas of activity are purchases of finished

products. Self-manufacturing constitutes one quarter of the cost of sale

of these areas of activity. The raw materials and accessories required

for the Company’s self-manufacturing activity are purchased from

subcontractors and suppliers.

The raw materials used by the Group for the manufacture of the variety

of garments it manufactures itself are mainly cotton string, cotton

mixes, synthetic string (such as cotton-Spandex, cotton-Lycra and

cotton-Viscose) as well as additional materials such as elastic bands,

lace and other textile components, which are sold in a broad price

39

range. The Group purchases the raw materials from a number of

international and local manufacturers and has not encountered any

difficulties in the past in securing the raw materials appropriate for its

manufacturing requirements.

Due to variable supply and demand conditions and other market factors

over which the Company has no influence, the price of raw materials is

exposed to fluctuations.

Over the course of 2010 the price of cotton increased significantly,

which led to a rise in the price of cotton string. This increase was

caused, among other things, by a drop in crop yields as a result of

natural disasters and an increase in global consumption.

With the exception of cotton string, the Company purchases the raw

materials it needed for the manufacture of its products only after

receiving purchase orders from its customers. As a rule, the Company

does not hold an inventory of raw materials for a period of more than

eight weeks. In purchasing basic cotton string, Company practice is to

enter into agreements from time to time and when market conditions

are in its favor, with a number of suppliers of cotton string for a period

of between three and six months. Recently, as a result of a rise in the

prices of cotton string, the Company increases its purchases of raw

material and finished product inventory, this in order to moderate the

erosion in raw profit as a result of the amount of time required to adjust

sales prices to customers.

1.9.21.2. Relations with Suppliers

The Company maintains ties with dozens of suppliers, most through

regular accounts, and some through letters of credit. Usually, as is

normal in the industry, the Company does not enter into agreements

with these suppliers. Some of the suppliers employed by the Company

are approved by customers and some are dictated by them.

1.9.21.3. Dependence on Suppliers and Products Regarding Which

Dependence Exists on Suppliers

The Company has no material dependence on the various suppliers of

raw and finished materials due to the existence of multiple suppliers

40

and factories. However, in the event that a supplier is replace, the

process of locating an appropriate customer that meets the standards of

the Company and the end customer may take several months

1.9.21.4. Manufacturing Process at the Company’s Plants

The Company provides its customers with a broad array of high-quality

products in accordance with their specific requirements, at competitive

prices. The Company manufactures some of the products itself and

purchases some from subcontractors. The following are the stages of

the production process:

a. Purchase of Raw Materials

The Group purchases the raw materials it uses for the manufacture

of its products from a number of international and local supplies

and has not encountered any difficulties in the past in finding raw

materials meeting its manufacturing requirements. For details

regarding the main raw materials used by the Group, see Section

1.9.21 above.

b. Knitting

The Company knits itself and purchases the remaining fabrics

required to manufacture its products from suppliers. The Group

operates some 50 automatic knitting machines in Egypt with the

total manufacturing capacity of 200 tons of cloth per month,

depending on the type of fabric manufactured. In 2010, the Group

manufactured an average of some 130 tons of fabric per month

compared 100 tons per month in 2009. The increase in production

capability in 2010 compared to 2009 derived from an increase in

sales to European customers. When the amount of fabric required

by the Company exceeds the amount it is capable of producing, the

Company engages subcontractors for the purchase of the remaining

cloth it requires.

c. Sock Knitting

Starting from Q2 2010, the Company has operated some 500

knitting machines in its factories in Bulgaria and in Israel compared

41

to 750 machines in 2009 when it also operated its Indian factory,

compared to 500 machines in 2008. In 2010 the Group

manufactured and average of 1.9 million pairs per month, compared

to 2.2 million pairs in 2009. The decrease in production capability

in 2010 compared to 2009 derived from the sale of the Indian plant.

d. Coloring and Finishing

The Company colors most of the products it manufactures using

Egyptian subcontractors.

e. Cutting

The Company operates computerized cutting equipment in its

factories in Egypt and Thailand.

f. Sewing

After the cutting stage, products are sewed at Company plants in

Egypt, Jordan and Thailand as well as through subcontractors in

Egypt and East Asia.

g. Quality Assurance

The Company places a great deal of emphasis on the quality of the

items of clothing it manufactures. For this purpose, it employs QA

teams that examine the products throughout the process. The

Company’s QA standards meet the tough standards demanded by

its customers.

h. Manufacture of Seamless Clothing

The Company applies a special manufacturing technology through

the use of Santoni knitting machines for the purpose of

manufacturing seamless clothing in the undergarment, shapewear

and sportswear categories.

i. Outsourcing

The Company engages subcontractors for the purpose of

manufacturing some of its products. In 2010 and 2009 some 77% of

42

its revenues derived from the sale of products manufactured by

subcontractors. The company has relationships with subcontractors

in Turkey, China, Pakistan and Bulgaria for the manufactured of

socks and in Egypt, Jordan and East Asia for the manufacture of

undergarments and seamless clothing for its other areas of activity.

The Company is not dependent on any of these subcontractors; for

details see 1.9.24.3 above.

1.9.22. Environment

In late December 2006 the Company signed an agreement with ALA

Environmental Infrastructures (hereinafter: “ALA”), which arranges the subject of

disposal of waste from the Company’s coloring plant to the depths of the sea off

the coast of Akko, through existing ALA infrastructure.

After delays came up in ALA’s activity (due to a lack of a license from the City of

Akko) and after a hearing was held at the Magistrates’ Court on February 12 2007

pursuant to the legal proceedings between ALA and the City of Akko the Court

decided that ALA shall continue to operate under certain restrictions.

In May 2007 a representative of the Company was summoned for an investigation

on an alleged violation on the Company's behalf of the terms of the permit granted

it on the matter of waste removal, but after interviewing the Company’s

representative, the committee put the demand to cancel the terms of the permit on

hold.

On August 15 2007 Delta was issued a court order instructing it to stop dumping

the coloring plant’s waste into the sea off Akko, through ALA, and ordered it to

send them to the Tel Aviv area via the SFDN. After holding a hearing on the issue,

the permit given the Company allowing it to dispose of its waste in the sea of Akko

(and not to the SFDN) was renewed.

The Company has drastically reduced the activity of its coloring plant and for the

few activities remaining, processes such as water softening and others are carried

out, allowing it to dump its waste directly into the municipal sewage system,

significantly reducing the use of ALA services.

On February 21 2008 Tzallul, an environmental association, filed an administrative

petition against nine respondents including the Ministry of the Environment, the

Maritime Waste Disposal Permission Committee, ALA and a number of companies

43

employing ALA’s services, including the Company. Tzallul’s main complaints

against the respondents are: (1) against the very practice of disposing of brines in

the sea; (2) against the fact that ALA had been granted operation rights. After a

hearing held on June 3 2008, on August 27 the Court ruled to reject Tzallul’s

petition.

On April 19 2009 the Ministry of the Environment filed an indictment against the

Company and against the person serving as its CEO during the relevant period and

against an additional employee (who had served as Engineering and Waste

Manager). The indictment claimed that the Company and its manager had

exceeding the permits for waste disposal at sea that were in effect in 2006 and

2007. The indictment was issued on the basis of two legislative instructions –

disposing of waste in the sea contrary to the legally dumping permit and disposing

waste in public. After a number of charges were dropped as a result of receiving

statute of limitations arguments raised by the Company, a hearing was held on the

case, as well as evidentiary hearings. After the prosecution completed presenting its

case, the Company replied with a motion of “no case to answer”. After submitting

the motion, the Ministry of the Environment was given the right to respond to this

motion in writing. If the parties fail to reach an agreement and the Company’s

motion of no case to answer is rejected by the Court – on March 6 2011 a second

evidentiary hearing shall be held in which defense witnesses will testify and oral

summations will be made.

1.9.23. Restrictions and Supervision on the Corporation’s Activity

Activity Subject to Specific Laws/Business Licenses/Export Licenses

The Company holds appropriate license and operates according to the specific laws

of the countries in which it operates. For further information on this issue see

section 1.9.4 above.

1.9.24. Material Agreements

1.9.24.1. Burlen Purchase Agreement

In December 2004 the Company purchased Burlen, a manufacturer

of women’s undergarments, from its shareholders at the time.

Burlen’s customers are retailers, with its largest customer being Wal-

Mart, with which it has had a business relationship for over forty

years. Burlen’s shareholders, who sold their holdings to the

44

Company, are employed in executive positions by the Group.

Design, sales promotion, marketing, logistics and distribution are

carried out in the U.S. while manufacturing is mainly conducted

through subcontractors in East Asia and the Dominican Republic.

In return for the purchase, the Company paid some $60 million, in

cash and in ordinary Company shares. In accordance with the

purchase agreement, it was decided that the Company must pay

additional sums amounting to $15 million to the selling shareholders,

contingent on meeting certain levels of income and operational profit

goals for a period of three years, from 2005 to 2007.

Revision to the Burlen Purchase Agreement

On February 16 2006 the purchase agreement was revised for all

matters pertaining to the additional payments that were supposed to

be paid to Burlen shareholders. The revision to the agreement

derived from the parties’ desire to compensate earlier Burlen

shareholders for the fact that although both parties had intended,

upon signing, to concentrate all of the Company’s activities in the

field of women’s products vis-à-vis Wal-Mart at Burlen, it was later

agreed to act otherwise. According to the revision, the selling

shareholders shall be entitled to an additional comprehensive

payment not exceeding $18,000,000 (instead of the sum of

$15,000,000 set in the original Burlen purchase agreement), which

will be paid based on the Company meeting certain goals between

2006 and 2011 (with the commitment for meeting certain goals on

behalf of the Company being until just 2007 in the original

agreement). Any such additional payment shall be distributed to the

earlier Burlen shareholders according to their relative stake in it

before the sale and in the following manner: 75% shall be paid in

cash and the balance shall be paid at the Company’s discretion in

cash or in ordinary Company shares, subject to stock transfer

restrictions.

On March 15 2006, Delta USA made an advance payment to the

selling shareholders totaling $1.25 million. The advance payment is

non-recourse, and bears 5% interest guaranteed on performance

45

payments that are supposed to be paid to recognized shareholders for

2007 and 2008.

In March 2007 the Company paid an additional $2.4 million to the

selling shareholders for the achievement of 2006 objectives.

In April 2008, the Company paid $2.1 million to the selling

shareholders for the achievement of 2007 objectives. The sum paid is

after offsetting one half of the advance payment (amounting to $0.7

million) paid the shareholders in 2006 for meeting 2007-2008 goals,

as noted above.

In 2010 and 2009 the Company paid no additional sums due to its

failure to meet the goals set for 2009 and 2008.

As of this report, the Company has paid the selling shareholders a

total sum of $5.75 million for meeting goals.

In accordance with Burlen’s 2010 business results and its estimates

for 2011, in is unlikely that additional sums will be paid the selling

shareholders due to their failure to meet goals set for 2011.

Accordingly, the liability for the payment of the sums in question

was cancelled from the Company’s December 2010 and 2009

balance sheets. For further details see Note 9.b.2 to the Financial

Statements in Chapter C of this periodic report.

1.9.24.2. Agreement for the Purchase of Gibor’s Assets and Part of its

Activities in the Field of Socks

For details regarding the purchase of Gibor’s assets and some of its

activities in the field of socks see 1.1.4 above.

1.9.24.3. Trademark Usage Rights

For details regarding agreements granting the right to use labels see

Section 1.9.20.2 above.

1.9.25. Working Capital

For details regarding working capital used for the areas of activity see Section 1.19

below.

46

Operating Segment: Delta Israel

1.10. General Information on Operating Segment: Delta Israel

1.10.1. The Company markets a variety of undergarments and socks in the retail field in

Israel through its chain of “Delta Shops”, some of which it owns and some of which

are operated by franchise holders, as well in the wholesale field by sales to retail

chains and private shops.

Most products marketed are purchased from suppliers in East Asia. The Company

markets a number of labels in Israel, some of which it owns and for others it

purchases franchises, which include, among others, the following brands: Delta,

Matchtonim, Yorfat, FOX, Disney, Nike, Puma, Keds, Wilson, NICI and others.

The Company’s estimates that the labels it markets provides it with an advantage in

the Israeli market.

To the best of the Company’s knowledge and according to its internal estimates, the

financial scope of the Israeli undergarment and sock market moves between $500

and $600 million a year.

1.10.2. Structure of the Segment and Changes Occurring Therein

Many bodies exist in the field of undergarments in Israel, most of them importers

owning fashion outlets, competing with the Group’s activity. The garment industry

in general, and the field of undergarments in particular, continues to be

characterized in recent years by a high level of competition and in reduced import

costs and consumer prices due to the transfer of a significant portion of product

purchases to East Asian subcontractors, mainly in China, as well as due to the

reinforcement of the exchange rate of the NIS vs. the USD in recent years.

1.10.3. Restrictions, Legislation, Standards and Special Constraints Applying to the

Field of Activity

The Company’s activity in Israel is subject to general legislation on the matter of

imports, customs, consumer protections, product marking, in so much as these are

relevant to its products, and labor and licensing laws insomuch as these pertain to

the operation of the Company's shops. Furthermore, all of the Company’s products

are covered by legal restrictions regarding price marking and component marking

and laundry instructions in accordance with the Consumer goods and Services

Supervision Law, 1957 and resulting ordinances, and in accordance with the

47

Consumer Protection Law, 1981 and resulting ordinances. The Company is

complying with all of the legal requirements in question.

1.10.4. Changes in Scope of Activity and Profitability of the Area

In recent years, the scope of the Company’s activities and its profits in its area of

activities have increased, inter alia, due to the following factors: (a) the shift to

purchasing products in countries with lower manufacturing costs, mainly East Asia;

(b) the strengthening of the exchange rate of the NIS vs. the dollar; (c) the chain’s

expansion and the growth of the Israeli economy. The increase in the Company’s

scope of activity and profitability in its Segment was expressed in an increase in the

amount of its shops and expanding its product lines; see Section 2.3.3 in the Board

of Directors’ Report, Chapter B of the Periodic Report.

1.10.5. Technological Changes that May have a Material Impact on the Segment

For further details see section 1.12.1 below.

1.10.6. Critical Success Factors in the Segment and Changes Occurring Thereof

The Company estimates that success in its Segment depends on several key factors,

as detailed below:

1.10.6.1. Marketing and branding Company brands through constant

investment in advertising and reinforcing Company brands in order

to differentiate the brands and emphasize their advantages,

innovation and fashionability as well as through the Company’s

customers club.

1.10.6.2. Investing resources in design and development departments while

constantly focusing on local and global developments in the field of

undergarments and customer taste and developing and designing

fashion collections, while making sure to apply constant innovation.

1.10.6.3. Nation-wide deployment and shop location.

1.10.6.4. Upholding a steadfast manufacturing infrastructure through

subcontractors, with it being steadfast, flexible and competitive

abroad.

1.10.6.5. The existence of effective product QA system.

48

1.10.6.6. The existence of efficient operational arrays, chains of supply and

distributional systems providing full support for sales needs and

meeting supply times, which have shortened in recent years.

1.10.7. Changes in the Supplier Array for the Segment

In recent years, most of the products sold by the Company have been manufactured

by East Asian subcontractors. At the same time, the Company is not dependent on a

specific supplier and/or subcontractor, as the Company acts through agents and due

to the fact that all of the products marketed in Israel as part of its Segment can be

manufactured by a large number of suppliers and/or subcontractors in East Asia

without a significant increase in production costs.

The price of finished products increased in 2010 as a result of an increase in wages

and other inputs in East Asia; see Section 1.12.2 below. The Company increased

the prices of sales to its customers over the course of the year so that the gross

profit rate of the Segment was preserved.

1.10.8. Main Entry Blocks for the Segment and Changes Occurring Thereof

According to the Company's estimates, the main entry blocks for its areas of

activity are as detailed below:

1.10.8.1. Construction of brands with significant awareness in the fashion

market and preserving them on a long-term basis through

significant investments in marketing and advertising.

1.10.8.2. Capital investments in the establishment of retail chain and shop

maintenance.

1.10.8.3. The need for a critical mass of sales to allow a competitive

operational costs structure.

1.10.9. Alternatives for the Products of the Segment and Changes Occurring Thereof

There are many alternative to the Company's products offered by local

manufacturers or importers marketing in Israel at a variety of locations. The

Company is acting to reinforce and preserve its products’ advantage over

alternative products, by differentiating itself and making itself more conspicuous in

terms of fashionability, quality and assigning “added value” to its brands by

49

ensuring cutting-edge design, development, competitive pricing, product variety

and advertising on various media.

1.10.10. Structure of Competition in the Segment and Changes Occurring Therein

Fierce competition exists in the Segment between branded chains and private

retailers. According to the Company’s estimates, in recent years, national chains

have strengthened at the expense of local retail shops such as Loggia (Gibor

Sabrina), Jack Cuba, Aphrodita and Intima.

To the best of the Company’s knowledge, and based on its internal evaluations, the

market it addresses is between $500 million and $600 million year in size.

According to the Company’s estimates, its share of the market is between 10% and

30%, depending on the category.

1.10.11. Customers in the Delta Israel Segment

The Company’s customers in this Segment are divided into retail and wholesale

customers. The Company’s retail customers are the consumers shopping at the

Company’s retail outlets.

The Company’s wholesale customers include department stores, supermarkets and

fashion chains. Total sales of this Segment in Israel in 2010 and 2009 amounted to

$77 and $73 million, 37% of which in 2010 was through department stores,

supermarkets and private shops, and 63% of sales were through the Company’s

shops. As of this report the Company has 113 shops, 95 of which it owns and 18 of

which are owned by franchise holders.

According to the Company’s estimates, it is not dependent on any of its customers

in this Segment.

1.10.12. Marketing and Distribution in the Delta Israel Segment

The Company markets its products through the following two marketing channels:

wholesale marketing and marketing through its retail outlets. Distribution is from the

Company’s logistical centers.

1.10.12.1. Wholesale Marketing

The Company’s products are sold through a variety of marketing

channels, including department store chains, the New Mashbir

50

Latzarchan, H&O, food retailers (Supersal, Co-Op, Hatzi Hinam) and

hundreds of private shops throughout the country.

For marketing purposes, the Company operates an array consisting of

sales agents, account executives, sales stewards and ushers. Alongside

marketing the Company’s labels, the Company also deals in

management, manufacturing and marketing for private labels such as

"LIFE" for Superpharm and “Cherokee” for Supersal.

The company enters into general framework agreements with the retail

chains, which do not include instructions pertaining to commitments

with specific suppliers such as agreement durations or order amounts.

1.10.12.2. Retail Marketing

Marketing of products in this channel is through the Company's shops

which, as of this report, number 113. The label shops are located inside

malls, in town centers and in power centers throughout the country.

1.10.12.3. Distribution

The Company’s products are stored in its logistical centers, from

which they are distributed to shops and to wholesale customers, with

orders collected through the private shops’ and supermarkets’ sales

representatives and through a computerized system from the label

shops and department stores.

1.10.13. Accumulated Orders

The Company has no significant accumulation of orders in its area of activities and

its sales are conducted on a regular basis at the chain shops.

Total product returns from retail chains and private shops in the Segment amounted

to $2.7, $3.0 and $3.9 in 2010, 2009 and 2008, respectively. The decrease in

returns in 2010 vs. 2009 was mainly due to activity with food retailers.

1.10.14. Advertising

The Company advertises its brands, its specific products and its sales. Advertising

is on a variety of media, primarily television and print, as well as signage at shops

and wholesale sales locations and catalogue distribution.

51

The Company’s total advertising expenses in 2010 in the Segment amounted to

$2.5 million compared to $2.1 million in 2009 and $2.6 million in 2008. The

increase in advertising in the reported year compared to 2009 derived from the

costs involved in launching the customer club, setting up a website as well as the

revaluation of the exchange rate of the NIS vs. the USD.

1.10.15. Competition

The Company is active in a highly competitive market characterized by multiple

competing brands, some international and some local.

This competition compels the Company to set competitive prices and invest a great

deal of money in marketing, advertising and sales.

The Company's chief Israeli competitors in this Segment in the regular market are:

Intima, Triumph, Gibor Sabrina, Go_Under, Jack Cuba, Hamashbir Latzarchan,

Aphrodita, H&O and Srigamish. In addition, Israel has hundreds of shops

marketing undergarments and socks.

1.10.16. Manufacturing Capabilities

Products in the Delta Israel Segment are purchased from suppliers located mainly

in East Asia and therefore there are no manufacturing capability restrictions in this

Segment.

1.10.17. Intangible Assets

The Company owns the following labels: Delta, Yodfat, Matchtonim and others

which are listed in the Israeli trademarks registry.

In addition, the Company has signed contracts for the receipt of franchises such as

NICI, Disney, FOX, Keds, Puma, Nike, Wilson and others in the field of

undergarments and socks. For further details, see Section 1.11.16.2 above.

1.10.18. Restrictions and Supervision of the Corporation’s Business

The Company holds the required licenses.

1.10.19. Working Capital in the Delta Israel Segment

The following are details regarding the average inventory used by Segment and

inventory days for 2010 and 2009:

52

2010 2009

Average inventory (in

millions of dollars)

11.1 11.0

Inventory days 142 132

For more information regarding working capital see section 1.19 below.

1.10.20. Projected Developments in the Coming Year

The Company intends to open a new retail chain selling children’s clothing in 2011,

which will serve as a step in the Company’s expansion and growth strategy.

The Company intends to open 9 new independent shops (Delta Kids) and 8

additional combined shops that will be integrated in additional chain shops over the

course of the year.

The Company estimates that sales of children’s clothing, which in 2010 amounted

to 40 million NIS, is expected to increase to 120 million NIS over four years, and to

40 shops by 2015.

The Company estimates that the scope of the expected investment in the shops,

equipment and working capital will amount to 20 million NIS3.

3Note that the above is an estimate and forward-looking information, which may or may not materialize or

may differ from Company estimates and forecasts, due to circumstances outside of the Company's control,

and due to being based on information available as of the report date, including Company estimates as of the

report date.

53

Part D – Additional Information at the Corporate Level

The following is additional information at the corporate level, pertaining to all of the Company’s

areas of activity:

1.11. The Company’s Products

1.11.1. Women’s Undergarments

The Company manufactures basic and designer undergarments for women, including

panties, seamless garments, shapewear, brassieres, nightwear and others.

1.11.2. Men’s Undergarments

The Company manufactures basic and designer undergarments for men.

1.11.3. Socks

The Company manufactures a variety of socks for men, women and children in formal,

sportive and day-to-day styles, some of which feature prints of familiar cartoon

characters as well as prints of other images the Company is licensed to use.

1.12. General Information on Areas of Activity

1.12.1. Technological Changes that May have a Material Impact on Activities

The Company keeps regular track of relevant technological developments in its

Segment and applies these technologies, when possible, to its production processes.

Technological developments pertaining to the strings from which the fabric is woven

has an indirect impact on the areas of activity, as they allow the manufacture of

finished products characterized by innovation, such as products allowing more

comfortable movement, high levels of ventilation etc. Such technological

developments in the field of string allow the manufacture or advanced textile products,

which grant products a distinct competitive advantage and reduce the possibility of

pressure on behalf of customer to reduce prices.

1.12.2. Changes in the Supplier Array and Raw Materials for Areas of Activity

In recent years, most manufacturing in the undergarment industry and in the Group has

been carried out by subcontractors in East Asia. In accordance with this trend, the

products in the Company’s areas of activity are mostly manufactured by East Asian

subcontractors. Recently, following the global economic crisis, the increase in wages

54

and raw material costs and shortages in textile workers in East Asia, the number of

suppliers has dropped. This development led to pressure to increase prices and to

erosion of gross profits due to the amount of time required to adapt sales prices to

customers. Note that the Company is not dependent on any specific supplier and/or

subcontractor.

In recent years there were no material changes in the array of suppliers from which the

Company purchases the raw materials used to manufacture its products.

The Company is constantly searching for new suppliers, evaluating existing suppliers

and performing quality inspections.

1.13. Seasonal Factors

The Company’s revenues are characterized by fluctuations that derive, inter alia, from

periodic consumer purchases. The Company’s revenues in the second half of the year

generally exceed its revenues in the first half due to increased consumer purchases in

the “back to school” period and during Christian holidays.

The following are the Group’s sales by quarter in the past three years in thousands of

dollars:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total

2010 sales - USD 140,541 156,665 169,696 153,172 620,074

2010 sales - % 22.6% 25.3% 27.4% 24.7% 100%

2009 sales - USD 123,426 135,911 162,506 150,691 572,534

2009 sales - % 21.6% 23.7% 28.4% 26.3% 100%

2008 sales - USD 156,989 154,669 167,674 143,502 622,834

2008 sales - % 25.2% 24.8% 27.0% 23.0% 100%

55

1.14. Fixed Assets and Facilities

1.14.1. Real Estate and Facilities

The Company has manufacturing facilities in Israel, Jordan, Egypt, Bulgaria and

Thailand.

As of this periodic report, the Company owns several real estate properties in Israel.

Furthermore, the Company rents additional properties in Israel serving as warehouses,

offices and shops. The rental agreements for the properties, including option periods

for their extension, end between 2011 and 2015. The Company believes that it will be

able to renew these rental agreements under terms not inferior to those in effect today.

The Company rents offices in London and is currently studying the possibility of

reducing the space rented by it from two floors to one.

The Company rents manufacturing and storage facilities in Egypt for period of 25

years. This rental period is expected to expire between 2014 and 2029.

The Company’s joint Jordanian venture is located in Irbid and includes a number of

sewing facilities and warehouses, rented by the Company.

The Company rents warehouses and offices in the U.S. and China. These rental periods

in these agreements are expected to expire between 2011 and 2018. The Company

believes that it will be capable of renewing these rental agreements under terms not

inferior to those in effect today.

The above information pertaining to the Company’s estimates regarding the extension

of its rental agreements constitutes forward-looking information as defined in the

Securities Law. No certainty may be attached to this estimate , this, inter alia, due to it

being based on information existing on the report date and dependent on factors

independent of the Company such as market conditions, agreements with landlords and

more.

The Company owns additional facilities in Bulgaria, the U.S. and Thailand. Company

management believes that these facilities are in good operational condition, are

properly maintained, and their area is appropriate to the Company’s current level of

activity. In addition, the Company believes that its activity and facilities are in

compliance with current government standards pertaining to safety, health and

environmental issues. As a rule, the Company has complied with these rules without

56

said compliance having any material impact on the Company’s expenses, profitability

or competitive ability.

The Company owns a logistical center in Hungary, which has been evacuated and is

intended for sale but due to the low probability of its realization, was included under

fixed assets and not under assets available for sale in current property. In accordance

with an assessor’s evaluation conducted by the Company in late 2010, the cost of the

property was reduced over the course of Q4 of the year by $1 million and amounts to

$2.1 million as of the report.

As of this report, real estate properties intended for sale include three properties in

Israel the historic cost of which amounts to $2.8 million. The property in Daliyat Al-

Carmel classified as held for sale in 2009 was sold over the course of 2010.

1.14.2. The following table concentrates material real estate properties owned by the

Company or rented by it as of this periodic report:

Country Town Area in M² Main Use Rented/Owned

14,014 – structure; some 24,000 land

Fabric development and coloring and warehouses

Owned

Karmiel 8,700 – structure; some 20,000 land

Seamless product manufacturing plant

Leased from the state

7,500 Offices and warehouses

Rented

2,500 structures

4,700 land

Intended for sale, one rented to 3rd party

Leased from the state

Nahariya** 255,484

Undeveloped property on the beach in Nahariya – intended for sale

Owned

Rosh Ha’ayin 8,400 Offices and warehouse

Rented

A chain consisting of 95 shops, self-managed

Some 12,000 Delta shops –national retail chain

Rented

Israel*

Tel Aviv Some 1,000 Head office – held for sale

Owned

57

Country Town Area in M² Main Use Rented/Owned

UK London*** 1,400 Offices Rented

Jordan Irbid 21,637 Sewing workshops and warehouses and part rented to 3rd party

Some rented and some via financial lease (rented to 3rd party)

Egypt Cairo 38,554 Knitting, cutting and sewing plant, offices and warehouses

Rented

New Jersey 3,437 Offices Rented

New York 2,160 Offices Rented

Williamsport, Pennsylvania

34,931 Warehouse, logistical center and offices

Rented and owned

U.S.A.

Tifton, Georgia 45,987 Warehouse, logistical center and offices

Owned

China Guangzhou 11,666 Offices and space rented to third party factory

Rented

Hungary Tizalok Some 12,000 Logistical center. Not in use and intended for sale.

Owned

Bulgaria Rousse 8,640 Sock manufacturing plant

Owned

Thailand Ayutaya 1,707 Cutting and sewing plant

Owned

* The Company has signed an agreement according to which a compound with a

built-up area of 11,500 square meters is supposed to be constructed for it, which

upon completion will be rented by the Company for a warehouse and offices.

This transaction is contingent on the receipt of building permits that have yet to

be received as of the report.

** Over the course of 2010 an agreement was signed for the sale of the real

estate in Nahariya, however, due to the fact that the conditions for recognizing

income have not yet been fulfilled, the property was classified as held for sale in

the Financial Statements; see Note 8.b.1 to the Financial Statements in Part C of

this annual report.

*** The Company intends to reduce the space rented by it.

1.14.3. Equipment

58

1.14.3.1. The Company operates some 60 automatic cloth knitting machines

in its Egyptian plant and its Israeli cloth development facility.

1.14.3.2. The Company operates some 500 knitting machines for its sock

manufacturing process in Israel and Bulgaria.

1.14.3.3. The Company operates some 3,100 sewing machines in its factories

in Egypt, Jordan and Thailand.

1.14.3.4. The Company operates some 200 seamless sewing machines in the

Company’s Israeli plant as well as through subcontractors in China.

1.15. Research and Development

The Company has a number of creative team with each design team featuring fashion,

textile and graphic designers, knitting, finishing and coloring technologists, and in the

field of products. These teams keep up to date on global market trends and relevant

technological innovations.

The Company’s design and development teams work out of Israel and the U.S.

Design and development work is carried out using SIP – Systematic Innovation Process.

This method is designed for innovative thinking intended to bring about groundbreaking

products for Company Customers, which emphasize and maintain the Company's added

value and competitive edge.

The process includes integrated work by all disciplines – design, marketing, development

and technology, from the search stage, through research, development and design to

presentation to the end customer and reaching conclusions.

In addition, the Company creates “cross-Company” projects employing the same method,

placing emphasis on creative thinking, designed to bring about breakthroughs for markets

in the Company’s product categories.

The work of the development teams is integrated into the activity of the Company’s

manufacturing and marketing systems.

In addition, the Company operates in a special fabric development center, which

constitutes added value to the product development core.

59

Design and development costs amounted to $25 and $27 million in 2010 and 2009,

respectively.

The decrease in design and development costs in 2010 vs. 2009 derives mainly as a result

of a reduction in overhead in Delta U.S.A and the transfer of development functions

nearer to manufacturing sources in order to lower costs.

Over the course of 2010 the Company submitted two requests to the Israeli Chief

Scientist’s Offices for the receipt of support of research and development activity for

cloths and finished products within the framework of traditional industry. These requests

were approved in December 2010.

1.16. Human Capital

1.16.1. Description of organizational structure:

The following is a description of Group management’s organizational structure and its

areas of activity:

IT Systems

Segment Delta Israel

Finance

Human Resources

Marketing and Strategic

Development

CEO

Segment Global Upper

Market

Segment Delta USA – Mass Market

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1.16.2. Worker Roll

As of December 31, 2010, the Group employs 6,760 employees.

1.16.3. The following is a breakdown of employees by countries in which they are

employed:

As of December 31

2010

As of December 31

2009

Egypt 2,589 2,835

Israel 1,442 1,447

Far East (mainly Thailand) 995 1,310

Jordan 552 830

U.S.A. 538 500

Others (mainly Bulgaria) 644 578

Total employees 6,760 7,500

1.16.4. Of the above employees, some 4,100 employees are employed in manufacturing

activity and 2,660 employees are employed in development, logistics, marketing,

sales and administrative activities. As of December 31 2009, 4,600 employees were

employed in manufacturing activities and the balance was employed in other

activities as stated above.

1.16.5. Material Changes to the Worker Roll

Over the course of 2010 the number of Company employees decreased by 740

compared to December 31 2009. This decrease derives from the sale of the

Company’s factory in India which employed some 300 employees, from the

discontinuation of sock finishing activity and reduction of sewing activity in Jordan

(a decrease of 280 employees) and a decrease of 250 manufacturing employees in

Egypt as a result of streamlining, which was partially offset by an increase in the

number of employees in Bulgaria and the U.S.

1.16.6. Compensation Plans (Options) for Company Employees

See Note 14b to the Financial Statements, in part C of this periodic report.

1.16.7. Structural Changes

For details concerning structural changes carried out by the Company, see Section

1.2.1 above.

61

1.16.8. Streamlining Plans and Worker Cuts

For details concerning the Company’s streamlining plans, see Section 1.2.1 above.

1.16.9. Benefits and the Nature of Employment Agreements

As of December 31 2010, the Company employs 6,760 employees, 1,286 of which

work in Israel, the Company’s commitment with whom is based on general

collective work agreements for the textile and garment industry and general

expansion orders applicable to them and 156 employees hired by way of personal

contracts. The Company generally enters into agreements with senior executives

and management by way of personal contracts.

The personal contracts the Company signs with its Israeli employees arrange,

among other things, the following matters: monthly salaries, social rights such as

yearly vacations, advance notice, provisions to pension funds, executive insurance

and education funds. Each party may end the commitment by providing written

notice of one to 2.5 days for each month of work and one month’s notice after one

year of work.

1.16.10. Agreements with Senior Executives and Senior Management

1.16.10.1. Agreements with Senior Executives

Employment contracts of senior executives include, among other things,

details of the senior executives' social rights such as yearly vacations,

recovery fees, sick days, provisions to executive insurance, education funds

and other benefits to which the senior executive is entitled. In addition to

salaries, senior executives are generally entitled to a yearly bonus of up to

50% of their yearly pay, based on goals met and according to the formula set

in their employment agreement. Likewise, in the event that results in practice

exceed the goals set, the executive shall be entitled to additional benefits as

set by management from time to time. Furthermore, the Company places at

the senior executive’s disposal a vehicle and mobile phone and bears all

related costs. Senior Company executives undertake to uphold absolute

confidentiality in the matter of all issues pertaining to the Company’s

business, and to make no use of the confidential information even after the

end of their employment at the Company. As a rule, the Company may end a

62

senior executive’s employment by providing 90 days written notice, extended

by an additional 30 days for each year of work past the third year at the

Company up to six years, this to a maximum ceiling of 180 days, with the

exception of predefined exceptional cases. In most cases, a senior executive

may resign their position at the Company after providing it with 90 days

written notice.

1.16.10.2. Employment Agreement of Company CEO

See details in Additional Information Regarding the Corporation, Chapter D

of this periodic report.

1.16.10.3. Employment Agreement of Company Chief Operations Officer.

On July 23rd 2009 it was decided that Mr. Shlomo Doron would be

appointed as Chief Operations Officer (COO) and Deputy CEO. The terms of

his employment and service were approved by the Company's Audit

Committee and Board of Directors (for more details see immediate report

from July 23 2009 reference no. 209-01-177156).

On November 9 2009 Mr. Doron started his employment at the Company

(for further details see immediate report from November 9 20098 reference

no. 2009-01-277797).

On November 9 2009, the Company's Board of Directors approved the

allocation of 250,000 options to Mr. Doron. The options allocation is in

accordance with resolutions by the Audit Committee and Board of Directors

as mentioned above and according to the conditions included in his

employment agreement. The exercise price of each option is $3.072 and the

value per option based on the Black and Scholes model is $2.44.

1.16.10.4. Granting Options to Company Directors and the Chairman of the

Board

The Audit Committee, Board of Directors and general meeting of the

Company's shareholders (the meeting was held on October 20 2009)

approved the allocation of 10,000 options (non-tradable) to each of the

Company's directors: Israel Baum, Shaul Ben-Ze’ev, Tzipporah Carmon,

Noam Lautmann and Dr. Gideon Shatiat exercisable as 10,000 ordinary

Company shares worth 1 NIS NV each in return for an exercise price of $5

63

per option. For details regarding the issues on the meeting’s agenda on

October 20 2009, see immediate reports from September 6 2009, September

22 2009, October 18 2009 and October 20 2009 (reference nos. 2009-01-

224304, 2009-01-224325, 2009-01-237762, 2009-01-237765, 2009-01-

257625, 2009-01-257628 and 2009-01-260757).

The Audit Committee, Board of Directors and general meeting of the

Company's shareholders (the meeting was held on December 7 2009

approved the allocation, free of charge, of 10,000 options (non-tradable) to

Mr. Dovrat, exercisable as 10,000 ordinary Company shares worth 1 NIS NV

each, in accordance with the 2009 option allocation plan adopted by the

Board of Directors on August 20 2009.

For details regarding the issues on the meeting’s agenda on December 7

2009, see immediate reports from October 28 2009 and December 7 2009

(reference nos. 2009-01-267591 and 2009-01-312165).

1.16.10.5. Appointment of the Chairman of the Company’s Board of Directors

On August 20 2009 the Company’s Board of Directors decided to appoint

Mr. Gideon Shatiat, Company director, to the position of Chairman of the

Company's Board of Directors. The appointment shall remain in effect until

March 31 2011. The terms of his service as Chairman of the Board of

Directors were ratified by the General Meeting on October 20 2009 (after

receiving the approval of the Audit Committee and the Company's Board of

Directors) For details see immediate reports from September 22 2009 and

October 20 2009 (reference nos. 2009-01-237762 and 2009-01-260757).

1.16.11. Group Executive Remuneration Plan – Payment for Performance

Starting 2006 the Company has been operating a remuneration plan for 300 Group

executives; this plan consists of three components of the remuneration: (a)

remuneration on the basis of personal goals achieved; (b) remuneration on the basis

of achieving goals derived from the budget of the division in which the executive

works (sales and profitability); (c) remuneration on the basis of achieving goals

derived from the Company’s consolidated budget.

The remuneration mixture changes based on the rank of the executive and may

change from year to year. Furthermore, goals change from year to year based on the

decisions of Company management.

64

The remuneration rate according to the plan is generally between 20% and 50% of

the executive’s yearly salary.

1.16.12. Collective Work Agreements

Some of the employees of the Group in Israel are employed according to the

general collective agreement for the textile and garment industry signed between

the General Histadrut and the Manufacturer’s Association of Israel and general

expansion orders applicable to these agreements.

The Company upholds the directives of this collective agreement.

1.16.13. Severance Pay Liability

The Company’s obligations resulting from the discontinuation of employer-

employee relations for Group employees in Israel are mostly covered by provisions

to executive insurance policies, comprehensive pension funds and Company

provident funds or other provident funds.

In other countries in which the Company has significant activity, which include

mainly Thailand and Egypt, employees have no pension rights or other rights

granting them compensation or other payments in the event of departure.

1.17. Material Agreements

1.17.1. Shareholders Agreement

On July 12 2007 a shareholders agreement was signed between the Lautmann

Group and GMM.

The Shareholders Agreement establishes, among other things, the following

principles:

1.17.1.1. Right of first refusal and restrictions on the sale of shares – any

transfer of Company shares, held as of the signing of the

shareholders agreement by the Lautmann group, shall be subject to

the following conditions: (a) with the exception of the transfer of

shares to authorized recipients, as detailed below, any transfer of

Company shares by any of the Lautmann Group is subject to the

right of first refusal on behalf of GMM, in such a manner that the

party seeking to sell (hereinafter: “the Offerer” must inform GMM

65

in writing of their intention to sell shares and they must first offer

the shares to GMM (hereinafter: “the Sale Offer”). The

announcement in question shall note the number of shares offered

for sale, the name of the recipient (unless the Offerer intends to sell

the shares on the Tel Aviv Securities Exchange or on the

NASDAQ) and the terms of the offer. In the event that the Offerer

is interested in selling the shares through the stock exchange (Tel-

Aviv or NASDAQ), then the price of the offer shall be the weighted

average of the closing price of the Company’ share on the stock

exchange (Tel-Aviv or NASDAQ, as the case may be) on the three

days of trade preceding the date of the Sale Offer. GMM has the

right to accept the Sale Offer as is, for all offered shares and not a

portion thereof, by providing a written purchase notice (hereinafter:

“the Purchase Notice”) within five business days from the date of

the Sales Offer when the offer refers to a sale not through the stock

exchange (Tel-Aviv or NASDAQ), and within one business day

when the offer refers to sale through the stock exchange

(hereinafter: “the Sale Offer Period”). In spite of the above, as

regards sales through the stock exchange or in the event that the

Offerer noted in the sales notice to GMM that the sale notice is

based on an agreement between the Offerer and a person willing to

purchase fewer than the full number of shares offered in the sales

offer, GMM shall have the right to accept the offer within the Sales

Offer Period, regarding part of the offered shares.

1.17.1.2. Sending a purchase notice to the Offerer, as above, creates a

binding agreement between the Offerer and GMM regarding the

offered shares for which the Purchase Notice was received, free of

any encumbrances, and at a price and under terms set in the Sale

Offer.

1.17.1.3. GMM shall pay the proceeds for the Offered Shares within 14 days

of receiving the Purchase Notice (or on a later date, in the event that

the notice states as much), or, in the event that the Offerer asks to

submit a sales offer through the stock exchange (Tel-Aviv or

NASDAQ), then the payment will be paid within five business days

of the purchase notice, and in any event in return for receiving stock

66

transfer deeds and stock certificates for the offered shares, properly

signed.

1.17.1.4. If GMM has not announced that it received the offer within the Sale

Offer Period, GMM shall be seen as have refused the offer and the

Offerer may sell the Offered Shares to the person noted in the offer,

for a price and under terms no better than those noted in the offer,

for a period of 45 days from the expiry date of the sale offer. If the

offer is by way of a stock market sale (Tel-Aviv or NASDAQ, as

the case may be), the selling price of the shares shall not be limited,

and the Offerer shall have the right to sell the same number of

shares on the stock exchange within the period of time in question

(45 days) without being subject to the right of first refusal detailed

in Subsection 1.17.1.4. If the Offerer has not sold the Offered

Shares under the same conditions within the 45 day time period, the

Offerer’s right to sell the offered shares shall again be subject to the

right of first refusal as detailed in Section 1.17.1.1 above. In spite of

the above, in the event of a sale that is supposed to be carried out

through the stock exchange, after the offer but before the actual

sale, the price of each shall on this date or prior to the sale in

question drop by over 15% from the average price set in the offer,

then the Offerer must carry out one of the following: (a) fulfill the

conditions denoted in Sections 1.17.1.1-1.17.1.4 above before

making the seller (b) withdraw the offer and not sell the shares.

1.17.1.5. In spite of the above, the Lautmann Group can transfer, sell or

assign in some other manner the shares held by it to the following:

(a) Lautmann family members, as defined in the agreement, or any

trust benefitting or controlled by the Lautmann group or Lautmann

family members; (b) a person or entity controlling or controlled by

the Lautmann Group or members of the Lautmann family, as

defined in the agreement; (c) in the event of a company, to its

shareholders or their relatives, in accordance with their holdings in

said company, on the date the shareholders agreement was signed;

m(d) to any member of the Lautmann Group; (e) to a recognized

charitable organization; (f) one or more transfers of up to 200,000

shares in any twelve month period starting from the date of the

67

shareholders agreement. (Hereinafter together: “the Authorized

Recipients”).

1.17.1.6. Any sale or transfer as detailed in Section 1.17.1.5 to the

Authorized Transferees shall remain in effect only if the purchaser

or the recipient has made a written commitment to GMM to be

bound by all the conditions denoted above as if they were a party to

them instead of the Offeree.

1.17.1.7. Any transfer of control in any corporation directly or indirectly

holding the Company’s share to a party not constituting an

Authorized Transferee shall be considered transfer of Company

shares held by such a corporation and shall be subject to the

aforementioned right of first refusal. In such a case, the offering

party must send GMM, prior to the transfer of control, an offer

pertaining to the Company shares held by that party that shall be

subject to all the conditions applicable to the sales offer not through

sales on the stock exchange (Tel Aviv or NASDAQ) and giving that

the price of said shares shall be the weighted average of the closing

price of said shares on the Tel Aviv Securities Exchange over the

course of the three days of trade preceding the Sale Offer Date.

Regarding this subsection, control refers to holding 70% or more of

the issued capital (or other voting rights) of the relevant

corporation.

1.17.1.8. The shareholders agreement shall remain in effect until one of the

following occurs, whichever comes first: (in) the date on which

GMM ceases holding at least 20% of the Company’s capital; (ii) the

date on which the Lautmann Group, along with the Authorized

Recipients, holds fewer than 500,000 Company shares.

1.18. Legal Proceedings

The Company is not a party to any material pending legal proceedings exceeding 10% of

the Company’s current assets according to its 2010 Financial Statements.

1.19. Working Capital

1.19.1. Raw Material Inventory Holding Policy

68

The chief raw materials used by the Company are cotton string, cotton mixture and

synthetic string and other textile components. Most raw materials are purchased by

the Company parallel to receiving manufacturing orders from customers, and

therefore the Company does not generally hold raw material inventories for

extended periods of time. Over the course of 2010 the Company changes its policy

and increase the volume of raw material inventory in its possession due to rising

cotton prices, see 1.9.21.1 above.

1.19.2. Finished Product Inventory Holding Policy

The Company’s sales are mostly conducted in two manners, either on the basis of

specific production orders or on the basis of replenishment orders referring to a

product or line of products sold earlier; for details see 1.9.17 above.

The Company places a great deal of emphasis on high levels of inventory

maintenance, so that its ability to satisfy customer demands is not impacted. The

Company has recently changed its policy and increased its finished product

inventory due to price increases, in such a manner so as to comply with sales

projections.

The following are details of the various stages in working capital holdings from the

moment an order or agreed projection was received until collection of proceeds in

the two different methods of sale and in the Delta Marketing Israel Segment:

Ad-Hoc (Specific) Orders

Process Length

in Weeks

Accumulated Time Axis in Weeks

Receiving order from customer 0 0

Planning (including entering the order into the system)

1 1

Arrival of materials and fabrics 5-6 7

Manufacturing 4-6 12

Shipping 0.5-3 14

Payment to supplier (from invoice date) 5-6 17

Collection from customer Up to 9 23

69

Replenishment Order – Relevant Mainly to the Delta USA – Mass Market Segment

Process Length

in Weeks


Receipt of sales projection agreed upon by the customer

0 0

Issuing manufacturing order to subcontractor 1 1

Supply until arrival at Company distribution center 15-20 18

Payment to supplier (from invoice date) 5 23

Storage for customer 10-14 30

Collection from customer 10 40

Held Working Capital in Delta Israel Segment

The process starts at the fashion collection design stage, followed by transfer of product

files to subcontractors for pricing. This stage takes 10-12 weeks but has no impact on

wording capital.

Process Length in Weeks


Manufacturing order to supplier 0 0

Development of product by supplier until approval is received

16-18 *0

Manufacturing 2-4 3

Shipping 4 7

Payment to supplier (from invoice date) 8-12 17

Storage and distribution 15-20 24

Collection from customer 2-8 29

* Does not affect holding of working capital

1.19.3. Credit Policy

The following are details of credit scope balance and credit days on a quarterly basis of

Company customers and suppliers for 2010 and 2009

2010 2009

Average Scope* of

Credit Credit Days

Average Scope* of

Credit Credit Days

Customers 97 53 97 62

Suppliers 55 50 49 46

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* In millions of dollars on a yearly basis

The debit balance of the Company’s material customer (Wal-Mart) as of December 31

2010 amounted to $2.7 million. As of December 31 2009, when the Company had two

material customers (Wal-Mart and Marks & Spencer), their balance in the balance

sheet amounted to $26.8 million.

Credit days practiced with Wal-Mart are between 20 and 30 days, respectively, from

the date merchandise is shipped and invoices issued.

For details regarding the change in Wal-Mart’s payment terms, see Section 1.9.14

above.

The following are details regarding average inventory balance and inventory days, with

the exception of the Delta Israel areas of activity (for details see Section 1.10.19 above)

for 2010 and 2009.

2010 2009

Average inventory (in millions of

dollars)

91.3 83.1

Inventory days 71 68

The increase in average inventory in 2010 compared to 2009 derived from the

accumulation of inventory mainly in the Delta Israel Segment, see Section 2.3.3 of the

Board of Directors’ Report, which was offset by a reduction in inventory held for

Marks & Spencer and other UK customers due to changes in work methods with them

and the transition to FOB.

1.20. Finance

1.20.1. Average Interest Rate

The average interest rate of short term bank loans as of December 31 2010 and

December 31 2009 was 2.1% and 2.4%, respectively.

1.20.2. Restrictions Applicable to the Corporation in the Receipt of Credit

For details see Bank Liabilities, in 1.20.6 below.

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1.20.3. The Corporation’s Credit Frameworks and their Terms and Unused Credit Balances

as of the Report

Total lines of credit provided the Company by the banks for short and long terms as

of December 31 2010 amounted to a total of $175 million ($182 million in 2009),

$110 million of which was unused ($44 million in 2009). In addition to these lines

of credit, as of December 31 2010, the Company has a short-term bank deposit to

the amount of $40 million, mainly due to the proceeds of the debenture issue made

in January 2010, so that the sum of the Company’s unused credit resources

amounted to $150 million.

Note that as of December 31 2010, out of the sum of credit sources denoted above,

a sum of $22 million does not constitute binding lines of credit.

1.20.4. The Corporation’s Credit Rating

On December 19 2010 Midroog Ltd. announced that it would be ratifying an

A3/Stable rating for the debentures (Series K) issued by the Company and grant an

A3/Stable rating for the debentures the Company would issue by way of expanding

the series, at a scope of up to 105,000,000 NIS NV. See report from December 19

2010 (reference no. 2010-01-721767).

1.20.5. The Corporation’s Estimate Regarding the Need to Raise Sources of Finance

The Company finances its operations from its cash flow from current activity, from

bank credit frameworks and from the proceeds from the issuance of debentures

(Series K). From time to time, based on market conditions and its changing needs,

the Company studies the possibility of making its various sources of finance more

variable.

1.20.6. Bank Liabilities

1.20.6.1. The Company has bank liabilities deriving mainly from the need to

finance working capital and investments in fixed assets, as well as

as a result of the purchase of companies. These liabilities are

guaranteed by liens on assets of the Company and some of its

subsidiaries.

The Company's credit frameworks permit short-term loans

including current maturities of long-term loans and the receipt of

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documentary credit. The Company’s short-term loans reach their

redemption date within a period of up to one year. The redemption

date of some of the loans is shorter, in order to maintain flexibility

in financial management. The redemption date of the long-term

loans is on different dates up to 2014. The Company and some of its

subsidiaries have provided each other with collateral against their

debts.

1.20.6.2. In Israel, the Company has credit frameworks renewable for a

period of up to one year from a number of banks. The banks have

current liens on the Company's assets including its stock capital and

goodwill. Interest for the credit frameworks is set from time to time

in negotiations between the Company and each of the banks

separately. The banks have entered into a pari passu agreement

among themselves regarding the manner in which this collateral is

realized.

1.20.6.3. On December 9 2004, subsidiary Delta USA signed a credit

agreement with Bank Leumi U.S.A. and Bank Hapoalim Ltd.,

which is renewed each year. This credit agreement is guaranteed by

an unlimited floating lien on the assets and rights of Delta U.S.A.

and on some of the assets of its subsidiaries. As of December 31

2010, as part of the credit agreement, the balance of short-term

loans amounted to $20.7 million. The unused line of credit at its

disposal is $36.0 million. As of this report and in accordance with

the latest amendment to the agreement made in April 2010, the

credit rate for short-term loans is LIBOR + 2.75% per year or in

certain cases the amendment to the agreement allows loans at Prime

interest rates.

In April 2010, the aforementioned credit agreement was renewed.

Key points of the loan renewal agreement: a. the total short-term

revolving loan is $80 million; b. the short-term interest rate is

LIBOR + 2.75% per year and in certain cases the possibility of

Prime interest loans is given; and c. the loan agreement depends

upon the following financial stipulations:

(1) Delta USA’s net yearly profit shall not be below $1.

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(2) Capital investments shall not exceed $2 million on the

basis of the past twelve months (not including label

purchases).

(3) Tangible equity defined as equity less intangible assets

(mainly goodwill) shall not drop below $28 million.

(4) The ratio between financial liabilities and equity will not

exceed 3.5.

The Subsidiary, Delta USA, was given the option of redeeming the

loan granted it by the Company to the amount of $15 million under

the condition that it complies with financial stipulations as well as

the assumptions at the basis of the loan.

As part of the renewal of the agreement, it was decided to add Bank

Discount New York as a party to the credit agreement with Bank

Hapoalim and Bank Leumi USA.

The current agreement shall remain in effect until April 2011.

In December 2010 the subsidiary received a loan from the parent

company to the amount of $26.5 million and used the proceeds of the

loan to redeem an identical sum of the balance of short-term loans.

As of the balance sheet date and as of this report, the Company has

complied with the financial stipulations in question.

For further details see Note 20c to the financial statements in part C

of this report.

1.20.6.4. Long-term loans from banking corporations – over the course of

February and April 2009 the Company received loans to the amount

of $3 and $5.3 million, respectively, for 5 years.

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1.20.6.5. The following is information on short-term credit and long-term

loans taken by the Company from banks as of December 31 2010:

In Millions of Dollars % Average Interest

Short term loans 57.4 2.1%

Current maturities of long-term loans 2.1 5.7%

Long-term loans 3.6 5.7%

Total bank loans 63.1

1.20.7. Liabilities to Debenture Holders

Over the course of January 2010 the Company issued debentures (Series K) to the

amount of 113 million NIS (some $30 million) in accordance with the shelf offer

report published January 18 2010 by virtue of the Company's May 28 2008 shelf

prospectus. For details see 1.1.8 above.

The debentures began trade on the Tel-Aviv Securities Exchange on January 24

2010.

Over the course of December 2010 the Company expanded its series of debentures

(Series K) through a public offering to the amount of 98 million NIS (some $27.4

million) in accordance with the shelf offer report published December 23 2010 by

virtue of the Company's November 22 2010 shelf prospectus. Of the total proceeds,

$26.5 million were used to reduce a short-term bank debt in the U.S. by way of

providing a loan to the subsidiary, see Section 1.20.6.3 above.

The debentures in question entered trade on the Tel-Aviv Securities Exchange on

December 28 2010.

For further details regarding liabilities to debenture holders see Note 12a to the

Financial Statements in Part C of this report.

1.21. Goals and Business Strategy

1.21.1. Strategic Acquisitions

In order to achieve growth, the Company considers making strategic acquisitions

that will fill in its product lines and improve its relations with customers.

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In examining these purchases, the Company focuses on increasing the scope of its

branded activity.

Due to the size of the North American market, the Company has marked the

American market as a strategic target that can have a significant contribution to the

Company’s growth and profitability. By way of a series of acquisitions made by the

Group in North America, its presence has increased significantly in this market in

such a manner that the scope of sales to North America leapt from a total of $47

million in 1998, which constituted 16% of the Company's sales that year to $400

million in 2010, 65% of the Company’s sales.

Over the course of February 2009, the Company announced that it would be

entering into an agreement to purchase assets and some of the activity of Gibor in

the field of socks; for details see Section 1.1.4 above.

Over the course of December 2009 through June 2010 the Company was engaged

in negotiations to purchase international branded apparel assets activity in the field

of garments, which was eventually discontinued in light of the seller’s decision to

end sales proceedings.

In addition, the Company has marked the European market as having major

expansion potential.

1.21.2. Customers

One of the Company’s chief assets is its customers. The Company places an

emphasis on the level of service and innovation provided customers and acts on

several levels to develop business with them, as follows:

1.21.2.1. Increasing Sales to Existing Customers

The Company is interested in increasing the scope of sales of

existing products and new products presented to existing Company

customers. The Company believes that the broad selection of

products it offers, placing an emphasis on customer service and

reliability, provides the Company with a competitive advantage over

its competitors, as retailers generally prefer engaging a small number

of suppliers. The Company intends to continue this trend by

reinforcing and expanding the scope of the Company’s relationship

with its customers.

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1.21.2.2. Maintaining Relationships with Company Customers

The Company’s presence in the U.S. and in Europe allows the

Company’s design team to advise Company management on

marketing and sales in Europe and the U.S. Despite the fact that a

large portion of the Company’s products are sold under its

customers’ private brand names, the Company's development and

design experts cooperate closely with the Company's customers in

designing and developing products. The development and design

teams prepare presentations for customers that include, among other

things, an analysis of successes and failures from previous seasons,

and develop, along with the customer, the basic idea, product and

packaging, all in accordance with the customer’s needs. The

Company believes that the comprehensive package of services it

offers its customers is a significant factor in the steadfastness of

relations with it.

1.21.2.3. Developing Relations with New Customers

The Company develops relations with new customers who demand

high quality products to sell under their private labels, who are

capable of making large-scale orders, as well as display significant

growth potential and demand the high level of service offered by the

Company. Among new customers acquired recently are: "Macy's",

"Spanx", "Decathlon", "Triumph", "LuLu Lemon".

1.21.3. Innovation and Investment in Research and Development

The Company invests a great deal of resources in the design and development of its

products in order to provide innovation and fashionability to its customers, with the

understanding that this innovation is what differentiates it from its competitors.

1.21.4. Streamlining Production Processes and the Chain of Supply

The Company is constantly working to streamline its production processes, by

continuing to transfer manufacturing processes requiring significant manpower to

countries offering cheap workforce, automation of manufacturing processes and

presenting new technologies.

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The Company invests in the development of its chain of supply while recognizing

its importance in guaranteeing high standards of service to its customers.

1.21.5. Branding

The importance of branding is constantly increasing and plays a major role in the

end customer’s (the consumer’s) decision whether or not to purchase a product.

Behind each brand name is a message that creates an emotional connection between

the consumer and the product. The Company, which has acted in the past as a

manufacturer for private labels, began acquiring licenses to market men’s and

women’s undergarments and socks under leading brand names. The Company

holds the right to use the following brands, among others: “Wilson” and

“Converse” (for men’s and women’s socks and undergarments in European and

North American markets), “Tommy Hilfiger” (for women’s products in the U.S.

and a number of other countries), “Maidenform”, “Daisy Fuentes” (for girls in the

U.S.), “MLB” (socks) and “Lucky" (for women and men in the U.S.).

The Company intends to continue acquiring licenses for marketing under additional

brand names.

Over the course of Q1 2010 the Company acquired an additional usage right for the

“Nearly Nude” brand name, in return for $0.6 million.

1.21.6. Reinforcing and Expanding Retail Activity

The Company aims to reinforce the retail activity segment of its business, whether

by expanding existing Israeli activity or by making strategic purchases.

1.21.7. For details regarding the opening of a new chain of shops selling children’s clothing

in the Delta Israel Segment see Section 1.10.20 above.

1.22. Projected Developments in the Coming Year

1.22.1. Forecast of Material Acquisition of Fixed Assets and the Company's production

capability after making the purchases in question.

From time to time, the Company invests in the purchase of fixed asset items, such

as knitting, coloring and sewing machine and other equipment based on

requirements and needs at various production sites. As of this periodic report, the

Company has no material obligations for purchases that do not appear in the

Financial Statements.

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1.22.2. Projected Material Changes in Organizational Systems and Worker Rolls

The Group does not forecast any material changes in its organizational systems and

worker rolls.

1.22.3. For details regarding the opening of a new chain of shops selling children’s clothing

in the Delta Israel Segment see Section 1.10.20 above.

1.23. Financial Information Regarding Geographical Segments

The Company does not operate according to geographical segments.

The following are details of the Company’s sales by geographical region in 2010, 2009

and 2008, in thousands of dollars:

2010 2009 2008

North America 400,198 352,455 375,905

Europe (except the UK) 83,113 65,178 70,563

Israel 78,202 75,204 81,069

UK 55,976 77,827 94,609

Others 2,585 1,870 688

Total sales 620,074 572,534 622,834

For further details see Note 5c to the Financial Statements.

1.24. Taxation

1.24.1. The Company:

1.24.1.1. Tax benefits under the Encouragement of Capital Investments Law,

1959 (in this section – “the Law”).

The Company received investment grants from the State of Israel.

Entitlement to these grants and other benefits was stipulated on the

fact that the Company will uphold the terms set in the Law, resulting

regulations and letters of approval for certain investments in

authorized factories. In the event that the conditions attached to these

grants are not met, the Company may be asked to return the sum of

the grants, in whole or in part, including CPI linkage differences

from the date the grant was received.

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The Company placed floating liens on all of its assets for the State of

Israel as collateral for the terms of the grant.

The income from this approved program shall be tax free for the first

two years, starting from the year the Company first had taxable

income and will be charged corporate tax and a rate of 25% or lower

according to corporate tax rate revisions and the rate of foreign

investment in the Company in the balance of the benefit period, so

long as 14 years have not passed from the year approval was granted

and 12 years from the year the factory began operations.

1.24.1.2. Measurement of results for tax purposes in accordance with the

Income Tax Law (Adjustments Due to Inflation), 1985 (hereinafter

- “the Adjustments Law”)

Pursuant to the Adjustments Law, results for tax purposes are

measured in real values, according to changes in the Consumer Price

Index. In accordance with the Income Tax Regulations, the Company

and certain of its subsidiaries may adjust their results for tax

purposes on the basis of changes in the dollar’s exchange rate, in lieu

of changes in the CPI. The Company and one of its subsidiaries

chose to do so.

Pursuant to the Income Tax Law (Adjustments Due to Inflation)

(Amendment 20), 2008 (hereinafter – “the Amendment”), passed by

the Knesset on February 26 2008, the provisions of the Adjustments

Law would no longer apply to the Company starting from the 2008

tax year. In accordance with the regulations, transition orders were

established regarding the end of the incidence of the Adjustments

Law, which applied to the Company up to the end of the 2007 tax

year.

1.24.1.3. Tax Rates

The income of the Company and its subsidiaries is taxed at statutory

tax rates.

On July 23 2009 it was published in the 2203 Law Book, the

Financial Reorganization Law (Legal Amendments to the

Implementation of the Financial Plan for 2009-2010) 2009

(hereinafter: "the Law"), that revised, among other things, the

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corporate tax rates set in a previous amendment. As a result of these

amendments, the tax rates will decrease in the following manner: in

2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20%

and 2016 onward – 18%.

1.24.2. Non-Israeli Subsidiaries

Subsidiaries incorporated outside of Israel, excluding those incorporated in free

trade zones, are assessed for tax purposes pursuant to the laws of the countries of

their incorporation.

The following is a summary of tax laws applicable to the U.S., in which the

Company has material activity:

As a rule, the (federal) corporate tax rate in the U.S. is 34%.

Weighing in state tax in the various states in which Delta USA is active, the

effective tax rate applying to it is between 36% and 38%.

The U.S. and Israel have a treaty to prevent tax redundancy.

As a rule, tax deduction rates at source according to the tax treaty between the U.S.

and Israel are as follows:

For dividends: 12.5%.

For interest payments: 17.5%.

For royalties: 15%.

1.24.3. Losses for Tax Purposes Transferrable to Subsequent Years

Losses for tax purposes transferrable to subsequent years derive from the Company

in Israel, and as of December 31, 2010 and 2009 amounted to $65 million and $85

million, respectively.

The tax asset recognized as of December 31, 2010 $7 million.

Transferable losses for tax purposes in Israel starting 2008, after the merger, may

be offset over an unlimited period of time.

1.24.4. Structural Changes

On March 2, 2008, the Tax Authority approved an application for tax-exempt

restructuring of the Delta Group, effective from December 31 2007; pursuant to the

restructuring, Delta Galil merged Delta Marketing and Tag Li into it in such a

manner that Delta Marketing and Tag-Li transferred all their assets and liabilities to

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Delta Galil for no return, so that Delta Marketing and Tag Li were eliminated

without being liquidated.

Pursuant to the approval received, restrictions were imposed on offsetting losses, in

such a manner that the amount that may be offset each year would not exceed 1/12

of total losses (some $7 million) or 50% of taxable Company revenues that year

before offsetting losses from previous years, whichever is lower, as well as

regarding the future sale or allocation of shares for two years from the merger date.

1.25. Discussion of Risk Factors

This section includes forward-looking information. Forward-looking information is

uncertain information regarding the future, based on information existing at the Company

on the periodic report date and includes Company estimates or intents as of the periodic

report. Results in practice may be materially different from the results estimated or

implied from these assessments. In certain cases, segments featuring forward-looking

information may be identified by the presence of words such as “we estimate”, “we

mean”, “we believe”, “we predict” and so one, but this information may also appear with

different wording.

1.25.1. Macro-Economic Risk Factors

1.25.1.1. Increased Costs of Purchasing Finished Products from East Asian

Manufacturers.

The Company purchases and manufactures a significant portion of the

products it sells, from subcontractors or at its factories located in East

Asian countries. Increases in the costs of finished products and self-

manufacturing costs, may erode the Company’s gross profits.

1.25.1.2. Exchange Rate Volatility

As the Company is active in a variety of countries, it is exposed to risks

deriving from changes in exchange rates of various currencies.

Fluctuations in the exchange rates of various currencies may have an

impact on the Company’s operating results, mainly in light of the fact that

the Company’s sales are carried out around the world in a variety of

currencies. In order to limit the Company’s exposure to fluctuations in

exchange rates between the various currencies, from time to time the

Company considers taking action to protect its currency exposure so that

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purchases and other costs will be denominated in the sales currency,

including by purchasing future contracts to convert foreign currency to the

USD at a pre-fixed price, and it acts to change the sales currency to the

USD. At the same time, these hedging agreements will not protect the

Company if the depreciation of these currencies vs. the dollar continues

after the end of the future contract periods. For further details, see Section

4.3 of the Board of Directors’ Report, Chapter B of the Periodic Report.

1.25.1.3. Free Trade Agreements

Changes to global free trade agreements may lead to changes in customs

and quotas procedures in the countries constituting the Company’s chief

target and production countries – the Company currently enjoys free trade

agreements between Israel and the U.S., Canada, the EU and the European

Free Trade Association as well as Mexico. The trade agreements allow the

Company to sell the products manufactured in Israel to the U.S., Canada,

and EU and EFTA member states exempt of customs and import quotas.

The U.S. has expanded the benefits covered by the U.S-Israel free trade

agreement to goods processed in the Company’s Jordanian facilities, and

as a result, the Company’s products manufactured in Israel and Jordan are

customs-free for EU and EFTA market. Following the free trade

agreement between the EU, the U.S. and Egypt, the Company’s products

manufactured in Egypt are exempt of taxes and quotas for EU member

states and the U.S.

Loss of the free trade advantages will cancel one of the Company’s most

important competitive advantages and may lead to erosion in profitability.

1.25.1.4. Economic Situation in Target Markets

The economic situation in the target markets and concerns of deepening

recession in these markets may impact consumer habits and the scope of

their consumption in the areas of activity and may lead to a reduction in

the Company’s sales; for details see Section 4.3.1 of the Board of

Directors’ Report, Chapter B of the Periodic Report.

1.25.1.5. Security and Political Situation.

The political, economic and security status of the State of Israel has a

direct impact on the Company, the management, offices and some of the

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manufacturing facilities of which are located in Israel. Since the

establishment of the State of Israel in 1948, Israel and its Arab neighbors

were engaged in a number of armed conflicts. In July and August 2006, the

State of Israel was involved in a war in the country’s north and over the

course of January 2009 it was involved in a war in the country’s south. In

spite of efforts to advance peace processes between the State of Israel,

neighboring Arab states and the Palestinian people, the possibility of

renewed and/or escalated hostilities against Israel still exists. These

hostilities may set Israel’s international commerce activities back and have

a material impact on the Company’s activity. In addition, Israel features a

reserve duty obligation, both on a yearly basis and/or during emergencies,

applicable to citizens of the State of Israel and permanent residents. The

Company cannot predict the full impact of this reserve duty on the

Company's work force, in the event that some of the Company’s workers

and executives are called up to reserve duty.

In light of the Company’s activities in Jordan and Egypt, the security

situation between Israel and the Arab states in general and between Israel

and Jordan and Egypt in particular may impact the Company’s activities

and production capabilities in these countries. In addition, in January 2011

protests broke out in Egypt, demanding a change in their regime, and in

light of this the Company shut down activity in its plant for a number of

days, reopening it on February 6 2011. In light of the fact that operations in

Egypt are responsible for supplying 11% of the Company's sales, a

worsening of the political, economic and social instability in that country

may impact the Company’s activity. In addition, in light of the expected

change in the Egyptian regime, uncertainty exists regarding the new

regime’s policy and relations between Egypt and Israel in particular and

Israeli-identified companies in particular.

1.25.2. Industry Risk Factors

1.25.2.1. Competition

The Company might be incapable of dealing with competition on behalf of

different manufacturers with economic, geographic and other advantages

over the Company. The Company is in direct competition with a number

of garment manufacturers who enjoy reduced manufacturing costs due to

84

economy of scale, cheaper work force, geographic proximity to consumers

and/or suppliers and who have larger economic resources and/or markets at

their disposal. Increasing competition on behalf of the competitors may

lead to pressure to reduce prices or to loss of market shares, and thus have

a negative impact on the Company's revenues and profitability. No

certainty exists that the Company will successfully handle competition

with existing or new competitors.

1.25.2.2. Cancellation of Textile Product Import Quotas

Starting January 1 2005, the WTO member nations withdrew some of the

quotas on textile products. As a result, some of the textile products

manufactured in WTO member states are no longer limited by quotas.

These changes allow retailers, clothing companies and others to import

unlimited amounts of textile products from member states in which

production costs are low. As a result, textile and garment prices around the

world, including those of Company products, are facing pressure to lower

prices, and these prices may continue dropping. In the event that prices

decrease faster than the Company’s ability to reduce costs, the Company's

business and operating results may be negatively impacted.

1.25.2.3. Seasonal Factors

As a result of seasonal fluctuations, the results of the Company's activity

on a quarterly basis might not reflect the Company's future performance. In

light of seasonal consumer purchases, the Company's revenues underwent

fluctuations in its yearly and quarterly operating results in certain years, in

such a manner that the Company’s revenues in the last two quarters of

certain years exceeded the Company’s revenues in the first two quarters

thanks to holiday and back-to-school purchases. In light of this

inconsistency, the results of the Company's activity on a quarterly basis

might not reflect the Company's future performance. The above

inconsistency may make it harder for investors to properly estimate the

Company's future performance.

1.25.2.4. Changes in Fashion Preferences

The garment industry is subject to changes in fashion preferences and

consumer fashion trends. The Company’s sales rates may decrease if the

85

Company and/or its customers err in evaluating current fashion. The

Company’s success is partially dependent on its ability to design and

produce products its customers like and which withstand changes in

fashion trends. The Company may fail in its attempt to predict fashion

trends. In the event that the Company and its customers err in evaluating

fashion trends, product orders from Company customers may decrease,

which may have a negative impact on the Company.

1.25.2.5. Changes in Raw Material Costs and Shipping Prices

The Company has no control over changes in the prices of raw materials it

uses as well as changes in shipping prices. Increases in costs of raw

materials and/or shipping may harm the Company’s profitability. The

majority of raw materials used by the Company for the manufacture of its

products are cotton strings, Lycra and rubber. The Company’s financial

results are to a large degree dependent on the cost and availability of raw

materials. Raw material prices, as well as shipping prices, are unstable, in

light of variable supply and demand conditions and other market factors

over which the Company has no control. The Company might not be able

to pass on the increase in costs in question to its customers. This situation

may have a negative impact on the Company and on its economic status.

1.25.2.6. Regulatory Developments

As the Company is active in the international market, its is exposed to

changes in foreign laws, export restrictions, protective tariffs, trade blocks,

changes in tax laws, difficulties in hiring appropriate personnel and

management of international operations, social, political and economic

changes as well as other risks inherent to international business activity,

any of which may have a significant impact on the Company’s financial

results. Any of the above factors may have a negative impact on the

Company’s ability to provide or receive merchandise under competitive

conditions and under worthwhile timetables and may have a negative

impact on its operating results.

1.25.2.7. Political Situation in the Countries in which the Company is Active

The political situation in the countries in which the Company is active,

which include Egypt, Jordan, Israel, Turkey, Bangladesh and Pakistan may

86

have an impact on the Company’s activity, and therefore its financial

results.

1.25.3. Risk Factors Unique to the Company

1.25.3.1. Dependence on Key Customers

A significant portion of the Company’s revenues up to 2009 derived from

sales to two material customers active in Europe and the U.S. As noted, in

2010 one of the customers in question ceased serving as a material

customer as defined in the regulations. A reduction in orders from a key

customer for Company products may have a material negative impact on

the Company’s revenues. The Company’s agreements with its customers,

including the customers detailed in this report, are short-term agreements

and do not include minimum purchase requirements. Company customers

may decide not to purchase Company products in the future at the same

amount or under the same conditions as in the past. Any decrease in

purchases on behalf of these key customers, or any material customer, may

have a negative impact on the Company's economic results.

1.25.3.2. Deterioration in Relations between Israel and Neighboring States

The security situation in Israel and in the region may influence the

Company’s business. Deterioration in the relations between Israel and its

neighbors, in some of which Company production facilities are located,

may disrupt production processes and product purchases on behalf of the

Company and harm its financial results. Of the Company’s 2010 sales,

some 17% derived from sales of merchandise manufactured in Egypt and

Jordan. The Company’s activity in these countries is dependent, to a great

degree, on the relations between them and Israel. A state of hostility

existed in the past between Israel and Jordan and Egypt. Furthermore,

starting October 2000, the level of hostility between Israel and the

Palestinians increased and as a result, a number of Arab states have

lowered the level of their relations with Israel, particularly in terms of

economic and commercial activity. Deterioration in the relationship

between Israel and Jordan or Egypt may impact the Company’s

manufacturing and thus have a negative impact on the Company.

87

Following the protest flotilla takeover incident on May 31 2010, severe

diplomatic tension has arisen between Israel and Turkey, and relations

between the two countries have deteriorated. Of the Company’s 2010

sales, some 5% derived from sales of merchandise manufactured in Turkey

by subcontractors. In the event that the relations between the countries

worsen and reach the level of severance of diplomatic relations, this may

have a negative impact on the Company. For further details, see Section

1.25.1.5 above.

1.25.3.3. Completion of Integration Proceedings with Subsidiaries

In recent years, the Group has purchase a number of companies,

integration with which has not been completed and which claim

administrative resources. The possibility exists that the Company fails to

successfully complete the integration process. The Company is continuing

with the integration process with the aim of merging and combining the

facilities, IT systems and personnel of the purchased companies into the

Company. For the purpose of this integration, the Company allocates a

great deal of the time inputs of its senior management from their day-to-

day activities, and as a result a significant work load is created for the

Company’s management team. Completion of the integration process may

be negatively influenced by economic conditions, failure to integrate

economic and operational systems, reactions from competitors or

customers or regulatory developments, insomuch as such exist. Failure on

behalf of the Company to successfully complete integration may have a

negative impact on the Company.

1.25.3.4. Direct Engagement by Retailers with Far East Manufacturers

In recent years, a number of retail chains have been trying to circumvent

companies designing and developing undergarments and enter into direct

relationships with factories so that they manufacture products directly for

them. The Company believes that this phenomenon will be found with

basic products intended for the general market, where the design element is

less significant. The Company’s sales may be impacted in the event that

this phenomenon becomes more common.

1.25.3.5. Reduction in the Market Share of Company Customers

88

The Company’s sales may be impacted in the event that Company

customers are unsuccessful in competing in the competitive markets in

which they are active. In the event that a central customer’s sales have

decreased for some reason, whether or not it is has any connection to the

Company and its product, the Company’s sales to such a customer may

also drop.

1.25.4. The following table shows the Company’s evaluation of the degree of impact of the

risk factors detailed above on the Company:

Degree of Impact of Risk Factor on the Company

Major Impact Medium Impact Minor Impact

Macro risks

Increased costs of purchasing finished products from East Asian manufacturers.

X

Exchange rate volatility X

Free trade agreements X

Economic situation in target markets X

Security and political situation. X

Industry risks

Competition X

Cancellation of textile product import quotas X

Seasonal factors X

Changes in fashion preferences X

Changes in raw material costs and shipping prices

X

Regulatory developments X

Political situation in the countries in which the company is active

X

Risk particular to the company

Dependence on key customers X

Deterioration in relations between Israel and its neighbors

X

Completion of integration processes with subsidiaries

X

Direct engagement by retailers with East Asian manufacturers

X

Reduction in the market share of Company customers

X

1


Part B

Report of the Board of Directors on

the State of the Corporation's Affairs

December 31, 2010

2

Report of the Board of Directors on the State of Corporate Affairs

We hereby present to you the report of the Board of Directors of DELTA GALIL Industries Ltd.

(hereinafter: “the Company” or “Delta”) in reference to the Consolidated Financial Statements of the

Company and its subsidiaries in Israel and overseas (hereinafter: “the Group”) for the year ending

December 31 2010 in accordance with the Securities Regulations (Periodic and Immediate Reports),

1970.

1. Summary Description of the Corporation and its Business Environment

1.1. Overview

The Company is engaged in the design, development, production, marketing and sales

of undergarments and socks for men, women and children.

Among the Group’s customers are leading retail chains such as Wal-Mart, Target,

Victoria's Secret, Marks & Spencer Kohl's, and Hema, as well as leading brands like

Nike, Calvin Klein, Hugo Boss, Maidenform Tommy Hilfiger, Spanx, Under Armour

and more.

The Group also sells its products under franchise brands, including: Maidenform®,

Converse®, Wilson®, MLB, Tommy Hilfiger® and Lucky® etc. and under its “Delta”

private label in its domestic operations in Israel.

Delta designs and develops its products primarily in Israel, and the US whereas

production is mostly done via sub-contractors and in its facilities in the Middle East

and in the Far East.

1.2. Material Events in the Corporation’s Activities During and After the Reported Period

1.2.1. Dividends

On May 23 2010 the Company declared that it would be distributing dividends to

the amount of $1.5 million, at 6.41 cents per share, distributed on June 16

2010(see May 24 2010 immediate report, ref. 2010-01-489957).

On August 10 2010 the Company declared that it would be distributing dividends

to the amount of $1.5 million, at 6.41 cents per share, distributed on September 5

2010 (see August 11 2010 immediate report, ref. 2010-01-582885).

3

On November 28 2010 the Company declared that it would be distributing

dividends to the amount of $2 million, at 8.5 cents per share, distributed on

December 21 2010(see November 29 2010 immediate report, ref. 2010-01-

698475).

1.2.2. Declaration of Dividends Distributed Subsequent to the Balance Sheet Date

On February 16 2011 the Company decided to distribute dividends to the amount

of $2 million, at 8.54 cents per share, to be distributed on March 15 2011

according to the dollar’s representative rate of exchange as published the day

prior to the payment date. The determining date for this distribution shall be

February 28 2011 and the “X” date shall be March 1 2011. For further details see

Section 4 below.

1.2.3. Purchase of Shares by Company CEO, Director and Controlling Shareholder, Mr.

Isaac Dabah

In the period between June 6 and June 10 2010 Mr. Isaac Dabah purchased

(through GMM Capital LLC) 22,197 Company shares at an average price of 27

NIS, and an additional 1,000 Company shares were purchased in December at 29

NIS, so that after the purchase in question, his holdings in the Company's issued

and paid-up stock capital and voting rights is 54.4% (see ref. 2010-01-512271,

2010-01-51393, 2010-01-515178, 2010-01-516789, 2010-01-518397, 2010-01-

710319).

On June 9 and 10 2010 the Sterling Macro investment fund (managed by Mr.

Isaac Dabah) purchased 14,500 Company shares at an average price of 28 NIS,

with an additional 3,700 Company shares purchased at an average price of 28

NIS, so that after the purchases in question its holdings in the Company's issued

and paid-up capital and voting rights is 1.6% (see ref. 2010-01-576798, 2010-01-

.(2010-01-706878 -ו 2010-01-705216 ,518400

On January 31 2011 the Sterling Macro investment fund (managed by Mr. Isaac

Dabah) purchased 8,524 Company shares at an average price of 31.31 NIS, so

that after the purchase in question its holdings in the Company's issued and paid-

up capital and voting rights is 1.67% (see ref. 2011-01-034515).

4

1.2.4. Entering an Agreement to Grant option to Purchase Real Estate Property in

Nahariyah

On March 2, 2010, the Company announced it had signed an option agreement,

whereby it granted a group of buyers an option to acquire real estate in Nahariyah

owned by the Company - 25.8 hectares, before expropriation, known as Block

18206 Lot 18 (hereinafter: “the Real Estate”), over the course of a four month

period starting with the signing of the option agreement (hereinafter: “the

Option”). On June 22 2010, the Company signed a revision to the Option

Agreement, according to which the option exercise period was extended by an

additional month (see report from June 23 2010, ref. 2010-01-529776). On July

27 2010, the Company signed an additional revision to the Option Agreement,

according to which the option exercise period was extended by an additional two

months, meaning up to October 3 2010. This additional extension was requested

by the option recipient so that they could study the influence - if any - of a

regional outline plan from 2007 on the Real Estate’s construction rights (see

report from July 28 2010, ref. 2010-01-567957).

In return for the option in question, the purchasers paid the Company a total of

2,000,000 NIS (plus tax), which will not be refunded the purchasers even if they

choose not to exercise the option. In addition, the purchasers deposited an

additional 3,000,000 NIS (plus tax) with a Company representative as a good

faith deposit. The option agreement states that if the option is exercised, the good

faith deposit shall be used for payment as part of the proceeds and if the

purchasers decide not to exercise the options, the purchasers shall have their good

faith deposit returned, with interest.

In return for the Company’s agreement to extend the option, the Company

received an additional sum of 500,000 NIS (plus tax) to be deducted from the

good faith deposit; so that if the option is not exercised, the Company shall

receive a total of 2,500,000 NIS (plus tax). At the same time it was agreed that if

the purchasers choose to exercise the option and sign a full purchase agreement

by the end of the option period, the sum of 500,000 NIS would be considered

part of the proceeds owed the Company for the Real Estate.

5

1.2.5. Entry into Sales Agreement for the Sale of the Nahariyah Real Estate

On October 3 2010, the Company received written notice from the option

holders of their intent to exercise the option and sign an agreement to purchase

the Real Estate in Nahariyah - some 25.8 hectares, before expropriation, known

as Block 82106 Lot 18 (hereinafter - “the Nahariyah Land”). According to the

option agreement, the parties must sign a sales agreement within 15 days of

receiving the exercise notice, and if the option holders refuse to sign the

agreement in question, this shall be seen as reneging on the option notice – which

shall award the Company with the proceeds given for the option (2.5 million NIS

plus tax).

On October 6 the Company announced that on October 5 2010 it signed a sales

agreement, in which it sold the Nahariyah Land to a buyer’s group (4 private

companies). According to the sales agreement, the purchasers shall pay the

Company $23,972,602 US (plus tax) for the Nahariyah Land, of which the

Company has received $7.4 million, with the balance paid in payments according

to a number of milestones deployed across a period of up to 39 months from

signing the sales agreement; it was agreed that total compensation in NIS shall be

no less than 91,000,000 NIS.

As part of the agreement the Company assigned the rights (and obligations) to

the purchasers according to a claim submitted by the Company to the Nahariyah

Design and Construction Local Council as per Section 197 of the Design and

Construction Law for the real estate (as stated in the Company’s July 28 2010

report).

The capital gains expected for the Company are estimated at between $18 and

$20 million US before tax, and between $16 and $18 million after tax.

In accordance with the preliminary decision (pre-rolling) the Company received

from the Securities Authority, capital gains from the transaction will be

recognized upon completing the terms included in the sales agreement which

precede the third payment from the purchasers and include removal of the sludge

and evacuation of the tenants from the property. Accordingly, the Company

6

continued to classify the property as real estate available for sale in its Financial

Statements.

For further details see immediate report dated January 4 2010 (ref. 2010-01-

633762), March 2 2010 (ref. 2010-01-400428), June 23 2010 (ref. 2010-01-

529776) and July 28 2010 (ref. 2010-01-567957), dated October 4 2010 (ref.

200-01-633762) and dated October 6 2010 (ref. 2010-01-637704), presented by

reference.

1.2.6. Following the June 3 2010 immediate report (ref. 2010-01-509061), on June 29

2010 the Company announced that negotiations for purchasing branded assets

and activity in the field of clothing was discontinued due to the seller's decision

to cease sales proceedings. For further details see immediate report dated June 29

2010 ref. 2010-01-535980.

1.2.7. Approval of Interested Party Terms of Employment

1.2.7.1. Approval of the terms of employment of the daughter of the Company

controlling shareholder, acting as merchandising manager in a subsidiary.

On October 13 2010 the Company’s Audit Committee approved the terms of

the employment of the daughter of the Company's CEO and controlling

shareholder as product manager and merchandising manager at Delta Galil

USA Inc. The terms of her employment were ratified at the Company’s

general meeting held December 27 2010.

For further details, including on the matter of Ms. Dabah’s employment, see

referenced transaction with controlling shareholder and general meeting

summons report published November 18 2010, ref. 2010-01-685278.

1.2.7.2. The approval of the terms of employment of Mr. Yitzhak Weinstock,

Company director, as Chief Operations Manager of subsidiary.

On October 13 2010 the Company’s Audit Committee and Board of

Directors approved the terms of the employment of Company director Mr.

Yitzhak Weinstock at Delta Galil USA Inc. (in this section: “the

Subsidiary”). In this position, starting January 1 2011 he shall serve as the

Chief Operations Officer (COO) of the Company’s activities in North

America, including the activities of the subsidiary, as a full-time job. The

7

terms of his employment were ratified at the Company’s general meeting

held December 27 2010.

For further details, including on the matter of Ms. Weinstock’s employment,

see referenced transaction with controlling shareholder and general meeting

summons report published November 18 2010, ref. 2010-01-685278.

1.2.8. On November 21 2010 the Company submitted a draft shelf prospectus on the

basis of its December 31 2009 and June 30 2010 Financial Statements (ref. 2010-

01-687153).

1.2.9. On December 27 2010 a special general meeting was conducted in which the

following resolutions were reached:

1.2.9.1. Appointment of directors – appointment of part of the directors who are not

external director (Israel Baum, Isaac Dabah, Yitzhak Weinstock, Tzipporah

Carmon, Noam Lautman and Dr. Gideon Shetiat) to an additional term in

office until the next annual assembly.

1.2.9.2. Appointment of Kesselman and Kesselman, C.P.A. as the Company's

accountant and auditor for 2011 and authorizing the Company's Board of

directors to set its fee according to the extent and nature of services given the

Company during 2011.

1.2.9.3. Discussion of the Company’s Financial Statements and Board of Directors’

Report for the year ending December 31, 2009.

1.2.9.4. Approval of the terms of employment of Ms. Gloria Dabah, daughter of the

Company’s controlling shareholder, as product manager and merchandising

manager in a subsidiary, as detailed in 1.2.7.1 above.

1.2.9.5. Approval of the terms of employment of Mr. Yitzhak Weinstock as Chief

Operations Manager of a subsidiary, as detailed in 1.2.7.2 above.

For further information on the matters on the general meeting’s agenda see the November

18 2010 immediate report ref: 2010-01-685278.

1.2.10. Securities Issue

1.2.10.1. On January 20, 2010,the Company announced the results of the issue of

debentures (Series C) carried out as per the shelf offering by the Company

8

dated January 18 2010 (hereinafter – "the Shelf Offering Report"),

published pursuant to the Company's shelf prospectus dated May 29, 2008.

For further information regarding the issue as per the Shelf Offering Report,

an early tender carried out for institutional investors and the results of the

issue, see referenced immediate reports from January 19 2010, ref. 2010-01-

359094, January 17 2010, ref. 2010-01-355935 and January 20 2010 ref.

2010-01-362040.

The immediate (gross) proceeds from the debentures (Series C) issued

according to the Shelf Offer Report amounted to 113 million NIS.

1.2.10.2. On December 27, 2010, the Company announced the results of the issue of

debentures (Series C) carried out by way of the expansion of the series as per

the shelf offering by the Company dated December 23 2010, published

pursuant to the Company's shelf prospectus dated November 22 2010.

For further information regarding the issue as per the Shelf Offering Report,

an early tender carried out for institutional investors and the results of the

issue, see referenced immediate reports from December 23 2010, ref. 2010-

01-729624, December 23 2010, ref. 2010-01-728115, and December 27 2010

ref. 2010-01-731286.

The immediate (gross) proceeds from the 92,632,000 debentures (Series C)

issued according to the Shelf Offer Report amounted to 98,189,000 NIS.

The Company has entered into a swap agreement with a banking corporation,

to swap NIS cash flows for a commitment to pay debenture holders with a

dollar cash flow. The dollar interest set in the transaction is 6.08%.

1.2.10.3. On January 30 2011 the Company announced that in light of the current

situation in Egypt and the difficulty in conducting routine activity, Company

management has decided, at its own initiative, not to open the factory gates.

The activity in Egypt, which is intended largely for the operations of the

Global Division, Upper Market Share, is responsible for supplying 11% of

the Company's sales, of that 9% is manufactured at the Company's plant and

the balance is provided by local subcontractors.

9

On February 6 2010 the Company announced that its Egyptian plant had

reopened and that work was continuing as usual. Furthermore, it announced

that due to the curfew in place, work at the factory would end an hour and a

half before the regular closing time upon the postponement of the regular

closing time, work will resume ending at its usual hour. Work returned to its

usual hours this week in light of the change in curfew times.

The Company estimates that a work stoppage of up to two weeks will have

no material impact on its activities. Work at the plant depends on the

situation in Egypt and Company management continues to keep a close eye

on events. If necessary, the Company shall consider, in conjunction with its

customers, finding alternatives for manufacturing its products.

For further details see immediate reports dated January 31 2011 and February

6 2011 ref. 2011-01-032037, 2011-01-039138.

Board of Directors' Discussion of the State of Corporate Affairs

2. Analysis of Financial Position

2.1. Balance Sheet

The Group’s consolidated balance sheet as of December 31, 2010 amounted to $419.6

million, compared to $376.4 million on December 31 2009.

The Group’s consolidated current assets as of December 31, 2010 amounted to $273.4

million, compared to $222.7 million on December 31, 2009.

The increase in current property and in the balance sheet total as of December 31 2010

compared to December 31 2009 derived mainly from a $40.6 million increase in

inventory balance, largely due to the activity of Delta U.S.A. (Mass Market), see

Section 2.3.3 below. Furthermore, the increase in current property was also derived

from an $18.3 million increase in cash and cash equivalents as a result of depositing

part of the proceeds of the debenture issue in a short-term banking deposit which was

partially offset by a decrease in the customers item.

The Group’s consolidated current liabilities as of December 31, 2010 amounted to

$154.9 million, compared to $187.2 million on December 31 2009.

The decrease in current liabilities as of December 31 2010 vs. December 31 2009

derived mainly from the proceeds of the debenture offering made in December 2010

which was used to repay short-term credit.

10

Group equity as of December 31, 2010 amounted to $197.3 million, or 47.0% of the

balance sheet total, compared to $178.5 million, or 47.4% of the balance sheet total as

of December 31 2009.

The increase in the Group’s equity as of December 31 2010 compared to December 31

2009 derived mainly from the year’s profits less dividends distributed.

2.2. Operating Results

2.2.1. 2010 saw a continuation of the gradual improvement in the Company's results, an

improvement that began in the second half of 2009 and is a result of streamlining

steps and implementation of the reorganization plan declared by the Company in

2009. For details see 1.2.1 of Part A of this annual report.

These steps included a decrease in overhead, improvement in supplying customers

on time, reducing failure costs, improvements to inventory management and

increasing inventory turnover, an increase in brassiere sales and assimilation of

activity purchased from Gibor.

The improved results were achieved in spite of rising costs of raw materials and the

cost of finished products which led to an erosion of gross profits in the second half

of the year, mainly in the Delta U.S. – Mass Market activity, due to time needed to

adapt sales prices to customers.

11

2.2.2. The following are concise Group statements of operations for 2010 and 2009 and by quarter in 2010 and for the fourth quarter of 2009:

In Thousands of Dollars, Except for Earnings per Share Data Year Q4 Q4 Q3 Q2 Q1

2010 2009 2009 2010 2010 2010 2010

Audited Un - Audited

Sales 620,074 572,534 150,691 153,172 169,696 156,665 140,541

Cost of sales 498,805 468,831 121,482 123,013 136,251 127,192 112,349

Gross profit 121,269 103,703 29,209 30,159 33,445 29,473 28,192

Selling and marketing expenses 65,207 66,342 15,802 16,676 16,531 16,263 15,737

General and administrative expenses 25,347 21,956 5,993 6,430 6,608 6,220 6,089

Other income (expenses), net 2,494 761 527 2,069 )1,137( 615 947

Operating income before restructuring expenses, impairment of fixed assets and capital loss from realization of investment in subsidiary 33,209 16,166 7,941 9.122 9,169 7,605 7,313

Restructuring expenses (income) 485 )1,331( )1,805( - - - 485

Impairment of fixed assets 992 1,945 1,945 992 - - -

Capital loss from sale of a subsidiary 666 - - - - - 666

Operating profit 31,066 15,552 7,801 8,130 9,169 7,605 6,162

Finance expenses, net 7,817 6,369 1,326 2,088 2,098 1,591 2,040

Company share of loss of associate (income) - )41( - - - - -

Income (loss) before taxes on revenue 23,249 9,224 6,475 6,042 7,071 6,014 4,122

Taxes on income (tax benefit) 2,067 1,574 684 )191( 558 1,450 250

Net profit for the period 21,182 7,650 5,791 6,233 6,513 4,564 3,872

Attribution of net income for the period:

To Company shareholders 21,060 7,662 5,957 6,203 6,483 4,534 3,842

To non-controlling interests 122 )12( )166( 30 30 30 30

21,182 7,650 5,791 6,233 6,513 4,564 3,872

Net earnings per share attributable to Company shareholders:

Basic 0.90 0.40 0.29 0.27 0.28 0.19 0.16

Diluted 0.87 0.40 0.29 0.26 0.27 0.19 0.16

12

2.2.3. The following tables lists major data in millions of dollars:

The improvement in EBITDA in the reporting periods is due to the increase in operating profit.

Calculating EBITDA

(*) Adjusted EBITDA is a benchmark not in accordance with GAAP, which the Company uses to measure its

results from continued operations; to the best of the Company's knowledge this is a benchmark commonly used by other companies in the Company's operating sectors. Standardized EBITDA is calculated as follows: net earnings plus taxes on income (tax benefit), net financing expenses, depreciation and amortization, impairment of fixed assets, restructuring expenses (income), and capital loss from the sale of a subsidiary.

2010 2009 Q4 2010 Q4 2009

Sales 620.1 572.5 153.2 150.7

Operating income before restructuring expenses (income), impairment of fixed assets and capital loss

33.2 16.2 9.1 7.9

Restructuring expenses (income) 0.5 )1.3( - )1.8(

Impairment of fixed assets 1.0 1.9 1.0 1.9

Capital loss from the sale of subsidiary 0.7 - - -

Operating profit 31.1 15.6 8.1 7.8

Standardized EBITDA (*) 44.3 29.1 11.9 11.4

Net earnings attributed to for Company shareholders before restructuring expenses (revenues), impairment of fixed assets and capital loss from realization of

23.2 8.3 7.2 6.1

Net earning attributed to company shareholders 21.1 7.7 6.2 6.0

Cash flow from current operations 14.3 40.8 3.7 16.4

2010 2009 Q4 2010 Q4 2009

Net earnings for the period - as reported 21.2 7.7 6.2 5.8

Taxes on income (tax benefit) 2.1 1.6 )0.2( 0.7

Finance expenses, net 7.8 6.4 2.1 1.3

Restructuring expenses (income) 0.5 )1.3( - )1.8(

Impairment of fixed assets 1.0 1.9 1.0 1.9

Capital loss from the sale of subsidiary 0.7 - - -

Depreciation and amortization 11.0 12.9 2.8 3.5

Standardized EBITDA 44.3 29.1 11.9 11.4

13

2.3. Analysis of Operating Results

2.3.1. Overview

Group sales in 2010 amounted to $620.1 million compared to $572.5 million in

2009, an 8% increase.

Group sales in origin currency in 2010 increased by 9% compared to 2009.

Group sales in Q4 of 2010 amounted to $153.2 million, compared to $150.7

million in Q4 of 2009, a 2% increase.

In Q4 2010 sales in original currency increased by 3% compared to 2009.

The following is the distribution of Company sales by geographical regions in

the fourth quarter and in 2010 and 2009, in millions of dollars:

The improvement in the Company's sales in North America, Israel and Europe in

2010 compared to 2009 matched the Company expectations and was due to the

improvement of most selling markets, this following the recovery in sales of retain

chains in the U.S. and Europe.

North America

North American sales increased 14% in 2010, amounting to $400.2 million,

compared to $354.2 million in 2009.

North American sales in the fourth quarter of the year remained almost unchanged

and amounted to $87.3 million, compared to $87.2 million in the corresponding

quarter last year.

Yearly Fourth Quarter

%

Change

in

Original

Currency

%

Change 2010

% of

Total 2009

% of

Total

%

Change

in

Original

Currency

%

Change2010

% of

Total 2009

% of

Total

North

America

14 14 400.2 65 352.4 62 - - 87.3 57 87.2 58

Europe 33 27 83.1 13 65.2 11 51 43 24.9 17 17.4 12

Israel )1( 4 78.2 13 75.2 13 )1( 2 23.5 15 23.0 15

UK )27( )28( 56.0 9 77.8 14 )22( )25( 16.9 11 22.5 15

Others 38 38 2.6 - 1.9 - - ( -) 0.6 - 0.7 -

Total 9 8 620.1 100 572.5 100 3 2 153.2 100 150.7 100

14

The increase in North American sales in 2010 compared to 2009 derived mainly

from an increase in brassiere sales and a certain recovery in the sales of U.S. retail

chains during the reported period.

Europe

European sales increased 43% and 27% in the fourth quarter and in 2010 compared

to corresponding periods last year, respectively.

In original currency terms, European sales increased 51% and 33% in the fourth

quarter and in 2010 compared to corresponding periods last year, respectively.

Most of the increase in sales derived from sales to existing customers due to the

recovery in European sales and from sales to new customers.

UK

UK sakes decreased by 25% and 28% in the fourth quarter and in 2010,

respectively, compared to corresponding reporting periods last year. Said decrease

in sales derived mainly from a drop in activity with a certain customer and in

accordance with Company plans, as well as the shift to FOB-based sales, which

reduced sales prices.

Israel

Israeli sales increased by 4% in 2010 compared to 2009 in dollar terms but

decreased by 1% in NIS.

Sales in Israel in Q4 2010 increased by 2% in USD terms compared to the same

quarter last year, while decreasing 1% in NIS terms.

Gross profit in 2010 amounted to $121.3 million, or 19.6% of sales, compared to

$103.7 million in 2009 or 18.1% of sales, an increased of 16.9%.

Gross profit in Q4 of 2010 amounted to $30.2 million, or 19.7% of sales, compared

to $29.2 million in Q4 of 2009, or 19.4% of sales, an increase of 3.3%.

The increase in gross profits in 2010 as a whole and in Q4 2010 compared to

corresponding periods last year is due to an increase in sales of brassieres to a U.S.

customer, as well as steps taken by the Company in 2009 to improve efficiency,

including exiting non-profitable categories of operations in the UK, a drop in

overhead, improved on-time delivery to customers, decreased failure cost and

improved inventory management.

15

The increase in gross profits was achieved in spite of increased prices in raw

material and finished product prices in the second half of the year, see 2.2.1 above.

Selling and marketing expenses decreased by 1.7%, amounting to $65.2 million

in 2010 (10.5% of sales), compared to $66.3 million in 2009 (11.6% of sales)

Selling and marketing expenses increased by 5.5%, amounting to $16.7 million in

Q4 2010 (10.9% of total sales), compared to $15.8 million in Q4 of 2009 (10.5%

of total sales).

The following table shows composition of selling and marketing expenses for the

Delta Israel segment and for other Group operating segments, in millions of

dollars:

The increase in selling and marketing expenses in Delta Israel activity the fourth

quarter and in 2010 as a whole, over corresponding periods last year, is due to the

expansion of retail chains, as well as the 4% average revaluation of the NIS over

average exchange rates last year, which resulted in higher expenses in dollar terms.

The drop in selling and marketing expenses in other Segment in 2010 derived

mainly from streamlining as a result of the reduction of activity in the UK. In

addition, selling and marketing expenses decreased due to the decrease in overhead

and decrease in storage and distribution expenses following the transition to FOB

activity in the UK.

General and Administrative expenses increased by 15.4% in 2010 and amounted

to $25.3 million, compared to $22.0 million in 2009.

In Q4 2010 general and administrative expenses increased by 7.3% and amounted

to $6.4 million, compared to $6.0 million in the same quarter last year.

The increase in administrative and general expenses in 2010 vs. 2010 derived

mainly from including expenses due to the examination of a $0.9 million

transaction (see Section 1.2.6 above), due to the $0.9 increase of the benefit due to

employee options component and an increase in salary expenses and provisions for

2010 2009 Q4 2010 Q4 2009

Delta Israel 30.0 27.2 8.2 7.5 Percentage of sales and marketing expenses from sales

39.0% 37.4% 35.2% 33.1%

Other Segments 35.2 39.1 8.5 8.3 Percentage of sales and marketing expenses from sales

6.5% 7.8% 6.5% 6.5%

Total sales and marketing expenses 65.2 66.3 16.7 15.8

Percentage of sales and marketing expenses from sales

10.5% 11.6% 10.9% 10.5%

16

bonuses, due to an improvement in business results as well as the strengthening of

the rate of exchange of the NIS vs. the USD by 4% compared to the average rate

last year, which led to an increase in expenses in dollar terms.

The increase in administrative and general expenses Q4 2010 compared to the

same quarter last year derived mainly from an increase in the employee options

benefit component as well as an increase in the provision to doubtful debts.

Other net income in Q4 and in 2010 as a whole amounted to $2.1 and $2.5

million, respectively, compared to $0.5 and $0.8 million in corresponding

reporting periods, as follows:

Revaluation from currency transactions includes $0.9 million in profits from

forward agreements worth $20 million closed over the course of Q4 2010 after

reaching an agreement with a European customer to change the currency of sale

from euros to dollars. The balance of revenues derives from forward agreements

valuated according to the closing rate on the balance sheet date.

Capital gains in Q4 2010 include mainly profits from the realization of a real estate

property in Daliyat al-Carmel.

Restructuring expenses - in the first quarter of 2010, the Company decided to

terminate its socks finishing operations in Jordan. The cost of discontinuing of the

operations in question amounted to $0.5 million, consisting primarily of

impairment of fixed assets and severance pay to 90 terminated employees.

Capital loss from sale of a subsidiary - the Company signed an agreement to sell

its subsidiary in India engaged in manufacture of socks. The capital loss from this

sale amounted to $0.7 million and was included in results of the first quarter of

2010. The transaction was completed in Q2 2010.

Impairment of fixed assets – during Q4 2010 the Company included amortization

due to impairment to its fixed assets in the amount of $1.0 million. The

amortization in question was calculated according to an assessor’s estimates

regarding the value of real estate in Hungary that is not in use and which is

available for sale.

2010 2009 Q4 2010 Q4 2009

Revaluation from currency transactions

1.8 0.4 1.6 0.3

Capital gain from the sale of fixed assets

0.7 0.4 0.5 0.2

Total other income, net 2.5 0.8 2.1 0.5

17

Operating income in 2010 amounted to $31.1 million compared to $15.6 million

in 2009.

In Q4 2010 operating income amounted to $8.1 million, compared $7.8 million in

Q4 2009.

Operating income in 2010 before restructuring expenses and impairment of fixed

assets and capital loss from the realization of a subsidiary amounted to $33.2

million compared to $16.2 million in 2009.

Operating income in Q4 2010 before the impairment of fixed assets amounted to

$9.1 million compared to $7.9 million before one-time items in the corresponding

quarter last year, a 15% increase.

The improvement in operating profits in the fourth quarter and all of 2010,

compared to corresponding periods last year, was largely due to the increase in

sales and in gross profits as described above.

Finance expenses increased by 22.7% in 2010, and amounted to $7.8 million

compared to $6.4 million in 2009.

Financing expenses increased by 57.4% in the fourth quarter of 2010, amounting to

$2.1 million, compared to $1.3 million in the corresponding period last year.

The table below presents the composition of financing expenses in the fourth

quarters and entire years of 2010 and 2009 in millions of dollars:

The increase in financing expenses Q4 and in 2010 as a whole compared to

corresponding periods in 2009 derived from the issue of debentures, this in spite of

a decrease in bank debt. The rate of interest on the debentures raised the average

credit price of the Company's financial debt.

Exchange rate difference expenses in the fourth quarter of 2010 and in 2010 as a

whole amounted to $0.5 and $1.2 million compared to $0.1 million in revenue and

$0.4 million in expenses in corresponding periods last year, deriving largely from

fluctuations in the average rate of exchange of the euro vs. the USD.

2010 2009 Q4 2010 Q4 2009

Interest and commission expenses 6.1 5.3 1.5 1.2

Exchange rate differences 1.2 0.4 0.5 )0.1(

IFRS adjustments 0.5 0.7 0.1 0.2

Total finance expenses 7.8 6.4 2.1 1.3

18

Tax expenses in 2009 amounted to $2.1 million compared to $1.6 million in 2009.

Q4 2010 saw a tax benefit of $0.2 million listed compared to taxes on income to

the amount of $0.7 in the same quarter last year.

The Company’s low effective tax rate in the reported period derives mainly from

the use of losses to income tax in Israel, for which no deferred taxes were

attributed.

Profit attributed to Company shareholders amounted to $21.1 million in 2010,

or $23.2 million before reorganization costs, the impairment of fixed assets and

loss of capital from the sale of a subsidiary, this compared to $7.7 or $8.3 million

in profits in 2009, respectively.

Profit attributed to Company shareholders in amounted to $6.2 million in the fourth

quarter of 2010, or $7.2 million before the impairment of fixed assets, this

compared to $6.0 or $6.1 million in the same quarter last year, respectively.

19

2.3.2. Operating Segment Results Analysis

The following is a summary of the Company’s consolidated business results, by accounting segments in its financial statements for the 2010 and 2009

and for their fourth quarters, in thousands of dollars:

Year Ending December 31 (Audited)

Sales

Operational Profit (loss) Before Restructuring Expenses, Capital Loss from the Sale of Subsidiary and Impairment of Fixed Assets

Restructuring expenses (income)

Impairment of fixed assets

Capital loss from the sale of subsidiary

2010 2009 %

Change 2010 2009 %

Change 2010 2009 2010 2009 2010

Delta USA – “Mass Market" 298,740 268,566 11 6,015 5,927 2 - 474 - - -

Global upper market 257,449 243,576 6 15,965 1,428 1,018 485 )1,805( - 1,945 666

Delta Israel 76,949 72,822 6 13,060 10,464 25 - - - - -

Cancellation of sales and profits between companies )15,207( )15,612( 18 )881( - - - - -

Others 2,143 3,182 )1,849( )772( - - 992 - -

Total sales and operating profit before restructuring expenses (income), loss of capital from realization of subsidiary and impairment of fixed assets. 620,074 572,534 8 33,209 16,166 105 485 )1,331( 992 1,945 666

Restructuring expenses (income) 485 )1,331(

Capital loss from the sale of a subsidiary 666 -

Impairment of fixed assets 992 1,945

Total operating profit in consolidated statements 31,066 15,552

20

Fourth quarter ending December 31 (Audited)

Sales

Operating profit (Loss) before restructuring expenses and impairment of fixed assets

Restructuring income

Impairment of fixed assets

2010 2009 %

Change 2010 2009 %

Change 2010 2009 2010 2009

Delta USA – Mass Market 68,780 66,957 3 164 1,682 )90( - - - -

Global upper market 61,451 67,146 )8( 3,288 2,156 53 - )1,805( - 1,945

Delta Israel 23,283 22,598 3 5,184 5,474 )5( - - - -

Cancellation of sales and profits between companies )792( )6,825( - )298( - - - -

Others 450 815 486 )1,073( - - 992 -

Total sales and operating profit before restructuring income and impairment of fixed assets. 153,172 150,691 2 9,122 7,941 15 - )1,805( 992 1,945

Restructuring income - )1,805(

Impairment of fixed assets 992 1,945

Total operating profit in consolidated statements 8,130 7,801

21

2.3.3. Analysis of Business Results by Operating Segment

DELTA USA – Mass Market

Sales in 2010 amounted to $298.7 million, compared to $268.6 million in 2009,

an 11% increase.

Sales in Q4 2010 amounted to $68.8 million, compared to $67.0 million in the

corresponding period last year, a 3% increase.

The increase in sales in the Segment in Q4 2010 and in all of the year over the

same periods last year derived mainly from the expansion of brand activity for

men and women as a result of the increase in UK activity and in spite of the

decrease in sales to the main customer.

Over the course of 2010, working relations with Wal-Mart were altered, in such

a manner that a significant portion of the products are provided the customer

based on orders (ad hoc) and not in the form of replenishment, as was practiced

to date.

As part of the change in question, the customer approached strategic suppliers

and proposed joining a discount arrangement through a financial factor, under

attractive commercial conditions (LIBOR + 1%). As a result of this change,

customers are granted between 20 and 30 credit days.

In 2011 the sales procedure for Wal-Mart is expected to change again in such a

manner that most of the products provided customers shall be in the form of

replenishment.

The Company chose to join this arrangement over the course of Q2 2010, a fact

that led to a $12 million reduction in the customer balance in the Company’s

balance sheet as of December 31 2010, compared to the balance in the balance

sheet as of December 31 2009.

Operating income in 2010 before restructuring expenses amounted to $6.0

million, compared to $5.9 million last year, a 2% increase.

Operating income in the fourth quarter of 2010 amounted to $0.2 million,

compared to $1.7 million in the corresponding quarter last year, a 90%

decrease.

22

The drop in operational profit in Q4 2010 compared to the same quarter last

year derived from the impairment of inventory in branded activity due to supply

delays and creation of surplus inventory sole at reduced cost as well as from the

erosion of gross profit due to increases in product costs, mainly in light of the

increase in cotton prices in the second half of 2010. The erosion of gross profits

was mainly a result of the period of time required to adapt sales prices to

customers.

In order to deal with the price increase in question, the Company is active on

two levels:

a. Adapting sales prices to customers. Note that an increase in sales prices

will mostly be expressed in the second half of 2011 2.

b. An increase in inventory balances with the aim or reducing the exposure

level to the increase in the price of the products in question.

Inventory balance for the Segment as of December 2010, 31 amounted to $80

million, compared to $42 million as of December 31 2009.

The increase in inventory balance derived from that stated in Section B above

as well as the conversion of products from packages of 10 units per product

(10pp) to packages of 3pp, as demanded by a key customer, which led to the

accumulation of $9 million in inventory, which is expected to be sold over the

course of 2011 in conjunction with the customer.1

Starting January 1 2011, Mr. Itzhak Weinstock began serving as Chief

Operations Officer for this Segment (see Section 1.2.7.2 above).

Global Upper Market

Sales in 2010 amounted to $257.4 million, compared to $243.6 million last

year, a 6% increase.

1 Note that the above is an estimate and constitutes foreword-looking information, which may or may

not materialize or may differ from Company estimates and forecasts, due to circumstances outside of

the Company's control, and due to being based on information available as of the report date, including

Company estimates as of the report date.

23

The increase in sales in this Segment in 2010 compared to the corresponding

period last year derives from the increase in sales to existing customers in

Europe and the US, and was achieved in spite of a drop in sales to a specific

customer in the UK.


corresponding period last year, an 8% decrease.

The decrease in sales in the fourth quarter of the year compared to the

corresponding quarter last year derived mainly from a drop in sales to a specific

customer in the UK.

Operating income in 2010 before special items of the Segment amounted to

$16.0 million compared to $1.4 million last year.

Operating income before special items in Q4 2010 amounted to $3.3 million,

compared to $2.2 million in Q4 last year, a 53% increase.

The improvement in results in Q4 and in 2010 as a whole compared to

corresponding periods last year, derived from an increase in sales in Europe and

the U.S., particularly in brassieres, as well as a result of the streamlining efforts

and the restructuring plan that began in Q4 2008 and as a result of exits from

unprofitable categories.

Delta Israel

Sales in 2010 amounted to $76.9 million, compared to $72.8 million last year, a

6% increase.

Sales in NIS in 2010 amounted to 287.3 million NIS, compared to 284.7

million NIS in 2009, a 1% increase.


corresponding period last year, a 3% increase.

Sales in NIS in Q4 2010 amounted to 84.9 million NIS, compared to 85.1

million NIS in Q4 2009.

The increase in NIS sales in 2010 over 2009 was largely due to the expansion

of the retail store chain.

Operating income in 2010 amounted to $13.1 million, compared to $10.5

million last year, a 25% increase.

24

In NIS terms, operating income in 2010 amounted to 48.9 million NIS,

compared to 43.3 million NIS in 2009, a 13% increase.

Operating income in the fourth quarter of 2010 amounted to $5.2 million,

compared to $5.5 million in the corresponding quarter last year, a 5% decrease.

In NIS terms, operating income in Q4 2010 amounted to 19.0 million NIS,

compared to 18.8 million NIS in the same quarter last year, a 1% increase.

The improvement in operating income in NIS terms in Q4 and in 2010 as a

whole over corresponding periods last year was mainly due to improved gross

profits achieved in spite of increases in the price of finished products mainly

over the course of the second half of the year, through increased sales prices to

customers.

Starting 2010, the new Israeli shekel has become the main currency influencing

the activity of Delta Israel. The circumstances that led to the change in

operating currency derive from the fact that the area had become economically

independent. As a result, Company management has decided that the operating

currency in this area from USD to NIS. The change was carried out

prospectively.

3. Liquidity and Financing Sources

Condensed cash flow statement, in millions of dollars:

Fourth Quarter Ending 31 December

For the Year Ending December 31

2010 2009 2010 2009

Net cash from current operations 3.7 16.4 14.3 40.8

Net cash from (used for) investment activity 3.4 )0.2( 1.9 )11.0(

Net cash from (used in) financing activity 4.0 6.2 1.9 )6.1(

Increase in cash and cash equivalents 11.1 22.4 18.1 23.7

The Company finances its operations from its cash flow from current operations, from

bank credit frameworks and from the issuance of debentures.

The decrease in cash flow from current activity in the fourth quarter and in 2010 as a

whole, compared to corresponding periods last year, was largely due to the increase in

inventory in Delta USA, which was offset by a decrease in the customers item.

25

In 2010 and in the fourth quarter of the year the Company's cash flow from current

operations was positive and amounted to $1.9 and $3.4 million, respectively, compared to

a negative cash flow of $11.0 and $0.2 million in corresponding reported periods last

year.

The positive cash flow from the investment activity in question derived from the receipt

of proceeds to the amount of $4.9 million, which constitutes the first payment resulting

from the sale of the real estate in Nahariyah and the proceeds of the options for that

agreement which was partially offset by the tax sums and the betterment excise referring

to the sale.

The following are several financial indicators for Q4 and for 2010 and 2009:

2010

2009

Current ratio 1.77 1.19

Quick ratio 0.98 0.76

Customer credit days (quarterly basis)* 53 62

Supplier credit days (quarterly basis) 50 46

Inventory days (quarterly basis)* 89 60

Cash flow from current operations (millions of dollars) – year 14.3 40.8

Cash flow from current operations (millions of dollars) – Q4 3.7 16.4

Adjusted EBITDA (millions of dollars) – year 44.3 29.1

Adjusted EBITDA (millions of dollars) – Q4 11.9 11.4

Net financial debt (millions of dollars) 75.0 84.1

Bank debt coverage ratio to adjusted EBITDA 1.7 2.9

Equity/balance sheet total 47.0% 47.4%

Equity (in millions of dollars) 197.3 178.5

* For an explanation regarding the decrease in customer credit days and the increase in

inventory days, see Section 2.3.3 above.

Total net financial debt as of December 31 2010 amounted to $75.0 million, compared to

$84.1 million as of December 31 2009

The decrease in net debt as of December 31 2010 compared to December 31 2010 derived

mainly from the positive cash flow from current operations in 2010.

The improvement in the current ratio and the quick ratio as of December 31 2010

compared to December 31 2009 derives from the issue of debentures in January and

December 2010, which was used in part to redeem short-term credit, the balance of which

26

was deposited in a short-term bank deposit which was included under cash and cash

equivalents.

4. Dividends

4.1. As of the balance sheet date the Company declared that it would be distributing

dividends to the amount of $2 million, at 8.54 cents per share, to be distributed on

March 15 2011 according to the dollar’s representative rate of exchange as published

the day prior to the payment date. The determining date for this distribution shall be

February 28 2011 and the “X” date shall be March 1 2011.

The following are details regarding the examination carried out by the Board of

Directors in relation to the receipt of the decision to distribute dividends as stated

above:

a. The Company’s board of directors tested whether the Company passed the

profit and repayment ability test set in Section 302(a) of the Companies Law,

1999, and following this examination confirmed that the Company had

passed these tests in the matter of the distribution of the dividends in

question.

b. In the matter of passing the profit test, the Board of Directors approved the

dividend distribution in question on the basis of the Company's retained

earnings as of December 31 2010, which exceeds the sum of dividends

approved.

c. In the matter of passing the repayment test, the Board of Directors took the

following into consideration: data regarding the Company's financial status

including data regarding the Company’s liquid reserves, the Company's debit

balance and its net debit balance; the Company's unused bank credit

frameworks, the projected cash flow for 2011 and expected interest and

principal payments for the debentures (Series K) issued by the Company,

including the series expansion made in December 2010. Following

examination of the above, the Board of Directors confirmed that the

Company passes the repayment ability test regarding the distribution of

dividends in question, including in conservative scenarios.

d. The Board of Directors estimates that the dividend distribution will have no

material negative effect on the Company’s financial status, including its

27

capital structure, leverage, liquidity and its ability to continue operating

according to its existing format.

e. The Board of Directors did not base its estimates on the Company’s ability to

sell assets or on financial sources deriving from companies held by the

Company.

f. The projected data and estimates in c. and d. above constitute foreword-

looking information, as defined in the Securities Law, 1986, based on

analysis of the data detailed in c. above carried out by the Company. These

expectations and projects may not be realized, in whole or in part, or be

realized in a materially different manner than projected, among other things

due to changes in economic markets in Israel and in the world, changes in

capital market conditions, exchange rates, and various market conditions in

which the Company operates, which may impact the Company's activities

and results.

5. Exposure to Market Risk and Management Thereof

Exposure to Market Risk, Risk Factors and Management Thereof

5.1. The person responsible for market risk management at the Company:

The Company manages the market risks based on a policy set by its Board of

Directors and senior management.

Mr. Isaac Dabah, the Company's CEO, is responsible for managing the Company’s

market risks. Mr. Yossi Hajaj, the Company's CFO, is responsible for managing the

market risk associated with exchange rates and interest.

5.2. Description of market risk factors:

The Group, in its operations, is exposed to multiple market risk factors, including the

state of the economy in target markets in which the Company operates, as well as

fluctuations in exchange rates in those markets vs. the Company's operating

currency, the USD.

For details of risk factors to which the Company is exposed, see Section 1.25 of Part

A of this report.

5.3. Group Policy with Respect to Market Risk Management

28

(1) Increase in Cotton Prices

2010 saw a significant increase of 80% in average cotton prices compared to

2009. This increase led to a significant increase in the price of cotton string, the

Company's main raw material. The Company tracks fluctuations in the price in

question and tries to adapt its string and finished product inventory levels to sales

projections. In addition, the Company acts to increase prices for customers, but

this price adjustment may take several months.2 See Section 2.3.3 above.

(2) Volatility of Exchange Rates of the Euro vs. the USD

The Company had a surplus of receivables over payments denominated in Euro in

2010, estimated to $40 million.

In the first half of 2010 the Company acted with an average exchange rate of

$1.484 per euro, as a result of hedging transactions carried out in 2009.

The Company carried out hedging transactions for the second half of 2010 with

an average exchange rate of $1.292 per euro.

In 2011, the Company’s receipts in euros are expected to drop to just $20 million

in light of the transfer for some of the Company's sales contracts with European

customers to dollars (see Other Revenues, Net, Section 2.3.1).

The Company carried out hedging transactions equaling $20 million in 2011,

with an average exchange rate of $1.359 per euro, this in order to protect the

receipt surplus in question, see 5.4 below.

2 Note that the above is an estimate and constitutes foreword-looking information, which may or may

not materialize or may differ from Company estimates and forecasts, due to circumstances outside of

the Company's control, and due to being based on information available as of the report date, including

Company estimates as of the report date.

29

The following are average euro/USD exchange rates for 2011 and 2010:

2011(**) 2010 % Change

First quarter 1.308 1.384$ )5%(

Second quarter 1.362 1.275$ 7%

Third quarter 1.382 1.291$ 7%

Fourth quarter 1.384 1.360$ 2%

(**) Average rate of exchange for hedging transactions carried out by the

Company.

It is Company policy to maintain as high an alignment as possible between the

currency in which its products are sold and the currency in which products and/or raw

materials are bought. The Company regularly reviews its balance sheet exposure and

its economic exposure in accordance with forecast revenues and expenses for the

coming 12 months.

The Company's operations are exposed to macroeconomic risks, industry risks and

risks unique to its operations. Full details of theses risks factors can be found in

Section 1.25 if Part A of this periodic report.

5.4. Financial Instruments

In its results for Q4 and 2010 as a whole the Company included under other revenues,

net, the results of transactions completed during the reported period and the results of

the revaluation of currency transactions referring to future reporting periods not

recognized as accounting hedges against the euro to the amount of $1.6 and $1.8

million respectively.

30

The following positions are not recognized as an accounting hedge vs. the euro:

Redemption

Date

Exchange Rate for Transaction (USD per €1)

Amount in Thousands of

Dollars Average

Exchange Rate 10/1/11 1.308 1,300 8/2/11 1.309 1,300 10/3/11 1.308 2,400 Q1 2011 5,000 1.308 11/4/11 1.336 1,000 26/4/11 1.404 300 10/5/11 1.336 1,000 26/5/11 1.403 300 9/6/11 1.335 1,000 28/6/11 1.402 1,400 Q2 2011 5,000 1.362 11/7/11 1.382 2,000 8/8/11 1.382 1,500 8/9/11 1.382 1,500 Q3 2011 5,000 1.382 11/10/11 1.831 1,200 8/11/11 1.380 1,200 28/11/11 1.395 100 8/12/11 1.380 1,100 24/12/11 1.394 1,400 Q4 2011 5,000 1.384 Total transactions 20,000 1.359

31

5.5. Linkage basis report, in thousands of dollars:


Audited

In USD

In Euro

In NIS In Other

Currencies

Non-Monetary Balances

Total

Assets:

Cash and cash equivalents 45,091 44 21 1,059 - 46,215

Trade receivables 55,831 10,842 19,222 4,422 - 90,317

Other accounts receivable 6,722 1,095 1,205 1,014 2,717 12,753

Inventories - - - - 121,275 121,275

Assets classified as held for sale - - - - 2,838 2,838

Debit balances and long-term prepaid expenses 836 - 39 - 213 1,088

Financial derivative 1,830 - - - - 1,830

Deferred tax assets - - - - 5,127 5,127

Fixed assets, net of accumulated depreciation - - - - 62,704 62,704

Intangible assets, net of accumulated amortization - - - - 75,464 75,464

Total assets 110,310 11,981 20,487 6,495 270,338 419,611

Liabilities:

Credit from banking corporations 51,211 8,317 21 - - 59,549

Trade payables 38,539 3,415 8,180 2,825 - 52,959

Other accounts payable 16,609 862 21,139 3,261 489 42,360

Long-term loans from banking corporations 3,614 - - - - 3,614

Severance pay liabilities, net of plan assets - - - - 472 472

Debentures (*) 58,023 - - - - 58,023

Long-term loans and other liabilities 4,967 - 63 266 - 5,296

Total liabilities 172,963 12,594 29,403 6,352 961 222,273

Balance sheet total, net )62,653( )613( )8,916( 143 269,377 197,338

(*) Debentures issued in January and December 2010, are denominated in NIS, bear fixed NIS

interest and are not linked. The Company has entered into a swap agreement with a bank to swap

NIS cash flows for a dollar cash flow, and vice versa, hence this liability is presented as linked to

the USD.

32


Audited

In USD

In Pounds

Sterling

In Euro

NIS In Other

Currencies

Non-Monetary Balances

Total

Assets:

Cash and cash equivalents 23,159 253 92 1,522 2,867 - 27,893

Trade receivables 62,823 7,214 14,969 17,053 1,081 - 103,140

Other accounts receivable 1,829 334 827 1,717 636 2,689 8,032

Inventories - - - - - 80,685 80,685

Assets classified as held for sale - - - - - 2,916 2,916

Long-term debit balances 1,047 - - 46 118 206 1,417

Deferred tax assets - - - - - 3,541 3,541

Surplus of plan assets over liabilities due to the termination of employee-employer relations

-

-

-

-

-

85

85

Fixed assets, net of accumulated depreciation

- - - - - 72,677 72,677

Intangible assets, net of accumulated amortization

- - - - - 76,040 76,040

Total assets 88,858 7,801 15,888 20,338 4,702 238,839 376,426

Liabilities:

Credit from banking corporations 91,475 2 14,752 8 - - 106,237

Trade payables 31,490 1,814 2,721 7,169 1,917 - 45,111

Other accounts payable 15,247 3,079 893 13,774 2,824 49 35,866

Long-term loans from banking corporations

5,723 - - - - - 5,723

Severance pay liabilities, net of plan assets

-

-

-

-

-

335

335

Deferred taxes - - - - - 787 787

Long-term loans and other liabilities 3,861 - - - - - 3,861

Total liabilities 147,796 4,895 18,366 20,951 4,741 1,171 197,920

Balance sheet total, net )58,938( 2,906 )2,478( )613( )39( 237,668 178,506

33

5.6. Sensitivity to changes in different exchange rates vs. the USD and changes in interest

rates for December 31 2010.

Sensitivity to change in NIS/USD exchange rate:

Gain (Loss) from Changes Gain (Loss) from Changes

10% Increase 5% Increase Fair Value 5% Decrease 10% Decrease

Expected exchange rate $1 = 3.90 NIS $1 = 3.73 NIS $1 = 3.55 NIS $1 = 3.37 NIS $1 = 3.19 NIS

Cash and cash equivalents )2( )1( 21 1 2

Customers 5 )1,922( )961( 19,222 961 1,922

Other accounts receivable and debit

balances

)121( )60( 1,205 60 121

Long-term debit balances )4( )2( 39 2 4

Short-term credit from banking

corporations

2 1 )21( )1( )2(

Trade payables 818 409 )8,180( )409( )818(

Other accounts payable 2,114 1,057 )21,139( )1,057( 2,114( )

Other long-term liabilities 6 3 )63( )3( )6(

Off-balance-sheet liabilities in respect of rental agreements

708 354 )7,079( )354( )708(

Total 1,599 800 )15,995( )800( )1,599(

Sensitivity to changes in the discount rate of liabilities in respect of rental and franchise

agreements denominated in NIS:

10% increase 1 5% increase 2 Discount rate of 12% 5% Decrease 3 10% Decrease 4

Pre-tax change in fair value 6 69 35 (7,289) (35) (70)

Sensitivity to changes in EUR/USD exchange rates:

Gain (Loss) from Changes Gain (Loss) from Changes

10% Increase 5% Increase Fair Value 5% Decrease 10% Decrease

Expected exchange rate €1 = $1.47 €1 = $1.40 €1 = $1.33 €1 = $1.27 €1 = $1.20

Cash and cash equivalents 4 2 44 )2( )4(

Customers 5 1,084 542 10,842 )542( )1,084(

Other accounts receivable and debit

balances

110 55 1,095 )55( )110(

Short-term credit from banking corporations )832( )416( )8,317( 416 832

Trade payables )342( )171( )3,415( 171 342

Other accounts payable )86( )43( )862( 43 86

Total )61( )31( )613( 31 61

34

Sensitivity to changes in the discount rate of liabilities in respect of franchise agreements

denominated in Euro:

10% increase 1 5% increase 2 Discount rate of 12% 5% Decrease 3 10% Decrease 4

Change in fair value, before tax 1 - (169) - (1)

Sensitivity to change in 3-month LIBOR interest rate: The following calculation relates to cash flow

exposure and not to changes in fair value to a loan portfolio amounting to $57.4 million (in thousands

of dollars) while the weighted interest on the investment portfolio of December 31 2010 is 2.1%

Change in interest rate 10% Increase 5% Increase 5% Decrease 10% Decrease

Interest rate expected after change 2.31% 2.21% 2.00% 1.89%

Pre-tax gain (loss) due to changes 120 )60( 60 120

The following are sensitivity analyses for the value of the SWAP contract the Company

entered regarding the replacement of NIS cash flows to debenture holders with a dollar cash

flow. Note that changes in the value of the contract shall be attributed to a capital fund in the

Company’s balance sheet with no impact on the Statement of Operations.

Analysis of the sensitivity of the value of the SWAP contract to changes in the exchange rate

(NIS/USD):

Rate of change 10% Decrease 5% Decrease Fair Value 5% Increase 10% Increase Expected exchange rate

$1 = 3.20 NIS $1 = 3.37 NIS $1 = 3.55 NIS $1 = 3.73 NIS $1 = 3.90 NIS

Forward contract value

9,089 5,269 1,831 )1,280( )4,107(

Difference 7,259 3,438 )3,111( )5,938(

Analysis of the sensitivity of the value of the swap contract to changes in NIS interest:

Rate of change 10% Decrease 5% Decrease Fair Value 5% Increase 10% Increase Expected interest rate

6.30% 6.70% 7.00% 7.35% 7.70%


2,581 2,204 1,831 1,460 1,092

Difference 750 373 )371( )738(

Analysis of the sensitivity of the value of the swap contract to changes in dollar interest:

Rate of change 10% Decrease 5% Decrease Fair Value 5% Increase 10% Increase Expected interest rate

5.47% 5.78% 6.08% 6.38% 6.69%


1,251 1,542 1,831 2,118 2,403

Difference )580( )289( 287 572 1 For a 13.2% discount rate. 2 For a 12.6% discount rate. 3 For an 11.4% discount rate. 4 For a 10.8% discount rate. 5 The balance of trade receivables in the above tables is short-term, hence the fair value presented as it is in line with the balance reflected in the financial statements. 6 Most of the liabilities included in the above sensitivity analysis tables refer to rental agreements, while liabilities due to franchise and storage services agreements are of non-material sums.

35

Aspects of Corporate Governance

6. Charitable Donations

The Company believes in involvement in the community the environment in which it

works and in assisting populations with potential. For many years, Delta has been

assisting in educational and cultural activities in Carmiel and has made contributions to

co-existence and community assistance activities.

Total donations made by the Company for education and cultural institutions amounted to

approximately $93,000 and $80,000 in 2010 and 2009, respectively.

In addition, the Company donates products to welfare organizations and to non-profit

organizations.

For details regarding a contribution in the amount of $45,000 to the "Ye'adim North

foundation" intended for the "Ma'aseh Center", the Chairman of which is Mr. Noam

Lautman, see immediate report published by the Company on February 17 2011.

7. Directors with Accounting and Financial Capabilities

The Company Board of Directors has determined that the minimum appropriate number

of directors with accounting and financial skills in the Company is two directors. This

determination was made taking into account the size of the Company, the type of its

operations and its complexity.

As of this report, the Board members determined by the Board of Directors to have

accounting and financial capabilities (who are not Company employees) are: Yechezkel

Dovrat and Shaul Ben Ze’ev. For details indicating that these Board members have

accounting and financial capabilities, see the Periodic Report (Part D), Regulation 26.

Most of the other members of the Company's Board of Directors can also be considered to

posses have accounting and financial expertise.

Disclosure Regarding the Rate of Independent Directors

As of the report date, the company did not adopt in its bylaws the instruction regarding

the rate of independent directors (as defined in Section 219 to the Companies Law, 1999).

36

8. Auditing Accountant’s Fee

The Company’s independent CPA is the firm of Kesselman and Kesselman - PWC.

The of the independent CPA’s fees for auditing services, audit-related services and tax

services rendered to the Company, and fees of CPAs of other material overseas

subsidiaries amounted to $1,260,000 in 2010, compared to $785,000 in 2009, while the

number of work hours increased from 10,900 in 2009 to 13,500 in 2010, as follows:

2010 2009


Audit services 725 622

Tax services and Others 535 163

Total 1,260 785

The increase in fees for auditing services in 2010 compared to 2009 derived mainly from

services pertaining to evaluations and inspections on the matter of the effectiveness of

auditing work on the Goshen project.

The increase in accounting fees attributed to tax and other services in 2010 compared to

2009 derives mainly from due diligence carried out regarding a purchase, see Section

1.2.6 above, and from the "Transfer Pricing" project.

9. Disclosure with Regard to the Corporation’s Internal Auditor

The following is disclosure with regard to the Company’s internal auditor, pursuant to

regulation 10(b)(11) of the Security Regulations (Periodic and Immediate Reports), 1970:

Details of internal auditor:

Auditor’s name: Oren Groupi, CPA

Start of term in office - March 2007.

To the best of the Company’s knowledge, the internal auditor meets all provisions set

forth in section 3(a) of the Internal Audit Act, 1992.

To the best of the Company’s knowledge, the internal auditor meets provisions set forth

in section 146(b) of the Companies Law, 1999 and provisions of Section 8 of the Internal

Audit Law, 1992.

37

To the best of the Company’s knowledge, the internal auditor does not hold securities of

the Company or of any entity affiliated with the Company.

To the best of the Company’s knowledge, the internal auditor has no material business

relationships or other material relationships with the Company or with its affiliated

entities.

The auditor is not employed by the corporation. Internal audit services are provided by

the auditor, as a personal appointment, via the firm of KPMG Somekh-Chaykin which

employs a staff with various skills, including internal auditing skills.

Method of appointment:

Appointment of Mr. Oren Groupi as internal auditor was approved by the Audit

Committee and by the Board of Directors in Q1 2007. Appointment of the internal auditor

was approved after intensive review of his education and extensive experience, and

following meetings held with him and first-hand impressions by Company management

and by the Audit Committee. Mr. Groupi was deemed suitable for the office of Company

internal auditor, inter alia, based on the extent and complexity of Company operations.

Identity of the internal auditor’s supervisor:

The supervisor of the internal auditor is the Company’s CEO.

Work plan:

The internal auditor's work plan is yearly.

The yearly work plan followed by the internal auditor in 2010 was decided, inter alia,

based on:

Risk management conducted in the Company and relevant adjustments made as

needed.

Proposals by members of the Audit Committee and the Company Board of Directors

based, inter alia, on proposals of the internal auditor and of Company management.

Scope of Company operations, its organizational structure and the nature of its business

operations.

The annual work plan was approved by the Audit Committee based on recommendation

of Company management.

38

The annual work plan contains no restrictions on deviating from said plan. The internal

auditor may propose adding and/or replacing issues, subject to approval by the Audit

Committee.

The 2010 annual work plan included audits of the Company in Israel and of corporations

fully-owned by the Company overseas.

Scope of employment:

In 2010, the internal auditor of the Group spent 825 hours in practice on internal auditing,

of which 620 hours were for the audit of the Company in Israel and 205 hours for internal

audits of overseas subsidiaries.

Conducting the audit:

According to the internal auditor's notification, the internal audit is conducted in

accordance with the Internal Audit Law, 1992 and with standards published by the Israel

Chamber of Internal Auditors.

Access to information:

The internal auditor was granted free access to the Company’s documents and

information systems, including its financial data, all provided for the purpose of carrying

out his duties, as set forth in Section 9 of the Internal Audit Act, 1992.

Internal auditor’s report:

Reports of the internal auditor were submitted in writing to the Chairman of the Audit

Committee, to its members and to Company management. The Audit Committee

convened for 7 meetings during 2010, 4 of which involved the internal audit reports.

Board of Directors’ assessment of internal auditor’s activities:

The Board of Directors believes that the internal auditor’s actual scope of work in 2010,

as set forth above, achieves the Company’s internal auditing objectives.

Compensation:

In exchange for his work during the reported period, and as agreed with the internal

auditor, his fee amounted to $51,000 in total.

No securities were granted to the internal auditor as part of the terms of his employment.

39

The Company’s Board of Directors believes that this compensation is reasonable and

should not affect the internal auditor’s judgment when auditing the Company.

10. Disclosure Regarding the Approval Process of the Financial Statements

The Company’s Board of Directors has decided that the organ in charge of overall

supervision of the Company’s financial statements will be the Financial Statement

Examination Committee.

This committee consists of three directors, as follows:

Yechezkel Dovrat, Chair of the Committee – outside director, with expertise in

accounting and finance.

Shaul Ben Ze’ev – outside director, with expertise in accounting and finance.

Noam Lautman – capable of reading and understanding the Financial Statements.

Prior to their appointment, the three members of the Committee provided the Company

with a statement in accordance with Section 3 of the Companies Regulations (Instructions

and Conditions Pertaining to the Financial Statement Approval Process), 2010.

Prior to the approval of the Company’s Financial Statements, drafts of the Financial

Statements and associated reports and notes to these Statements are sent to members of

the Finance Committee, usually three days before the meeting and subject the law.

Invited to the meeting of the Financial Statement Examination Committee to discuss the

approval of the Financial Statements are: the Company CEO, CFO Company Comptroller

as well as the independent CPAs who present the financial statements to Committee

members and answer any questions.

During the Financial Statement Examination Committee’s meeting on the Financial

Statements, the Committee reviews and discusses the Company's Financial Statements,

reviews major changes in them, refers to comments by Company management and the

independent CPA and reviews the compliance between the financial statements and

events that have occurred in the Company and standards used by the Company in the

preparation of its financial statements.

After the discussion, the Chair of the Financial Statement Examination Committee calls a

vote on the recommendation of the Committee to the Board of Directors to approve the

40

Financial Statements, and makes queries whether any Committee members still have any

unanswered questions or issues.

After the Financial Statement Examination Committee recommends approval of the

Financial Statements as set forth above, the Financial Statements and attached notes are

brought to the Company Board of Directors for approval.

Note also that if, during compilation of the financial statements, the CFO or the Company

CEO have any material questions or issues requiring preliminary discussion before

submitting the Financial Statements to the Board of Directors for approval, the CFO or

the Company CEO will instruct that the Board of Directors convene for a preliminary

meeting to discuss and resolve these issues.

11. Meetings of the Board of Directors and of the Audit Committee

In 2010, the Board of Directors held 13 meetings, the Company’s Audit Committee held

7 meetings, the Finance Committee held 4 meetings and the Copensation Committee held

a single meeting.

The names of the Finance Committee members who attended the meetings on February

13 and 14, 2011, at which the Committee recommended that the Company’s Board of

Directors approve the December 31 2010 Financial Statements in their entirety were:

Yechezkel Dovrat, Chairman of the Committee, Shaul Ben Ze’ev and Noam Lautman.

Also present at the February 14 2011 meeting was Company CEO Isaac Dabah.

The names of Board members who attended the Board of Directors' meeting on February

16 2011 at which the December 31 2010 annual report was approved were: Chairman of

the Board Gideon Chitayat, Israel Baum, Itzhak Weinstock, Noam Lautman, Shaul Ben-

Ze’ev, Tzipporah Carmon, Yechezkel Dovrat and Isaac Dabah.

12. Senior Employee Remuneration – Regulation 21

Compensation given senior Company employees and interested parties is detailed in

Section D of this periodic report.

As part of the 2010 yearly report approval process, the Board of Directors held extensive

discussions on the employment/service conditions of each of the Company’s executives

and interested parties, detailed pursuant to Regulation 21 of the Periodic and Immediate

Reports Regulations, separately. The Board discussed, among other things, the relation

between the sums of reimbursements given in 2010 to each of them and the contribution

to the Company over the course of the reported period and their actions in 2010. For the

41

purpose of the discussion, the Board members were presented, in advance, with relevant

data regarding each executive and interested party, as required by Regulation 21 of the

Periodic and Immediate Reports Regulations. The Board of Directors noted that the

compensation given each Company's senior executive, is determined, inter alia, taking

into account the position the senior executive fulfils in the Group and their contribution to

the group and its activity and in accordance with the Company's payment of performance

compensation program.

In addition, the Board of Directors noted that some of the bonuses given to some senior

executives are contingent on goals achieved and on the results of the Company’s activities

and that the bonus and the options received by senior management constitute adequate

incentives for the achievement of the Company's profits and the advancement of the

Company’s goals. The Board of Directors believes that payment received by each of the

Company's senior executives and interested, are fair and reasonable.

Directors' Compensation

The Company’s directors3, including outside directors, are entitled to identical directors'

compensation not exceeding generally accepted levels and set according to the directives

of the Companies Regulations (Rules Regarding Compensation and Expenses for Outside

Directors), 2000, in accordance with the Company's rank and not exceeding the maximum

sum as per those Regulations. The Company pays its directors yearly compensation of

60,000 NIS per year and participation compensation of approximately 2,200 NIS per

meeting.

Expense refund for Mr. Yizthak Weinstock

Expense reimbursements for director Mr. Itzhak Weinstock amounted to $45,000 in 2010.

The Company's Board of Directors believes that the reimbursement is reasonable and in

compliance with Company procedure, has been granted for expenses made by Mr.

Weinstock in relation to the fulfillment of his duties as Company director and did not

exceed the $80,000 ceiling approved by the General Meeting.

3 With the exception of Chairman of the Board Mr. Shatiat, Company CEO Isaac Dabah so long as he

serves as Company CEO and Mr. Weinstock starting January 2011 so long as he serves as a COO of a

subsidiary, for whom different terms of service were set.

42

Consultation Agreement with Mr. Israel Baum, Company Director

The terms of the consultation agreement with Mr. Baum have been reviewed and

discussed. Also discussed were the services provided by Mr. Baum to the Company over

the course of 2010 as per the agreement. The members of the Board of Directors believe

that payment given Mr. Baum for consultation services in 2010 is fair and reasonable.

Disclosure Provisions with Regard to the Corporation’s Financial Reporting

13. Disclosure on Critical Accounting Estimates

In preparing the Financial Statements according to generally accepted accounting

practices, management is required to employ estimates and assessments that impact the

reported information on assets and liabilities, on data on contingent assets and pending

liabilities disclosed in the Financial Statements and on revenue and expense data for the

reported period. These estimates sometimes require discretion in an uncertain

environment, and materially impact presentation of data on the financial statements.

Below is a description of critical accounting estimates used in compiling the financial

statements, the formulation of which requires that the Company make assumptions with

regard to circumstances and events involving significant uncertainty. In exercising its

judgment for the purpose of making accounting estimates, the Company accounts for the

relevant facts, past experience, impact of external factors and assumptions reasonable

under the circumstances. Naturally, as these are merely estimates, actual results may

differ.

Inventory

The inventory of Company products is a material component of total Group assets. The

Company’s inventory is recorded at cost or at net realization value, whichever is lower.

The cost of purchased finished goods, as well as the cost of raw material and other

materials is determined using the moving average method. The cost of in-process

inventory or inventory of products manufactured at Company plants is estimated as

follows: the cost of raw materials and packaging is measured using moving averages,

whereas labor cost and indirect manufacturing expenses are measured based on an

average for the manufacturing period. The Company makes monthly estimates for

amortization of slow or dead inventory, based on past experience, remaining inventory

from previous seasons and sales forecasts.

43

Goodwill

The goodwill balance in the Company’s Financial Statements is material to the sum of

Company assets.

Goodwill reflects surplus investment cost over the book value of subsidiaries acquired by

the Group. In accordance with GAAP, the Company does not depreciate goodwill on a

regular basis, but rather reviews the need for depreciation annually, on a fixed date.

Based on the Company review conducted this year, there is no need for impairment of

goodwill.

Fixed Assets

Fixed assets are a major component of total Group assets, and are presented at cost, net of

referring grant amounts and amortization expenses which are calculated using the straight

line method based on their estimated useful life for the Company.

Residual values and useful life spans of assets are reviewed and adjusted as needed on a

periodic basis.

Additional depreciation of fixed asset costs is recorded up to the market value of said

asset, if the future cash flow expected from its operation is lower than its carrying

amount.

According to the review conducted by the Company this year, the value of its real estate

in Hungary is lower than its cost in the Company’s books, and therefore impairment to its

value is required. See Note 7 to the financial statements, in part C of this periodic report.

For full details on accounting estimates and assumptions see Note 3 to the financial

statements, in part C of this periodic report.

44

Special Disclosure for Debenture Holders

14. Outstanding Obligatory Notes

The following is a description of outstanding Company debenture series as of this report:

Series K

Issuing Date 113,000,000 NIS NV debentures listed for trade on January 24 2010 pursuant to a shelf offering report published by the Company on January 18 2010 pursuant to the Company's shelf prospectus dated May 29 2008.

92,632,000 NIS NV debentures listed for trade on December 28 2010 pursuant to a shelf offering report published by the Company on December 23 2010 pursuant to the Company's shelf prospectus dated November 22 2010.

Extent of N.V. debentures at issuance (in NIS)

205,632,000

Extent of N.V. debentures as of December 31 2010 (in NIS) U, unlinked

205,632,000

Start date of principal repayment 19.7.2012

Number of annual installments of principal repayment

1

Accrued interest as of December 31, 2010 $1.8 million

Stock market value U near December 31 2010

217.9 million NIS

Interest type Fixed - 7%

Effective interest upon issue of debentures (including issuance expenses)

7.45%

Effective interest upon issue of debenture expansion (including issuance expenses and premium)

6.62%

Interest payment dates Semi-annual installments on July 19 and on January 19 of each of the years from 2010 through 2016 (first installment paid on July 19, 2010).

Linkage type Non-linked.

45

Series K

Conversion right The debentures are not convertible.

Right to early redemption or forced conversion

Should the stock exchange decide to de-list the debentures from trading due to a decline in the value of the debenture series below the threshold determined by the stock exchange, the Company shall not allow early redemption of debentures due to said de-listing.

Guarantee to secure payment U Not guaranteed by any liens.

Rating Rated A3/Stable by Midroog Ltd. (see report dated December 31 2009 (ref. 2009-01-338541) and December 19 2010 (ref: 2010-01-721767).

Details and contact information of trustee Strauss Lazar Trust Company (1992) Ltd., 17 Yitzhak Sadeh Street, Tel Aviv (Tel. 03-623777, Fax: 03-5613824). Contact at the trustee is Mr. Ori Lazar, email: [email protected].

As of the report, the Company is in compliance with all terms and conditions and

commitments to holders of outstanding debentures, including those pursuant to the trust

deed for said debentures, and there was no cause to demand immediate repayment of the

debentures.

Note that the debenture series (K including the expansion) is material and constitutes 77%

of the Company’s net financial debt and 26% of the Company's liabilities as of December

31 2010.

The Company has entered into a swap agreement with a banking corporation, to swap

NIS cash flows for a commitment to pay debenture holders with a dollar cash flow. The

dollar interest set for the transaction is 6.08%.

The Board of Directors and management express their deep appreciation of Delta

employees and managers.

Signed: February 16 2011.

Gideon Chitayat Isaac Dabah

Chairman of the Board of

Directors

CEO and Director


2010 Yearly Report


2010 Yearly Report

Table of Contents

Page

Independent Auditors' Report - Internal Controls over Financial

Reporting

2

Auditor’s Report 3-4

Consolidated Financial Statements – in USD:

Balance Sheets 5-6

Statements of Comprehensive Income (Loss) 7

Statements of Changes to Equity 8

Cash Flow Reports 9-10

Notes to the Financial Statements 11-83

Appendix A - Details of Investee Companies

______________ ___________________

______________

2

Auditors' Report

To the Shareholders of


We have inspected components of the internal controls of the financial reporting of Delta Galil Industries Ltd. (hereinafter – the Company) and its subsidiaries (hereinafter together - “the Company”) as of December 31 2010. These control components have been set as explained in the following paragraph. The Bank's Board of Directors and management are responsible for maintaining effective internal controls over financial reporting, and for evaluating the effectiveness of the internal controls over financial reporting which is included in the periodic report for the date in question. Our responsibility is to express our opinion on the Bank's internal controls of the Company’s financial reporting, based on our audit. The components of internal control of financial reporting inspected by use were determined according to Audit Standard 104 of the Institute of Certified Public Accountants in Israel “Inspection of Components of Internal Controls for Financial Reporting” (hereinafter “Audit Standard 104”). These components are: (1) organization-level controls, including controls of the process of preparing and closing financial reporting and general controls of information systems and including assessing the balance of goodwill; (2) controls for the inventory purchasing process, including inventory assessment and measurement, including provisions to impairment due to slow and/or dead inventory; (3) controls for the sales process (all of the above together are referred to as the “Audited Control Components”). We have conducted our audit in accordance with Audit Standard 104. According to this standard, we were required to plan the audit and carry it out with the aim of identifying the inspected control components and achieve a reasonable level of certainty as to whether these control components were upheld effectively in all material aspects. Our audit included achieving an understanding of the internal controls over financial reporting, evaluation of the risk of the presence of any material weakness in the inspected control components, as well as testing and evaluating those control components based on the evaluated risk. Our audit, regarding those control components, also included additional procedures that we believed to be necessary under the circumstances. Our audit referred solely to the audited control components, unlike an internal audit on all processes material to financial reporting, and therefore our opinion refers to the audited control components only. Furthermore, our audit did not refer to mutual influences between audited and unaudited control components and therefore, our opinion does not bring such negative impacts into account. We believe that our audit provides a sufficient basis for our opinion in the context described above. Due to their understandable limitations, internal controls over financial reporting in general, and components thereof in particular, may fail to prevent or discover a misrepresentation. Likewise, conclusions regarding future on the basis of any present effectiveness assessment may be exposed

Kesselman and Kesselman Certified Public Accountants Migdal Hashachar, 25 Hamered Tel Aviv 68125 P.O. Box 452 Tel Aviv 61003 Telephone no. 03-7954555 Fax 03-7954556

3

to the risk that the controls become inappropriate due to changes in circumstances or that the application of the policy or the procedures changes to the worse. In our opinion, the Company has upheld in an effective manner, in all material aspects, its audited control components as of December 31 2010. We have also conducted an audit, in accordance with generally accepted Israeli auditing standards, the Company’s Consolidated Financial Statements for December 31 2009 and 2010 and for each of the three years of the period ending December 31 2010 and our report, published February 16 2011, includes our unreserved opinion of those Financial Statements. Tel-Aviv Kesselman and Kesselman February 16, 2011 Certified Public Accountants

3

Kesselman and Kesselman Certified Public Accountants Migdal Hasachar, 25 Hamered Tel Aviv 68125 P.O. Box 452 Tel Aviv 61003 Telephone no. 03-7954555 Fax 03-7954556

Auditors' Report

To the Shareholders of

Delta Galil Industries Ltd. We have audited the consolidated balance sheets of Delta Galil Industries Ltd. (hereinafter – the Company) as of December 31 2010 and 2009 and the consolidated statements of income (loss), changes in equity and cash flow for each of the three years of the period ending December 31 2010. The Company's Board of Directors and management are responsible for these financial statements. Our responsibility is to express our opinion of these Financial Statements on the basis of our audit. We did not audit the financial statements of certain subsidiaries, whose assets included in the consolidation constitute 8% and 10% of the Company's total consolidated assets as of December 31, 2010 and 2009 respectively, and the assets of which included in the consolidation constitute approximately 1% of total consolidated revenues for the year ending December 31 2010. The financial statements of the above subsidiaries were audited by another independent auditor, whose reports have been provided to us, and our opinion, insofar as it relates to sums included for those companies, is based on the reports of the other independent auditor. We conducted our audit in accordance with generally accepted Israeli auditing standards, including standards prescribed in the Accountants Regulations (Methods of Operation of Accountant), 1973. These Standards require that we plan and perform the audit with the aim of obtaining reasonable assurance that the Financial Statements are free of material misrepresentations. The audit includes sampling of evidence supporting the sums and information in the Financial Statements. The audit also features an examination of the accounting rules implemented and of the material estimates made by the Company’s Board of Directors and Management, as well as an evaluation of the propriety of presentation on the Financial Statements as a whole. We believe that our audits and the reports of the other auditor provide a reasonable basis for our opinion. In our opinion, based on our audit and the reports of the other independent auditor as mentioned above, the Consolidated Financial Statements in question adequately reflect, in all material respects, the financial status of the Company and its subsidiaries as of December 31 2010 and 2009 and the results of their operations and cash flows for each of the three years of the period ending December 2010, in accordance with the International Financial Reporting Standards (IFRS) and with the Israeli Securities Regulations (Preparation of Yearly Financial Statements), 2010.

4

We have also audited, in accordance with Audit Standard 104 of the Institute of Certified Public Accountants in Israel “Inspection of Components of Internal Controls for Financial Reporting”, components of internal controls of the Company’s financial reporting as of December 31 2010, and our February 16 2011 report includes an unreserved opinion regarding the effective existence of those components. Tel-Aviv Kesselman and Kesselman February 16, 2010 Certified Public Accountants

5


Consolidated Balance Sheets

December 31 Note 2010 2009 Thousands of Dollars

Assets

Current assets: Cash and cash equivalents 2n 46,215 27,893Accounts receivable: 20a

Trade receivables: 90,317 103,140Taxes on income receivable 725 2,199Others 12,028 5,833

Inventory 20b 121,275 80,685Assets classified as held for sale 8 2,838 2,916

Total current assets 273,398 222,666

Non-current assets: Long-term pre-paid expenses 10a 198 94Long-term debit balances 10b 890 1,323Surplus of plan assets over liabilities due to the termination of employee-employer relations

16

- 85

Fixes assets, net of accumulated depreciation 7 62,704 72,677Intangible assets, net of accumulated amortization

9 75,464 76,040

Deferred tax assets 15e 5,127 3,541Financial derivative 12b 1,830 - Total non-current assets 146,213 153,760

Total assets 419,611 376,426

) Gideon Chitayat, ) Chairman of the Board of Directors ) Isaac Dabah, ) CEO ) Yossi Hajaj, ) CFO

Date of approval of Financial Statements by Company Board of Directors: February 16, 2011

6

December 31 Note 2010 2009 Thousands of Dollars

Liabilities and capital Current liabilities:

Short-term bank loans 20c 57,439 104,127Current maturities of long-term loans from banking corporations 11a 2,110 2,110Accounts payable:

Trade payables 52,959 45,111Taxes on income - payable 854 864Others 20d 41,506 35,002

Total current liabilities 154,868 187,214 Non-current liabilities:

Loans from banking corporations Less current maturities 11a 3,614 5,723

Severance pay liabilities, less plan assets 16 472 335Other non-current liabilities 13 5,296 3,861Deferred tax reserve 15e - 787Debentures 12a 58,023 -

Commitments 18 Total non-current liabilities: 67,405 10,706

Total liabilities 222,273 197,920

Capital 14 Equity attributable to parent company shareholders:

Share capital 23,091 23,086Share premium 120,966 120,854Other capital reserves 1,465 -Unassigned income balance 58,969 41,721Treasury shares (9,700) (9,700)

194,791 175,961Non-controlling interests 2,547 2,545

Total equity 197,338 178,506 Total liabilities and equity 419,611 376,426

The attached notes constitute an integral part of these Financial Statements.

7


Statements of Comprehensive Income (Loss)

For the Year Ending December 31 Note 2010 2009 2008 Thousands of Dollars

(Except for per-share data) In USD

Earnings (loss) per share attributable to equity holders of the parent company:

2x, 17

Basic 0.90 0.40 (1.41)

Diluted 0.87 0.40 (1.41)


Sales 5c(1)-d 620,074 572,534 622,834Cost of sales 20g 498,805 468,831 517,155Gross profit 121,269 103,703 105,679Selling and marketing expenses 20h 65,207 66,342 78,953General and administrative expenses 20h 25,347 21,956 26,703Other revenues, net 20j (2,494) (761) (805)Restructuring expenses (income), net 20e 485 (1,331) 9,162Impairment of fixed assets 7d 992 1,945 -Impairment of goodwill 9b - - 7,392Loss of capital from the sale of subsidiary 666 - -Operating profit (loss) 31,066 15,552 (15,726)Finance expenses, net 20k 7,817 6,369 7,479The Company’s share in losses (profits) of affiliate - (41) 55Profit (loss) before taxes on income 23,249 9,224 (23,260)Taxes on income 15 2,067 1,574 2,522

Yearly profit (loss) 21,182 7,650 (25,782) Other comprehensive profit (loss) Actuarial profits (losses) – defined employee benefit plan 16 (139) 23 (233)Net change in cash flow hedging transactions 12b 47 - -Adjustments from the translation of financial statements prepared in foreign currency 1,429 - 166Taxes on income and expenses charged directly to other comprehensive profit (loss)

15 54 (105) 38

Other comprehensive profit (loss) for the year, net of tax 1,391 (82) (29)Net comprehensive income (loss) for the year 22,573 7,568 (25,811) Attribution of net income (loss) for the year: To shareholders of the parent company 21,060 7,662 (26,400)To non-controlling interests 122 (12) 618Total net income (loss) for the year: 21,182 7,650 (25,782)Attribution of total comprehensive profit (loss) for the year: To shareholders of the parent company 22,451 7,580 (26,429)To non-controlling interests 122 (12) 618Net comprehensive income (loss) for the year 22,573 7,568 (25,811)

8

Delta Galil Industries Ltd. Statements of Changes to Equity

Attributable to Company Shareholders Ordinary Share Capital

Number of Shares Sum

Share Premium

Capital Reserve

from Translation Differences

Capital Reserves in Respect of Cash Flow Hedging

Actuary Loss due to

Severance Pay

Liabilities

Unassigned Retained Earnings

Treasury Shares Total

Non-Control-

ling Interests

Total

Capital Thousands Thousands of Dollars

Balance as of January 1, 2008 19,948 21,851 101,114 (166) - (1,148) 61,744 (9,700) 173,695 2,737 176,432 Movement in 2008:

Comprehensive income (loss) - - - 166 - (195) (26,400) - (26,429) 618 (25,811) Dividends to non-controlling interest holders - - - - - - - - - (365) (365) Benefit component of options granted - - - - - - (188) - (188) - (188)

Balance as of December 31, 2008 19,948 21,851 101,114 -,- -,- (1,343) 35,156 (9,700) 147,078 2,990 150,068 Movement in 2009:

Comprehensive income (loss) - - - - - (82) 7,662 - 7,580 (12) 7,568 Rights issue (see Note 14a4) 4,638 1,235 19,740 - - - - - 20,975 - 20,975 Dividends to non-controlling interest holders - - - - - - - - - (433) (433) Uncollected dividends with respect to previous years - - - - - - 27 - 27 - 27 Benefit component of options granted - - - - - - 301 - 301 - 301

Balance as of December 31 2009: 24,586 23,086 120,854 -,- -,- (1,425) 43,146 (9,700) 175,961 2,545 178,506 Movement in 2010:

Comprehensive earnings - - - 1,429 36 (74) 21,060 - 22,451 122 22,573 Proceeds from exercise of options 19 5 112 - - - - - 117 - 117

Dividends to non-controlling interest holders - - - - - - - - - (120) (120) Dividend distribution - - - - - - (5,000) - (5,000) - (5,000) Benefit component of options granted - - - - - - 1,262 - 1,262 - 1,262

Balance as of December 31 2010 24,605 23,091 120,966 1,429 36 (1,499) 60,468 (9,700) 194,791 2,547 197,338

9


Consolidated Cash Flow Reports

For the Year Ending December 31 2010 2009 2008 Thousands of Dollars

Cash flow from current operations: Net income (loss) for the year 21,182 7,650 (25,782)

Adjustments required to reflect cash flows from current operations 448 35,370 52,691Interest paid in cash (4,002) (3,817) (6,132)Taxes on income refunded (paid) in cash, net (3,368) 1,621 (4,987)Net cash from current operations 14,260 40,824 15,790

Cash flow from investment activities: Business combination (see Appendix A) - (8,237) -Proceeds from the sale of subsidiary, net (see Appendix B) 816 - -Additional payments due to the adjustment of purchase cost - - (2,117)Acquisition of fixed assets and intangible assets (5,217) (4,072) (7,781)Proceeds from sale of fixed assets intended for sale 644 - -Proceeds from the sale of fixed assets 710 1,071 1,887Proceeds from the sale of leased land - - 170Proceeds from the issue of option to sell asset available for sale 682 - -Proceeds from the sale of land, net of attached tax payments 4,218 - -Repayment of long-term receivables and deferred expenses 132 236 60Loan granted to affiliated company - - (81)Repayment of loan from affiliated company - - 16Loans granted employees (12) (13) (91)Repayment of loans to employees 25 28 77Long-term deposits (80) (2) 27

Net cash (used in investment activities) deriving from investment activity 1,918 (10,989) (7,833)

Cash flows from financing activity: Dividends paid holders of rights not granting control (120) (433) (365) of subsidiary

Dividend paid (5,000) - - Receipt of long-term loans - 8,300 -Repayment of loans and other long-term liabilities (2,220) (8,746) (8,289) Short-term credit from banking corporations, net (47,205) (26,242) (11,557)

Proceeds from the issuance of debentures, less issuance expenses 56,331 - -

Proceeds from exercise of employee options 117 - - Proceeds from issuance of rights, net of issuance expenses - 20,975 - Net cash provided by (used in) financing activities 1,903 (6,146) (20,211)

Net increase (decrease) in cash and cash equivalents 18,081 23,689 (12,254)Profit (loss) due to exchange rate differentials on cash and cash equivalents 241 (20) (198)

Balance of cash and cash equivalents at the beginning of the year 27,893 4,224 16,676

Balance of cash and cash equivalents at the end of the year 46,215 27,893 4,224


1.

10




Adjustments required to reflect cash flows from current operations:

Revenues and expenses not involving cash flow: Depreciation 9,291 11,366 11,073 Amortization 1,739 1,569 1,275 Impairment of fixed assets 992 1,945 - Impairment of goodwill - - 7,392 Loss of capital from the sale of subsidiary 666 - - The Company’s share in losses (profits) of affiliate - (41) 55 Cash erosion, net (241) 20 106 Interest paid in cash 4,002 3,817 6,132 Income taxes paid (received) in cash, net 3,368 (1,621) 4,987 Interest component of liability for adjustment of acquisition cost - - (2,982) Deferred taxes on income, net (2,319) 1,702 1,027 Severance pay liability, net 44 (79) (116) Restructuring expenses 327 429 8,861 Capital gain from sale of fixed assets (249) (375) (805) Capital gain from realization of asset classified as held for sale (483) - - Change in benefit component of options granted to employees 1,262 301 (188) Profit from changes in the fair value of derivatives (505) (448) (81) Long-term pre-paid expenses (6) (4) - Others 760 230 159 18,648 18,811 36,895 Changes to operating assets and liabilities: Decrease (increase) in trade receivables 13,645 (13,546) 13,535 Decrease (increase) in other receivables (1,379) 2,166 (1,108) Increase (decrease) in trade payables 7,926 (411) (14,420) Increase (decrease) in other payables 2,403 (5,691) (7,559) Decrease (increase) in inventory (40,795) 34,041 25,348 (18,200) 16,559 15,796 448 35,370 52,691

Additional information on investment and finance activities not involving cash flows:

December 31 2010 2009 2008 Thousands of Dollars

Trade payables for non-cash acquisition of fixed and other assets (89) 196 (754)

Receivables for non-cash sale of leased lands - - (23) Receivables with respect to the sale of non-cash fixed assets (997) (508) 60 Liability for minimum royalty payments 1,358 4,843 5,326 Liability payable for acquisition of consolidated company - - (4,478) Liability for payment with respect to acquisition of operations - 32 - Receivables as a result of the sale of subsidiary 1,454 - - Payables as a result of the sale of subsidiary 63 - -


2.

11



Appendix A:

Business combinations (see also Note 6):

Appendix B:

Yield from the sale of company consolidated in the past:

* Over the course of the second quarter the Company completed the sale of its Indian subsidiary. Total proceeds for the sale are $2.3 million, $0.9 million of which was received in cash, with the balance expected by the end of 2011.

Year Ending December 31

2009 Thousands of Dollars Receivables (79)Inventories (2,568)Fixed assets (3,638)Intangible assets (2,096)Trade payables 31Other payables 81Total proceeds (8,269)Plus receivables due to sale 32 (8,237)

Year Ending December 31

2010 Thousands of Dollars Trade receivables 223Other receivables 202Inventories 888Long-term deposits 122Fixed assets 1,536Trade payables (307)Other payables 232Capitalization component from the sale of company

40

Capital loss (666) Total proceeds 2,270 Less receivables due to sale of subsidiary

(1,454)

816

(End) - 3

12


Notes to the Financial Statements Note 1 – Overview

Delta Galil Industries Ltd. (hereinafter: “the Company”) is an Israeli corporation that together with its subsidiaries (hereinafter: “the Group”) is engaged primarily in the manufacturing and marketing of undergarments, and is active in three operating segments – USA Mass Market, Global Division Upper Market and Delta Israel. Information on Group's operating segments and principle markets is presented in Note 5. Company shares were traded through March 2008 on the Nasdaq Global Market (“NASDAQ”) and on the Tel Aviv Stock Exchange Ltd. (“the Stock Exchange”). In March 2008 the Company applied to de-list its shares from trade and to discontinue its registration in the U.S. On March 27, 2008, Company shares were de-listed from NASDAQ. From that date forward, the main stock exchange on which the Company is traded is the Israeli Stock Exchange in Tel-Aviv. The Company’s official address is 2 Kaufman Street, Tel Aviv.

Note 2 – Principal Accounting Policies: a. Basis of Preparation of the Financial Statements

1) The Group’s Financial Statements as of December 31 2010 and December 31 2009 and for each of the three years in the period ending December 31 2010, were prepared in accordance with IFRS standards, interpretations to IFRS standards made by the IFRIC, and include the additional disclosure required in accordance with the Securities Regulations (Yearly Financial Statements, 2010.

The principal account policies, described below, have been applied consistently in relation to all years presented, unless noted otherwise.

The Consolidated Financial Statements have been prepared according to the historical cost convention, subject to the adjustment of financial assets at fair value through gain/loss and the revaluation of derivatives and compensation fund assets, presented at fair value.

The preparation of the Financial Statements in accordance with the IFRS requires the use of certain critical accounting estimates. It also requires that Group management exercise its judgment in the process of applying the group’s accounting policies. Note 3 discloses the areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates have a material impact on the consolidated financial statements. Results in practice may be fundamentally different from the estimates and assumptions employed by Company management.

2) The Group’s operational turnover period is 12 months.

3) The Group analyses the expenses acknowledged in the Statement of Operations according to a classification method based on the expenses’ activity characteristic.

13

b. Consolidated Financial Statements:

1) Subsidiaries

Subsidiaries are entities in which the Company has control of their financial and operational policy, usually due to holding over half of the voting rights. The existence of potential voting rights that may be exercised or converted at any time is taken into account when considering whether one company has control of another. Subsidiaries are fully consolidated starting on the date when the Group achieves control over them. Their consolidation ceases on the date control ends. The Group applies the acquisition method in its accounting treatment of business combinations. The proceeds transferred for the purchase of a subsidiary (hereinafter – the Purchased Company) is calculated as the sum of the fair value qualities of the assets transferred by the Group, the liabilities created for the Group to the previous owners of the purchased company and the capital rights issued by the Group as part of the business combination agreement. The transferred proceeds include the fair value of any asset or liability deriving as a result of a conditional yield arrangement. Costs pertaining to the purchase are recognized under gain or loss upon creation. Identified assets purchased as well as liabilities and pending liabilities the Group takes upon itself as part of business combinations (with the exception of certain cases detailed in IFRS 3 – Business Combinations (Revised) (IFRS 3R)), are first measured at fair value upon purchase. Pursuant to any business combination agreement, the Group determines whether to recognize non-controlling interests in the purchased company according to their fair value or according to the relative stake of the non-controlling interests in the fair value of the net recognized assets of the purchased company. This determination is made for each transaction separately. The surplus of proceeds transferred, the sum of any rights not granting control of the purchased company, and the fair value on the date of purchase of any earlier rights to the capital of the purchased company, above a net sum, as of the purchase date, of identifiable assets purchased and liabilities taken, all measured as denoted above, is recognized as goodwill (see also f. below). In the event that the net sum, on the date of purchase, of identifiable assets purchased and liabilities taken, exceeds the total sum of proceeds transferred, the sum of any rights not granting control of the purchased company, and the fair value on the date of purchase of any earlier rights to the capital of the purchased company, as above, the difference shall be recognized directly to gain or loss on the date of purchase. Transactions, balances and profits not yet realized in transactions between Group members have been written off. Unrealized losses were also written off, unless circumstances indicate the impairment of the transferred asset. Accounting policy implemented for subsidiaries was changed as necessary, in order to guarantee consistency with the accounting policy adopted by the Group.

2) Affiliates

An affiliated company is an entity in which the Company has material influence, but not control, which is mostly expressed in a 20% to 50% stake in

14

voting rights. Investment in affiliates is presented using the book value method, and is first recognized at cost. The affiliated company is not active and is undergoing liquidation. Profits/losses included in the Company’s reports mainly refer to expenses pertaining to liquidation expenses and/or the legal suit against the affiliate.

c. Segment-Based Reporting

Operating segments report according to the same basis used for internal reporting purposes submitted to the Group’s operational decision makers. For details see Note 5.

d. Translation of Balances and Transactions with Foreign Currency

1) Functional and Presentation Currency Items included in the Financial Statements of each Group member are measured using the currency of the primary economic environment in which that entity operates (hereinafter – Functional Currency). The Consolidated Financial Statements are presented in USD, which is both the Company’s functional and its presentation currency.

Following are the changes occurring during the reported periods in the exchange rate of the U.S. dollar (hereinafter – the USD) versus the NIS and the rate of the euro versus the USD:

Change in USD/NIS Exchange Rate

Change in Euro/USD Exchange Rate

% % Year ending December 31 2010 (5.99) (7.39)

Year ending December 31 2009 (0.71) 3.46 Year ending December 31 2008 (1.14) (5.31) The exchange rate of the USD vs. the NIS on December 31 2010 is $1 = 3.549 NIS.

The exchange rate of the euro vs. the USD on December 31 2010 is €1 = $1.3350

2) Transactions and Balances

Transactions in currency other than the functional currency (hereinafter – Foreign Currency) are translated into the functional currency using the exchange rates in effect on the transaction date. Exchange rate differences resulting from the settlement of such transactions and from the translation monetary assets and liabilities denominated in foreign currencies according to exchange rates at the end of the period are charged to gain/loss, except when charged in a different comprehensive profit framework as a cash flow hedge.

Profit and loss from exchange rate differences pertaining to monetary assets or liabilities are presented in the Profit (Loss) Report under “Financing Expenses, Net".

3) Translation of Financial Statements of Group Members

The results and financial status of all group members (the functional currency of none of which is a currency from a hyperinflationary economy) the functional currency of which differs from the Company’s presentation currency are translated to the presentation currency in the following manner:

15

(a) Assets and liabilities in the Balance Sheet are translated according to the closing rate on the date of that report

(b) Revenues and expenses in the Report on Comprehensive Earnings are translated according to average exchange rates for the period.

(c) All exchange rate differences created are created as a separate component

within the framework of other comprehensive earnings.

4) Currency Change in the Delta Israel Area of Activity

Starting in 2010 most parameters influencing the Delta Israel area of activity are measured in NIS, and as a result Company management has decided to change the functional currency of this area from USD to NIS.

e. Fixed Assets

Fixed assets are presented at cost net of accumulated depreciation, provision to impairment and deduction of referring investment grant sum. Historic cost includes expenses directly attributable to the acquisition of the items. Impairment of assets, other than owned land that is not depreciated, is calculated using the straight line method over the estimated useful life of the fixed asset items in the following manner:

%

Structures 2-7 Mainly 4% Machinery and equipment 7-25 (Mainly 7%) Furnishings, office equipment and vehicles

6-25

(Mainly 7%)

General significant renovation costs are amortized across the asset’s remaining useful life span, or until the next general renovation, whichever comes first.

Improvements to rental properties are amortized using the equal depreciation method over the term of the lease or the expected life span of these improvements, whichever is shorter.

Assets' residual values, their depreciation method and useful life span are reviewed and adjusted on a case-by-case basis, on each balance sheet date. The reduction of an asset to its book value is recognized immediately, if its book value is larger than an estimate of its recoverable sum (see also Section G below).

f. Intangible Assets

1) Goodwill

Goodwill represents the surplus of proceeds transferred due to the purchase of a subsidiary, the sum of any rights not granting control of the purchased subsidiary and the fair value on the date of purchase of any capital rights to the purchased subsidiary held earlier by the Group over the net sum on the date of purchase of identifiable assets purchased and liabilities. Goodwill is included under intangible assets. The Group reviews goodwill for impairment once a year. Goodwill is presented at cost, less losses accumulated due to impairments, if any. Losses from the impairment of goodwill are not written off by later revaluations.

Goodwill is charged to cash-generating units for the purpose of testing impairment. The allocation is carried out for each cash-generating unit or group

16

of cash-generating units that are expected to benefit from the business combination from which the goodwill was derived, which is no greater than the operating segment.

Regarding impairment of goodwill, see note 9b.

2) Contractual Customer Relations

Customer relationships acquired as part of the business combination are included at their fair value on the date of purchase and amortized using the straight line method over their useful life span - 20 years.

3) Trademark Usage Rights

Rights to use trademarks are recorded at the discounted sum of the liability for minimum royalty payments, and are amortized over their contract period (usually 3-4 years) or their estimated period of use, whichever is shorter; see also note 9c.

4) Computer Software

Acquired computer software licenses are capitalized on the basis of the costs accumulated in the acquisition and utilization of the software. These costs are amortized over the estimated useful life span of the software (4 years). Costs associated with development or maintenance of computer software are recognized as expenses upon creation. Costs directly associated with the development of unique and identified software products under Group control and for which a high probability exists that they will generate economic benefits in excess of their costs including direct costs related to employees, accumulated as a result of the software's development and an appropriate part of the relevant indirect expenses. Costs of purchasing computer software recognized as assets are amortized across their estimated useful life span (but for no longer than 4 years).

g. Impairment of Non-Financial Assets Assets with an indefinite useful life span, such as goodwill, are not subjected to amortization and are tested annually for impairment. Assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their book value may not be recoverable. The impairment loss recognized for impairment is equal to the sum by which the asset's book value exceeds its recoverable sum. The recoverable sum is the fair value of the asset, less sales costs, or its value of use, whichever is higher. For the purpose of assessing impairment, assets are distributed at the lowest levels for which there are separate identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffer impairment are reviewed for possible reversal of the impairment recognized for them at each financial status reporting date.

h. Non-Current Assets Held for Sale

Non-current assets (or disposal groups) are classified as assets held for sale when the Group is about to recover their book value, mainly through a sales transaction, and the assessment is that and a sale is expected to highly probable. These assets are recognized at their book value or their fair value less sales costs, whichever is lower, this in the event that the Group expects to recover the book value mainly through a sales transaction, and not through continuous use of the assets.

i. Government Grants

Government grants referring to fixed assets are included as a deduction from the book value of the referred assets, and are recognized in the report on comprehensive

17

earnings (loss) through a reduced assignment of depreciation across the expected life span of the referred assets. Government grants referring to participation in R&D expenses shall be included in the Statement of Operations as a reduction of the costs included in the sakes cost and sales and marketing costs item.

j. Financial Assets

1) Classification

The Group classifies its financial assets into the following categories: “Financial Assets at Fair Value through Gain and Loss” and “Loans and Receivables”. Classification is determined according to the goal for which the financial assets were purchased. Group management determines the classification of the financial assets upon first recognition.

a. Financial Assets Measured at Fair Value Through Gain/Loss

Derivative financial instruments are classified as available for sale, unless they are intended for hedging purposes. The company does not have financial assets held for maturity or financial assets available for sale.

b. Loans and Accounts Receivable

Loans and receivables are non-derivative financial assets with fixed or fixable payments that are not quoted on an active market. These assets are included under current assets, with the exception of cases in which the period until redemption exceeds one year from the balance sheet date, in which assets are classified as non-current. The Group’s loans and receivables are included under cash and cash equivalents, other receivables and long-term receivables.

2) Recognition and Measurement

Regular purchases and sales of financial assets are listed in the Group’s books on the date the transaction is cleared, which is the date on which the asset is delivered to the Group or delivered by the Group. Financial assets presented at fair value through gain/loss are first recognized at fair value, and the transaction expenses are charged to the Statement of Operations. Financial assets are subtracted when the rights to receive cash flows from the investments expire or are passed on, and the Group has passed on all risks and yields from ownership of these assets. Financial values at fair value via gain/loss are presented in consecutive periods at fair value. Loans and receivables first recognized at fair value plus transaction costs are presented at amortized cost, on the basis of the effective interest method. As for the method by which the fair value of the Group’s financial assets is measured see Note 4.

3) Offsetting Financial Instruments

Financial assets and liabilities are offset and the net sums presented in the Balance Sheet when there is a legally enforceable right to offset the recognized sums, and there is an intention to clear the financial assets and financial liabilities on a net basis, or realize the asset and clear the liability simultaneously.

18

4) Impairment of Financial Assets

On each balance sheet date, the Group assesses whether objective evidence exists that a financial asset or group of financial assets has been impaired. A financial asset of a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as result of one or more events that occurred after the initial recognition of the asset (“Loss Event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial assets or group of financial assets that can be estimated reliably. The group first assesses whether objective evidence of impairment exists. In the event of such evidence, the sum of the impairment loss recognized in the Financial Statements is measured as the difference between the asset's book value and the present value of estimated future cash lows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate (meaning the effective interest rate calculated upon first recognition in the Financial Statements). The asset’s book value is impaired and the sum of the loss is recognized in the Report on Comprehensive Earnings (Loss). If a loan or investment held for redemption bears variable interest rates, the discount rate used to measure any impairment loss is the current effective interest set according to the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument's fair value using an observable market price. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be attributed objectively to an event occurring after the impairment was recognized (such as an improvement to the debtor's credit rating), the reversal of the previously recognized impairment loss shall be recognized in gain/loss. Impairment testing of trade receivables is described in m. below.

k. Derivative Financial Instruments and Hedging Activities

Derivative instruments are initially recognized at their fair value upon engagement in the derivative contract, and are measured anew in consecutive periods at fair value. The method for recognizing gain or loss deriving from changes in fair value depends on the question whether the derived instrument is intended as a hedging instrument, and if so, on the nature of the protected item. Changes to the fair value or derivative financial instruments not fit for hedging are charged to gain or loss. Derivatives embedded in financial instruments or any other hosting contract are separated from the hosting contract only if: (a) their characteristics and economic risks are not closely related to the host contract's economic characteristics and risks; (b) a separate instrument with the same conditions as the embedded derivative would meet the definition of derivative; and (c) the mixed instrument as a whole (including the embedded derivative) is not measured at fair value through gain or loss. Changes to the fair value of derivative financial instruments separated as above are charged to gain or loss. The Group designates specific derivative instruments to be of the following types of hedging:

1) Hedging the fair value of assets or liabilities recognized or of steadfast commitment (hereinafter – Fair Value Hedging);

19

2) Hedging a specific risk attributed to a recognized asset or liability or to a

highly expected transaction (hereinafter – Cash Flow Hedging);

The Group documents, as of the hedge's creation, the link between protecting instruments and protected items, as well as the goals of risk management and strategy as they pertain to various hedging agreements. In addition, the Group documents its estimates, both on the date the hedging was created and on a continuing basis, as to whether the derivative instruments, used in hedging transactions, which are highly effective in achieving changes, offset the fair value or cash flows of hedged items. The fair value of derivative instruments used for hedging purposes is detailed in Note 12b. Movements in hedging funds are charged to other comprehensive earnings and are presented as part of the Report on Changes in Capital. The full fair value of a hedging derivative is classified as a non-current asset or liability, when the time remaining until the redemption of the hedged item is no longer than 12 months after the balance sheet date, or as a non-current asset or liability, when the time remaining until the redemption of the hedged item is less than 12 months after the balance sheet date. Derivative instruments for commercial purposes are classified as current assets or liabilities.

1) Fair Value Hedging

Changes in the fair value of derivative instruments intended and fit to serve as fair value hedging are charged to gain/loss along with any change in the fair value of the hedged assets or liabilities, attributed to the hedged risk. The Group applies fair value hedging accounting, only for hedging fixed interest risks on loans. The gain or loss connected to the effective part of the interest rate swap agreements hedging loans at fixed interest rates, are recognized in the Statement of Operations under financing expenses. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under “Other Income (Expenses) – Net”. Changes in the fair value of hedged loans at fixed interest rates, attributed to interest rate risk, are recognized in the Statement of Operations under financing expenses. If the hedging no longer upholds the criteria for hedging accounts, the adjustment to book value of a hedged item, for which use was made of the effective interest method, is depreciated to gain or loss across the period until the item’s redemption.

2) Cash Flow Hedges: The effective portion of changes in the fair value of derivative instruments intended and fit for use in hedging cash flows, is recognized under other comprehensive earnings. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under “Other Income (Expenses) – Net”. Sums accumulated in capital are reclassified into the Statement of Operations in periods during which the hedged item influence profit or loss (for instance, when a projected sale, that is hedged, takes place). The gain or loss attributed to the effective part of the interest rate swap agreements hedging loans at fixed interest rates is recognized in the Statement of Operations under financing expenses. The gain or loss connected to the non-effective part is recognized in the Statement of Operations under “Other Income (Expenses) – Net”.

20

At the same time, when a projected hedged transaction brings about the recognition of a non-financial asset (for instance, inventory or fixed asset), the profits or losses rejected in the past within the framework of equity are transferred from equity and are included in the initial measurement of the asset’s cost. The deferred sums are recognized, eventually, in the sales cost item, in the event of inventory, or under impairment costs, in the event of fixed assets.

When a hedging instrument expires or is sold, or when the hedging no longer upholds the criteria for hedge accounting, the accumulated profit or loss recognized in equity as of that date, remains recognized in equity, and shall be recognized in the Statement of Operations when the projected transaction itself is eventually recognized in the Statement of Operations. When the projected transaction is not yet expected to take place, the accumulated profit or loss, recognized earlier within the framework of equity, is immediately transferred to the Statement of Operations, under “Other Income (Expenses) – Net”.

l. Inventory

Inventory is assessed at cost or according to its realization value, whichever is lower. Cost is determined based on a moving average. The cost of finished products and mid-process inventory includes direct manufacturing costs, cost of labor and loading indirect costs according to normal capacity. Amortization of inventory values is carried out in accordance with projections of its discontinuation, based on assumptions regarding demand and future market conditions. The net realization price is the estimated sales price over the normal course of business, less completion and sales costs.

m. Customers

Customers are initially recognized at fair value less provision to doubtful debt. The provision to doubtful debt is created when objective evidence exists of the fact that the Group is unable to collect all sums owed it according to the original terns of the debit balances. Material customer difficulties, the probability they will go bankrupt or undergo economic reorganization and insolvency or material delays in payments are considered indicative of the fact that the value of the debtor’s balance has decreased. The debt’s book value is reduced through the provision account, and the sum of the loss is recognized in the Report on Comprehensive Earnings (loss) under administrative and general expenses. When a customer debt cannot be collected, it is erased against the provision to doubtful debt.

The Company performs a discount to the debit balance of a central customer. The discount takes place through a U.S. banking institution, with no recourse. The results of the discount action are charged to financing expenses on the date of the transaction.

n. Cash and Cash Equivalents

Cash and cash equivalents include cash in hand, short-term bank deposits, other short-term highly liquid investments with original maturities of three months or less.

o. Share Capital

The Company’s ordinary shares are classified as share capital. Incremental costs directly attributable to share or option issuance are presented in equity as a deduction from issuing proceeds net of tax.

21

When the Company acquires its own shares (treasury shares), the cost of purchase in question, including any direct and incremental costs less tax, is deducted from equity attributed to the owners of the parent company until the shares are cancelled or re-issued. On the matter of rights issues, see Note 14.(a).(4).

p. Trade Payables

Trade payable balances include obligations on behalf of the Company/Group to pay for goods or services purchased from suppliers over the normal course of business. Trade payable balances are classified as current liabilities when payment is supposed to be made within one year (or during the business’s normal operational turnover, in the event that it is longer than a year); otherwise they are presented as non-current liabilities.

q. Loans Received and Debentures

Loans received and debentures are initially recognized at fair value, less transaction costs. In subsequent periods, the loans are presented at amortized cost with the difference between the sum of the loan initially recognized and the redemption value is recognized in the Report on Comprehensive Earnings (loss) across the loan period or debentures using the effective interest method. Loans are classified as current liabilities unless the Group has the unconditional right to defer repayment of the liability for at least 12 months after the balance sheet date.

r. Current and Deferred Taxes

Taxes on income include current and deferred taxes. Taxes on income are charged to gain/loss, with the exception of items charged to other comprehensive earnings (loss) or directly to equity, respectively, along with the item for which they were created. In these cases, the tax influence is also charged to other comprehensive earnings (loss). Current taxes are tax sums expected to be payable for taxable income, calculated according to tax rates and tax statutes legislated or effectively legislated as of the balance sheet date, in countries in which the Company and its subsidiaries are active, including tax payments referring to previous years. From time to time, Group management studies tax aspects applicable to its taxable income, in accordance with relevant tax laws, and creates provisions as needed. Deferred taxes are calculated in full, using the liability method for all temporary differences between the sums of assets and liabilities as reported in the Consolidated Financial Statements, and sums taken into account for tax purposes, with the exception of temporary differences created upon first-time recognition of reputation, and temporary differences created upon initial recognition of the asset or liability with no impact on profit or loss on that date – whether for accounting purposes or that reported for tax purposes (unless the temporary difference arises from an initial recognition of a business combination transaction).

Recognition of deferred tax assets is conducted for all temporary differences deductable for tax purposes, within the sum of the differentials that may be expected to be used in the future in return for taxable revenues. Deferred tax assets are reviewed at each reporting date and are impaired if it is no longer probable that the related tax benefit will be realized.

22

Deferred tax balances are calculated using tax rates expected to apply upon realization of the deferred tax asset, or settlement of the deferred tax liability, in accordance with tax rates and tax laws that have been enacted, or effectively enacted, in the countries in which those companies are active, as of the balance sheet date.

In calculating of deferred taxes, taxes which would have been created in the event of realization of investments in subsidiaries are not taken into account, as it is Company policy to hold these investments and not realize them.

The Group may be liable for additional taxes in the event of inter-company dividend distribution. This added tax has not been accounted for in light of Company policy not to have dividends involving additional tax distributed in the foreseeable future.

s. Employee Benefits

1) Retirement/Pension Compensation Liability

a. Defined Benefit Plans:

In accordance with labor laws and labor agreements in Israel and according to Group member practices, Group members must pay severance pay to employees who are dismissed or retire from their positions under certain circumstances. The Group members’ severance pay liability is treated as a defined benefit plan, and regarding some of the employees, as a defined deposit plan.

In accordance with the obligations borne by Group members to employees covered by a plan constituting a defined benefit plan, the sums of benefits received by the employee entitled to compensation upon retirement are based on their years of seniority and their last paycheck.

The obligation borne by the Company toward employees covered by a defined deposit plan is to make fixed deposits to a separate and independent entity, with Group members having no legal or implied obligations to make additional deposits, in situations in which the sums of the fund will be insufficient to pay all of the employees for all the benefits owed for work services in the current period and in earlier periods.

The retirement compensation liability presented in the balance sheet is the current value of the defined benefit liabilities as of the balance sheet date, less the fair value of the plan’s assets and plus adjustments due to actuary profits or losses not yet recognized and the cost of past services not year recognized. The defined benefit liability is measured on a yearly basis by an actuary, using the projected unit credit method. The current value of the liability is determined by discounting expected future cash flows (after taking into account expected pay increase rates), on the basis of interest rates on government debentures in Israel and on the basis of corporate debenture rates in the U.S. subsidiary, denominated in the currency in which the benefits will be paid, the validity of which until redemption is near the period of the liabilities referring to retirement compensation.

In accordance with International accounting Standard 19 – Employee Benefits (hereinafter – IAS 19), the discount rate used to calculate actuary obligation shall be determined using market yields as of the balance sheet date on high-quality corporate debentures. At the same time, IAS 19 notes that in countries lacking a deep market for these debentures, market yields as of the balance sheet date on government debentures must be used.

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As noted, the interest rate used by the Company to capitalize expected future cash flows for the purpose of calculating actuary obligation was determined based on interest rates of high-rated government debentures, as Company management believes that Israel lacks a deep market for corporate debentures while in the U.S., the interest rate used by the subsidiary to capitalize future cash flows was determined based on interest rates of corporate debentures, this as Company management believes that the U.S. has a deep market for such debentures. The Group charges actuary profits or losses created as a result in changes in actuary assumptions and as a result of the difference between assumptions made in the past and results in practice, directly to surpluses, under other comprehensive earnings, in the period they were created. b. Defined Deposit Plan

The Group members operate a number of pension plans. The plans are generally finance by payments made to insurance companies or pension funds held in trust. These plans constitute defined deposit plans as the Group members make regular deposits to a separate and independent entity. The Group has no obligation, legal or implied, to make additional deposits, in situations in which the fund’s assets are not sufficient to pay all employees the benefits for work services in the current period and during earlier periods. As noted above, the Company purchases insurance policies and makes deposits in pension and compensation funds in return for its pension payment and retirement compensation obligation, which constitute a defined deposit plan. Upon making the deposits, it is not obligated to make additional payments. The deposits are recognized as expenses for employee benefits when they are carried out. Advance deposits are recognized as an asset, in the event that the Group is entitled to refunds for sums deposited in cash or to a reduction in future payments. Furthermore, the American subsidiary operates two defined deposit pension plans pursuant to section 401(K); the benefit is based on a percentage of employees’ yearly salary. The Company usually matches 50% of any employee contribution, pre-tax, up to 4% of the employee’s annual compensation, depending on the plan.

2) Vacation and Convalescence Pay

According to labor laws in Israel and in some of the other countries in which the Group is active, each employee is entitled to vacation days and convalescence days, both calculated on a yearly basis. This right is established throughout the employee’s employment at the Company. The Group recognizes the liability and expense for vacation and convalescence pay based on the benefit created for each employee on a non-capitalized basis.

3) Executive Compensation

The Company recognizes its liability and expense for executive compensation based on various compensation components that vary according to the rank of the executive and may change from year to year based on the decision of Company management. The Company recognizes the provision in question when a contractual obligation exists or when practice in the past created an implies obligation

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t. Share-Based Payments The Company’s Board of Directors approves a plan for the issue of options to Group members from time to time; see Note 14; some of the options granted are occasionally dependent on achieving operational goals. The fair value of the options upon issue is charged as a salary expense concurrent with an increase in capital, across the period in which the employees become entitled to options and it upholds all of the defined conditions for the maturation of a share-based payment arrangement. The sum charged as an expense is adapted in order to reflect the numbers to shares expected to vest. When the options to purchase the shares are exercised, the resulting exercise bonus is charged to stock capital (according to their notational value) and stock premium.

u. Provisions

Provisions for re-structuring cost are recognized in the Financial Statements when the Group has a legal or implied liability as a result of past events; the Group is expected to bear the cash flows in order to redeem the liabilities and the sum can be reliably estimated. Provisions for restructuring expenses include employee compensation payments when the Group approves a formal and detailed restructuring plan, and when the restructuring begins in practice, or when it is announced (see Note 20e). The provisions do not include future operational costs. The provisions are measured according to the current value of management’s best estimates regarding the cash flows expected to be required to clear existing commitments as of the balance sheet date.

v. Revenues

The Group’s sales reflect revenues from the sale of goods. The Group's revenues are measured at fair value of proceeds received or proceeds the group is entitled to receive in respect of sales over the ordinary course of the Group’s business. The revenues are presented net of VAT, returns, credits and discounts and after writing off inter-group revenues. The Group recognizes revenues from the sale of goods when all the following conditions are met: (a) the significant risks and rewards arising from ownership of the goods have been transferred to the buyer; (b) the Group no longer maintains effective control of goods or continuous administrative involvement of a level characterizing ownership; (c) the sum of revenues may be reliably measured; (d) the economic benefits associated with the transaction are expected to accrue to the company; and (e) all costs incurred or which will be incurred with regard to the transaction may be measured reliably. Discounts given to customers at the point of sale or as a function of purchase volume, whether pursuant to an agreement with the customer or not, are deducted from revenues in the Financial Statements. The Company bases its estimates on past experience, taking into account the type of customer, type of transaction and the specific details of each arrangement.

w. Lease Agreements

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the Report on Comprehensive Earnings (loss) on a straight-line basis for the duration of the lease.

The group leases certain property, plant and equipment items. Leases of fixed assets, in which the Group has been transferred for all effects and purposes all the risks and

25

rewards of ownership are classified as financial leases. Finance leases are capitalized and recognized as assets and liabilities at the commencement of the lease at the fair value of the leased property or the present value of the minimum lease payments, whichever is lower. All lease payments are attributed between liability repayments and financing expenses, in such a manner that the interest rate on the balance of the liability remains unchanged. The lease liabilities in question, less the finance element, are included under loans and other non-current liabilities. The interest component of the liabilities is charged to the Report on Comprehensive Earnings (loss) over the lease period. Fixed assets purchased pursuant to financial leases are depreciated across the asset’s useful life span or the lease period, whichever is shorter.

Advance payments for land leasing rights for the period of 38-40 years for which the company has paid capitalized lease payments to the Administration are presented under prepaid expenses and depreciated over usage period of the rights in question. The lease agreements grant the Company the right to extend the agreement period by and additional 49 years.

x. Net Profit (loss) per Share

The calculation of basic net profit (loss) per share is based, as a rule, on the net profit (loss) divided to ordinary shareholders, divided by the weighted average of the number of ordinary shares in circulation during the period, less Company shares held by the company itself. In calculating the diluted profit or loss per share, the weighted average of the number of shares issued is also added to the ordinary share average, assuming that all diluted potential shares will be converted to shares. The potential shares are only taken into account as above when their effect is non-diluting (decreasing profit or increasing loss per share).

y. New International Standards, Amendments to the Standards and New Interpretations

1) Standards and amendments to the existing standards coming into effect and

binding for reporting periods starting January 1 2010:

a. Revision to International Financial Reporting Standard 8 – “Operating Segments” (hereinafter – the IFRS Revision). The revision in question is part of the IASB annual improvement project published in April 2009. The IFRS Revision includes minor wording corrections in order to clarify that disclosure regarding segment assets will only be given if information regarding segment assets is provided the chief operational decision maker on a regular basis. The IFRS 8 Revision applies retroactively to yearly periods starting on or after January 1, 2010. The Company has applied the revision to the reported period.

b. Revision to International Accounting Standard 1 – Presentation of Financial

Statements (hereinafter – the IAS 1 Revision). The revision in question constitutes part of the IFRS improvement paper published May 2010.The IAS 1 Revision allows entities to present an analysis of the components of other comprehensive earnings pursuant to the report on changes in equity or as part of the notes to the Financial Statements. The Group intends to apply the revision in question starting January 1 2011. The Group is testing the impact, if any, the revision in question will have on its Financial Statements.

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c. Revision to International Accounting Standard 34 – Financial Reporting for

Interim Periods (Hereinafter – the IAS 34 Revision). The revision in question constitutes part of the IFRS improvement paper published May 2010.The IAS revision clarifies and corrects the disclosure requirements in the interim reports regarding material transactions or events or other matters. This standard shall be applied retroactively to yearly reporting periods starting January 1 2011 or subsequently. Early application is possible. The Group intends to apply the revision in question starting January 1 2011. The first-time application of this revision is not expected to have a material impact on the Group’s Financial Statements.

d. International Accounting Standard 27 (Revised) – Consolidated and Separate

Financial Statements (hereinafter – IAS 27R) (in effect for annual reporting periods starting on or after July 1, 2009). IAS 27R stipulates that the impact of all transactions with non-controlling interests that do not result in the loss of control of a subsidiary be recognized in equity, and accordingly, such transactions would no longer result in the creation of goodwill or gain/loss. IAS 27R also deals with the accounting treatment upon loss of control of an investee. Any remaining interest in the entity upon loss of control is measured anew at fair value, and gain or loss received (any difference created from all the listings pertaining to the transaction in which control was lost) is recognized in gain/loss. The first-time application of this revision is not expected to have a material impact on the Group’s Financial Statements.

e. Revision to International Financial Reporting Standard 7 – Financial

Instruments: Disclosure (hereinafter – IFRS 7) published October 2010.The revision to IFRS 7 expands disclosure rights as regards financial assets transferred to a second party, which are still included in the Company's balance sheet as well as regards related financial liabilities, including the connection between the assets and the liabilities in question. In addition, the revision to IFRS 7 expands disclosure requirements regarding subtracted financial assets, for which exposure to certain risks and yields connected to the transferred asset still remain. The revision to IFRS 7 will be applied to yearly reporting periods starting July 1 2011 or subsequently. Early application is possible. The Group intends to apply the revision in question starting January 1 2011. The first-time application of this revision is not expected to have a material impact on the Group’s Financial Statements.

f. International Financial Reporting Standard 9 – Financial Instruments

(Hereinafter – IFRS9). The first part of IFRS 9 dealing with the classification and measurement of financial assets was published in November 2009 (hereinafter – the First Part of IFRS 9) and constitutes the first part of the project for the replacement of International Financial Reporting Standard 39 – Financial Instruments: Recognition and Measurement with a new standard. The First Part of IFRS sets new requirements for the classification and measurement of financial assets and may impact the accounting treatment of the Company’s/Group’s financial assets. Among other things, the First Part of IFRS 9 states that financial assets shall be classified according to one of the following two categories: financial assets measured after first recognition at fair value and financial assets measured after first recognition at reduced cost. The decision as to what category a financial asset is to be classified to is carried out upon first recognition. The classification is based on the manner in which the entity manages its financial instruments (its business model) and the characteristics of the instrument’s contractual cash flows. In October 2010 an additional part of IFRS 9 was published (hereinafter – the Second Part of IFRS 9) constituting the second part of the project for the replacement of IAS 39. The Second Part of IFRS 9 includes directives

27

regarding financial liabilities and regarding the subtraction of financial instruments. The instructions added to IFRS 9 as part of the Second Part of IFRS 9, including those pertaining to the measurement and classification of financial liabilities and treatment derivatives embedded in instruments in which the host contract is a financial liability, were copies as is from the instructions featured in IAS 39 regarding the issues in question, this with the exception of the instructions pertaining to financial liabilities intended to fair value via gain/loss (hereinafter – FVTPL). In accordance with the new instructions in question, with the exception of the detailed cases, entities with financial liabilities intended for FVTPL will recognize changes to the fair value of the liabilities in question deriving from changes in credit risk pertaining to liabilities, directly to other comprehensive earnings, this in lieu of recognizing them under gain/loss. Regarding sums recognized in other comprehensive earnings, they shall not be later recycled to gain/loss. At the same time, accumulated profits or losses may be transferred between capital items.

The two parts of IFRS 9 shall apply to yearly reporting periods starting January 1 2013 or subsequently. Entities may choose to apply IFRS 9 by way of early application, but the Second Part of IFRS 9 cannot be applied without simultaneously applying the First Part of IFRS 9. Alternately, the First Part of IFRS 9 can be applied without simultaneously applying the Second Part of IFRS 9. Entities that apply IFRS 9 early regarding reporting periods starting prior to January 1 2012 shall not be required to correct their comparison numbers during the initial application.

At this stage, the Company has not adopted IFRS 9 by way of early adoption.

The Group is studying the expected impact of IFRS 9 on its Financial Statements and the timing of its adoption.

Note 3 – Material Accounting Estimates and Judgments

As part of the financial reporting process, Company management is required to make certain assumptions and estimates which may impact the value of its assets, liabilities, revenues, expenses and part of the disclosures provided in the Group’s consolidated statements. By their nature, these estimates may be subjective and complex, and may therefore differ from results in practice.

The accounting estimates and assumptions used in preparing the Financial Statements are reviewed regularly and are based on past experience and other factors, including future events which are reasonably likely to occur in view of current circumstances.

Below is a description of critical accounting estimates used in preparing the Financial Statements, the formulation of which required the Company to make assumptions with regard to circumstances and events which involve significant uncertainty. In exercising its judgment for the purpose of making accounting estimates, the Company takes into account, respectively, the relevant facts, past experience, the impact of external factors and assumptions reasonable under the circumstances.

a. Critical Accounting Estimates and Assumptions

1) Inventory

The Company makes monthly estimates for the purpose of amortization of slow or dead inventory, based on past experience, remaining inventory balances from previous seasons and sales forecasts.

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2) Goodwill

Once a year, the Company reviews the need to recognize the impairment of goodwill, based on management forecasts regarding the discounted amount of the cash flow expected from the cash generating unit to which goodwill refers.

3) Fixed Assets

Depreciation expenses due to fixed assets are calculated using the straight line method on the basis of the estimated period of time they will be used by the Company. In addition, the Company reviews the need for additional depreciation whenever it deems that indications exist for the need for such a review. Additional depreciation of fixed asset costs is recorded up to the market value of said asset, in the event that the future cash flows expected from the operation of the asset are lower than its carrying amount.

4) Customer Relationships

The customer relationships asset is attributed to a primary customer and an additional Company customer. In the event that the engagement with one of these customers is discontinued, the Company shall be required to depreciate the asset in question. In addition, the Company reviews the need for depreciation whenever it sees any indication of the need for such a review.

b. Judgments with a Material Impact on the Implementation of the Entity’s Accounting Policy

1) Taxes on Income and Deferred Taxes

The Company is assessed for tax purposes in a large number of jurisdictions, and accordingly, Group management is required to apply considerable judgment in order to determine the overall provision for taxes on income. The Group lists provisions in its books based on its estimates regarding the possible likelihood of additional tax payments for these transactions.

When the final tax liability determined by the tax authorities differs from the tax liability accounted for in previous periods, the difference shall be charged to gain/loss in the period when the final assessment in question was made by the tax authorities.

Furthermore, the Group records deferred tax assets and deferred tax liabilities on the basis of differences between carrying amounts of assets and liabilities and their sums taken into account for tax purposes. The Group regularly reviews the recoverability of deferred tax assets included in its accounts, on the basis of historical taxable revenues, projected taxable revenues, the timing of the expected reversal of temporary differences and implementation of tax planning strategies. If the Company is unable to derive sufficient future taxable revenues, or in the event of a material change in effective tax rates in the period during which the temporary differences become taxable or deductible, the Group may be required to reverse part of its deferred tax assets or to increase its deferred tax liabilities, which may increase its effective tax rate and negatively impact its operating results

2) Assets Classified as Held for Sale

Assets are classified as held for sale if the expectation exists that the investment will be recovered by way of sale. The Company exercises judgment, taking into account the relevant facts for the purpose of estimating the expected date of the assets’ realization.

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Note 4 – Financial Instruments and Financial Risk Management

a. Financial Risk Factors

The Group's activities are exposed to a variety of financial risks: market risks (including exchange rate risk, cash flow interest rate risk and price risk), credit risks and liquidity risks. The Group’s risk management program focuses on the uncertainty of financial markets and sees ways to minimize potential adverse effects on Group financial performance. The Group makes use from time to time of financial derivatives to hedge certain risk exposures. The Group manages financial risks based on a policy approved by its Board of Directors and senior management. This policy refers to the management of exchange rate risk, credit risk and cash management.

1) Market risks:

a) Exchange Rate Risks

The Group operates on a global scale and is exposed to exchange rate fluctuations, primarily of the euro/dollar rate. Exchange rate risks arise from commercial transactions, assets or liabilities denominated in foreign currency and net investments in foreign operations. The Company invests from time to time in foreign currency derivatives - forward contracts - in order to protect itself from the risk in which cash flow from sale of products is impacted by changes in exchange rates. The duration of these contracts is usually under one year. These transactions are primarily intended to protect against change in the exchange rates in question, but as of the balance sheet date, do not constitute accounting hedges. Regarding hedging agreements for cash flows from the issue of NIS debentures, see Note 12b. Exchange rate risk exists when future commercial transactions or assets and liabilities recognized in the Financial Statements are measured and denominated in a currency other than the entity’s functional currency. As of December 2010, 2010, if the group's functional currency had weakened/strengthened by 5% against the NIS with all other variables held constant, pre-tax profit for the year would have been higher/lower by $446,000 (2009 – $30,000), mainly as a result of profits from changes in exchange rates due to the translation of net financial balances presented in the Company's balance sheet denominated in NIS. As of December 2010, 2009, if the group's functional currency had weakened/strengthened by 5% against the euro with all other variables held constant, pre-tax profit/loss for the year would have been higher/lower by $31,000 (2009 – $124,000), mainly as a result of profits/losses from exchange rate differences due to the translation of net financial balances presented in the Company’s balance sheet denominated in euro.

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Note on linking financial items: As of December 31 2010 (*)

In Dollars

In

Euros

In NIS

In Other Currencies

Others

Total Thousands of Dollars Assets:

Current assets: Cash and cash equivalents 45,091 44 21 1,059 46,215Trade receivables 55,831 10,842 19,222 4,422 90,317Other accounts receivable 6,722 1,095 1,205 1,014 10,035Long-term debit balances 836 - 39 - 875Financial derivatives 1,830 - - - 1,830

Total assets 110,310 11,981 20,487 6,495 149,273 Liabilities:

Current liabilities: Short-term loans and current maturities of long-term loans from banking corporations 51,211 8,317 21 - 59,549Trade payables 38,539 3,415 8,180 2,825 52,959Other accounts payable 16,609 862 21,139 3,261 41,871Long term loans from banking corporations 3,614 - - - 3,614Other non-current liabilities 4,967 - 63 266 5,296Debentures (**) 58,023 - - - 58,023

Total liabilities 172,963 12,594 29,403 6,352 221,312Balance sheet total, net (62,653) (613) (8,916) 143 (72,039)


In Dollars

In Pounds Sterling

In

Euros

In NIS

In Other Currencies

Others

Total Thousands of Dollars Assets:

Current assets: Cash and cash equivalents 23,159 253 92 1,522 2,867 27,893 Trade receivables 62,823 7,214 14,969 17,053 1,081 103,140 Other accounts receivable 1,829 334 827 1,717 636 5,343 Long-term debit balances 1,047 - - 46 118 1,211 Total assets 88,858 7,801 15,888 20,338 4,702 137,587

Liabilities:

Current liabilities: Short-term loans and current maturities of long-term loans from banking corporations 91,475 2 14,752

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- 106,237

Trade payables 31,490 1,814 2,721 7,169 1,917 45,111 Other accounts payable 15,247 3,079 893 13,774 2,824 35,817 Long term loans from banking corporations 5,723 - - - - 5,723 Other non-current liabilities 3,861 - - - - 3,861

Total liabilities 147,796 4,895 18,366 20,951 4,741 196,749 Balance sheet total, net (58,938) 2,906 (2,478) (613) (39) (59,162)

(*) Starting 2010, the pound sterling no longer constitutes a material currency in terms of the

Company's balance sheet exposure. (**) Debentures issued in January and December 2010 are denominated in NIS, bear fixed NIS

interest and are unlinked. The Company has entered into a swap agreement with a bank to swap NIS cash flows for a dollar cash flow, and vice versa, hence this liability is presented as linked to the USD.

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b) Price Risk

The Group is not exposed to significant price risks due to financial instruments and does not hold capital instruments in the reported periods.

c) Cash Flow and Fair Value due to Interest Rate Risk.

Risks related to interest rates derive from changes to interest rates which may have a negative impact on the Group's net profit or cash flow. The changes in interest rates lead to changes in the Group’s revenues and interest expenses due to interest-bearing assets and liabilities. As the Group has no material interest-bearing assets, the Group’s revenues and operational cash flows are not affected by changes in market interest rates.

The Group has a number of interest-bearing liabilities defined as long-term loans as well as short-term and long-term loans from banking corporations. The Company has no policy for protection against interest risks on cash flow and does not generally perform interest rate swap agreements.

If interest rates had been 10% higher/lower than current rates, and given the balance of assets and liabilities subject to variable interest as of December 31 2010 and December 31 2009, with all other variables being equal, profit before tax for the year would have been impacted by $0.1 million and $0.3 million, respectively.

The Company has no fair value exposure, as the fixed interest is close to the market interest.

2) Credit Risks

Credit risks are managed at the Group level. Credit risks derive primarily from cash and cash equivalents, bank deposits and credit exposure to customers. The Company assesses risk associated with the quality of customer credit by weighing the customer’s financial standing, past experience and other factors. Sales to Company customers are carried out under credit terms of up to 90 days; sales to retail customers are made in cash or credit card, through the major credit card companies. The Group’s cash and cash equivalents as of December 31 20109 are mainly deposited with in Union Bank of Israel, the credit rating of which as published by Midroog is P-1 Stable. The Company estimates that credit risk with regard to balances in this bank is low. In 2010 and as of December 31 of that year the Company has a single primary customer, the rate of sales to which out of total sales is 17.5%. In 2009 the rate of sales to the two primary customers was 31%. This receivable debit balance as of December 31 2010 is $2.7 million or 3% of total customer debt. Receivables from these two customers as of December 31 2009 amounted to $26.8 million, or 26.0% of total receivables in the Company’s balance sheet as of that date.

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The Company rates this debt grade based on past experience with this customer and on its credit rating as published by Moody’s as follows: Wal-Mart -"AA" The Company has no guarantees from this customer and it does not anticipate any difficulty collecting its debt. The receivables balance is composed of a large number of customers which constitute a homogenous group for the purpose of credit rating analysis. Provision for doubtful debts is made based on a specific provision for debts collection of which is in doubt. Regarding the discount arrangement with a material customer see Note 20(a)(1)(b).

3) Liquidity Risks

Prudent liquidity risk management requires the maintenance of sufficient cash and available credit frameworks to finance activity; in light of the dynamic nature of its business activity, the Group maintains financial flexibility by taking care to maintain available credit frameworks (see Note 20(c)). The following table analyzes the Group’s financial liabilities according to redemption dates based on the balance for the period as of the projected repayment date. The sums presented in the table represent a non-capitalized cash flow.

Less Than 1

Year 1-2 Years 2-6 Years

Total


December 31, 2010: Debentures 4,056 15,644 54,464 74,164Credit and loans from banking corporations 59,819 2,261 1,545 63,625Trade and other payables 91,055 - - 91,055Other liabilities 4,507 3,458 2,744 10,709 159,437 21,363 58,753 239,553

December 31, 2009: Credit and loans from banking corporations 106,691 2,380 3,805 112,876Trade and other payables 75,052 - - 75,052Other liabilities 6,305 2,675 2,135 11,114 188,048 5,055 5,940 199,042

Group management periodically reviews the ratio between future cash flows derived from maturities of its liabilities and future cash flows derived from maturities of its financial assets. If needed, the Group modifies its liability mix and their maturities. In the opinion of Group management, the Group’s liquidity risk is low.

b. Capital Risk Management

The Group’s capital risk objectives are to safeguard the Group’s ability to continue operating as a going concern in order to provide returns on shareholder investments and benefits to other interested parties, and to maintain an optimal capital structure in order to reduce the cost of capital. From time to time, as needed, the Company considers the need to raise outside capital.

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Over the course of Q4 2009 the Company raised $21 million through the issue of rights; see Note 14(a)(4).

c. Fair Value Assessments

Starting January 1 2009, the Company adopted the IFRS 7 Revision pertaining to financial assets measured in the balance sheet at fair value. The revision requires that fair value be measured according to the following measurement hierarchy:

Quoted prices (unadjusted) in active markets in which identical assets or

liabilities are traded (Level 1). Data other than quoted prices included in level 1, which may be directly or

indirectly observed regarding the asset or liability, whether directly (meaning as prices) or indirectly (meaning derived from the prices) (Level 2).

Data regarding the asset or liability not based on observable market information (unobservable input) (Level 3).

The Group’s financial instruments primarily include non-derivative assets and liabilities of non-material amounts (items included under working capital, long-term receivables and long-term liabilities). As of December 31 2010, the Company has forward agreements to the amount of $20 million, measured according to non-quoted prices, that can be predicted regarding an asset or liability, whether (meaning prices) or indirectly (meaning derived from prices). These contracts are measured at Level (2); see Note 20(a)(2). The fair value of the receivables and payables balances is determined based on their book value less the provision in question. The fair value of long-term loans is also close to their cost, as the interest they bear is in part variable interest and in part fixed interest at rates close to market rates. Note that the swap agreement has no observable quoted price and is therefore included under Level 3; regarding the fair value of the swap agreement see Note 12b.

Note 5 – Segment-Based Reporting

a. Operating segments:

1) Overview Group Management has determined the operational segments on the basis of the reports examined by the Company's CEO and Board of Directors on a regular basis. The CEO and Board of Directors were identified as the Company's strategic steering committee, which makes the Company’s strategic decisions. The following is a short description of each of the reported areas of activity: (a) Delta USA Mass Market – this segment is engaged in the development and marketing of undergarments and socks and for women, men and girls; (b) Global Division Upper Market Segment (formerly “Delta Israel”) – this segment is engaged in the production, development and marketing of undergarments, socks and seamless products for women, men and children in the U.S. and European upper market segment; (c) Delta Israel (formerly “Delta Marketing Israel”) – this segment is engaged in marketing of branded undergarments mainly under the "Delta” brand, to various customers in Israel through retail and wholesale activity.

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2) Information on sales, segment earnings (losses) and assets of reportable segments:

(a) Measuring sales, segment earnings (losses) and segment assets: Measuring sales, segment earnings (losses) and segment assets is based on the same accounting principles applied in the Consolidated Financial Statements. Segment earnings (losses) reflect the profit (loss) from the segment’s activities, and exclude net financing expenses, taxes on income, profit (loss) from affiliates and cash flow hedging transactions, as these items are not attributed to segments and are not analyzed by the CODM by segment. Sales prices between segments are based on negotiations between the segments, when possible, on market prices. (b) Segment assets mostly include fixed assets, intangible assets, inventory, trade receivables and other accounts receivable. Assets not attributed to segments include mainly cash and cash equivalents, deferred taxes and assets held for sale. In addition, the CODM does not test liabilities as part of segment data.

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b. Data related to the operating segments:

Delta USA – Mass Market

Global Upper Market

Delta Israel Others

Inter-Divisional Write-Offs

Total For the year ending December 31, 2010: Thousands of Dollars Sales to external customers 298,740 242,645 76,949 1,740 - 620,074 Inter-segment - 14,804 - 403 (15,207) - Total sales, net 298,740 257,449 76,949 2,143 (15,207) 620,074 Segment profits (loss) before restructuring expenses, capital loss from the sale of subsidiary and impairment of fixed assets 6,015 15,965 13,060 (1,849) 18 33,209 Restructuring expenses, net - 485 - - - 485 Capital loss from the sale of subsidiary - 666 - - - 666 Impairment of fixed assets - - - 992 - 992 Segment profits (loss) after restructuring expenses, capital loss from the sale of subsidiary and impairment of fixed assets 6,015 14,814 13,060 (2,841) 18 31,066 Finance expenses, net 7,817 7,817 Pre-tax income 23,249 Assets at the end of the year 196,786 120,138 36,207 63,641 - 416,773 Assets classified as held for sale - - - 2,838 - 2,838 Depreciation and amortization 2,358 7,145 654 873 - 11,030 Capital gain, net 241 (5) - 496 - 732 Capital investments in fixed and intangible assets (*) 1,005 1,618 1,265 1,240 - 5,128

(*) This data does not include minimum sums for franchise agreements to which the Company is a party.

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Global Upper Market

Delta Israel Others


Total For the year ending December 31, 2009: Thousands of Dollars Sales to external customers 268,465 228,804 72,804 2,461 - 572,534 Inter-segment 101 14,772 18 721 (15,612) - Total sales, net 268,566 243,576 72,822 3,182 (15,612) 572,534 Segment income (loss) before restructuring expenses and impairment of fixed assets 5,927 1,428 10,464 (772) (881) 16,166 Restructuring expenses (income), net 474 (1,805) - - - (1,331) Impairment of fixed assets - 1,945 - - - 1,945 Segment earnings (loss) after restructuring and impairment of fixed assets 5,453 1,288 10,464 (772) (881) 15,552 Finance expenses, net 6,369 6,369 Company share of income of affiliate 41 41 Pre-tax income 9,224 Assets at the end of the year 176,437 122,428 30,073 44,572 - 373,510 Assets classified as held for sale - - - 2,916 - 2,916 Depreciation and amortization 2,554 8,551 828 1,002 - 12,935 Capital gain, net 202 169 - 4 - 375 Capital investments in fixed assets, intangible assets and purchased activity (*) 1,302 7,350 642 776 - 10,070


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Global Upper Market

Delta Israel Others


Total Thousands of Dollars For the year ending December 31, 2008: Sales to external customers 292,512 249,683 77,496 3,143 - 622,834 Inter-segment - 6,151 49 779 (6,979) - Total sales, net 292,512 255,834 77,545 3,922 (6,979) 622,834 Segment earnings (loss) before restructuring expenses and impairment of goodwill 7,686 (16,946) 12,724 (2,636) - 828 Restructuring expenses - 9,162 - - - 9,162 Impairment of goodwill 5,586 1,806 - - - 7,392 Segment earnings (loss) after restructuring and impairment of goodwill 2,100 (27,914) 12,724 (2,636) - (15,726) Finance expenses, net 7,479 7,479 The Company’s share in losses of affiliate 55 55 Loss before tax (23,260) Assets at the end of the year 186,620 137,540 31,676 21,394 - 377,230 Assets classified as held for sale - - - 2,916 - 2,916 Depreciation and amortization 2,982 7,997 550 819 - 12,348 Capital profit (loss), net 432 348 1 24 - 805 Capital investments in fixed and intangible assets (*) 1,221 3,860 1,098 848 - 7,027


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c. Additional information on a geographical basis:

1) Sales on a geographical basis (based on customer location):

For the Year Ending on December 31

2010 2009 2008


North America 400,198 352,455 375,905 Europe (except the UK) 83,113 65,178 70,563 Israel 78,202 75,204 81,069 UK 55,976 77,827 94,609 Others 2,585 1,870 688 620,074 572,534 622,834

2) The balance of non-current assets (*) on a geographical basis is detailed below:

December 31

2010 2009 2008


United States 79,759 82,146 84,313Israel 33,751 35,013 34,072Egypt 14,876 16,775 20,642Bulgaria and Hungary 8,437 8,624 8,894East Asia (mainly Thailand) 2,980 4,973 5,336Jordan 1,243 2,415 2,621Others 40 188 533

141,086 150,134 156,411

(*) With the exception of deferred taxes and the surplus of plan assets over severance

pay liabilities net.

d. Sales information by product category:

For the Year Ending on December 31 2010 2009 2008

Thousands of Dollars Women’s underwear 381,538 354,008 371,387 Socks 122,302 125,884 124,596 Men’s underwear 104,649 78,958 110,132 Others 11,585 13,684 16,719

620,074 572,534 622,834

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e. Sales to major customers:


* Starting 2010 this customer is not considered a main customer.

Note 6 – Business Combinations

a. On April 2, 2009 the agreement for the purchase of assets and part of the activity of Gibor Sports Active Wear (GSAW) Ltd ("Gibor") in the field of design, development, manufacturing, marketing and sale of socks was completed, after the contingent terms for carrying out the agreement were completed.

The purchase of Gibor's assets was carried out in order to expand and leverage the Company’s activity in the field of socks. As part of the agreement, the Company purchased from Gibor all equipment and machinery owned by Gibor in the field of sock activity (hereinafter the Area of Activity); a list of customers in the area of activity and relations with them (insomuch as these can be transferred) without a commitment on behalf of Gibor to continue activity with them, all of Gibor’s knowledge in the area of activity and 100% of the issued capital of the company owned by Gibor in Jordan. The Company has purchased the inventories held by Gibor on the completion of the agreement, as detailed in the contract. Total proceeds for assets purchased, including purchase costs and for no return for the inventory, amounted to $5.7 million. The proceeds were attributed as follows – $3.6 million was attributed to fixed assets, $2.1 million was attributed to customer relations and the balance was attributed to current assets and liabilities. In addition, the Company purchased the inventory in Gibor’s possession on the date of the transaction’s completion, as stated above, in return for $2.6 million. In the nine-month period ending December 31 2009 sales of the purchased activity amounted to $18.3 million and the contribution to operational profits amounted to $0.9 million.

b. On December 11 2009 the Company published that it was in negotiations to purchase

international branded apparel assets and activity in the field of garments. On June 29, 2010 the Company announced that the seller had decided to discontinue sales efforts and therefore negotiations between the parties were brought to a conclusion.

Customer A – belongs to Delta USA Mass Market segment 108,486 118,889 148,726

Customer B – belongs to Delta USA Mass Market segment and Global Upper Market * 59,249 78,348

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NOTES TO THE FINANCIAL STATEMENTS (continued)

Note 7 – Fixed Assets

a. Composition of the cost of fixed assets and the depreciation and amortization accrued as a result, by main groups, and movement thereof in 2010, is as follows:

Cost

Balance at the Beginning of the

Year

Additions During the

Year

Realization of Investment in

Subsidiary

Disposals During the

Year

Writing Off Assets Depreciated in Full and Are Not in Use

Adjustments and Other Sorting*

Capital Reserve from Translation Differences

Balance at the End of the Year

Thousands of Dollars Land and buildings 30,120 287 - (1,866) (18) (217) - 28,306 Machinery and equipment 90,542 752 (1,927) (708) (835) (151) - 87,673 Office furnishings and equipment, vehicles and improvements to rental properties 43,566 2,369 (38) (998) (1,644) (403) 1,384 44,236 164,228 3,408 (1,965) (3,572) (2,497) (771) 1,384 160,215

Accrued depreciation and devaluation

Balance at the Beginning of the

Year

Additions During the

Year

Realization of Investment in

Subsidiary

Disposals During the

Year

Writing Off Assets Depreciated in Full and Are Not in Use

Adjustments and Other Sorting*


Balance at the End of the Year

Thousands of Dollars Land and buildings 19,040 649 - (726) (18) 695 - 19,640 Machinery and equipment 49,233 5,719 (409) (896) (835) (69) - 52,743 Office furnishings and equipment, vehicles and improvements to rental properties 23,278 2,923 (19) (331) (1,644) (155) 1,076 25,128 91,551 9,291 (428) (1,953) (2,497) 471 1,076 97,511

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Depreciated Balance December 31 2010 2009 Thousands of Dollars Land and buildings 8,666 11,080 Machinery and equipment 34,930 41,309 Office furnishings and equipment, vehicles and improvements to rental properties 19,108 20,288 62,704 72,677

* Includes assets classified starting from this report as held for sale and depreciation (see Section d. below) and writing-off of fixed assets as a result of restructuring (see Section e. below).

The composition of the cost of fixed assets and the depreciation and amortization accrued as a result, by main groups, and movement thereof in 2009, is as follows:

Cost

Accumulated depreciation and amortization

Depreciated Balance

Writing Off Writing Off Balance Assets Balance Assets Balance For the Depreciated For the Balance Added Depreciated For the Beginning Additions Disposals In Full End of For the Depreciation Disposals In Full End of of Throughout Purchase Throughout and are Not the Beginning Throughout Purchase Throughout and Not Changes the December 31 The Year The Year Activity The Year In Use Year The Year The Year Activity The Year In Use Others* Year 2009 2008 Thousands of Dollars

Land and buildings

30,328 275 - (447) (36) 30,120 18,391 787 - (102) (36) - 19,040 11,080 11,937

Machinery and equipment

92,984 1,478 3,091 (4,187) (2,824) 90,542 46,436 7,107 22 (3,453) (2,824) 1,945 49,233 41,309 46,548

Office furnishings and equipment, vehicles and improvements to rental properties 44,050 1,600 646 (215) (2,515) 43,566 22,422 3,472 77 (178) (2,515) - 23,278 20,288 21,628

167,362 3,353 3,737 (4,849) (5,375) 164,228 87,249 11,366 99 (3,733) (5,375) 1,945 91,551 72,677 80,113

(*) See Section d. below.

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b. Land and Buildings

The Group owns land and buildings used for its operations, which are located in Israel, the U.S., Bulgaria, Egypt and Thailand. For land and buildings classified by the Group as held for sale - see Note 8 below.

c. Encumbrances on Assets - see Note 11b.

d. Impairment

Over the course of 2010 the Group noted a depreciation provision to the amount of $1 million to the value of fixed assets in its Financial Statements. The depreciation in question is due to real estate in Hungary no longer in use. The recoverable sum of the real estate in question was determined based on an assessor’s evaluation Over the course of 2009 the Group noted a depreciation provision to the amount of $1.9 to the value of fixed assets in its Financial Statements. The depreciation in question was carried out due to knitting and sewing machinery in the Egyptian plan that are not in use. The recoverable sum of the machinery in question is determined based on the fair value less sales costs, which is higher than the machines value in use. The fair value less sales costs is based on the prices of similar machines on an active market.

e. Restructuring Expenses

Over the course of 2010, as a result of the restructuring plan described in Note 20e, the Group included in its Financial Statements a write-off to the amount of $0.3 in the value of fixed assets in its sock finishing plant in Jordan, which mainly consisted of improvements to rental properties. Over the course of 2008, as a result of the restructuring plan described in Note 20e, the Group included in its Financial Statements a write-off to the amount of $1.1 of fixed assets. The property write-off in question mainly consisted of improvements to rental properties in the distribution center that were passed on to a third party of management and the abandoned UK distribution center.

f. For classification of depreciation expenses in Report on Comprehensive Earnings

(Loss), see Note 20.

Note 8 – Assets Classified as Held for Sale

a. As of December 31, 2010, the Group has several assets in Israel held for sale, which are included in the Financial Statements at their net historical cost of $2.8 million. Note that for one of the three assets in question, the Nahariya real estate, a sales contract was signed over the course of Q4 2010. For further details regarding the inclusion of this asset under assets held for sale see Section b.1 below. These assets are classified as held for sale as-is, and the Company is committed and making efforts to locate a buyer. The Company estimates that the realization value net of realization costs of these assets exceeds their cost in the Financial Statements.

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b. Sale of Assets Classified for Sale in the Report Period

1. Sale of Real Estate Property in Nahariya

In March 2010 the Company signed an agreement with a group of buyers in which it granted the option to purchase real estate in Nahariya in its possession (hereinafter – the Nahariya Real Estate), for a period of four months. In return for the option, the Company received 2 million NIS ($538,000), which will not be refunded the purchasers even if they choose not to exercise the option. In the event that the purchasers choose to exercise the option and sign a full purchase order, over the course of those four months, the purchasers shall pay the Company 91 million NIS ($24 million) for the land, in installments over the course of a period of three years from the signing of the purchase agreement. On June 23 2010 the Company signed a correction to the option agreement to purchase real estate properties in Nahariya, according to which the exercise period for the option to purchase the real estate was extended by an additional month, in return for which the Company received an additional 500,000 NIS ($129,000). On July 28 2010 the Company announced another revision of the real estate purchase option, according to which the option was extended by an additional two months, while at the same time a prudence claim was filed to the Nahariya Local Design and Construction Committee, in order to compensate it for the damages caused by the real estate’s impairment, in the event that it is determined by a certified design agency – contrary to the position of the Company and its advisors – that the 2/9 Regional Outline Plan harms the rights to build on the property. On October 3 2010, the Company received written notice from the option recipients of their intent to exercise the option and sign an agreement to purchase the Nahariya Real Estate in its possession. According to the option agreement, the parties must sign a sales agreement within 15 days of receiving the exercise notice, and if the option holders refuse to sign the agreement in question, this shall be seen as reneging on the exercise notice on behalf of the option holders – which shall award the Company with the proceeds given for the option (2.5 million NIS plus tax).

On October 2 2010 the Company signed a sales agreement, in which it sold the Nahariya Real Estate in its possession to a buyer’s group (4 private companies) – some 25.8 hectares, before expropriation, known as Block 18206 Lot 18. According to the sales agreement, the purchasers shall pay the Company $23,972,602 US (plus tax) for the real estate, of which the Company has received $7.4 million, with the balance to be paid in installments according to a number of milestones spread out across a period of up to 39 months from signing the sales agreement; it was agreed that total compensation in NIS shall be no less than 91 million NIS. As part of the agreement the Company assigned the rights (and obligations) to the purchasers according to a claim submitted by the Company to the Nahariya Design and Construction Local Council as per Section 197 of the Design and Construction Law for the real estate. The capital gains expected for the Company are estimated at between $18 and $20 million US before tax. In accordance with the preliminary decision (pre-rolling) the Company received from the Securities Authority, capital gains from the transaction will be

44

recognized upon completing the terms included in the sales agreement which precede the third payment from the purchasers and include removal of sludge and evacuation of tenants from the property. Accordingly, the Company continued to classify the property as real estate available for sale in its Financial Statements. The Company presented the proceeds from the option and the sale of real estate pursuant to net liabilities net of betterment tax payments and advance payments due to betterment tax deriving from the sale and paid in 2010.

2. Sale of Real Estate in Daliyat al-Carmel

On October 13 2010, the Company signed an agreement to sell 1 hectare of land in Daliyat al-Carmel, which it had leased from the Israel Land Administration, to a private company. On the land are structures with a total area of 3,600 square meters, which were used by the Company's rubber plant until its closing in 2007. According to the agreement and as of the report publication date, the Company received the full yield set in the contract in return for the leasing rights. Of the sum in question, the Company received $997,000 in 2011. The capital gain the Company generated from this sale amounted to $0.5 million and was included under other revenues, net.

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Note 9 – Intangible Assets

a. Composition of intangible assets and amortization accumulated as a result, by

main groups:

Goodwill (b)

Customer Relations

Trademarks (c)

Computer Software

Total

Thousands of Dollars On January 1 2008:

Cost 63,208 14,778 19,013 3,834 100,833Accumulated amortization - (2,258) (9,840) (2,473) (14,571)

Balance as of January 1, 2008 63,208 12,520 9,173 1,361 86,262In 2008: Balance as of January 1, 2008 63,208 12,520 9,173 1,361 86,262

Additions - - 5,326 924 6,250Changes to payment estimates of contingent yield, (see b. below) (4,478) - - - (4,478)Software write-off - - - (5) (5)Amortization (7,392) (739) (4,558) (499) (13,188)

Balance as of December 31, 2008 51,338 11,781 9,941 1,781 74,841On December 31, 2008:

Cost 58,730 14,778 24,339 4,708 102,555Accumulated amortization (7,392) (2,997) (14,398) (2,927) (27,714)

Balance as of December 31, 2008 51,338 11,781 9,941 1,781 74,841In 2009: Balance as of January 1, 2009 51,338 11,781 9,941 1,781 74,841

Additions - - 4,843 915 5,758Additions – purchase of activity (see Note 6 below)

- 2,096 - - 2,096

Amortization - (817) (5,125) (713) (6,655)Balance as of December 31, 2009 51,338 13,060 9,659 1,983 76,040On December 31, 2009:


Balance as of December 31, 2009 51,338 13,060 9,659 1,983 76,040In 2010: Balance as of January 1 2010 51,338 13,060 9,659 1,983 76,040


- - - 10 10

Additions - - 1,958 1,122 3,080Amortization - (844) (1,967) (855) (3,666)

Balance as of December 31, 2010 51,338 12,216 9,650 2,260 75,464On December 31, 2010:


Balance as of December 31, 2010 51,338 12,216 9,650 2,260 75,464

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b. Goodwill

There were no changes in the balance of goodwill in the years ending December 31 2010 and 2009. The balance of goodwill for December 31 2010 and 2009 was due to the Delta USA Mass Market segment.

Test to Determine Impairment of Goodwill

The Group reviews the need for goodwill depreciation once a year. As a result of the aforementioned 2008 review, the Company recognized impairment to the amount of $5,586,000 for goodwill attributed to Delta USA and $1,806,000 for goodwill for attributed to the Global Division Upper Market segment. This impairment was charged to gain/loss under impairment of goodwill. As a result of the reviews conducted in 2009 and 2010, no need arose for such impairment. The recoverable amount of cash-generating units is determined based on calculations of value in use. The cash flow forecast is based on the budget for the coming year, approved by management, and on other assumptions regarding growth rates of sales and expense in the following four years. The cash flow beyond the next 5 years is extrapolated using the expected growth rates indicated below. The following basic assumptions were used in calculating the value in use:

Delta USA - Mass Market 2010 2009 Gross profit rate(1) 17.3% 20% Growth rate (2) 3% 3% Pre-tax capitalization rate (3)

17.9% 18.3%

The Group uses the above assumptions to analyze the value of goodwill of cash generating units in the different segments: 1) Long-term representative gross profit. The gross profit rate is determined based

on past experience and Group forecasts of market developments. 2) The weighted average growth rate used to estimate cash flows past the budget

period. 3) Pre-tax capitalization rate applied to the cash flow forecast. Discount rate set

according to segment risks The Group is assisted by an external expert for the purpose of reviewing the value of goodwill included in the Financial Statements.

Adjustments to Acquisition Price

In 2004 the Group acquired, via a wholly-owned subsidiary, all of the shares of Burlen Inc. (“Burlen”), a private US-based company engaged in the design, development, manufacturing and marketing of women’s undergarments. The acquisition cost amounted to $60 million. Pursuant to the purchase agreement, and due to a change to the agreement signed in February 2006, it was agreed that the Group would be liable for additional payment to the selling shareholders, subject to achievement of certain revenue and operating income objectives during a 6-year period (2006-2011).

47

According to Company forecasts of said additional payments, an amount of $11.7 million was charged to goodwill, in addition to the amount paid upon acquisition. This amount was adjusted so that in 2006-2007 the amount decreased by $2.2 million due to changes in payment projections. Over the course of 2006-2008 the Company made an advance payment to shareholders amounting to $5.8 million for meeting budget goals. In 2010, 2009 and 2008 the company didn’t meet the defined goals, and therefore and in light of the expected failure to achieve 2011 goals, as it is more likely than not that additional payment will be required on behalf of the Group for the purchase of Burlen, the conditional payment liability was zeroed on December 31 2008 and accordingly, the adjustment to the purchase cost as charged in the past to the reputation asset was cancelled.

c. Trademark Usage Rights

The Company has entered into agreements which confer on it the right to market products under brand names owned by other parties, usually for periods of 3-4 years. Royalties for these agreements are calculated as a percentage of sales. Royalty rates range from 5% and 12% of sales; pursuant to with these agreements, the Company is liable for minimum royalty payments, as set forth in these agreements, and the discounted sums of which are included under this item.

Note 10 – Pre-Paid Expenses and Long Term Debit Balances

a. Long-Term Pre-Paid Expenses

As of December 31 2010 2009 Thousands of Dollars

Land leased from the Israel Land Authority Less current maturities (1) 32 38 Pre-paid expenses for leased vehicles (2) 155 40 Others 11 16

198 94

1. Some Company facilities are located on land leased from the Israel Land Authority for a period expiring in 2016. Lease payments have been pre-paid by the Company at a capitalized sum at the beginning of the lease contract. The balance as of December 31 2010 and 2009 is net of current maturities amounting to $8,000 each year.

2. Mainly consists of pre-payment for 3 months of operational leasing of vehicles.

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b. Long-term debit balances

As of December 31

2010 2009 Thousands of Dollars

Long-term employee receivables 15 23

Long-term debit balance for sale of fixed assets (1) 826 798

Long-term deposits (2) 334 480

Long-term loan to supplier 15 132

1,190 1,433

Less current maturities - (110)

Less provision to doubtful debt (300) -

890 1,323 1. The debt balance for machinery sold by a subsidiary over the course of 2007 in

return for $1.1 million. This debt does not bear interest and is repayable in monthly installments from July 2008 to July 31 2015. This balance is presented in the Financial Statements at its capitalized value. The Company has a fixed lien on assets sold until full repayment of the debt.

As of December 31 2010 the entire debit balance was presented less the $300,000 provision to doubtful debt as a long-term debt, due to the fat that the debtor has encountered difficulties and his activity was discontinued until a bank arrangement could be achieved.

According to the Company’s estimates, the above debt shall be received in coming years and as of the balance sheet date, represents the recoverable sum of the assets sold.

2. Mostly includes non-interest-bearing deposits for operational leases of buildings (see Note 18a).

The fair value of long term debit balances is not materially different from their book value.

Note 11b – Long-Term Loans from Banking Corporations:

a. Composition:

7,833 5,724 5.7 Dollar loans from banking corporations*

2,110 2,110 Less current maturities 5,723 3,614

* USD loans from banking corporations are at fixed dollar interest. b. Liabilities to banks are fully secured by an unlimited floating lien on all Company assets

and rights and on assets of some of its subsidiaries and by fixed liens on equipment and machinery due to the purchase of Gibor activity.

c. On the matter of unused bank credit frameworks – see Note 20c.

Average Interest Rate December 31 December 31

2009 2010 2010 and 2009 In Thousands of Dollars %

49

d. The fair value of the liabilities is equal to their book value as fixed interest is close to market interest.

e. The following are details of long-term bank liabilities payable by year:

December 31 2010 2009 Thousands of Dollars

2011 - 2,110 2012 2,110 2,110 2013 1,354 1,354 2014 150 149 3,614 5,723

Note 12a – Debentures

1. On January 2010 the Company published the results of the debentures offering carried out according to the Company’s shelf offering from January 18 2010(in hereinafter – “the Shelf Offering Report"), that was published according to the Company's shelf prospectus from May 29 2008.

The fund shall be redeemed in 5 equal monthly payments from 2012 to 2016 (the average duration for the end of 2010 is 3.5 years), on July 19 each year. Interest is paid in semiannual payments on January 19 and in July. The listed interest rate is 7%. The debentures are not guaranteed by liens. The immediate (gross) proceeds from the 113,000 units of debentures (Series K) issued according to the Shelf Offer Report amounted to 113 million NIS ($30 million). The Company has entered into an agreement with a banking corporation, to swap NIS cash flows for a commitment to pay debenture holders with a dollar cash flow. The dollar interest set in the transaction is 6.08%. Over the course of July 2010 the Company paid the debenture holders the first interest payment.

2. On January 27, 2010,the Company announced the results of the issue of debentures (Series K) carried out as per the shelf offering by the Company dated December 23 2010 published according to the Company’s November 22 2010 shelf prospectus.

The (gross) proceeds from the debentures (Series K) issued according to the Shelf Offer Report amounted to 98.1 million NIS, some $27.4 million.

3. The following are details of liabilities (principal and interest) for the debentures,

payable by year:

December 31 2010 Thousands of

Dollars

2011 2,149 2012 14,134 2013 12,507 2014 onward 29,233

58,023

50

4. The following are additional details regarding the debentures issued:

Debentures Series Expansion Issued Debentures Issued on January

20 2010 on December 27

2010 Total Issuing costs (thousands of dollars) 375 346 721Effective interest (in %) 7.45% 6.62% -Market value as of December 31, 2010 (thousands of NIS)

119,746 98,162 217,908

Interest payable as of December 31, 2010 (thousands of dollars)

999 826 1,825

Value of swap agreement as of December 31 2010 (thousands of dollars)

1,646 184 1,830

Note 12b – Financial Derivatives

1. Agreements Hedging the Cash Flow from the Issue of Debentures Series K

The Company’s functional currency is the dollar and therefore the Company has decided to enter a bilateral agreement to replace cash flows with those identical to the repayment date of the debentures according to a fixed formula with a banking corporation to hedge cash flows for the payment of debentures against exchange rate risk. This hedging creates a steady cash flow for the Company in dollar terms. Therefore, on January 20 2010 the Company entered into a swap agreement. The sum of the initial NIS fund is 113 million NIS while the initial USD fund is $30.5 million. According to the agreement, the Company undertakes to transfer a dollar payment according to a fixed 6.08% interest rate and receive NIS payment from the banking corporation according to a fixed 7% interest rate, according to the debentures’ clearance table. This transaction is back to back with refunds due to the debentures required by the Company. The Company treats the swap agreement as cash flow hedging.

2. Agreements Hedging the Cash Flow from the Expansion of Debentures Series K

Following the January 20 2010 swap agreement, the Company decided to hedge cash flows fixed in dollar terms for the series expansion as well. On December 29 2010 the Company entered into a swap agreement; the sum of the initial NIS fund is 92.6 million NIS while the initial USD fund is $25.9 million. This swap agreement was carried out under the same conditions at which the Company entered into the agreement for the issue of debentures on January 20 2010 (see 12(b)(1) above) The maximum exposure limit the banking corporation set for this transaction is $5 million. The Company will be asked to provide collateral in the event that the exposure exceeds the sum in question, as the bank demands.

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Note 13 – Other Non-Current Liabilities


Minimum royalty payment liability (1) 9,042 9,164 Minimum financial lease payments (2) 518 622 Total liabilities (3) 9,560 9,786 Less current maturities 4,264 5,925 Total long-term liabilities 5,296 3,861

1. See Note 9c.

2. One of the Group members is a party to a financial lease agreement for a building

and land used by it. This agreement shall remain in effect through 2014. Starting in 2007, due to reduced manufacturing activity in Jordan, the Company leases the building under an operational sub-lease.

3. Below are other details of other liabilities payable by year:


2010 - 6,305 2011 4,507 2,675 2012 3,458 1,458 2013 2,585 519 2014 onward 159 159 Less interest component (1,149) (1,330) 9,560 9,786

Note 14 - Capital

a. Equity, funds and surpluses:

1) Composed of ordinary shares worth 1 NIS NV, as follows:

Number of Shares As of December 31 2010 2009

Listed capital (3) 36,000,000 36,000,000 Issued and paid up (after neutralizing treasury shares and shares held in trust in relation to option plan) 23,398,121 23,379,365 Treasury Shares 1,206,971 1,206,971

As of December 31 2010, Company shares are traded on the Tel Aviv Stock Exchange at $9.52 (32.75 NIS) per ordinary share.

2) As of December 31 2010 and 2009 the balance of shares issued by the

Company and held in trust for the purpose of future exercise of employee options, amounted to 147,106 and 165,862, respectively.

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3) On October 2009 an increase of the Company’s listed capital by 10,000,000 ordinary shares worth 1 NIS NV each was approved, so that the Company’s registered capital amounted to 36,000,000 NIS divided into 36,000,000 ordinary shares worth 1 NIS NV each.

4) On October 27 2009 the Company published a shelf offering report fore the

issue of rights and listing on the stock exchange. The offered shares were offered by way of rights to the Company's ordinary shareholders, which were listed in the shareholders’ registry at the end of the November 2 2009 trading day, in such a manner that each holder of 4 ordinary shares would be entitled to purchase one right to one share for a price of 17 NIS ($4.53). Until the last day the rights could be used, November 16 2009, the Company received right usage notices for the purchase of 4,638,487 ordinary Company shares worth 1 NIS NV each. The (gross) proceeds for the use of the rights in question amounted to a total of 78 million NIS ($21 million).

5) On May 23 2010 the Company declared that it would be distributing dividends

to the amount of $1.5 million, at 6.41 cents per share, distributed on Jun 16 2010. The determining date for the distribution was June 2 2010 and the X date was June 3 2010. On August 10 2010 the Company declared that it would be distributing dividends to the amount of $1.5 million, at 6.41 cents per share, distributed on September 5 2010. The determining date for the distribution was August 22 2010 and the X date was August 23 2010. On November 28 2010 the Company declared that it would be distributing dividends to the amount of $2million, at 8.51 cents per share, distributed on December 21 2010. The determining date for the distribution was December 6 2010 and the X date was December 7 2010. The shares held by the Company (“treasury shares”) as well as the shares held in trust do not grant voting rights and do not grant dividends.

The Company has adopted various option plans subject to service conditions and performance levels.

b. Share-based payment:

1. Stock option plans subject to service conditions:

a) On October 23, 2002, the Company Board of Directors approved an

employee stock option plan whereby 1,100,000 options would be granted at no cost (including 100,000 options to the Company’s former CEO), exercisable into 1,100,000 ordinary Company shares worth 1 NIS NV. The exercise price for each option is $9.

On November 22, 2002, the Company granted 1,004,500 options to 97 senior Group employees (including 100,000 options to the Company’s former CEO). As of December 31 2010, these options have expired in full. In May 2003, the Company granted 30,000 options to 3 Group employees at an exercise price of $10.76, which have fully vested as of December 31, 2009. In March and August 2004, the Company granted 80,000 and 30,000

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options, respectively, to 6 and 1 Group employees, respectively, at an exercise price of $15.35 and $12.74, respectively. As of December 31 2009, theses options are fully vested. The options may be exercised during a three-year period starting one year after the vesting date of the first batch, and on the vesting date of the 2nd, 3rd and 4th batches.

As of December 31, 2010, the first three batches of options with an exercise price of $10.76 and the three batches of options with an exercise price of $15.35 expired. The four batches of options with an exercise price of $12.74 also expired. No options remained to be granted as part of this plan.

b) In May 2006, the Company Board of Directors approved two stock option

plans, one for Israeli and non-US employees, and the other for US-based employees. The plan consists of 1,400,000 options, of which 1,100,000 options may be issued in conjunction with the plan for Israeli and other non-US employees, and 300,000 options may be issued in conjunction with the plan for US-based employees. Each option is exercisable into one ordinary Company share worth 1 NIS NV.

A total of 1,068,019 options have been granted subject to completing a period of employment. In May 2006, in June 2006 and in September 2006 the Company granted 568,016, 25,002 and 50,000 options, respectively, at exercise prices of $8.43, $7.59 and $9.2, respectively. In June 2006, the Company granted the Company CEO at the time, Aviram Lahav, 425,001 options at an exercise price of $7.26 per option. These options were forfeited during the course of 2008 in light of the CEO's departure.

Furthermore, 50,000 options granted at a price of $9.2 to the manager of Delta USA were forfeited in 2008 in light of his departure.

342,980 of the options granted in 2006 would vest and be exercisable in 4 batches as follows: First quarter - these options vested 1 year after their granting date and may be exercised during a 3-year period starting 1 year after the vesting date. Second quarter - these options would vest 2 years after their granting date and may be exercised during the subsequent 3 years. Third quarter - these options would vest 3 years after their granting date and may be exercised during the subsequent 3 years. Last quarter - these options would vest 4 years after their granting (June 2010) date and may be exercised during the subsequent 3 years. In March 2007, the Company granted 2,000 additional options at an exercise price of $6.95, subject to the above vesting and exercise terms. 725,039 of the options granted in 2006 will vest and will be exercisable in 3 batches as follows: First batch - these options would vest 2 years after their granting date and may be exercised during the subsequent 3 years. Second batch - these options would vest 3 years after their granting date and may be exercised during the subsequent 3 years. Third batch - these options would vest 4 years after their granting date (June 2010) and may be exercised during the subsequent 3 years. In March 2007, the Company granted 120,000 additional options at an exercise price of $6.95, subject to the vesting and exercise terms set forth above. Out of this allocation, over the course of 2008, 35,000 options have

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been forfeited by 2 employees who had left the Company; out of the total options in question, 6,666 were exercised.

The number of options remaining in this granted amounted to 78,334, 28,333 of which have yet to vest as of December 31 2010. In March 2008, the Company granted 85,000 additional options at an exercise price of $5.13, subject to the vesting and exercise terms set forth above. As of December 31 2010 75,000 options have been forfeited due to the departure of a Company employee. 3,333 options were exercised and 81,667 remain, 6,667 of which have yet to vest. In addition, on March 2008, 50,000 and 25,000 options were granted at an exercise price of $5.13 the vesting date of which was June 30 2010 and December 31 2010 respectively, and may be exercised three years from the vesting date. As of the balance sheet date these options have vested in full.

In August 2008, the Company granted 50,000 additional options at an exercise price of $4.7, subject to the vesting and exercise terms set forth above, in three batches as follows: 16,667 have vested as of the balance sheet date and the balance has yet to vest.

In August 2008, the Company granted 15,000 additional options at an exercise price of $4.7. These options shall vest and will be exercisable in the following three batches: one half, 7,500 options have vested as of the balance sheet date and the balance has yet to vest.

On July 13 2009 the Company granted 325,500 options to 120 employees

at an exercise price of $3.02. The exercise price was determined based on the average share price in the 30 days of trade prior to the decision. According to the vesting and exercise terms for the four batches detailed above. 66,500 options of the options in question are contingent on achieving objectives; see Section 2 below.

During 2009 7,900 options were forfeited due to departure of two

Company employees. Over the course of 2010 1,250 options were exercised, 24,740 options were

forfeited due to the departure of six Company employees and 15,000 conditional options were forfeited. In addition, 40,500 conditional options expired due to a failure to meet objectives set.

As of December 31 2010, 58,150 options (first batch) have vested, as well

as 11,000 options stipulated upon achieving objectives. On September 3 2009 the company granted 30,000 options at an exercise

price of $3.35 per option. The vesting period of 10,000 of the options was 12 months from their granting date and as of December 31 2010 they have already vested. The vesting of the remaining options is stipulated on achieving objectives, see Section 2 below.

On November 2009, the company granted 250,000 options to the COO and

Deputy CEO at an exercise price of $3.072 per option.

The vesting period of these options is three years. At the end of each full year of employment starting May 9 2010 a third of the options will vest so

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long that the COO is employed in practice at the end of each of the years in question.

On January 14, 2010, the Company Board of Directors resolved to grant, out of options available for allocation under the 2006 program, 40,000 options to 7 employees at an exercise price of $6.93 per option. Of these options: 20,000 options are contingent on the results of the U.S. subsidiary in 2010; these options shall vest within 15 months of issue. The theoretical economic value of each option as calculated according to the Black & Scholes formula is $2.91 per option; see Section 2 below. An additional 20,000 options were granted in three equal batches; these options will vest in two, three and four years from their date of issue. The theoretical economic value of each option is calculated according to the Black & Scholes formula is $4.20 per option. Of the allocation in question, 20,000 options expired due to a failure to meet goals and 10,000 options expired due to the departure of a Company employee. On April 21, 2010, the Company Board of Directors resolved to grant 65,000 options at an exercise price of $8.98 per option from the 2006 non-American employee options plan. Of these options: 15,000 options will vest 18 months from their granting date – their benefit component as per Black & Scholes is $3.05 per option; and an additional 50,000 options were granted in four equal batches - these options will vest at the end of one, two, three and four years from their date of issue; their benefit component as per Black & Scholes is $3.75 per option. On October 13 2010, the Company Board of Directors resolved to grant 150,000 options at an exercise price of $8.00 per option to a Company executive. The benefit component as per Black & Scholes is $4.01 per option. The options were granted in four equal batches, which will vest after one, two, three and four years from their date of issue. As of December 31 2010 419,561 options were forfeited pursuant to this plan due to employees leaving the company, 15,194 were exercised and 174,611 remain available for granting.

c) On August 2009 the Company's Board of Directors decided to adopt an

additional options plan for the compensation of employees, executives, directors, consultants and other services suppliers of the Company or its subsidiaries and related companies (hereinafter – “the Recipients”). The options shall be granted free of charge. Pursuant to the plan, the Company is entitled to grant up to 800,000 non-tradable options, that can be exercised into 800,000 ordinary Company shares worth 1 NIS NV each. The exercise price of each option will be determined by the company's Board of Directors at its sole discretion in accordance with the law.

In addition, the Board of Directors decided to adopt an option plan for the compensation of American employees of the Company and its subsidiaries. Pursuant to this plan, the Company shall be entitled to grant 300,000 options that can be excised as up to 300,000 ordinary Company shares worth 1 NIS NV each.

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On October 20, 2009, the special and general meeting approved the grant of 50,000 options to five Company directors in exercise price of $5 per option, exercisable as up to 50,000 ordinary Company shares. In addition, a grant of 10,000 options was approved to the Chairman of the Board of Directors, exercisable as up to 10,000 ordinary Company shares of at the same exercise price. The options’ vesting period will be three years from their granting date, so that at the end of each full year of employment as director, a third of the options granted each director will vest. The average economic value of the options according to the Black & Scholes Model is $1.13. Furthermore, an allocation of 720,000 options to the Company's CEO, Mr. Isaac Dabach, contingent on achieving goals, was also approved; see Section 2 below. On October 28 2009, the Company granted 10,000 options to an external director at an exercise price of $5 per option exercisable as up to 10,000 ordinary Company shares. These options’ vesting period will be 3 years from their granting date, so that at the end of each full year of employment as director, a third of the options granted will vest.

On April 21, 2010, the Company Board of Directors resolved to grant 50,000 options from the 2009 American employee options plan at an exercise price of $8.98 per option. Of these options: 25,000 options are contingent on operational objectives of a U.S. subsidiary in 2010. These options expired due to the failure to meet the goals set; see 2 below. The benefit component as per Black & Scholes is $3.65 per option; an additional 25,000 options will vest within one year of granting the theoretical economic value of each option calculated according to Black & Scholes is $3.52 per option. On August 10 2010 the Company’s Board of Directors decided to grant 10,000 options at an exercise price of $6.70 per option to a Delta U.S. employee. The theoretical economic value of each option calculated according to the Black & Scholes formula is $2.43 per option. The options were granted in three equal batches, which will vest after one, two, three and four years from their date of issue.

d) The fair value of the options granted during 2010, 2009 and 2008 as of

their date of issue amounted to $1,191,000, $2,136,000 and $400,000, respectively.

The fair value of each option granted (with the exception of options contingent on achieving objectives) is estimated on date of grant using the Black &Scholes option pricing model with the following assumptions:

2010 2009 2008

Dividend yield 2% / 0% 2% / 0% 2% / 0%

Expected standard deviation (*) 58% 64% 48% Risk-free interest rate 3.7% - 2.8% 4.45% - 2.5% 3.0% - 2.5% Expected life span - in years 3.9 4.0 4.5

(*) Based on historical volatility of Company shares over periods corresponding to the option's expected life span until its exercise date.

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e) The sums of the expenses (revenues) attached to the options included in the Financial Statements for 2010, 2009, and 2008 are $1,259,000, $301,000 and ($188,000), respectively.

The balance of benefits not yet recognized for all of the option plans, as of December 31 2010, assuming the achievement of all goals set, amounts to a total of $1,714,000 (less the forfeiture rate where relevant), and its recognition is expected over the course of the coming 4 years.

2. Stock options subject to performance stipulations:

a) In May 2006, the Company granted 277,000 options to 11 senior

executives pursuant to the May 2006 stock option plan (see Note 1c below). These options were subject to achieving of performance objectives and vested as of December 2009, due to a failure to achieve the goals.

In March 2008, 25,000 options were granted to one of the Company's executives, contingent on achieving certain performance objectives. The exercise price $5.13 per option. As of December 31 2009 those options have been forfeited due to the executive’s departure from the Company. On July 13 2009 the company granted 66,500 options contingent on achieving performance objectives at an exercise price of $3.02 per option. As of December 31 2010, 15,000 options were forfeited as a result of the departure of three employees from the Company and 40,500 options expired due to a failure to meet goals. On September 3 2009 the Company granted 30,000 options at an exercise price of $3.35 per option, 20,000 of which are contingent on achieving operational profit goals, as follows: 10,000 options will vest on March 31 2011 subject to the Delta Israel division achieving an operational profit of no less than $10.8 million in 2010. These options have vested in light of the achievement of the goal set. 10,000 additional options will be vest on March 31 subject to Delta Israel achieving an operational profit rate of no less then 13% of sales in 2011. In January 2010 20,000 options were granted to two senior executives of a U.S. subsidiary as part of the May 2006 option plan, these options were contingent on performance objectives and expired as of December 2010, due to a failure to achieve the objectives. In April 2010, 25,000 options were granted to a senior executive at a U.S. subsidiary pursuant to the August 2009 option plan. These options were contingent on operational goals and expired as of December 2010, due to a failure to achieve objectives.

b) On October 20 2009, the shareholders general and special meeting

approved the issue of options to Mr. Isaac Dabach, Company CEO and Director and its controlling shareholder. Mr. Dabach was granted 720,000 options at the price of $3.27 per option, exercisable as 720,000 Company shares. The vesting of the options in question is contingent on achieving objectives pertaining to the operational earnings from regular actions not including the impact of one-time items (hereinafter – “EBIT”), over the course of 2010-2013:

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1) Subject to achieving EBIT to the amount of $35 million in 2010, 200,000 options will vest on March 31 2011. These options have not yet vested as of December 31 2010 due to the failure to achieve the goal set.

2) Subject to achieving an accumulated EBIT of $70 million in 2010 and 2011, 200,000 options will vest on March 31 2012; in this case the recipient will also be entitled, on the same date, to the vesting of the options mentioned in Section (1) above (if they do not vest earlier).

3) Subject to achieving an accumulated EBIT of $105 million in 2010–2012, 200,000 additional options will vest on March 31 2013 In this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Sections (1) and (2) above (if they do not mature earlier).

4) An additional 50,000 options will mature on March 31 2012 if the accumulated EBIT for 2010 and 2011 will reach $75 million and 70,000 additional options will mature on March 31 2013 if the accumulated EBIT for 2010, 2011 and 2012 will reach of $121 million. If the accumulated EBIT for 2010, 2011 and 2012 will reach $121 million while the EBIT in question does not reach $75 million, the recipient shall be entitled, on March 31 2013, to the maturation of the 50,000 options denoted at the beginning of this section (4).

The average economic value of the options according to the Black & Scholes Model as of their date of issue is $1.64.

The theoretical economic value to the options subject to the achievement of goals granted in 2010 and 2009 was estimated on the date of issue using the Black & Scholes option pricing model, using the following average assumptions:

2010 2009 2008

Dividend yield 2% 0% 2% Expected standard deviation (*) 66% 61% 47% Risk-free interest rate 3.1%-3.5% 3.4% 2.5% Expected life span - in years 2.8 4.0 4.0%

(*) Based on historical volatility of Company shares over periods similar to the expected life of the option through its exercise date.

3. Options granted to Israeli employees up to 2004 pursuant to Company plans are subject to the conditions denoted in sections 102 and 102a of the Income Tax Ordinance. This section stipulates, inter alia, that the Company may claim as a tax deductible expense the sums granted employees as benefits, with the related tax paid by the employee. The option allocation starting 2006 is subject to the capital track of section 102 chosen by the Company and consequently, the Company may not claim sums credited as a benefit to employees as an expense for tax purposes, including sums recorded as salary benefits in the Company's accounts, in respect of options granted employees pursuant to the plan, other than the benefit component as salary, if any, determined on the granting date.

4. The rights granted by the ordinary shares issued upon the exercise of the options would be identical to those of the other ordinary Company shares.

5. The movements in the number of options not yet exercised and the relevant

weighted averages of the exercise prices are as follows:

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a. Options not contingent of meeting performance goals:

2010 2009 2008

Quantity

Average Weighted Exercise

price Quantity


price Quantity


price

In circulation at the beginning of the year

1,128,206 $5.49 928,490 $8.29 1,688,435 $9.8

Granted - market price 270,000 $8.20 589,000 $3.28 225,000 $5.01 Forfeited (81,317) $9.09 (140,684) $6.37 (603,770) $7.67 Expired - - (248,600) $10.29 (381,175) $14.04 Exercised (15,194) $6.61 - - - - Outstanding at end of the year

1,301,695 $5.80 1,128,206 $5.49 928,490 $8.29

Exercisable at end of the year

433,595 $7.52 267,432 $9.41 437,750 $10.21

b. Stock options subject to meeting performance goals:

2010 2009 2008

Quantity


Price Quantity


Price Quantity


Price

In circulation at the beginning of the year

806,500 $3.25 25,000 $5.13 69,000 $8.43

Granted at market price 45,000 $8.07 806,500 $3.25 25,000 $5.13 Forfeited (15,000) $3.02 (25,000) $5.13 (44,000) $8.43 Expired (85,500) $5.68 - - (25,000) $8.43 Outstanding at end of the year 751,000 $3.27 806,500 $3.25 25,000 $5.13 Balance of options exercisable at the end of the year

-,- -,- -,-

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6. Details of Option Balance as of December 31 2010 according to plans:

Plan Date

Granting Date

Exercise Price

($) (**)

Balance of Options Granted

and not yet Exercised

Average Weighted Balance of

Projected Life Span

(Years)

October 2002 October 2002 15.35 17,500 0.33

May 2006 May 2006 8.43 217,092 1.34

May 2006 June 2006 7.59 25,002 1.50

May 2006 March 2007 6.95 80,334 2.35

May 2006 March 2008 5.13 81,667 2.60

May 2006 August 2008 4.70 65,000 3.53

May 2006 July 2009 3.02 225,100 4.24

May 2006 July 2009 contingent on performance 3.02 11,000 3.25

May 2006 September 2009 3.35 10,000 3.67

May 2006 September 2009 contingent on performance 3.35 20,000 4.17

May 2006 November 2009 3.07 250,000 3.67

May 2006 January 2010 6.93 10,000 5.00

May 2006 April 2010 8.98 65,000 5.05

May 2006 October 2010 8.00 150,000 6.29

October 2009 October 2009 – granted to Directors 5.00 70,000 3.79

October 2009 October 2009 – contingent on performance – granted to CEO

3.27 720,000 4.18

October 2009 April 2010 8.98 25,000 4.31

October 2009 August 2010 6.70 10,000 5.61

4.87 2,052,695 2.89

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Details of balance of options as of December 31 2009 according to plans*:

Plan Date Granting Date

Price Exercise ($) (**)

Balance of Options Granted

and not yet Exercised

Average Weighted Balance of

Projected Life Span

(Years)

October 2002 October 2002 10.76 6,250 0.3

October 2002 October 2002 15.35 40,000 0.8

October 2002 October 2002 12.74 7,500 0.6

May 2006 May 2006 8.43 231,354 2.3

May 2006 June 2006 7.59 25,002 2.5

May 2006 March 2007 6.95 87,000 3.3

May 2006 March 2008 5.13 85,000 3.6

May 2006 August 2008 4.70 65,000 4.6

May 2006 July 2009 3.02 251,100 5.25

May 2006 July 2009 contingent on performance 3.02 66,500 4.25

May 2006 September 2009 3.35 10,000 4.67

May 2006 September 2009 contingent on performance 3.35 20,000 5.17

May 2006 November 2009 3.07 250,000 4.67

October 2009 October 2009 – granted to Directors 5.00 70,000 4.79

October 2009 October 2009 – contingent on performance – granted to CEO

3.27 720,000 5.18

4.55 1,934,706 4.40 * See also 6d below. ** The exercise price in the above table is the original price before adaptation due to the

distribution of dividends in the relevant plans.

c. On July 2009 the Board of Directors decided to revise the May 2006 option plan so that the exercise price paid for each option would be adjusted by the dividend rate declared by the Company from time to time. This adjustment is not in accordance with the original plan, and in it features a benefit to options owners as of December 31 2009 to the amount of $314,000.

d. According to the shelf offering report published by the Company on October 27 2009, according to which the Company made an offering by way of rights to the Company's ordinary shareholders, the Company adjusted the options which were granted as part of the 2002 and 2006 plans and which have not yet vested according to terms of the original plan. According to the option plans in question (2002 and 2006), at the vesting date each exerciser of 4 options would be entitled to 5 shares in return for the payment of 4 times the exercise price plus the rights usage price from the issue of the rights set at 17 NIS ($4.53). In light of the above and as of December 31 2010 and assuming the exercise of all of the options existing in the 2002 and 2006 plans and which were allocated to non-American recipients, 4,375 and 136,106 shares,

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respectively, will be added to the ordinary shares converted (the conversion ratio shall be 5 shares for each 4 options, instead of 1:1).

e. As for the options granted subsequent to the balance sheet date, see Note

f. Surpluses In determining the sums available for distribution as dividends, according to the Companies Law, the total number of Company shares bought back (presented under a separate item in equity) should be deducted from retained earnings presented under Company equity.

Note 15 – Taxes on Income

a. The Company:

1) Starting from tax year 2008 onward the Company’s results are measured, for tax purposes, in nominal sums. By the end of tax year 2007, the Company’s and its Israeli subsidiaries results for tax purposes were measured taking into account changes in the CPI, in accordance with the Income Tax Law (Adjustments Due to Inflation), 1985 (hereinafter - the Adjustments Law).

2) Tax Rates The income of the Company and its subsidiaries is taxed at statutory tax rates. On July 14, 2009, the Knesset enacted the Economic Efficiency Law (Legislative Changes for Implementation of the Economic Plan for 2009–2010), 2010 (hereinafter: “the Law”), which revises, inter alia, corporate tax rates set pursuant to a previous amendment. As a result of these amendments, corporate tax rates will decrease in the following manner: in 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20% and 2016 onward – 18%.

3) Tax benefits under the Encouragement of Capital Investments Law, 1959 (hereinafter – “the Law”). The Company received investment grants from the State of Israel. Entitlement to these benefits was stipulated on the fact that the Company will uphold the terms set in the Law, resulting regulations and letters of approval for certain investments in authorized factories. In the event that the conditions attached to these grants are not met, the Company may be asked to return the sum of the grants, in whole or in part, including CPI linkage differences from the date the grant was received.

The Company placed floating liens on all of its assets in favor of the State of Israel as collateral for the terms of the grant. The income from this approved program shall be tax free for the first two years, starting from the year the Company first had taxable income and will be charged corporate tax and a rate of 25% for the subsequent 5 years, so long as 14 years have not passed from the year approval was granted and 12 years from the year the factory began operations.

4) Amendment to the Encouragement of Capital Investments Law, 1959

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Pursuant to the 2011 and 2012 Economic Policy Law, 2011, which was approved by the Knesset on december 29 2010, the Capital Investment Encouragement Law, 1959 was also amended (hereinafter – the Amendment). The Amendment comes into effect January 1 2011. Pursuant to the Amendment benefit plans were estavlished, in lieu of the plans currently existing in the Capital Investment Encouragement Law, 1959 (hereinafter – the Law), as follows: a grants plan for factories in Development Area A and two tax benefit plans (preferred factory and special preferrred factory), dealing with the incidence of a uniform tax rate on all of the Company’s preferred revenues, as defined in the Amendment. The Company is studying the Law’s impact on its activity.

b. Non-Israeli Subsidiaries Subsidiaries incorporated outside of Israel, in free trade zones, are assessed for tax purposes according to the laws in the countries of their residence. The tax rate applicable to the main subsidiary incorporated in the U.S. is 36%-38% (including federal and state tax). As a rule, inter-company transactions between the company and the foreign subsidiaries are subject to the provisions of the Income Tax Regulations (Determination of Market Terms), 2006.

c. Losses for Tax Purposes Carried On to Subsequent Years Deferred tax assets for losses for tax purposes carried on to subsequent years are recognized in the event that realization of the tax benefit in question through the existence of future taxable income is expected. Losses for tax purposes to be carried on to subsequent years derive mainly from the Company in Israel, and as of December 31, 2010 and 2009 amounted to $65 million and $85 million, respectively.

The tax asset recognized as of December 31, 2010 and December 31 2009 amounted to $7.0 million and $6.1 million, respectively. Carried on losses for tax purposes accumulated in Israel may be offset over an unlimited period of time; see also D below.

d. Mergers

On March 2, 2008, the Tax Authority approved an application for a tax-exempt re-structuring of the Delta Group, effective from December 31 2007. Pursuant to the restructuring, Delta Galil merged Delta Marketing and Tag LI into itself in such a manner that that Delta Marketing and Tag-Li transferred all their assets and liabilities to Delta Galil for no return, so that Delta Marketing and Tag Li were eliminated with no liquidation. Pursuant to the confirmation received, some restrictions were imposed on offsetting losses, such that the amount that may be offset each year would not exceed 1/12 of total losses (some $7 million), or 50% of the Company’s taxable revenues for that year before offsetting losses from previous years, whichever is lower.

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e. Deferred taxes on income:

1) Composition of deferred taxes as of the balance sheet dates and transactions in said years are as follows:

For Balance Sheet Items

Fixed Assets

Intangible assets

Inventory

Provision to Employee Benefits

Others

With Respect to Losses for Tax

Purposes

Total Thousands of Dollars Balance as of January 1 (5,363) 32 1,805 1,029 838 7,209 5,550 Changes in 2008: Charged to Statement of Operations 806 (1,646) (997) (59) 899 (30) (1,027) Sums charged to other comprehensive earnings - - - 38 - - 38 Balance on December 31, 2008 (4,557) (1,614) 808 1,008 1,737 7,179 4,561 Changes in 2009:

Charged to Statement of Operations 331 (336) (215) (181) (897) 834 (464) Influence of change in tax rates on deferred tax balances. 650 - - 97 (40) (1,945) (1,238) Sums charged to other comprehensive earnings

- - - 23 - - 23

Influence of change in tax rates on deferred tax balances in other comprehensive earnings (loss) - - - (128) - - (128)

Balance on December 31, 2009 (3,576) (1,950) 593 819 800 6,068 2,754 Changes in 2010: Charged to Statement of Operations 324 (466) 642 302 592 925 2,319 Sums charged to other comprehensive earnings - - - 65 (11) - 54 Balance on December 31, 2010 (3,252) (2,416) 1,235 1,186 1,381 6,993 5,127

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2) Deferred income taxes:

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority. The offset sums are as follows:


Deferred tax assets:

Repayment of which is expected within 12 months of the balance sheet date.

5,923 3,219

Repayment of which is expected over 12 months after the balance sheet date. 4,939 6,053

10,862 9,272

Deferred tax liabilities:

Repayment of which is expected within 12 months of the balance sheet date. - (16)

Repayment of which is expected over 12 months after the balance sheet date. (5,735) (6,501)

(5,735) (6,517)

Tax assets, net 5,127 2,754


Presented in the balance sheet:

Under deferred tax assets 5,127 3,541 Under deferred tax liabilities - (787)

5,127 2,754

The deferred taxes are calculated according to tax rates of 18%-38%.

f. Income (loss) before taxes on income is comprised as follows:


2010 2009 2008


The Company in Israel 17,423 4,849 (12,756) Non-Israeli subsidiaries 5,826 4,375 (10,504)

23,249 9,224 (23,260)

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g. Composition of tax expenses (revenues) on income in Report on Comprehensive

Earnings (loss):

For the Year Ending on December 31 2010 2009 2008 Thousands of Dollars

Current:

The Company in Israel 1,952 188 - Non-Israeli subsidiaries 1,830 (849) 611 3,782 (661) 611

Deferred: The Company in Israel (1,603) 193 (48) Non-Israeli subsidiaries (716) 1,509 1,075 (2,319) 1,702 1,027

Current for previous years: The Company in Israel (200) 7 (37) Non-Israeli subsidiaries 804 526 921 604 533 884 2,067 1,574 2,522

h. The following is a reconciliation of the “theoretical” tax amount that would have

applied if all revenues had been taxed at the regular tax rate applicable to companies in Israel (see a2 above), to the tax sum charged in the Reports on Comprehensive Earnings (loss) for the reported year:

For the Year Ending on December 31 2010 2009 2008 Thousands of Dollars

Income (loss) before taxes on income as presented in the Reports on Comprehensive Earnings (Loss) 23,249 9,224 (23,260) Theoretical tax expenses (revenues) 5,812 2,398 (6,280) Decrease in tax due to different tax rates applicable to non-Israeli subsidiaries (277) (100) (575) 5,535 2,298 (6,855) Increase (decrease) in tax due to fixed differences: Non-deductable expenses 355 177 109 Impairment of non-deductable goodwill - - 1,996 Impairment of non-deductable fixed assets 179 506 - Tax expenses for prior years, net 604 533 884 Increase in taxes deriving from losses for tax purposes created in the reported year and for which no deferred taxes were credited. 104 142 5,978 Decrease in taxes from losses for tax purposes in the reported year for which no deferred taxes were credited in the past. (3,952) (857) - Exchange rate differences and differences in the measurement base. (556) 43 278 Decrease in deferred taxes as a result of the change in tax rates occurring in coming years - (1,366) - Other, net (202) 98 132 Taxes on income – in Statements of Operations 2,067 1,574 2,522

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i. Tax Assessments Tax self-assessments filed by the Company and subsidiaries in Israel through 2006 are deemed to be final. Tax self-assessments filed by a U.S. subsidiary through 2006 are deemed to be final.

j. Influence of the Adoption of IFRS in Israel on Tax Liability

As discussed in note 2a, the Company has prepared its Financial Statements in accordance with the IFRS as of January 1, 2007. IFRS standards differ from generally accepted Israeli accounting standards, and accordingly, preparation of financial statements as per IFRS standards may reflect a financial situation, operating results and cash flows materially different from those presented in these Financial Statements. Pursuant to the Income Tax Ordinance Revision (no. 174 – Temporary Orders Regarding Tax Years 2007 and 2008), 2010, published on February 4 2010, it was determined that taxable income for tax years 2007, 2008 and 2008 shall not be prepared in accordance with Accounting Standard 29 set by the Israeli Accounting Standards Board (hereinafter: “IFRS Rules”), note that where the tax laws provide specific instructions regarding the treatment of income, as an expenses etc., the tax laws shall take precedence over accounting rules, be they IFRS or others. Company management calculated its taxable income for tax years 2008 and 2009 based on Israeli accounting standards in effect prior to the Israeli adaptation of the IFRS, subject to certain adjustments, and therefore revision of the ordinance has no impact on the calculation of current and deferred taxes in the Financial Statements. Although the temporary ordinance has not yet been extended to tax year 2010, the Company has calculated its taxable income based on Israeli accounting standards in effect prior to the Israeli adaptation of the IFRS. The amendment to the ordinance had no material impact on the tax expenses reported in these Financial Statements.

Note 16 – Severance Pay Liability

a. The following sums presented in relation to payments and benefits to employees

have been included in determining operating income:


2010 2009 2008


Salary and associated 106,305 102,442 122,734

Post-retirement benefits: defined deposit plan 2,563 2,261 2,550

Post-retirement benefits: defined contribution plan

257 335 456

Benefits pursuant to option plan 1,262 301 (188)Total employee benefits 110,387 105,339 125,552

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b. Post-Employment Benefits – Defined Benefit Plan

The sums presented in the balance sheet were determined as follows:


Present value of funded liabilities 6,350 6,668

Fair value of plan assets 5,925 6,438

Balance of liabilities in the balance sheet 425 230

Sums presented in the balance sheet with regard to severance pay liability:


Defined benefit plan, net 425 230Other liabilities due to employment termination 47 20

472 250

Presented: As of December 31 2010 2009 Thousands of Dollars Surplus of plan assets over liabilities from the termination of employer- employee relationships, net

- 85

Liabilities for employment termination, net of deposits to severance pay funds

(472) (335)

(472) (250)

Transactions in defined benefit plan liabilities over the course of the years were as follows:

2010 2009 2008 Thousands of Dollars

Balance at the Beginning of the Year 6,668 6,626 8,025

Current service cost 218 258 338

Current interest expenses 300 329 457

Actuarial losses (gains) 184 366 (282)

Linkage differentials 204 26 137

Benefits paid (1,224) (937) (2,049)

Balance at the end of the year 6,350 6,668 6,626

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Movements in the fair value of defined benefit plan assets over the years are as follows:

2010 2009 2008 Thousands of Dollars

Balance at the Beginning of the Year 6,438 6,404 8,044

Expected return on plan assets 261 252 339

Actuarial losses (gains) 45 389 (515)

Linkage differentials 184 27 161

Employer contributions 208 242 703

Benefits paid (1,211) (876) (2,328)

Balance at the end of the year 5,925 6,438 6,404 The expenses recognized in the Report on Comprehensive Earnings (Loss) are as follows:


2010 2009 2008


Current service expenses 218 258 338

Current interest expenses 300 329 457

Expected rate of return on plan assets (261) (252) (339)

Expenses (revenues) from linkage differentials

20 (1) (24)

277 334 432 Presented under:


2010 2009 2009


Cost of sales 95 153 286

Sales and marketing expenses 85 99 95

General and administrative expenses 77 83 75

Financing expenses (revenues) 20 (1) (24)

277 334 432

The chief actuary assumptions employed are as follows:

2010 2009 Percent

Israel U.S.A. Israel U.S.A.

Discount rate 4.14 5.15 4.14 5.49

CPI increase rate 2.99 0.00 2.82 0.00

Expected return on plan assets 4.14 5.50 4.14 6.00

Future salary increase 3.50 0.00 3.50 0.00

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The expected return on plan assets is determined based on available expected returns on assets underlying the current investment policy. Expected returns on fixed interest investments are based on the gross yield to maturity as of the balance sheet date. The projected benefits of the post-retirement plan for the year ending December 31 2011, amount to $454,000.

Note 17 – Earnings (Loss) per Share

a. Basic The basic profit per share calculated by dividing the profit charged to parent company shareholders by the weighted average of the number of ordinary shares issued, with the exception of ordinary shares purchased by the Company and held as treasury shares.

b. Diluted

The diluted profit per share in calculated by adapting the weighted average of the number of ordinary shares in circulation less treasure shares while including potential ordinary shares with a diluting effect (2008 not included as they were anti-diluting).

Note 18 – Commitments

a. The Company and its subsidiaries rent 18 structures via operational lease. The lease

(including optional extension) for 7 facilities would expire on different dates between 2012 and 2029, with the remaining lease agreements expiring in 2011.

2010 2009 2008

Net income (loss) attributed to Company shareholders (in thousands of dollars)

21,060 7,662 (26,400)

Weighted average of number of ordinary shares issued (in thousands)

24,599 20,528 19,948

Less treasury shares (in thousands) 1,207 1,207 1,207Number of shares for calculating basic earnings (loss) per share 23,392 19,321 18,741 Basic earnings (loss) per share (dollars per share) 0.90 0.40 (1.41)

2010 2009 2008

Net income (loss) used for calculating diluted earnings per share (in thousands of dollars)

21,060 7,662 (26,400)

Weighted average of the number of ordinary shares issued (in thousands) used for the calculation of profit (loss) per share

24,599 20,528 19,948

Less treasury shares (in thousands) 1,207 1,207 1,207 Adjustment due to incremental shares from the exercise of options (in thousands)

700 30 -

Weighted average of the number of ordinary shares for calculating diluted earnings (loss) per share (in thousands)

24,092 19,348 18,741

Net diluted earnings (loss) per share (dollars per share) 0.87 0.40 (1.41)In calculating profit (loss) per share, adaptations due to non-diluted options (in thousands) were not taken into account. 1,493 2,063 953

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The Company intends to renew some of the aforementioned lease agreements and has signed an agreement according to which a compound is supposed to be constructed for it which it undertook to rent out for a period of 10 years with an option to extend. Minimum future annual lease payments (accounting for optional extensions likely to be exercised) for each year from 2011 to 2014 will amount to $9.1million, $5.6 million, $4.4 million and $3.3 million, respectively. In the period between 2015 and the end of the lease term, accumulated lease payments would amount to $15.5 million. Lease expenses for 2010, 2009 and 2008 amounted to $9.3, $9.1 and $9.7 million, respectively.

b. Regarding liability for minimum royalty payments, see Notes 13, 9c.

Note 19 – Transactions and Balances with Interested and Related Parties

The company is controlled by Isaac Dabah, through GMM Capital LLC, which owns 54% of the Company's shares. “Interested parties" - according to the definitions of “interested parties” in the Securities Refulations (Yearly Financial Statements), 2010. "Related Parties" – As defined in IAS 24, Related Party Disclosures. Key Company management personnel included together under the definition of “related parties” as per AS 24, include the members of the Board of Directors and the Company's CEO. a. Transactions with interested parties and related parties:

Benefits were given interested parties and related parties as follows:

For the Year Ending December 31 2010 2009 2008 Sales in thousands of dollars, see (1) below - - 261Purchases in thousands of dollars, see (2) below - 122 - Salary and benefit component for options granted interested parties and related parties employed by the Company or on its behalf:

Sum – in thousands of dollars, see (3), (4) and (6a) below.

1,082 644 353

Number of people to whom benefits refer 2 1 1 Pay, consulting expenses, expense refunds paid and the benefit component for options granted directors:

Sum – in thousands of dollars, see (5) below 413 340 221Number of people to whom benefits refer 7 7 7

1) Sales

Sales sums presented above refer to transactions between Group members and a company owned by an interested party, conducted in the normal course of business, at market prices and according to prevailing credit terms. On June 2008 this company ceased being owned by the interest party.

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2) Purchases The sum of purchases presented above refers to the transaction between a U.S.

subsidiary and an interest party, carried out over the normal course of businss, at market prices and under prevailing credit terms.

3) Options to the Company's Former CEO In conjunction with the 2006 employee stock option plan (see Note 14), the Company's CEO was granted 502,003 options, of which 425,001 options were at $7.26 per option and 75,002 options at $8.43 per option. Out of the options in question, 50,000 options were contingent on performance in 2007 and 2008. In light of the CEO’s departure, all of the options granted him through this plan have expired.

In addition, the balance of options granted the then-CEO pursuant to prior plans which have not yet been exercise have also expired.

4) Options to the Company CEO

On October 20 2009 the Company's CEO and controlling shareholder was granted 720,000 options in the price of $3.27 per option, contingent on achieving operational objectives in 2010 – 2012 (see note 14.b.2). The benefit component for these options listed as an expense in 2010 amounted to $498,000.

5) Consultation Agreement

The Company has a consultation agreement with a director in the company. In return for the consultation, the director is entitled to payment according to hours invested. in 2010, the directror received a total of $44,000 for the consultation services provided.

6) Approval of Terms of Employment of Interested Party

a. Ratification of the terms of the daughter of the Company’s controlling shareholder, acting as product manager and merchandising manager in a subsidiary.

On October 13 2010 the Company’s Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Company’s Board of Directors approved the terms of the daughter of the Company's CEO and controlling shareholder as product manager and merchandising manager at Delta Galil USA Inc.(hereinafter in this section: “the Subsidiary”). The terms of her employment shall be presented for ratification at the Company's general meeting, which shall convene these coming weeks. The following are the key points of the terms of her employment, as approved:

1) The terms of her employment shall apply from the start of work at the

subsidiary, meaning March 8 2010. The terms of her employment are not limited in time and U.S. law shall apply to their conclusion.

2) A yearly salary of $70,000 (gross) and she shall be entitled to the other generally accepted benefits granted employees of the subsidiary. In addition, she shall be entitled to a yearly bonus in accordance with the senior employee bonus plan employed by the subsidiary, according to targets set, which shall not exceed 20% of her yearly salary.

3) She shall be entitled to take part in the subsidiary’s health insurance plan and 401k and to a refund of expenses accrued, as per the rules

73

and directives applying to the employees of the subsidiary in effect at the time.

4) The CEO of the subsidiary may revise, from time to time, the terms of her employment at a rate of no higher than 10% a year, subject to the approval of the Company’s Audit Committee that the revision is reasonable based on the scope of her employment, the nature of her duties, her qualifications and other related circumstance, so long as that insomuch as the total accumulated rate of the raises compared to salaries approved by the General Meeting exceeds 25%, the matter shall be brought to the general meeting for approval, in accordance with the law.

5) These terms of employment were established on the basis of accepted terms for other employees at the subsidiary in similar positions and with similar qualifications.

Upon the approval of this agreement by all the Company’s institutions (including the shareholders meeting), Ms. Dabach shall be paid the sums owed her for the period since she began work in practice (March 8 2010).

b. Approval of the terms of employment of Mr. Yitzhak Weinstock, as Chief

Operations Officer of a subsidiary.

On October 13 2010 the Company’s Audit Committee and on November 17 2010 (following a discussion held on October 13 2010) the Company’s Board of Directors approved the terms of the employment at Delta Galil USA (hereinafter in this section: “the Delta Galil Industries Ltd. Subsidiary”) of a Company director. In this position, starting January 1 2011, he shall serve as the Chief Operations Officer (COO) of the Company’s activities in North America, including the activities of the subsidiary, as a full-time job. The terms of his employment shall be presented for ratification at the Company's general meeting. The following are the key points of the terms of his employment, as approved:

1. A yearly salary of $360,000 (gross). In addition, Mr. Weinstock shall

be entitled to a yearly bonus in accordance with the senior employee bonus plan employed by the subsidiary, according to objectives set, which shall not exceed 30% of his yearly salary.

2. He shall be entitled to take part in the subsidiary’s health insurance plan and 401k and to a refund of expenses accrued, as per the rules and directives applying to the employees of the subsidiary in effect at the time.

3. This agreement is not limited in time and either of the parties may bring it to conclusion by providing three months advance notice to the other party, with the exception of predefined cases in which the Company may terminate the agreement immediately.

4. The Company CEO may revise, from time to time, his salary at a rate of no more than 10% a year, subject to the approval of the Company’s Audit Committee that the revision is a result of meeting goals set in his yearly work plan and the performance of the Company as a whole, so long as that insomuch as the total accumulated rate of the raises compared to salary approved by the General Meeting exceeds 25%, the matter shall be brought to the general meeting for approval, in accordance with the law.

5. Note that so long as the director is employed by the subsidiary he shall not receive Company director compensation for serving as director.

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7) On February 16 2011 the Company’s Audit Committee and Board of Directors reached a decision in which a Company executive has a personal interest, regrading a $45,000 contribution to a non-profit which designated the contribution to another non-profit, in which a Company director serves as chairman.

b. Balances with interested and related parties:


Current credit balances for purchases from related parties (see 2a) Balance as of the balance sheet date - 57Highest balance during the year - 65

Current credit balance due to salary expenses, consultation and expense refunds to directors: Balance as of the balance sheet date 42 100

Current debit balance due to salaries of interested and related parties employed at the Company or on its behalf: Balance as of the balance sheet date 42 31

c. Director Compensation and Insurance

The Company has a remuneration and insurance arrangement for directors and senior executives, including senior executives in subsidiaries in which the Company holds at least 25% of its stock capital. The remuneration is limited to $15 million from which $10 million is covered by an insurance policy with yearly premium in 2010 of $42,000.

d. On April 14 2008 the Board of Directors approved the reimbursement of future

expenses to the Chairman of the Board and to an additional director, in relation to the fulfillment of their duties in the Board of Directors, with a ceiling not exceeding $200,000 per year for the Chairman of the Board and $80,000 for the additional director. On the same date the Company's Board of Directors approved an update to the participation remuneration and yearly remuneration for Company directors and external directors starting April 1 2008 and recommended that the Company’s shareholders meeting approve participation remuneration and yearly remuneration for the Chairman of the Board and an additional director starting April 1 2008. The general meeting of the Company’s shareholders ratified these recommendations in May 2008. The Chairman of the Board of Directors (Mr. Gideon Chitayat) is not entitled to reimbursement for the expenses in question.

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Note 20 – Additional Information Pertaining to the Financial Statements:

a. Accounts Receivable 1. Trade Receivables December 31


Outstanding debt 88,583 101,324

Checks collectable 1,734 1,816

90,317 103,140

The item is presented net of a provision for doubtful debt to the amount of

918 732

a. As of December 31, 2010, a trade receivables balance of $0.7 million ($1.9

million – December 31 2009) is a balance exceeding the contractual payment date for which no provision has been made to doubtful debts. Most of the balance has been repaid by the approval of these Financial Statements. This concerns a number of customers independent of each other who have no insolvency events in their past. The age of most of the balances is up to 3 months.

The Company periodically reviews the aging of its trade receivables, and provides a provision to doubtful debt for customers whom the Company believes are insolent. Movements in Company provisions to doubtful debts are as follows:


Balance at the beginning of the period 732 2,717

Increase in provision to doubtful debts 170 36

Exchange rate differences 30 4

Decrease in provision to doubtful debts (14) (2,025)

Balance at the end of the period 918 732

Net expense from bad and doubtful debts for the years ending on December 31 2009 and 2010, accumulated to $479,000 (which includes $300,000 for a debt owed for the sale of fixed assets, see Note 10(b)(1) above) and $159,000 respectively. Net income (expense) from doubtful debts includes net revenues charged directly to expenses in the Statement of Operations, which were not reflected in the provision for doubtful debts to the amount of ($23,000) and $104,000 for the years ending December 31 2010 and 2009, respectively. The creation and release of provisions to doubtful debts due to trade receivables balances were included under “administrative and general expenses” in the Statement of Operations. Customer balances charged to doubtful debt are written off when their collection is not expected.

76

For the credit rating of a major customer, see note 4(a)(2).

b. Change in the Terms of the Commitment with a Material Customer.

Over the course of 2010, working relations with Wal-Mart were altered, in such a manner that a significant portion of the products are provided the customer based on orders (ad hoc) and not in the form of replenishment, as was the practice to date. As part of the change in question, the customer approached strategic suppliers and proposed joining a discount arrangement through a financial factor under attractive commercial conditions (LIBOR + 1%). The Company chose to joint this arrangement over the course of Q2 2010. As a result of this change, credit days granted the customer are between 20 and 30 days. The impact of this arrangement on the trade receivables balance as of December 31 2010 is a $12 million reduction compared to the balance in the balance sheet as of December 31 2009.

2. Other Accounts Receivable December 31 2010 2009 Thousands of

Dollars

Government institutions 2,426 1,487

Receivables from suppliers 1,494 977

Prepaid expenses 1,215 1,702

Employees 189 234

Deposits 601 225

Income receivables 1,922 116

Receivables due to a sales transaction of fixed assets classified in the past as available for sale (1)

1,158 -

Receivables from the sale of subsidiary (2) 1,454 -

Revenues receivable from the revaluation of forward agreements (3) 1,034 529

Others 535 563

12,028 5,833

(1) See Note 8(b)(2), this balance includes VAT. (2) See cash flow, extraction from consolidation appendix. (3) The Company entered into forward transactions on the exchange rate of the

euro and the dollar for 2011, which amounted to $20 million as of December 31 2010. These transactions are not recognized as accounting hedging transactions.

The fair value of the financial items from the balance of other receivables is close to the value presented in the books. The balances included in other receivables for financial items do not include doubtful debts and do not include overdue sums. The maximum exposure to credit risks as of the balance sheet date due to receivable balances is the fair value of the whole group less non-

77

financial balances (from advanced expenses). The Company does not hold any collateral for these receivables.

b. Inventory Composition of inventory:


Finished products 103,029 61,105

Goods in process 4,464 8,298

Raw materials 11,414 8,496

Packaging and other materials 2,368 2,786

121,275 80,685 As of December 31 2010, the inventory balance for the area of activity that has undergone depreciation is presented less the depreciation provision to the amount of $10.5 million (as of December 31 2009 - $11.6 million). For the purpose of presenting it at fair value, inventory is presented net of sales costs. The change in the depreciation provision is included under “sales costs” in the Report on Comprehensive Earnings. As for the cost of inventory recognized as an expense and included in the cost of sales, see Note 20g. Regarding liens on inventory see Note 11b.

c. Short-Term Bank Loans

December 31 2010 2009


Loans from banks 57,518 104,148 Less deferred expenses (79) (21)

Total 57,439 104,127

1. The average interest rate on the balance of credit and short-term loans as of December 31, 2010 and December 31, 2009 was 2.1% and 2.4%, respectively.

2. Total unutilized short-term credit lines as of December 31, 2010 and December

31, 2007 amounted to $110 million and $44 million, respectively. In addition to those credit lines, the Company has short term deposits as of December 31 2010 to the amount of $40 million, deriving from the proceeds of the January 2010 debenture issue, so that the sum of the Company’s unused credit resources amounts to $150 million. The sum of the above credit sources includes $22 million in non-binding lines. As of December 31, 2010, the effective framework amounted to a sum of $56 million (credit frameworks against inventory and customers according to coefficients agreed with the banks), and the unutilized short-term credit line amounted to $36 million, and is included in the total unutilized credit balance.

3. The fair value of the short-term lawns is equal to its value in the books as the

influence of capitalization is not material.

78

4. Delta Galil USA Inc., a Company subsidiary, is party to a credit agreement dated December 9, 2004 with Bank Leumi U.S.A. and Bank Hapoalim. Loans by virtue of the credit agreement are guaranteed by most of the assets of the subsidiary.

The aforementioned credit agreement was renewed in April 2010. Key points of the loan renewal agreement: a. the total short-term revolving loan is $80 million; b. the short-term interest rate is LIBOR + 2.75% per year and in certain cases the possibility of taking Prime interest loans is given; and c. the loan agreement depends upon the following financial stipulations:

1. Delta USA’s net yearly profit shall not be below $1. 2. Capital investments shall not exceed $2 million on the basis of the past twelve

months (not including label purchases). 3. Tangible equity defined as equity less intangible assets (mainly goodwill) shall

not drop below $28 million. 4. The ratio between financial liabilities and equity shall not exceed 3.5.

The lending bank allowed the subsidiary, Delta U.S.A., to redeem the loan given it by the parent company to the amount of $41.5 million (of which a loan of $26.5 was given over the course of December 2010 following the issue of debentures (see Note 12 above) so long as it meets the financial stipulations as well as the assumptions at the basis of the loan. The current agreement shall remain in effect until the end of April 2011. As part of the renewal of the agreement, it was decided to add Bank Discount New York as a party to the credit agreement with Bank Hapoalim and Bank Leumi USA. As of the balance sheet date and as of this report, the Company has complied with the above financial stipulations. On the matter of liens guaranteeing the bank obligations, see Note 11b.

d. Other Accounts Payable

December 31 2010 2009


Employees and institutions in respect of salary 11,468 10,805 Provision for vacation and convalescence pay 3,357 3,422 Institutions 2,758 1,875 Liability for minimum royalty payments 4,150 5,820 Expenses payable 10,932 11,032 Deferred income due to transaction to sell real estate classified as intended for sale less related costs paid (1) 4,900 - Interest payables due to debentures (2) 1,825 - Restructuring expenses payable 750 1,646 Others 1,366 402 41,506 35,002

(1) See Note 8(b)(1) (2) See Note 12

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e. Restructuring Expenses

2010 plan

Over the course of the first quarter of 2010, the Company decided to terminate its socks finishing operations in Jordan. The cost of discontinuing the operations in question amounted to $0.5 million, consisting primarily of impairment of fixed assets and severance pay to 90 terminated employees. 2009 plan In Q3 of 2009 the Company decided on the merger of the distribution center and the operational and administration support systems in its socks in its subsidiary in Auburn Hosiery Mills Inc. in the U.S. with existing Delta Galil USA arrays. This merger was made possible after completing the transfer to a new IT system in both subsidiaries. The cost of the aforementioned merger, to the amount of $0.5 million, was included in 2009 results as part of restructuring costs and included compensation payments to 40 dismissed employees. 2008 plan Due to changes in the business environment in which the UK business unit was active, as expressed in the decrease in the scope of its activity, in the erosion of margins and the weakening of the exchange rate of the pound sterling vs. the USD, the Company decided over the course of 2008 to discontinue the unit's business activity in its current format, and to perform changes in its working model with its customers and on further streamlining steps in order to improve its performance and competitiveness. The activity of the UK business unit was in the women’s undergarment category in conjunction with Marks & Spencer and additional customers. The sales of the UK business unit in 2008 amounted to a total of 55 million, and the operational loss for that period amounted to $15.5 million. The changes in the working model with the customers in the UK from FSV (Full Service Vendor) to FOB (Free on Board), included the following steps: 1. Products will be supplied directly from factories (on an FOB basis). 2. Responsibility for the transporting products, their storage and distribution will be

passed on to the customers. 3. The Company will not hold any inventory for its customers and responsibility for

its management and the risk embedded in holding it will be passed on to them. 4. The Company has changed its sales currency to USD. In addition, the Company has taken further steps to reduce fixed expenses as described below: 1. Transferring product development from the UK and Israel to the Company's

factory in Egypt. 2. Closing the brassiere development center in Mansfield, UK. 3. Significant reduction of activity in the London office, which will serve as a sales

office. 4. Reducing overhead in Israel and in Egypt related to UK activity. The above restructuring expenses amounted to a total of $9.2 million. These expenses include employee compensation, payment of minimal usage fees in a UK storage and distribution agreement and writing off fixed assets used for UK activity.

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Over the course of 2009 the Company signed an amendment to the UK storage and distribution agreement, in which the minimum sums denoted in the original agreements were reduced. Accordingly, the Company wrote off the provision listed in 2008 for minimal usage fees to the sum of $1.8 million. Implementation of the key elements of these steps was completed in Q4 2009. 1. Movement in the restructuring provision over the course of 2010 and 2009:


Opening balance 1,646 7,900Additional provisions during the year 485 474Reversal of unutilized provisions (129) (1,583)Utilization during the year (1,200) (5,555)Exchange rate differences (52) 410

Closing balance 750 1,646

Presented: Payables and credit balances 750 1,646

2. The principal components of expenses for the restructuring plan are as

follows:


2010 2009 2008


Costs associated with workforce reduction 158 474 3,501

Writing off fixed assets and computer software 327 - 1,130Other expenses (income)* - (1,805) 4,531 485 (1,331) 9,162

* Other income – see 2008 restructuring plan above.

f. Sales

On the matter of sales to main customers see note 5e.

g. Cost of Sales


Purchases from subcontractors 313,232 234,123 256,689Materials consumed 77,414 66,557 78,098Salaries and associated expenses 60,615 57,737 68,025Other manufacturing expenses 22,795 28,835 28,051Shipping and customs 44,412 35,145 43,344Depreciation and amortization 7,922 9,696 9,020Royalties 10,505 9,299 9,540Decrease (increase) in inventory of finished goods and in-process inventory (38,090) 27,439 24,388

498,805 468,831 517,155

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h. Selling & Marketing, General and Administrative Expenses

For the Year Ending December 31 2010 2009 2008 In Thousands of Dollars

Selling and marketing: Salaries and associated expenses 34,424 33,656 42,275Packing, shipping and storage 4,485 7,874 7,703Rent and maintenance 10,493 9,180 10,483Advertising 2,503 2,688 2,960Commissions 4,213 3,685 4,009Depreciation and amortization 1,531 1,679 2,045Amortization of intangible assets 844 817 739Other 6,714 6,763 8,739Total sales and marketing expenses 65,207 66,342 78,953

Administrative and general:

Salaries and associated expenses 15,348 13,946 15,252Professional fees 3,500 2,665 3,434Travel, hospitality and entertainment 1,743 1,404 1,471Office expenses 1,109 976 1,240Rent and office maintenance 457 570 748Telephone and postage 337 388 260Depreciation and amortization 693 708 519Doubtful debt and bad debt 479 159 2,168Other 1,681 1,140 1,611Total general and administrative expenses 25,347 21,956 26,703Total sales, marketing, general and administrative expenses

90,554 88,298 105,656

i. Expenses by Type For the Year Ending December 31 2010 2009 2008 In Thousands of Dollars Purchases from subcontractors 313,232 234,123 256,689Wages and payroll 110,387 105,339 125,552Use of raw materials 77,414 66,557 78,098Shipping, packaging, storage and customs expenses 48,897 43,019 51,047Depreciation and amortization 10,146 12,083 11,584Royalties expenses 10,505 9,299 9,540Advertising expenses 2,503 2,688 2,960Amortization of intangible assets 844 817 739Impairment of goodwill - - 7,392Impairment of fixed assets 992 1,945 -Other expenses 53,521 55,765 62,214Changes in finished goods inventory and in-process inventory (38,090) 27,439 24,388Total cost of sales, selling and marketing, general and administrative expenses and impairment of goodwill and fixed assets 590,351 559,074 630,203

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j. Other revenues


2010 2009 2008


Capital gain from the sale of fixed assets 249 375 805

Capital gain from the sale of asset classified as held for sale 483 - -

Profit from derivative financial instruments 1,762 386 -

2,494 761 805

k. Finance expenses, net


2010 2009 2008

In Thousands of Dollars

Interest expenses due to on credit and loans from banking corporations

3,981 4,967 7,288

Interest expenses with respect to debentures (1) 1,847 - -

Other interest expenses, net. 367 373 544

Capitalization component of long-term assets and liabilities

452 638 (1,607)

Interest expenses due to discount arrangement with material customer (2)

36 - -

Total financing expenses 6,683 5,978 6,225

Interest income from banking corporations (71) (28) (89)

Exchange rate differentials, net 1,205 419 1,343

Total financial expenses, net 7,817 6,369 7,479

(1) $166,000 was charged to financing income from the capital reserve in 2010.

(2) See Note 20(a)(1)(b).

l. Extra-Balance Sheet Liabilities

December 31 2010 2009 In Thousands of Dollars Extra-balance sheet liabilities – for: Customs collateral 2,188 3,132 Documentary credit for future royalty payments 3,900 2,420 Documentary credit 8,533 11,923 Others 483 206 15,104 17,681

83

Note 21 – Additional Details Regarding Investment in Investee Companies as of December 31 2010

Investment

Cost

Balance Sheet Value

Loans and Capital

Notes (*)

Dividend Revenues

(*) Fully-Controlled and Fully Held (100%) Subsidiaries

Number of Shares of Any Type Held by the Company

Notational Value of the

Shares in NIS/Foreign

Currency In Thousands of Dollars Delta Galil USA Inc. 100 $10 39,126 83,175 41,790 -Delta (Textile) London Ltd. 1,300,000 £1,300,000 2,061 3,302 - 1,548Delta Galil Holland B.V. 250 $21,000 21 32,002 13,914 120Delta Egypt Sourcing Ltd.** 500 $14,706 15 (199) - -Peace Bridge Co.** 30,000 $42,373 783 - - -DGT (Holdings) Ltd. ** 1,020 1,020 NIS - - - -Textard Ltd.*** 2,000 0.2 NIS - - - -Delta Galil Properties (1981) Ltd. 24,980,002 24,980 NIS 782 (92) - -Delta Elastic Ribbon Industries Ltd. ** 995,464 995,472 NIS 1,806 - - -

* Including directly and indirectly related companies. ** The company is undergoing liquidation. *** The company is inactive.

Note 22 – Events Subsequent to the Balance Sheet Date:

1. Dividend distribution

On February 16 2011 the Company decided to distribute dividends to the amount of $2 million, at 8.54 cents per share, to be distributed on March 15 2011 according to the dollar’s representative rate of exchange as published the day prior to the payment date. The determining date for this distribution shall be February 28 2011 and the X date shall be March 1 2011.

2. On February 16 2011, the Company Board of Directors resolved to grant, out of

options available for allocation under the 2009 plan for American employees, 15,000 options to a Delta USA employee at an exercise price of $8.91 per option. The exercise price is equal to the average share price on the 30 trading days preceding day of the decision.

3. Regarding a contribution approved by the Company’s Audit Committee and Board of

Directors on February 16 2011, see Note 19(a)(7)

____________

___________________ ____________


Appendix A – Details of Subsidiaries and Associates

Ownership and control by the holding company directly and through subsidiaries as of December 31, 2010:

Holding Company Company Name Ownership and Control Rate

Delta Galil Industries Ltd. Delta Galil USA. Inc. 100% Subsidiary

Delta Galil Holland B.V. 100% Subsidiary

Delta Textiles (London) Ltd. 100% Subsidiary

Delta Sourcing Egypt (L.L.C.)** 100% Subsidiary

Peace Bridge Co. ** 100% Subsidiary

Delta Elastic Tapes Industries Ltd.** 90% Subsidiary

Delta Galil Properties (1988) Ltd. 100% Subsidiary

Textard Ltd.* 100% Subsidiary

D.G.T. Holdings Ltd.* 100% Subsidiary

Delta Textile Egypt - Free Zone S.A.E. 100% Subsidiary

Century Wear Corporation (WLL) 50% Subsidiary

Thai Progress Garment Co. Ltd. 100% Subsidiary

Delta Textile Bulgaria Ltd. 100% Subsidiary

Delta Galil Hong Kong Ltd. 100% Subsidiary

Dominion Hosiery mills Inc 100% Subsidiary

Delta Galil Romania SRL** 100% Subsidiary

Delta Galil Holland B.V.

Delta Galil Hungary Kft* 100% Subsidiary

Delta Galil Hong Kong Ltd. Delta Galil Limited Apparel (Guangzhou) Co. Ltd. 100% Subsidiary

Delta Textiles (London) Ltd. Delta Galil Europe Ltd. 100% Subsidiary

Delta Galil Europe Ltd Sport Socks Company (Belgium) Ltd. 100% Subsidiary

Delta Galil Germany GMBH 100% Subsidiary

Delta Galil USA Inc. Burlen Corp. 100% Subsidiary

Delta Galil Properties (1988) Ltd. Adumit Ltd.** 50% Associate

* Inactive companies. ** Undergoing liquidation.

DDeellttaa GGaalliill UU..SS..AA

Valuation for

Goodwill Impairment Assessment

****

PPrreeppaarreedd aatt tthhee rreeqquueesstt ooff::


February 2011

2

Table of Contents

Chapter A - General ...................................................................................... 3

Chapter B - Executive Summary ............................................................... 13

Chapter C - Description of the Company & Its Activities ........................ 16

Chapter D - Business Environment .......................................................... 23

Chapter E - Business Results ................................................................... 34

Chapter F - Valuation ................................................................................. 40

3

Chapter A - General

1.1 General

We were commissioned by you to prepare an economic valuation of Delta Galil

USA Inc. (hereinafter: "DGUSA" and/or the "Company") as of December 31,

2010 to ascertain whether there has been an impairment of the Company's

goodwill (hereinafter: the "Report") in the books of the parent company Delta

Galil Industries Ltd. (hereinafter: "Delta Galil" and/or the "Group").

This opinion includes a description of the methodology and main assumptions

and analyses used for assessing the value of the Company. Having said that,

the description does not purport to provide a full and detailed breakdown of all

the procedures that we applied in formulating the opinion.

1.2 Reliance on Information Received from the Company

In formulating this Opinion, Giza Singer Even Ltd. (hereinafter: "Giza Singer

Even") assumed and relied on the accuracy, completeness, and up-to-

datedness of the information received from the Company, including the

financial data and any forward-looking information. Giza Singer Even is not

responsible for independently verifying the information it has received, and

accordingly, did not conduct an independent examination of this information,

other than general and superficial reasonability tests.

In conducting this valuation, we also addressed, among other things, forecasts

that were submitted to us by Company management. These projections are

uncertain suppositions and expectations regarding the future, partly based on

information existing in the Company as of the date of the valuation, as well as

various assumptions and expectations pertaining to the Company and to

numerous extraneous factors, including the situation in the market segment in

which the Company operates, potential competitors, and the general market

situation. It should therefore be emphasized that there is no certainty that these

suppositions and expectations will fully or partially materialize. The

assessments and forecasts of Company management, apart from being based

on these assumptions, relate to the Company's future intentions and goals as

of the date of the evaluation. These intentions and goals are materially

4

influenced by the situation in the Company and in the market and need to be

continuously adjusted to the various changes in the working assumptions, the

Company's situation and the general economic situation. Any such change

stands to influence the chance that these estimations will materialize. If the

estimations of Company management do not materialize, the actual results

may vary materially from the results projected or inferred from these

estimations, insofar as they were used in this opinion, noting that the fair value

was appraised in this Report, as set out in the accounting standard chapter.

1.3 Forward-looking Information

In this valuation, we also addressed forward-looking information that was

submitted to us by Company management. Forward-looking information is

uncertain information concerning the future, which is based on information

available to the Company on the valuation date and includes management's

estimations or intentions as of the valuation date. If management's projections

do not materialize, the actual results may vary materially from the results

estimated or implied from this information, insofar as they were used in this

opinion.

1.4 Limitations in the Application of the Opinion

An economic assessment is not an exact science, and is intended to reflect in

a reasonable and fair manner the situation at a given time, based on known

data, basic assumptions and forecasts. Changes in key variables and/or other

information may alter the basis for the basic assumptions and alter the

conclusions accordingly.

This professional opinion does not constitute a due diligence study and does

not purport to contain the information, investigations and tests or any other

information contained in a due diligence study, including an examination of the

Company's contracts and engagements.

We emphasize that this opinion does not constitute legal advice or a legal

opinion. The interpretation of various documents that we reviewed was done

exclusively for the purpose of forming and providing this Opinion.

5

The information appearing in the Opinion and valuation does not presume to

include all the information required by a potential investor, and is not meant to

determine the value of the Company for a specific investor. Different investors

may have different objectives and methods of examination based on other

assumptions, and accordingly, the price they would be willing to pay will vary.

1.5 Personal and Financial Ties with the Company

We hereby confirm that we have no personal interest in DGUSA, other than the

fact that we receive a fee for providing advice, and our professional fees are

not contingent on the results of this valuation.

It should be noted that in recent years, Giza Singer Even prepared several

economic opinions on the Company, including an impairment analysis for

purposes of previous years' financial statements.

Subject of the Opinion

Date of the

Opinion

Relevant Standard

Work Method

Valuation Results ($ 000's)

Key Assumptions %

Capitalization Long-term

growth rate

Impairment analysis for financial statement purposes

December 2009

IAS No. 36 Discounting of cash flows

(DCF)

128,708 12.0% 3%

Impairment analysis for financial statement purposes

December 2008

IAS No. 36 Discounting of cash flows

(DCF)

133,276 11.9% 3%

In connection with this opinion, we should note that Giza Singer Even will

receive a letter of indemnity from the party commissioning this report in the

event that Giza Singer Even is sued in a legal proceeding for the payment of

any amount to a third party for a cause of action that could stem, directly or

indirectly, from this Opinion. In such case, the buyers shall indemnify Giza

Singer Even for any reasonable expenses that Giza Singer Even shall incur or

be required to pay for legal representation, legal advice, professional

consulting, defense against legal proceedings, negotiations, etc. The parties

commissioning the report shall also indemnify Giza Singer Even for the amount

that it shall be ordered to pay a third party in a legal proceeding. The duty of

6

indemnification shall not apply in the event that Giza Singer Even acted with

gross negligence or malicious intent in providing the services subject of the

opinion.

1.6 Reference to the Opinion

We consent that this Opinion may be cited in financial statements of Delta Galil

and in periodic reports to the Securities Authority.

We hereby give our consent to the party so authorized for this purpose by the

company commissioning this study to electronically report on our behalf and in

our stead to the Securities Authority of our having signed this valuation.

This opinion may not be used for any other purpose without receiving explicit

prior and written permission from Giza Singer Even. Anyone using the study, in

whole or in part, other than for the purposes for which it was submitted, and

without the prior written approval of Giza Singer Even, may be sued therefore.

1.7 Limitation of Liability

This Opinion is intended for the use of Company management and for the

purpose described above, and it may not be used for any other purpose,

including transferring our Opinion to a third party or citing it, without our prior

written consent. In no event, whether we have given our consent or not, will we

assume any responsibility toward any third party which was forwarded our

opinion.

In the course of our work, we received information, explanations, data and

representations from the Company and/or from someone on its behalf (the

“Information”). The responsibility for such information lies with whomever

provided such information. The ambit of our work does not include an

examination and/or verification of said information. Consequently, our work

shall not be considered and will not constitute a confirmation of the veracity,

completeness or accuracy of the information provided to us. In no event will we

be liable for any loss, damage, cost or expenditure that might be caused in any

manner or form from acts of fraud, misrepresentation, deception, submission of

information that is not true or complete or obstruction of information on the part

7

of Delta and/or anyone on its behalf, or any other reliance on said information,

subject to the aforesaid.

In general, forecasts tend to relate to future events and are based on

reasonable assumptions made on the date of the forecast. Such assumptions

may change over the forecasted period, and consequently forecasts made at

the time of the valuation may differ from actual financial results and/or from

estimates made at a later date. Therefore, these forecasts may not be treated

with the same level of confidence attributed to data appearing in audited

financial statements. We offer no opinion regarding the correlation of the

forecasts made by the companies and/or by anyone on their behalf with the

financial results that will actually be obtained.

Our opinion does not constitute a due diligence study and should not be relied

on as such.

Moreover, financial assessments do not presume to be an exact science, and

their conclusions are often contingent on the subjective judgment exercised by

the valuator. Although we believe that the value that we have set is reasonable

based on the information submitted to us, another value appraiser may reach a

different value.

1.8 Sources of Information

Main sources of information used in preparing the Opinion:

� Audited financial statements of Delta Galil (the parent company) for 2009

and financial statements (reviewed) as of September 30, 2010.

� Shelf prospectus of the parent company dated November 30, 2010

� Balance sheet and statement of income for 2008 and 2009 (audited in

accordance with U.S. accounting standard plus adjustments to

international accounting standards conducted by the Company) and

balance sheet and internal statement of income (unaudited and

unreviewed plus adjustments to international accounting standards carried

out by the Company) for 2010.

� Financial statements of the Company for 2008 to 2010

� Company budget for 2011.

8

� Sales forecast for 2012

� Background material, market data, analyst reports obtained from disclosed

information published on websites, newspaper articles or other publicly

available information

� Clarifications and data forwarded to us by the Company at our request

� Meetings and/or telephone conversations with the following officers in the

Company:

� Mr. Isaac Dabah, CEO Delta Galil

� Mr. Yossi Hajaj, CFO, Delta Galil

� Mr. Miki Laxer, Delta Galil Controller

� Ms. Ayelet Hajaj, Delta Galil deputy Controller

1.9 The Accounting Standard

At the request of the party commissioning this study, the evaluation will be

used for implementing International Accounting Standard No. 36 regarding

asset impairment (hereinafter: the "Standard") in its financial statements.

The purpose of the Standard is to prescribe the procedures that an enterprise

must apply to ensure that its assets are carried at no more than their

recoverable amount. An asset is carried at more than its recoverable amount

when the carrying value of the asset exceeds the amount to be recovered

through use or sale of the asset. In this case, the asset value has been

impaired, and the Standard requires the corporation to recognize an

impairment loss. The Standard also specifies when a corporation should

reverse an impairment loss and requires certain disclosures for impaired

assets, and for investments in investee companies that are not subsidiaries,

which are carried in the financial statements in an amount that significantly

exceeds their market value or net sale price.

The Standard prescribes the accounting treatment and statement required in

the event of asset impairment. If an enterprise prepares consolidated financial

statements (including proportionate consolidation), the Standard will be

applied to the accounting treatment of the impairment of all the assets

appearing in the enterprise's consolidated balance sheet, including

investments in investee companies that are not subsidiaries, goodwill

9

stemming from the acquisition of subsidiaries and fair value adjustments. In

effect, this Standard applies to investments in subsidiaries and jointly

controlled companies, so that provisions for impairment loss, which are

recognized in the consolidated financial statements with respect to assets of

the subsidiary or the jointly-controlled company, including goodwill and fair

value adjustments, will be stated in the separate financial statements of the

parent company as a reduction of the investment account in the subsidiary or

jointly-controlled company.

The Standard prescribes that the recoverable amount of an asset should be

estimated whenever there are indications that an asset may be impaired.

This standard requires recognizing the impairment loss of an asset (i.e. the

value of the asset has declined) whenever the carrying amount of the asset

exceeds its recoverable amount. An impairment loss will be recognized in the

statement of profit and loss for those assets stated at cost and should be

treated as a revaluation decrease, and only for those assets carried at a

revalued amount in accordance with other accounting standards or in

accordance with the provisions of any law.

The Standard prescribes that a recoverable amount shall be calculated as the

net sale price or value in use, whichever is higher:

1. The net sale price is the amount obtainable from the sale of the asset in a

good faith transaction between a knowledgeable and willing buyer and

seller, less direct incremental disposal costs.

2. The value in use of the asset is the estimate of the present value of future

cash flows to be derived from use and disposal of the asset at the end of

its useful life.

10

In determining the asset's value in use, this Standard requires that the

enterprise use, among other things:

1. Cash flow forecasts based on reasonable and substantiated assumptions

which:

� Reflect the present situation of the asset;

� Represent management's best estimate on the economic conditions

that will prevail for the rest of the asset's useful life.

2. The pre-tax discount rate, reflecting current market assessments of the

time value of money and the risks specific to the asset. The discount rate

should not reflect risks for which future cash flows have already been

adjusted. 1

An estimate of the recoverable amount will be calculated for each asset

separately. If this is not possible, this Standard requires the enterprise to

determine the recoverable amount for the cash-generating unit to which the

asset belongs. A cash-generating unit is the smallest identifiable group of

assets, generating cash inflows from continuing use, which are essentially

independent of the cash inflows from other assets or other groups of assets.

Having said that, if the output produced by an asset or by a group of assets is

traded in an active market, the asset or group of assets will be identified as a

separate cash-generating unit even if part or all of the output produced by the

asset or group of assets is meant for internal use.

In evaluating impairment of a cash-generating unit, this standard requires

taking into account goodwill and joint assets (such as head office assets)

attributed to that cash-generating unit.

The test for possible goodwill impairment is based on rules and guidelines

prescribed in International Accounting Standard No. 36.

1 Under section 85 of the summary of considerations and reasons for conclusions that

were taken into account in IAS 36 – Asset Impairment: "Theoretically, discounting after-tax cash flows at an after-tax discount rate and discounting pre-tax cash flows at a pre-tax discount rate should give the same result, as long as the pre-tax discount rate is equal to the after-tax discount rate, when it is adjusted to reflect the specific amount and timing of the cash flows for taxes." For reasons of convenience and according to generally accepted practice, we conducted the valuation based on after-tax cash flows and an after-tax discount rate.

11

Since goodwill cannot be measured separate from the activity, the generally

accepted method for testing for goodwill impairment is to measure the

recoverable account of each cash-generating unit to which the acquired

goodwill or part thereof is allocated and compare it to the carrying value of the

assets or liabilities (including the acquired goodwill) allocated to that unit. If the

recoverable amount is lower than the carrying amount of the cash-generating

unit, the difference will be amortized from the goodwill allocated to that unit. If

a difference remains after amortizing all the goodwill, the rest of the assets

allocated to that unit should be amortized on a pro rata basis, subject to the

recoverable value limitation of these assets.

As a rule, the test for goodwill impairment includes the following stages:

1. Determining the cash-generating units and the carrying value of their

assets and liabilities - This stage includes determining the relevant units

for measuring the goodwill value and allocating the assets and liabilities to

the various units, including allocation of acquired goodwill.

2. Measuring the recoverable value of each unit - Taking into account the

cash flows expected from it and/or its value in use, whichever is higher.

3. Comparing the recoverable value to the carrying value - as stated above.

12

1.10 Details on the Valuating Company

Giza Singer Even is the leading non-affiliated economic and financial advisory

firm in Israel. The firm has been in business for over 25 years.

Giza Singer Even's advisory services are divided into four fields: Consulting to

corporations and government authorities; mergers and acquisitions; issues;

tenders and infrastructure products.

Giza Singer Even provides its services through several departments: value

economics, financing and capital market, applied economic research, financial

accounting and risk management, project and infrastructure finance, and a

professional department.

The partners heading the firm: Chairman of the firm Yechiel Even and CEO

Yariv Philosoph, together with Prof. Eli Kraisberg, Yuval Zilberstein, Eli

Goldberg, Avshalom Herscovici and Udi Rosenberg, who also heads the firm's

professional department. Other partners of the firm are Eyal Jedwab, Yuval

Lapidot, Yuval Barak and Hila Himi from the Corporate Finance Department,

Asher Shakler from the Financial Accounting and Risk Management

Department, Varda Stern from the Project Finance and National

Infrastructures Department, and Alex Shechter from the Economic Valuation

Department.

This opinion was prepared by a team headed by Yechiel Even, a founding

partner of the firm. Mr. Even has over twenty years of experience in

performing valuations. He holds a B.A. and M.B.A. in Economics and

Business Administration from Bar-Ilan University.

Sincerely yours,

_____________________

Giza Singer Even

Date: February 16, 2011

13

Chapter B - Executive Summary

1. Brief Description of the Company and its Activities

1.1 Field of the Company's Activity

Delta Galil USA Inc. is a wholly-owned (100%) subsidiary of Delta Galil

Industries Ltd., which coordinates the operations of the DGUSA Group in the

U.S. mass market. The Company focuses on the marketing and sale of intimate

apparel and socks for the mass market and mid-market under private label and

other prestigious brand names.

DGUSA was founded in 2001 as a merger between Inner Secrets Inc. and

Wundies Industries, Inc. In 2003 the Company acquired Auburn Hosiery Mills, a

manufacturer of hosiery and socks whose primary customer is Wal-Mart. In

2004, the Company acquired Burlen Corp. which also manufactures for Wal-

Mart as a private label.

The company sells its products to various retailers and its operations are largely

aimed at the giant retailers in the U.S. Burlen also has operations in Britain for

Marks & Spencer.

1.2 Composition of Company Ownership:

Name of owner Holding % Delta Galil Industries Inc. 100.0%

2. Description of the Valuation Methodology

The evaluation of the Company's activity is based on the assumption that the

Company is a "going concern" and will continue to function as such over an

infinite horizon. The Company’s activity was valued based on the unleveraged

discounted cash flow ("DCF") approach. The projected cash flow is derived from

the Company's profit forecast.

The cash flows were discounted by a Weighted Average Cost Of Capital

(WACC) commensurate with the risk of the Company's activity. The value

obtained is the economic value of the Company’s activity. The economic value of

14

the activity is not dependent on the capital composition of the activity, i.e. it is

independent of how the Company's activity is financed, whether through

shareholders' equity or debt capital.

For the purpose of the valuation, the Company's cash flows were discounted at

the relevant discount rate. The residual value, at the end of the five forecast

years, was calculated in applying the Gordon model formula and is based on the

cost of capital and the permanent growth rate. The representative years for

calculating the residual value is 2016.

3. Valuation Summary

3.1 Key assumptions forming the basis of the valuation, as received from the Company and assumed by us

The valuation is based, among other things, on assumptions from the

Company's board-approved budget for 2011 as well as its estimates and

forecasts for the subsequent years, which reflect our assessment of the various

parameters based on information that was available to us.

The valuation relates to all of the operation's six segments, both in terms of

revenues and selling expenses. Given the assumption that the majority of selling

and marketing, administration and general expenses are allocated among the

various segments, we lumped them together and did not split them up by

segments.

Main assumptions forming the basis of our valuation:

DGUSA main assumptions 20112

2012 2013 2014 2015 Terminal

Revenues YOY (% Growth) 12.4% 4.5% 3.4% 3.0% 3.0% 3.0%

Gross Profit (% Revenues) 16.6% 17.1% 17.2% 17.2% 17.2% 17.3%

EBIT (% Revenues) 3.7% 4.5% 4.8% 4.9% 5.0% 5.5%

Working capital (% Revenues) 18.1% 18.1% 18.1% 18.1% 18.1% 18.1%

CAPEX (000' USA) 700 700 700 700 700 700

The representative year is Year 6 of the forecast (2016 and onwards), while the

real permanent growth reflecting annual population growth and GDP growth rate

in the U.S. is 3%. We also assumed about 5.5% EBIT out of revenues in the

representative year.

2 Based on company's budget

15

3.2 Discount Rate

Based on various calculations, the Weighted Average Cost Of Capital (WACC)

obtained in this study is between 11% - 12%3. Based on our experience and

professional judgment, we based our opinion on a discount rate of 12%, similar

to the discount rate applied in assessing previous years' impairment.

3.3 Enterprise Value

We calculated the Company's enterprise value that indicates value in use

approach, at about $144.1 million.

3.4 Sensitivity Analysis

The following table presents an analysis of the sensitivity of the Company's

enterprise value to the cost of capital and long-term growth

Table of Sensitivity to Enterprise Value (EV)

Discount rate

10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5%

Perm

an

en

t G

row

th R

ate

0.0% 140,045 134,133 128,736 123,789 119,237 115,035 111,145

1.0% 147,824 141,046 134,907 129,321 124,217 119,533 115,221

2.0% 157,434 149,495 142,378 135,961 130,145 124,849 120,007

3.0% 169,607 160,056 151,606 144,075 137,321 131,228 125,703

4.0% 185,524 173,634 163,295 154,219 146,186 139,024 132,599

5.0% 207,231 191,739 178,580 167,260 157,414 148,770 141,118

3 See chapter F 4.

16

Chapter C - Description of the Company & Its Activities

1. Background on the Group

Delta Galil Industries Ltd. is a public company engaged in the design,

development, manufacture, marketing and sale of intimate apparel and socks for

men, women and children. The Group is predominantly active in the U.S.,

Europe and Israel.

Among the Group's overseas customers are leading retail chains in the U.S. and

Europe, such as Wal-Mart, Kohl's, Marks & Spencer, Target, Victoria's Secret,

JC Penney as well as prominent brands, such as Tommy Hilfiger, Nike, Hugo

Boss, Calvin Klein and others.

Apart from this activity, the Company operates under a number of leading

international brand names (through licensing agreements), namely Maidenform,

Converse, Wilson, Nicole Miller, Lucky, etc. Within its activity in the local Israeli

market, the Group operates under the Delta brand name.

The products are primarily designed and developed in Israel and the U.S.,

whereas production is carried out at the Group's manufacturing facilities in the

Middle East and the Far East and/or through subcontractors.

The following chart shows Delta Galil's holdings in major subsidiaries as of

December 2010:

17

It should be noted that due to recent events in Egypt, we have conversed with

the company's management about the potential impact of such events on

DGUSA's operations. According to management, the manufacturing activity in

Egypt services mainly the upper market segment; therefore, no potential impact

is expected.

2. Description of the Company's Operations

Delta Galil USA Inc. is a wholly-owned (100%) subsidiary of Delta Galil, which

coordinates the Group's operations in the U.S. mass market. Following an

organizational change in the Group, the Company launched operations in Britain

as well.

DGUSA was founded in 2001 as a merger between Inner Secrets Inc. and

Wundies Industries, Inc. Auburn Hosiery Mills (hereinafter: "Auburn") which was

acquired in 2003, is active in the socks and hosiery segment, and operates

mainly with Wal-Mart. Burlen Corp. (hereinafter: "Burlen") was acquired in 2004.

It also operates vis-a-vis Wal-Mart as a PL4 player.

Auburn, which was part of Delta Galil's operations in the socks segment, was

incorporated in the Company's overall operations as of the end of 2009. This

change became feasible after merging the distribution centers and operating

support systems of both companies to create synergy and cut costs.

4 Private label

Delta Galil Industries LTD Delta Galil Industries LTD

(*) 50% stake

18

DGUSA focuses on the marketing and sale of intimate apparel and socks for the

mass market and mid-market under private label and other prestigious brand

names. Activity in the high-end brand segment is conducted through agreements

with large international companies which own leading brand(s) in return for

royalties. It should be noted that these agreements vary from time to time, and it

is quite likely that Delta will end its engagement with a certain brand and/or start

working with new brands.

The Company has six operating segments. Each segment specializes in

particular products (socks, men's underwear, women's underwear) and particular

Customer's activity (Brands or Private Labels). Most of the segments activity

revolves around the marketing and sale of intimate apparel for women, men and

children, with the women's market segment being the most dominant. The

Company also operates in the socks market.

DGUSA sells its products to various retailers, primarily to the retail giants and

leading department stores in the U.S. Relatively recently the Company added a

new activity in Britain that specializes in bras (working primarily with Marks &

Spencer – M&S), stemming from an organizational change in the group and bras

activity's business development.

Following is a breakdown of the Company's various segments:

1. DGUS5 is active in the market segment of bras, women's intimate apparel

and children's apparel for both the mass and mid-market. It works primarily

with Wal-Mart (accounting for about 24% of total sales in 2010), Target

(about 23%) and Kohl's (18%).

2. Burlen is active in the market segment of intimate apparel for women and

children aimed at both the mass and mid-market. It works primarily with

Wal-Mart (accounting for about 65% of total sales in 2010) and JC Penney

(10%).

3. Auburn is active in the panty hose and socks segment both as a private

label and under leading brands in the mid-market. It works primarily with

5 DGUSA solo (unconsolidated). For the sake of simplicity, the solo activity is referred to in

this opinion as "DGUS".

19

Modell's (accounting for about 23% of total sales in 2010) and Marshalls

(about 11%).

4. D2 Women operates in the segment of branded intimate apparel for

women through several leading brands (Tommy Hilfiger, Nicole Miller,

Lucky, etc.) aimed at both the mass market and the mid-market. It works

primarily with Sam's Club (about 38% of total sales in 2010) and Macy's

(about 25% of the turnover).

5. D2 Men's operates in the branded intimate apparel for men segment

under several brands (mostly Lucky) in the mid-market. This division

started operating during 2010.

6. UK - This segment operates in the bra and children's undergarment

segment in the UK, and is aimed at the mid-market. It works primarily with

M&S (68% of total sales in 2010). This is a relatively new activity for the

Company (Past two years), although it is founded on the group's long-term

working relations with M&S.

3. Customers

As already mentioned, the Company works with the large retail chains in the

U.S. and with leading retailers in the U.K.

distribution of major customers in 2010

Distribution of the C

The Company has several major customers.

the retail giant Wal-Mart (including its subsidiary Sam's Club)

about 37% of the Company's total sales.

has had business ties with Wal

Other major customers include Target, accounting for about 16% of the

Company's sales, JC Penney (about 10%), Kohl's (about 8%), M&S (about 6%)

and Macy's (about 3%).

over forty various customers

total sales.

It should be noted that activity with two of the Company's major customers, Wal

Mart and Target, was downsized somewhat in 2010

4% in sales volume, respectively, compared to 2009) following a change in these

customers' policies, a drop in the level of consumer demand for products and/or

6 Wal-Mart sales data also includes its subsidiary chain, Sam's Club.

JC Penney, 10

Kohl’s, 8%

Marks and

Spencer, 6%

Macy's, 3%

Others,

20


U.S. and with leading retailers in the U.K. The following chart shows the

distribution of major customers in 20106.

Distribution of the Company's Customers in 2010

The Company has several major customers. The Company's main customer is

Mart (including its subsidiary Sam's Club) which

about 37% of the Company's total sales. It is worth mentioning that the

has had business ties with Wal-Mart for over forty years.



and Macy's (about 3%). In addition to these customers, the Company works with

over forty various customers, which together account for 20% of the company's

It should be noted that activity with two of the Company's major customers, Wal

Mart and Target, was downsized somewhat in 2010 (declining by about 7% and



Mart sales data also includes its subsidiary chain, Sam's Club.

Walmart,

Target, 16%

10%

Others, 20%


The following chart shows the

The Company's main customer is

which accounts for

It is worth mentioning that the Company



customers, the Company works with

, which together account for 20% of the company's

It should be noted that activity with two of the Company's major customers, Wal-

(declining by about 7% and



Walmart, 37%

21

brands, stiffer competitive pressure and owing to the recession and rise in cotton

prices.

4. Raw Materials and Suppliers

The Company tends to buy its products from outside suppliers, mainly from the

Far East and from the parent company. The raw material and auxiliary materials

needed for the parent company's production activity are bought from

subcontractors and suppliers.

The main raw materials used by the Group for the range of apparel items it

manufactures in-house are cotton yarn, blends of cotton-synthetic yarn and other

materials.

Due to fluctuating supply and demand conditions and other market factors over

which the Group has no control, raw material prices are exposed to volatility.

Except for the cotton yard, the parent company only buys the raw materials its

needs for its manufacturing activity after receiving purchase orders from its

customers.

The parent company is not materially dependent on the various suppliers of raw

materials and finished products due to the wide range of suppliers and plants.

That said, whenever a supplier is replaced, there is a process of looking for a

suitable supplier who meets the standards of the Company and of the end

customers, which could take several months.

5. Agreements for the Grant of User Rights to Brands

From time to time, the Group enters into agreements to receive user rights to

international brands (including Lucky, Maidenform, Nicole Miller, Tommy Hilfiger,

Wilson). The license agreements are usually for three to four years, and include

payment of royalties of 3% to 15% of revenues to the licensor (5% to 8% for the

main agreements). These agreements usually contain a minimum royalty

payment clause which is set according to a minimum volume of sales during the

term of the agreement.

22

The agreements regulate the Group's obligations as the licensee to manufacture

branded products, including regarding the use of brand names, design and

development of the products and the submission of annual and semi-annual

business sales plan.

6. Competitors

The Company estimates the size of the market to which it caters at about $6

billion a year and its estimated market share at about 5%. Dozens of competitors

operate in the Company's sector of activity, most of which are private companies

from the U.S. and the Far East.

Among the competing companies are Ariella Intimates, Biflex Intimates Group,

Felina, Fruit of the Loom, Hanes, Jockey, Saramax Apparel Group, to name a

few. Since the vast majorities are private companies, we used data of other

similar public companies, for the purpose of analyzing the company's activity.

7. Risk Factors

Following are some of the risk factors that could impact the Company:

� Rise in prices of raw materials and/or production costs and/or costs of the

change, assuming that the Company is limited in rolling over the added costs

onto its customers.

� Regulatory changes (free trade agreements, import quotas, etc.).

� The economic situation in the U.S. and Britain, which affects the volume of

private consumption in general and consumption of intimate apparel in

particular.

� Stiffer competitive pressure

� Dependence on a key customer (Wal-Mart)

� High exposure arising from the amount of inventory held by the company -

amount which arises from the company's operations as an importer of

clothes from the East to largest retailers within the US. In addition, the value

of held inventory could decline, due to seasonality effects and changes in

current fashion trends.

23

Chapter D - Business Environment

1. Macro Data - the U.S. Market

Since the Company works primarily with the U.S. market, we surveyed selected

macroeconomic data on this market from highly regarded sources.

Macroeconomic data on the U.S. market according to the IMF (International Monetary Fund) USA Economics' Indicator 2009 2010E 2011F 2012F 2013 2014 2015

Real GDP -2.6% 2.6% 2.3% 3.0% 2.9% 2.8% 2.6%

Unemployment 9.3% 9.7% 9.6% 8.8% 8.0% 7.4% 6.8%

Population 0.9% 0.9% 1.0% 1.0% 1.0% 1.0% 1.0%

Macroeconomic date on the U.S. market according to Barclays Capital Economic Projections U.S 2009 2010E 2011F 2012F

Real GDP -2.6% 2.8% 3.1% 3.6%

Private Consumption -1.2% 1.7% 2.9% 3.5%

CPI Inflation -0.4% 1.6% 1.3% 1.9%

Unemployment Rate 9.3% 9.7% 9.1% 7.9%

From an analysis of the data, it appears that 2010 is considered a turning point

year in the emergence of the U.S. from the severe economic crisis in 2008 and

2009. Recovery is expected to pick up in the coming years. With the

improvement in the economic situation, the volume of private consumption is

expected to grow and both directly and indirectly affect apparel purchases in

general and intimate apparel purchases in particular.

2. Markets of Operation in the U.S. Relevant to the Company

As noted, the Company supplies intimate apparel and socks to the leading retail

chains, mostly in the U.S. The Company operates in a complex competitive

environment largely impacted by macroeconomic conditions prevailing in the

markets as well as varying consumer trends. The rise in cotton prices, stiff

competition among the retail chains and cheap supply from the Far East are

putting pressure on the value chain in general, and on the suppliers in the

apparel industry in particular.

As shown in the following table, sales of intimate apparel for women, girls and

boys (including panties, underpants, bras and undershirts) in the U.S. retail chain

24

market are estimated at about $6.2 billion7. According to the figures for the

twelve months ending on August 2010, the market declined in monetary terms

by about 3% compared to the same period the year before, as prices were

lowered by about 7%. In quantitative terms, the market grew by roughly 4%.

Market of Women's, Men's & Girls' Intimate Apparel in Retail Chains in the U.S. Aug 2010 (12 M) Vs.

Aug 2009 (12 M) Dollar Volume Average Retail Price

M. USD Share YOY USD per Unit YOY

Women 5.3 86% -5% 3.61 -8%

Girls 0.2 4% -11% 1.18 -6%

Boys 0.6 10% -3% 1.47 -6%

Total Segment 6.2 100% -3% 2.95 -7%

As shown in the following table, it is estimated that socks sales in the market of U.S.

retail chains totaled about $5.2 billion8. According to year-over-year data for the

twelve months ending February 2010, the market was down by about 3% compared

to the same period the year before due to the lowering of prices at a similar rate. It is

noteworthy that the data relates mostly to 2009 when the recession was at its lowest

point.

Socks Market in U.S. Retail Chains Aug 2010 (12 M) vs. Feb 2009 (12 M)

Dollar Volume Average Retail Price

M. USD Share YOY USD per Unit YOY

Men 2.0 40% 0% 1.77 0%

Women 1.9 36% -3% 1.82 -5%

Children 1.3 24% -6% 1.03 -5%

Total Segment 5.2 100% -3% 1.52 -3%

3. The U.S. Apparel Market

The U.S. apparel market has been characterized in recent years by volatility in

growth due to the economic crisis on the one hand and stiff competition on the

other. The economic crisis was reflected in a decline in the consumption of

apparel, an erosion in prices and a drop in the revenues of most of the retail

chains.

The following chart illustrates the rates of change in apparel consumption in the

U.S. in recent years. Due to a shortage of data, the rate of change relates to a

select sample of apparel items.

7 Source: The NPD Group and the Company.

8 Source: The NPD Group and the Company.

Annual Rate of Change in Apparel Consumption in the U.S.(In monetary terms, selected apparel items)

As can be seen from the sample data, 2010 marks a change in the trend and

shows certain recovery.

slim compared to 2007, a year in which particularly high growth was posted.

It should be noted that competition between the suppliers in the industry was

influenced in recent years by low production costs in Eastern

hand and the recession on the other.

Asia into the U.S. market and the retail chains' desire to lower the cost of goods

sold (COGS) exerted competitive pressure on all the suppliers in the industry

Owing to the drastic hike in the prices of cotton (see below), an increase in work

wages in Eastern Asia and the desire of the chains to work with a relatively small

number of high quality and serious suppliers, the number of competitors started

to decline.

The higher prices of cotton

From data compiled, it appears that apparel prices in the U.S. stand to go up by

9 Source: US Department of Commerce, Census Bureau.

More than 20%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2007

25

Annual Rate of Change in Apparel Consumption in the U.S.monetary terms, selected apparel items) 9


shows certain recovery. However, 3% sales growth in 2010 is considered quite



influenced in recent years by low production costs in Eastern Asia on the one

hand and the recession on the other. The influx of many suppliers from Eastern


sold (COGS) exerted competitive pressure on all the suppliers in the industry




The higher prices of cotton are forcing suppliers to raise their prices as well.


US Department of Commerce, Census Bureau.

-6%

-16%

2008 2009

Annual Rate of Change in Apparel Consumption in the U.S.


les growth in 2010 is considered quite



Asia on the one

The influx of many suppliers from Eastern


sold (COGS) exerted competitive pressure on all the suppliers in the industry.




suppliers to raise their prices as well.


3%

2010E

26

5%-10%, thereby stemming the deflationary trend characterizing the industry in

the last few years10.

4. Leading Retail Chains Among the Company's Customers

According to data compiled on the leading retail chains that are among the

Company's customers, it is noteworthy that its two major customers – Wal-Mart

and Target - stand to end 2010 with revenue growth of about 3.7% and 3.3%,

respectively. Analysts project that the growth trend characterizing 2010 stands to

pick up in 2011 and 201211.

Growth data on leading retails that are among the Company's customers12

Revenues (YOY) 2006 2007 2008 2009 2010E 2011E 2012E

Wal-Mart 11.6% 8.2% 7.3% 0.9% 3.7% 4.9% 3.6%

Target 13.1% 6.5% 2.5% 0.6% 3.3% 4.4% 4.3%

JC Penney 6.0% -0.2% -6.9% -5.0% 1.4% 2.2% 2.4%

Kohl's 16.0% 5.6% -0.5% 4.8% 7.4% 5.5% 5.3%

M&S 10.1% 5.1% 0.4% 5.2% 2.2% 4.1% 5.3%

5. Analysis of Peer Companies

The following table shows an analysis of companies operating in the apparel

field in the U.S., which can serve as a source of comparison to the operations of

DGUSA, with the reservation that the structure of the activity may be different.

From an analysis of the data, it appears that generally-speaking the

performances of the companies improved in 2010 compared to 2008 and 2009.

According to projections, the trend of improvement among some of the

companies is expected to continue at least in the next two years.

10 Source: The Wall Street Journal – 'Unable to Stretch Further, Apparel Makers Raise

Prices' - November 4, 2010. 11 Source: Capital IQ ,Barclays Capital

12 Source: Capital IQ

27

Annual Rate of Growth in Sales13 YOY Revenues 2007 2008 2009 2010 2011 2012

Bernard Chaus 7.3% -19.6% -5.0% -7.1%

Delta Apparel 3.1% 10.3% 19.5% 8.3% 4.8%

Fredrick's Of Holywood 17.4% -22.2% -5.6%

Hampshire Group -8.2% -6.3% -31.4% -7.6% 4.6% 7.0%

Hanesbrands Inc -0.6% -5.0% -8.4% 10.1% 8.9% 4.4%

Jiangsu Sanyou -4.6% -27.1% 23.5% 3.3%

Oxford Industries -9.2% -15.5% -12.7% 3.2% 11.0%

Phillip Van Housen 16.0% 2.8% -3.7% 90.3% 17.1% 7.1%

Unifirst Corp 9.9% 13.4% -1.0% 1.2% 4.5% 4.4%

Van De Velde 6.0% 2.1% 5.4% 18.7% 11.1% 5.9%

Warnaco 12.9% 13.4% -2.1% 12.4% 10.2% 8.8%

In analyzing the data on gross profit as a percentage of income, it can be seen

that the average gross profit in the sample is expected to rise in 2010 by about

0.9% compared to 2009 (38.5% compared to 37.6%). A similar trend also

characterizes the operating profit (EBIT) which is improving on the time axis (up

by about 0.7% in 2010 compared to 2009).

Gross profit as a percentage of revenue Gross Profit 2006 2007 2008 2009 2010

Bernard Chaus 27.1% 29.1% 27.2% 25.6% 23.6%

Delta Apparel 25.1% 21.6% 21.5% 23.7%

Fredrick's Of Holywood 49.1% 43.9% 46.7% 46.8%

Hampshire Group 25.5% 24.9% 21.7% 23.9% 23.4%

Hanesbrands Inc 33.0% 33.0% 33.4% 32.8% 33.5%

Jiangsu Sanyou 11.5% 11.3% 11.6% 13.8% 14.9%

Oxford Industries 39.9% 41.4% 41.7% 45.0%

Phillip Van Housen 49.3% 49.1% 48.4% 49.3% 51.7%

Unifirst Corp 36.1% 36.6% 37.1% 39.8% 39.5%

Van De Velde 75.4% 75.0% 76.1% 75.2% 76.2%

Warnaco 39.2% 42.4% 44.7% 43.1% 44.8%

Average 37.1% 37.8% 37.0% 37.6% 38.5%


28

EBIT as a percentage of revenue EBIT % 2006 2007 2008 2009 2010E

Bernard Chaus -2.7% 1.1% -5.6% -6.4% -4.9%

Delta Apparel 6.1% 3.0% 3.4% 4.7%

Fredrick's Of Holywood 1.6% -6.3% -4.1% -4.0%

Hampshire Group 4.4% 2.4% -2.3% -0.2% 0.1%

Hanesbrands Inc 8.6% 9.8% 9.7% 8.8% 10.0%

Jiangsu Sanyou 5.6% 5.1% 3.8% 5.0% 6.5%

Oxford Industries 5.7% 5.6% 5.3% 7.5%

Phillip Van Housen 12.3% 12.8% 11.0% 11.5% 9.1%

Unifirst Corp 8.9% 9.3% 10.6% 13.2% 12.7%

Van De Velde 31.6% 32.0% 30.2% 26.8% 28.6%

Warnaco 7.6% 9.7% 8.6% 10.4% 10.9%

Average 9.5% 8.7% 6.2% 6.7% 7.4%

In 2011, the expected improvement in the EBITDA as a percentage of the

turnover in the companies surveyed (see companies marked with an asterisk) is

about 0.4%, while in 2012 a slighter 0.1% improvement is projected. The

improvement in the companies' performance is a direct result of the markets'

emergence from the economic crisis, which affects the volume of private

consumption.

EBITDA as a percentage of revenueEBITDA %

Bernard Chaus

Delta Apparel

Fredrick's of Hollywood

Hampshire Group

Hanesbrands Inc*

Jiangsu Sanyou

Oxford Industries*

Phillip Van Housen*

Unifirst Corp*

Van De Velde*

Warnaco*

Average

Average*

Another indication that the

recorded in the average EBITDA of the leading apparel and footwear companies

in the U.S., as illustrated in the following chart:

Average EBITDA of the 15 Leading Apparel & Footwear Companies in the

14 Source: Barclays Capital

Textiles Dec 2010

11.3%12.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2004 2005

29

ITDA as a percentage of revenue 2006 2007 2008 2009 2010E

-1.8% 2.0% -4.6% -5.3% -4.4%

7.8% 5.0% 5.4% 6.3%

3.8% -3.6% -0.9% -0.9%

4.6% 2.7% -1.5% 1.0% 1.4%

11.9% 12.8% 12.4% 11.2% 11.8%

7.8% 7.7% 7.1% 7.4% 8.7%

7.8% 8.1% 7.6% 10.1%

14.1% 14.7% 13.2% 13.6% 14.7%

14.5% 14.8% 15.9% 19.0% 18.7%

33.6% 34.0% 32.6% 29.5% 30.0%

10.5% 13.3% 10.8% 12.7% 13.8%

11.9% 11.0% 8.7% 9.2% 10.0%

16.9% 16.2% 15.5% 15.6% 16.5%

Another indication that the economy is on its way to recovery is the improvement


in the U.S., as illustrated in the following chart:

Average EBITDA of the 15 Leading Apparel & Footwear Companies in the U.S.14

Barclays Capital- U.S. Department Stores/Broadlines Apparel, Footwear &

%12.9%

12.3%11.6% 11.8%

13.0

2005 2006 2007 2008 2009 2010

2011F 2012F

12.4% 13.0%

12.5% 11.6%

15.5% 16.2%

17.5% 17.7%

29.7% 29.6%

13.7% 13.6%

16.9% 17.0%

economy is on its way to recovery is the improvement


Average EBITDA of the 15 Leading Apparel & Footwear Companies in the

U.S. Department Stores/Broadlines Apparel, Footwear &

0%13.7%

2010E 2011E

30

6. Local Apparel Manufacturing and Imports

The volume of local apparel manufacturing in the U.S. has been on a continuing

downtrend as it faces stiffer competition from manufacturers in East Asia, which

still enjoy a preferred cost structure. However, this gap is expected to narrow on

the time axis owing to rising work wages and energy costs.

Despite the continued downward spiral in apparel manufacturing in the U.S.,

deeper government support in the form of subsidies to industries and switching

to production using a technology that reduces fabric costs stand to curb the

downtrend in local manufacturing for some of the products and perhaps even

change its direction on the time axis.

The following graph shows the volume of apparel manufacture in the U.S. from

2001 to Q3/201015 in quantitative and fiscal terms16:

Volume of Apparel Manufacture in the U.S.

As may be observed from the following graph, which presents the percentage of

imports out of total apparel consumption in the U.S.17, the share of imports has

been rising constantly in the last decade.

15 Apparel includes items for women, men and children.

16 Source: US Department of Commerce.

17 Source: US Census Bureau . The data relates to a representative sample of items of

apparel on the U.S. market.

0

2,000

4,000

6,000

8,000

10,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E

Va

lue

Qu

an

tity

Value (M$) Quantity (M Units)

Import of Apparel to the U.S. as a Percentage of Domestic Consumption

It may be observed from the above graph that while about 80% of total apparel

consumption originated from imports in 2002, the v

consumption in the U.S. today originates from imports.

7. The Rising Price of Cotton

The Company's products are mostly made from cotton.

Company, the cost of cotton account for 30

final products.

The price of cotton has risen sharply in the last two years and has today

reached a record high, as illustrated in the following graph:

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003

31



consumption originated from imports in 2002, the vast majority of apparel

consumption in the U.S. today originates from imports.

The Rising Price of Cotton

The Company's products are mostly made from cotton. As explained by the

Company, the cost of cotton account for 30-50% of the COGS of the relevant


reached a record high, as illustrated in the following graph:

2003 2004 2005 2006 2007 2008 2009



ast majority of apparel

As explained by the

50% of the COGS of the relevant


2010E

32

Price of Cotton on a Monthly Basis ($ NYF/Lbs)18

The reason for the drastic hike in cotton prices is a combination of climatic

hardships (floods in Pakistan) and the growing demand for cotton in China, the

world's largest cotton producer and consumer.

In an attempt to curb the rise in cotton prices, the governments of the large

cotton producers are trying to tighten price control (China) and/or to significantly

increase the quantity of cotton produced (USA).

Owing to the fact that the Group's COGS is exposed to increases in cotton

prices, Delta Galil tries to estimate the trends affecting cotton prices in the aim

of adjusting itself to the new competitive conditions and the new business

environment that is emerging in order to gauge the gross profitability in the

budgets of the various divisions.

Trends impacting cotton prices:

• Rise in the standard of living in China and India, the world's largest cotton

consumers;

• Price hike in alternative products (polyester, nylon, etc.) stemming from an

increase in petroleum prices, as its derivatives are used as a raw material

for these products;

18 Source: Factset, Barclays Capital, New York Futures

33

• U.S. subsidies to the domestic cotton industry aimed at restraining price

hikes and supporting the local industry;

• Floods and natural disasters, such as the floods that destroyed large cotton

fields in Pakistan;

• Total world's cotton crops;

The sharp increase in cotton prices contributes to the higher prices of apparel

products to the final customer. Today, the retail chains are being asked to

comply with their suppliers' demands to pass on the price hike of raw material to

their customers, to the displeasure of consumers. The measure may reduce the

volume of apparel sold on the one hand and raise the demand for non-branded

products on the other.

34

Chapter E - Business Results

1. Balance Sheet

Following are the Company's balance sheets for 2008, 2009 and 2010 in US$

thousands19:

Balance sheet DGUSA (000' USD) 31.12.2008 31.12.2009 31.12.2010E

Current assets

Cash & cash equivalents 1,280 1,506 1,965

Accounts receivable 47,307 54,146 42,174

Inventories 57,492 41,599 79,127

Total current assets 106,079 97,251 123,266

Fixed assets

Cost (Excluding Software) 24,492 24,223 24,000

Less - accumulated depreciation (13,876) (14,570) (15,317)

Software 1,541 1,640 1,733

Less - accumulated depreciation (629) (960) (1,255)

Total net fixed assets 11,527 10,333 9,162

Other assets & differed charges 64,655 63,429 63,770

Total assets 182,261 171,013 196,198

Current liabilities

Short term bank credit 51,500 37,700 20,750

Accounts payable 38,883 37,776 50,453

Total current liabilities 90,383 75,476 71,203

Long term liabilities

Deferred income tax 2,999 3,500 3,599

Long term union pension obligation 40 3,344 102

Long term royalties 4,922

5,508

Loans from parent 15,000 15,000 41,500

Total long term liabilities 22,961 21,844 50,709

Shareholders' equity 68,918 73,693 74,286

Total liabilities & shareholders' equity 182,261 171,013 196,198

19 The Company's financial statements apply US GAAP. Since the impairment was assessed

in accordance with IAS 36 for asset impairment, the financial data was presented in this chapter after adjusting the Company's financial statements to present them according to international standards. It should be noted that the financial statements for 2007 and 2008 are audited according to US GAAP, to which the Company added adjustments to international accounting standards. The statements for 2010 are not audited or reviewed.

35

2. Statement of Income

Following are the Company's statements of income for the years 2007 to 2010

(US$ thousands):

P&L DGUSA (000` USD) 2007 2008 2009 E2010

Revenues 301,595 293,334 268,567 299,230

% YOY

-2.7% -8.4% 11.4%

COGS 249,450 242,789 225,438 253,881

Gross Profit 52,144 50,546 43,129 45,348

% Gross Profit 17.3% 17.2% 16.1% 15.2%

Selling & Marketing expenses 27,111 27,909 24,409 25,469

General expenses &

Administrative 11,750 15,411 13,150 14,445

EBIT20

13,284 7,226 5,569 5,434

% EBIT 4.4% 2.5% 2.1% 1.8%

Net Financing Expenses 6,777 2,700 3,349 3,168

Income ) loss) before taxes 6,507 4,526 2,220 2,266

Taxes on Operations 2,111 2,649 442 1,553

Net Income 4,396 1,877 1,778 713

% Net Income 1.5% 0.6% 0.7% 0.2%

20 Excluding capital gain and extraordinary items

36

3. Revenues by Segments

The follow table shows a segmentation of the Company's revenues for 2007 to

2010 by segments (in US$ thousands):

Revenues by unit - Net (000' USD) 2007 2008 2009 2010E

DGUS 137,306 140,361 133,147 138,906

YOY

2.2% -5.1% 4.3%

D2 Men's - - - 5,928

YOY

UK - - 7,737 22,986

YOY

197.1%

D2 Women 9,985 11,756 14,896 20,640

YOY

17.7% 26.7% 38.6%

Burlen 115,513 102,282 79,586 85,772

YOY

-11.5% -22.2% 7.8%

Auburn 38,791 38,935 33,201 24,998

YOY

0.4% -14.7% -24.7%

Total 301,595 293,334 268,567 299,230

YOY

-2.7% -8.4% 11.4%

The Company's revenues totaled about $299.2 million in 2010, up by about

11.4% on a year-over-year basis.

Revenue growth in 2010 is attributed to an increase in the activity of DUSA, D2

Women and Burlen segments, bras selling growth to M&S in the UK Segment,

and the launching of the D2 Men's Segment which contributed about $5.9 million

to revenue. Auburn has not shown recovery during this period, but a further

erosion in its revenue is resulted by the downsizing of Wal-Mart's relevant

activity.

The decline in DGUS's activity from 2008-2009 stems, among other things, from

an erosion in prices and the downsizing of operations with Wal-Mart. Burlen's

operations declined during this period due to a change in policy of the segment's

major customer (Wal-Mart), which wanted to focus on large brands. 2010

marked a turning point in this trend, when Wal-Mart re-adopted its original policy

(which guided it for many years) of focusing on more basic products, a field in

which Burlen operates.

37

4. Gross Profit

Following is a segmentation of the Company's gross profit for 2007 to 2010 by

segments (in US$ thousands):

Gross Profit by Unit (000' USD) 2007 2008 2009 2010E

D USA 16,485 22,825 17,957 17,387

% Gross margin 12.0% 16.3% 13.5% 12.5%

D2 Men's - - - 891

% Gross margin

15.0%

UK - - 1,246 3,380

% Gross margin

16.1% 14.7%

D2 Women 1,885 1,298 1,154 1,609

% Gross margin 18.9% 11.0% 7.7% 7.8%

Burlen 26,419 19,931 16,641 16,339

% Gross margin 22.9% 19.5% 20.9% 19.0%

Auburn 7,355 6,493 6,132 5,742

% Gross margin 19.0% 16.7% 18.5% 23.0%

Total 52,144 50,546 43,129 45,348

% Gross margin 17.3% 17.2% 16.1% 15.2%

In 2010 there was a further erosion in the Company's gross profit margin (as a

percentage of the turnover) compared to the same period the year before, due to

the continues recessionary consumption environment in the US, the global rise

in cotton prices and in- house managerial malfunctions.

The Company maintained certain stability in its gross profit margin in 2007 and

2008, which was 17.3% and 17.2% respectively. With the deepening of the

recession, erosion of prices and downsizing of operations, gross profit fell back

in 2009 to 16.1%.

The gross profit margin in 2010 fell to about 15.2% as a result, among other

factors, of the high stock level of the D2 Women Segment owing to

administrative mistakes and not meeting delivery schedules. To get rid of the

surplus stock, the Company started selling its products to outlet stores at lower

prices, another factor that cut into the profit margin. Due to the change in the mix

of products and change in Wal-Mart's policy, the Burlen Segment showed

erosion in its gross profit margin over the last year.

38

5. Operating Expenses

The following table shows the development of the Company's operating

expenses for 2007 to 2010 (US$ thousands):

SG&A (000` USD) 2007 2008 2009 2010E

Selling & marketing 27,111 27,909 24,409 25,469

% Revenues 9.0% 9.5% 9.1% 8.5%

General & Administrative 11,750 15,411 13,150 14,445

% Revenues 3.9% 5.3% 4.9% 4.8%

Total SG&A 38,861 43,320 37,560 39,914

% Revenues 12.9% 14.8% 14.0% 13.3%

Although projected operating expenses went up in 2010 to a level of about $39.9

million, their percentage out of total revenues went down to about 13.3% due to

streamlining measures adopted in 2009 and 2010 that began to bear fruit. The

Company downsized headquarters, laid off workers, finished assimilating the

integrated ERP system and reduced the distribution centers from five to two, and

additionally added activities that require low operational costs (D2 Men's and

UK).

In 2008 the Company posted higher than usual operating expenses attributed to

a high and one-time provision for doubtful debts after several customers

declared bankruptcy.

6. Operating Profit (EBIT)

As can be seen from the following table, the EBIT in 2010 (about $5.4 million

accounting for about 1.8% of the turnover) continued the downtrend

characteristic of the last few years, attributed to the economic recession,

deflation in prices, rise in cotton prices, launching of new operations that called

for relatively high startup costs (D2 Men's, D2 Women) and false managerial

decisions.

DGUSA EBIT (000' USD)21

2007 2008 2009 2010E

EBIT 13,284 7,226 5,569 5,434 % Revenues 4.4% 2.5% 2.1% 1.8%

EBIT Adjusted - 9,726 7,569 8,434

% Revenues

3.3% 2.8% 2.8%

21 Excluding capital Gain and extra ordinary items

39

The adjusted EBIT excluding one-time specific investment in new activities were

established in recent years. For comparison reasons, according DGUSA, the

company estimated the value of the initial expenses involved in setting up new

Branded Items' activities as follows: 2008 - 2.5mm USD, 2009 - 2mm USD, 2010

- 3mm USD.

Based on information submitted to us by the Company, the EBIT posted in the

last few years is considered low compared to peer companies with a similar

structure of operations, whose EBIT out of total revenue ranges between 4% -

8%.

7. Selected Operational Ratios

Following are selected Operational ratios and data for 2008 to 2010:

Financial Ratios (000' USD) 2008 2009 E2010

Revenues 293,334 268,567 299,230

Gross Profit % 17.2% 16.1% 15.2%

EBIT % 2.5% 2.1% 1.8%

EBITDA % 3.5% 3.0% 2.6%

EBITDA / Interest expenses 2.4 2.4 2.3

% Working Capital / Revenues 22.5% 21.6% 23.7%

Current assets (Net) 11,527 10,333 9,162

Shareholders' equity 68,918 73,693 74,286

% Shareholders' equity / Total Liabilities and Shareholders' equity

37.8% 43.1% 37.9%

40

Chapter F - Valuation

1. Valuation Methodology

The Valuation was made according to the value in use approach, according IAS

36. The valuation of the Company's enterprise value is based on the assumption

that the Company is a "going concern" that will carry on its business activity in

the present format over an infinite horizon. The Company’s activity was valued

based on the unleveraged discounted cash flow ("DCF") approach. The

projected cash flow is derived from the Company's profit forecast.

The cash flows will be discounted by a cost of capital commensurate with the

risk of the Company's activity22. The value obtained is the economic value of the

Company’s activity. The economic value of the activity does not depend on the

capital composition of the activity, i.e. it is independent of how the Company's

activity is financed, whether through shareholders' equity or debt capital.

2. Comments on Specific Methodologies

The valuation is based, among other things, on assumptions and trends

reflecting from the Company's board-approved detailed budget for 2011 as well

as its estimates and forecasts for the subsequent years, which reflect our

opinion on the various parameters based on information that was available to us.

Note that the Company has not stayed within its budget in recent years.

According to the Company’s explanations, its failure to meet its budget is due,

among other things, to exogenous variables that affected the entire sector

(higher cotton prices, the economic crisis) and endogenous variables at the

company level, including managerial mistakes and a weak management

backbone in some of the Company’s segments. Given the gaps in recent years

between actual and projected results, we examined the company's budget for

2011 by analyzing the feasibility of its base assumptions, in light of future market

conditions and the company's development and efficiency measures, which are

planned to be executed in the years to come.

22 The cash flows are continuous and received during the entire year, and on average, the

flow for the year of activity is received in mid-year. Accordingly, the discount period is adjusted to the date of receipt of the cash flow, on average. See below for more details in the section relating to the discount rate.

41

For the purpose of the valuation, we discounted the Company's cash flow at the

relevant discount rate, as explained below. The residual value after the five

forecast years was estimated using the Gordon model formula, based on the

cost of capital and the permanent growth rate. The representative year for

calculating the residual value is 2016.

3. Cash Flow Forecast

Following is a list of all the assumptions used in constructing a model for

forecasting the Company’s cash flow:

3.1 Revenue

The Company’s 2011 budget predicts revenue growth of about 14.7%. This

budget, drawn up by Company management and approved by the Board of

Directors, includes a separate analysis of each segment, at the customer level,

and at the product category level.

The Company makes the following assumptions in its real growth forecast:

� Rise in prices - The Company plans to raise the price of its products by 6 -

10%, as a result of higher cotton prices, in order to maintain its gross profit

margin, in line with the trend in the US apparel industry. The alleged price

increase was already agreed upon by the company and several of its major

clients.

� Quantitative rise in sales volume - resulting from the recovery of the

economy from recession and an increase in the volume of private

consumption

� Recovery in the US retail sector - based on information from analysts

� Change in the mix of products - the Company is bolstering its activity in

branded goods, which feature higher prices than prices for private label

goods

� Strengthening the management backbone - put emphasis on recruiting

executives with relevant capabilities and experience and replacing a mass

number of the current executives

42

As a result of examining current market conditions (which are relevant to the

company's activity) and after several conversations held with the company's

directors, we estimated the growth in sales in 2011 to be about 12.4%.

It should be noted that the Company’s fairly high growth rate in 2011 is affected

by the intensified activity in relatively new segments (UK, D2 Men's). Discounting

this factor, the growth forecast matches analysts’ forecasts for peer companies

and large retail chains in the US, as reviewed in Chapter D (for example -

Warnaco: 10.2% ,Hanesbrands : 8.9% ,Wal-Mart: 4.9% ,Kohl's: 4.1%).

The following is a summary of the Company’s multiannual revenue forecast at

the level of its segments. In our opinion, the growth rate in sales from 2012

onward is likely to be more moderate than the 2011 sales forecast. It was

assumed that the real permanent growth rate in the representative year would

total 3%, an assumption reflecting the population growth rate and the average

growth in US GDP.

DGUSA's Revenues by Segments During the Forecast Years DGUSA Revenues

(000' USD) 2011 2012 2013 2014 2015 Terminal

D USA 148,629 156,061 160,743 165,565 170,532 175,648

YOY 7.0% 5.0% 3.0% 3.0% 3.0% 3.0%

D2 Men's 15,708 18,064 19,870 20,467 21,081 21,713

YOY 165.0% 15.0% 10.0% 3.0% 3.0% 3.0%

UK 33,414 36,755 37,858 38,994 40,163 41,368

YOY 45.4% 10.0% 3.0% 3.0% 3.0% 3.0%

D2 Women 25,181 21,555 22,201 22,868 23,554 24,260

YOY 22.0% -14.4% 3.0% 3.0% 3.0% 3.0%

Burlen 92,205 96,816 99,720 102,712 105,793 108,967

YOY 7.5% 5.0% 3.0% 3.0% 3.0% 3.0%

Auburn 21,123 22,179 22,845 23,530 24,236 24,963

YOY -15.5% 5.0% 3.0% 3.0% 3.0% 3.0%

Total Revenues 336,260 351,430 363,237 374,134 385,358 396,919

YOY 12.4% 4.5% 3.4% 3.0% 3.0% 3.0%

Following are the assumptions base for the growth rates estimated in the various

segments:

� DGUS - Growth in the bras and children's apparel sectors and a process of

price increases. According to data received from the company, the volume of

solid orders for the first quarter of 2011 matches the Company budget, with

minor deviations, and price increases of 6% - 10% towards mid 2011 were

43

agreed with a number of large customers. Moderate growth in 2012 is

attributed to the company exceeding the price increase process.

� D2 Men’s - This activity, which began in mid 2010, is based on branded

intimate apparel. Due to the parallel with the D2 Women’s segment, and

relying on the Company’s assessments, it is believed that this segment will

also in time reach sales of $25 million. It should be added that the Company

notes that the forecast for the segment’s business assumes expected sales

of over $20 million, based on knowledge of the market and characteristics of

the business environment and actual agreements made with clients; if the

sales amount is lower, the Company sees no justification in this separate

activity.

� UK - Relatively high growth in 2011, based, according to the Company’s

explanations, on concrete orders for longstanding customers (e.g. M&S) and

diversifying the mix of products besides bras. Note that Delta has extensive

experience in adapting high-quality products to the British market, and that a

volume of business in the neighborhood of $40 million is realistic, given the

fact that activity in this market generated revenues of more than $50 million

in the past.

� D2 Women - Growth attributed to a change in management and making

operational and marketing changes. In 2012, a sharp drop in revenue is

expected owing to the foreseen termination of the license agreement for the

Nicole Miller brand and reliance on the existing products (Tommy Hilfiger and

Lucky). Assuming that the Company buys a license for another high-quality

brand, actual sales are expected to be higher.

� Burlen - Growth stems from stepped-up activity in working with the Wal-Mart

chain, combined with the Company’s original strategy of featuring basic

items and raising prices. Total revenue in the representative year is still less

than the revenue posted in 2007.

� Auburn - A drop in sales volume in 2011, owing to the continued downtrend

in demand for the Wilson brand and a decision made by Wal-Mart to drop

this brand. Growth in 2012 is a result of renewed penetration of leading retail

chains and completion of the price raising process.

44

3.2 Cost of Goods Sold (COGS)

The COGS-to-revenue ratio, derived from the Company's budget for 2011, is

82.5%. After examining the current relevant market conditions, and after several

conversations held with the company, we used an 83.4% COGS rate for 2011,

an improvement of less than 1.5% compared with 2010 (84.8%).

In making the assumptions for this study, the COGS declined throughout the

forecast years, reaching 82.7% in the representative year, about the same as the

COGS posted in 2008 and 2007.

Improvement in the COGS is due to the following factors:

� Price increases – Rolling over the increased cost of raw materials onto the

Company’s customers. Due to the rising cotton prices, the Company plans to

raise the price of its products in order to halt the erosion in its gross profit

margin. According to the information submitted to us by Company

management, the Company has reached understandings, and even signed

agreements with some of its customers, for a 6% - 7% price hike in mid 2011.

� Change in the Company’s product mix – Moving the mix of activities in the

direction of branded goods (D2 Men’s and D2 Women), which feature higher

gross profit margins than goods sold in the mass market.

� Improvement in the quality of the management team – Better control of

orders and inventory, tighter connections with the customers, and better

adaptation of collections and products.

45

The following table shows the COGS for the forecast years according to the

various segments:

DGUSA COGS (000' USD) 2011 2012 2013 2014 2015 Terminal

D USA Total 127,974 134,216 138,243 142,390 146,662 151,059

% Revenues 86.1% 86.0% 86.0% 86.0% 86.0% 86.0%

D2 Men's 12,566 13,729 15,102 15,555 16,021 16,502

% Revenues 80.0% 76.0% 76.0% 76.0% 76.0% 76.0%

UK 28,235 30,764 31,528 32,474 33,448 34,452

% Revenues 84.5% 83.7% 83.3% 83.3% 83.3% 83.3%

D2 Women 19,465 16,166 16,429 16,922 17,430 17,953

% Revenues 77.3% 75.0% 74.0% 74.0% 74.0% 74.0%

Burlen 75,530 79,112 81,487 83,933 86,452 88,964

% Revenues 81.9% 81.7% 81.7% 81.7% 81.7% 81.6%

Auburn 16,556 17,340 17,860 18,397 18,950 19,472

% Revenues 78.4% 78.2% 78.2% 78.2% 78.2% 78.0%

DGUSA 280,326 291,327 300,650 309,671 318,963 328,402

% Revenues 83.4% 82.9% 82.8% 82.8% 82.8% 82.7%

The following are the reasons for COGS assumptions according to the

various segments:

� DGUS - Improvement in COGS in 2011 and 2012 due to price increases

owing to rolling over higher cotton prices onto the end customers. Starting

in 2012, the COGS stabilizes at 86.0%.

� D2 Men’s - Improvement in COGS in 2011 and 2012, due to stabilizing of

activity by the new segment. From 2012 on, the COGS stabilizes at

76.0%, reflecting in our view a reasonable COGS for men’s branded

underwear.

� UK - Improvement in COGS to 83.3%, as a result of higher prices and

stabilizing activity in the British market, which the group has been familiar

with for decades.

� D2 Women - A fairly steep drop in COGS, compared with 2010, following

the reduction in inventory. A decline in the COGS to 74.0% starting in

2013, reflecting in our view a reasonable COGS for women’s branded

intimate apparel.

� Burlen - COGS stabilizes at around 81.7% of turnover starting in 2012,

based on price increases and proper adjustment of the product mix. Note

that the segment reported better performance in recent years, and this

assumption reflects the new competitive environment vis-à-vis leading

chains, including Wal-Mart.

46

� Auburn - COGS stabilizes at around 78.2% of turnover starting in 2012,

based on price increases on the one hand and cancellation of one of the

best selling brands on the other.

3.3 Sales, Marketing, Management and General Expenses axes

A degree of improvement in the ratio of sales, marketing, management and

general expenses to total sales was assumed, due to the fixed cost factor

(approximately 60% of expenses). According to Company management, further

cost-cutting measures are expected in the coming years, which might directly

affect the company's performance.

The following table shows the expected SG&A expenses during the forecast

years:

DGUSA SG&A (000` USD) 2011 2012 2013 2014 2015 Terminal

Selling & marketing 28,171 28,871 29,515 30,066 30,627 30,555

% Revenues 8.4% 8.2% 8.1% 8.0% 7.9% 7.7%

General & Administrative 15,183 15,447 15,751 16,035 16,325 16,168

% Revenues 4.5% 4.4% 4.3% 4.3% 4.2% 4.1%

Total SG&A 43,354 44,318 45,265 46,102 46,952 46,723

% Revenues 12.9% 12.6% 12.5% 12.3% 12.2% 11.8%

The 2011 Company budget includes $3.7 million in expenses paid by the

Company to the parent company (Delta Galil) for services provided to the

Company. $2.4 million a year of these expenses were offset by the deduction of

tax benefits. Delta Galil management explained that DGUSA would not have

incurred these overhead expenses as an independent private company. This

reimbursement of expenses, amounting to $1.5 million per year (which include

deducted tax benefits), was included in the Company’s operating cash flow, and

does not increase over time.

Owing to the use of the Gordon formula for calculating the scrap value of the

general cash flow, based on permanent growth, $2.5 million was deducted from

the value of the Company’s general business, assuming that the reimbursement

of the surplus expenses to the cash flow does not increase over time.

47

3.4 Taxes

The effective tax rate used to calculate tax expenses in the model according to

the Company's effective tax rate in the U.S., according to its explanations, was

38%.

As explained by the Company, DGUSA has been enjoying from an annual tax

benefit of $245 thousand for the next 9 years, due to additional amortization of

Burlen's goodwill, which doesn't appears in the company's P&L. Originally, The

total additional amortization amount was $9.65 million, and the reduction period

was set to 15 years. The total discounted tax benefit amounts is approximately

$1.38 million.

3.5 Working Capital

The Company’s working capital includes customers, accounts receivable, and

inventory, net of obligations to suppliers and service providers and accounts

payable.

An exceptionally high volume of inventory was reported for 2010 compared to

the Company’s past performance. This exceptionally high volume is attributed to

the postponement of orders for underwear sold in packages of 10 products by

the Wal-Mart chain (a product developed specially for the chain, and was

replaced to packages of 3 products, because of disappointing sales figures), and

to a particularly large inventory accumulated by the D2 Women segment as a

result of managerial mistakes. The Company explained that the surplus

inventory is sellable, and that the Company is currently making efforts to sell it.

Taking these one-time events into account, we chose not to use the 23.7% ratio

of working capital to total sales in 2010 as a representative figure.

In order to calculate the changes in working capital for the forecast period, we

first calculated the average accounts receivable and the average suppliers and

service providers as a percentage of sales for the past three years (14.1% and

16.9%, respectively, in 2008-2010), and the average inventory for 2008-2009

(excluding the exceptional year of 2010) as a percentage of sales (17.8%).

48

Since UK activity is carried out using the FOB method23, and therefore the UK

segment operates without inventory, the UK segment’s proportion of revenue

was deducted from the calculated inventory rate. Using this methodology, the

rate of inventory for the forecast period was 16.0% of total revenue. The working

capital-to-total revenue ratio used by us for the forecast years was therefore

18.1%. For comparison reasons – the company's working capital rate, after

deducting the UK activity, is approximately 20% from generated sales.

The following table shows the calculation of the representative working capital

for the model:

Working Capital / Revenues 31.12.2008 31.12.2009 31.12.2010E 2011 - Terminal

Accounts Receivables 16.1% 20.2% 14.1% 16.8%

Inventories 19.6% 15.5% 26.4% 16.0%

Accounts Payable -13.3% -14.1% -16.9% -14.7%

Working Capital 22.5% 21.6% 23.7% 18.1%

The following table shows the working capital in 2008-2010 and during the

forecast years by components:

Working Capital (000` USD) 2008 2009 2010E

Accounts Receivable 47,307 54,146 42,174

Inventories 57,492 41,599 79,127

Accounts Payable (38,883) (37,776) (50,453)

Working Capital 65,916 57,969 70,848

Working Capital / Revenues 22.5% 21.6% 23.7%

Working Capital (000` USD)

2011 2012 2013 2014 2015 Terminal

Accounts Receivable 56,472 59,020 61,003 62,833 64,718 66,659

Inventories 53,828 56,256 58,147 59,891 61,688 63,538

Accounts Payable (49,522) (51,756) (53,495) (55,100) (56,753) (58,456)

Working Capital 60,778 63,520 65,654 67,624 69,652 71,742

% Revenues 18.1% 18.1% 18.1% 18.1% 18.1% 18.1%

23 Free On Board.

49

3.6 Investments and Amortization

As explained by the Company, it was assumed that total annual capital

investments in each of the forecast years would total $700,000. This amount

represents a sales and marketing company that does not require large

investments in expensive manufacturing equipment and/or logistical setups.

It is noteworthy that the total investments in the representative year assumed in

this study were $250,000, less than the total investments assumed in our study

of one year ago. The reason for the decline in costs is that the Company finished

installing computer systems in 2010, and it does not anticipate further

investments in these systems in the coming years, as assumed in the previous

study.

Depreciation in 2010 totaled $1.5 million in 2010. The investment depreciation

rate from 2011 on was set at 10%. For the representative year, it was assumed

that the depreciation rate would equal the level of the average annual

investment. Since the amount of depreciation in 2015 does not equal the

investment, a tax shield was computed for the years after 2015, when the

depreciation exceeds the amount of the investment. The total tax shield for

depreciation amounts to about $132,000. Note that added to the annual

depreciation is a fixed amortization of about $739,000 for the goodwill value of

Burlen's customer relations.

3.7 Operating Profit

Based on our assumptions, the EBIT in 2011 totals $12.6 million, about 3.7% of

turnover, compared with 1.8% in 2010. The improvement in the EBIT is due to

the improvement made in the Gross profit rate (as stated above), the expected

increase in sales and due to the expected improvement in operational efficiency.

Due to economies of scale for SG&A’s fixed expenses and the assumption that

the company's profitability improves over the forecast years, the estimated EBIT

reaches 5.5% in the representative year. According to our examinations, based

on peer companies and explanations provided by the Company, the EBIT rate

that we assumed is rather low for the industry.

50

The following table displays the EBIT in 2008-2010 and for the forecast years:

DGUSA (000' USD) 2007 2008 2009 2010E

EBIT 13,284 7,226 5,569 5,434

% Revenues 4.4% 2.5% 2.1% 1.8%

DGUSA (000' USD) 2011 2012 2013 2014 2015 Terminal

EBIT 12,580 15,784 17,322 18,361 19,443 21,794

% Revenues 3.7% 4.5% 4.8% 4.9% 5.0% 5.5%

3.8 Summary of Assumptions for the Cash Flow Forecast Model

The cash flow forecast model is based on the assumptions for the 2011

Company budget, among other things. This budget assumes better profitability

than the Company reported in its 2010 financial statements, at a rate of 4.6%

Following talks with Company management about Delta Galil’s current

operations in general and long-term plans, particularly for Delta USA, and after

thoroughly checking the Company’s results in recent years, the character of its

activity market, and the results of similar companies in Israel and overseas, we

were persuaded that the Company’s results for 2010 do not reflect its potential

profit, for several key reasons:

� 2010 was a turning point in the US economic recovery, reflected in improved

performance by the leading retail chains. Analysts predict that the upward

trend will continue, and will directly affect the apparel industry.

� 2010 featured a substantial rise in the price of the main raw material for the

Company’s goods - cotton. The company suffered a decrease in its

profitability following this price increase, due to its inability to implement a

similar short term price increase on its products. The Company plans to raise

the sale prices of most of its products in order to roll over the price rise onto

the end customers, as is accepted practice in the retail sector. Based on the

information provided to us, the Company has signed agreements for price

increases of 6% - 10% with a number of leading retail chains. This measure

is expected to take place in mid 2011.

� Because of eroding profit margins in the industry, the Company is focusing

on selling products with higher gross profit margins (branded products). This

measure is expected to boost its revenue and profitability.

51

� Owing to economies of scale, growth in the Company’s revenue will reinforce

its stature among its customers and competitors on the one hand, and

reduce the weight of its fixed costs on the other.

� Better quality management (Inc. new COO) will be a useful tool in the

achievement of the Company's plans.

The following charts show the performances of the business units in the past and

in the future based on the assumptions made in this opinion:

DGUSA ($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY -2.7% -8.4% 11.4% 12.4% 4.5% 3.4% 3.0% 3.0% 3.0%

301.6 293.3

268.6

299.2

336.3 351.4

363.2 374.1

385.4 396.9

52.1 50.5 43.1 45.3 55.9 60.1 62.6 64.5 66.4 68.5

13.3 7.2 5.6 5.4 12.6 15.8 17.3 18.4 19.4 21.8

17.3% 17.2%

16.1%15.2%

16.6%17.1% 17.2% 17.2% 17.2% 17.3%

4.4%

2.5% 2.1%1.8%

3.7%4.5% 4.8% 4.9% 5.0%

5.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50

100

150

200

250

300

350

400

450

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal

Revenues Gross Profit EBIT % Gross Profit % EBIT

52

DGUS Segment

($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY 2.2% -5.1% 4.3% 7.0% 5.0% 3.0% 3.0% 3.0% 3.0%

D2 Men's Segment ($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY 165.0% 15.0% 10.0% 3.0% 3.0% 3.0%

137.3 140.4 133.1

138.9 148.6

156.1 160.7

165.6 170.5

175.6

16.5 22.8

18.0 17.4 20.7 21.8 22.5 23.2 23.9 24.6

12.0%

16.3%

13.5%12.5%

13.9% 14.0% 14.0% 14.0% 14.0% 14.0%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal

Revenues Gross Profit % Gross Profit

5.9

15.7 18.1

19.9 20.5 21.1 21.7

0.9 3.1

4.3 4.8 4.9 5.1 5.2

15.0%

20.0%

24.0% 24.0% 24.0% 24.0% 24.0%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal


53

UK Segment

($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY 197.1% 45.4% 10.0% 3.0% 3.0% 3.0% 3.0%

D2 Women Segment ($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY 17.7% 26.7% 38.6% 22.0% -14.4% 3.0% 3.0% 3.0% 3.0%

7.7

23.0

33.4

36.8 37.9

39.0 40.2

41.4

1.2 3.4

5.2 6.0 6.3 6.5 6.7 6.9

16.1%14.7%

15.5%16.3% 16.7% 16.7% 16.7% 16.7%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal


10.0 11.8

14.9

20.6

25.2

21.6 22.2 22.9 23.6 24.3

0.0 1.3 1.2 1.6

5.7 5.4 5.8 5.9 6.1 6.3

18.9%

11.0%7.7%

7.8%

22.7%

25.0%26.0% 26.0% 26.0% 26.0%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal


54

Burlen Segment ($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY -11.5% -22.2% 7.8% 7.5% 5.0% 3.0% 3.0% 3.0% 3.0%

Auburn Segment ($M, % of Total Sales)

Revenues 08-07 09-08 10-09 11-10 12-11 13-12 14-13 15-14 Terminal YOY 0.4% -14.7% -24.7% -15.5% 5.0% 3.0% 3.0% 3.0% 3.0%

115.5

102.3

79.6 85.8

92.2 96.8 99.7 102.7 105.8 109.0

26.4 19.9 16.6 16.3 16.7 17.7 18.2 18.8 19.3 20.0

22.9%

19.5%20.9%

19.0%18.1% 18.3% 18.3% 18.3% 18.3% 18.4%

0%

5%

10%

15%

20%

25%

30%

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal


38.8 38.9

33.2

25.0

21.1 22.2 22.8 23.5 24.2 25.0

7.4 6.5 6.1 5.7 4.6 4.8 5.0 5.1 5.3 5.5

19.0%

16.7%

18.5%

23.0%21.6% 21.8% 21.8% 21.8% 21.8% 22.0%

0%

5%

10%

15%

20%

25%

30%

0

5

10

15

20

25

30

35

40

45

50

2007 2008 2009 2010E 2011F 2012F 2013F 2014F 2015F Terminal


55

3.9 Company's Cash Flow Forecast

Following is the Company's cash flow forecast for the years 2011 to 2015 and in

the representative year:

DGUSA (000' USD)

2011 2012 2013 2014 2015 Terminal

Revenues 336,260 351,430 363,237 374,134 385,358 396,919

YOY 12.4% 4.5% 3.4% 3.0% 3.0% 3.0%

COGS 280,326 291,327 300,650 309,671 318,963 328,402

% Revenues 83.4% 82.9% 82.8% 82.8% 82.8% 82.7%

Gross Profit 55,934 60,103 62,588 64,463 66,395 68,517

% Revenues 16.6% 17.1% 17.2% 17.2% 17.2% 17.3%

Selling & Marketing expenses 28,171 28,871 29,515 30,066 30,627 30,555

% Revenues 8.4% 8.2% 8.1% 8.0% 7.9% 7.7%


% Revenues 4.5% 4.4% 4.3% 4.3% 4.2% 4.1%

Total SG&A 43,354 44,318 45,265 46,102 46,952 46,723

% Revenues 12.9% 12.6% 12.5% 12.3% 12.2% 11.8%

EBIT 12,580 15,784 17,322 18,361 19,443 21,794

% Revenues 3.7% 4.5% 4.8% 4.9% 5.0% 5.5%

Depreciations & amortization 2,314 2,384 2,454 2,524 2,594 1,439

EBITDA 14,894 18,168 19,776 20,885 22,037 23,233

% Revenues 4.4% 5.2% 5.4% 5.6% 5.7% 5.9%

Overhead (Delta Galil) 1,488 1,488 1,488 1,488 1,488 1,488

CAPEX 700 700 700 700 700 700

Change in working capital (10,070) 2,742 2,134 1,970 2,029 2,090

TAX 4,780 5,998 6,582 6,977 7,388 8,282

Net cash flow 20,971 10,216 11,848 12,726 13,408 13,650

Discounted Net cash flow 19,816 8,619 8,924 8,559 8,052 91,07524

24 Not including depreciations & amortization tax shield, overhead's (Delta Galil) growth

correction, Burlen's amortization tax benefit

56

Following is the Company's cash flow forecast for the years 2011 to 2015 and in the

representative year pre tax:

DGUSA (000' USD) 2011 2012 2013 2014 2015 Terminal

Revenues 336,260 351,430 363,237 374,134 385,358 396,919

YOY 12.4% 4.5% 3.4% 3.0% 3.0% 3.0%

COGS 280,326 291,327 300,650 309,671 318,963 328,402

% Revenues 83.4% 82.9% 82.8% 82.8% 82.8% 82.7%

Gross Profit 55,934 60,103 62,588 64,463 66,395 68,517

% Revenues 16.6% 17.1% 17.2% 17.2% 17.2% 17.3%

Selling & Marketing expenses

28,171 28,871 29,515 30,066 30,627 30,555

% Revenues 8.4% 8.2% 8.1% 8.0% 7.9% 7.7%


% Revenues 4.5% 4.4% 4.3% 4.3% 4.2% 4.1%

Total SG&A 43,354 44,318 45,265 46,102 46,952 46,723

% Revenues 12.9% 12.6% 12.5% 12.3% 12.2% 11.8%

EBIT 12,580 15,784 17,322 18,361 19,443 21,794

% Revenues 3.7% 4.5% 4.8% 4.9% 5.0% 5.5%

Depreciations & amortization 2,314 2,384 2,454 2,524 2,594 1,439

EBITDA 14,894 18,168 19,776 20,885 22,037 23,233

% Revenues 4.4% 5.2% 5.4% 5.6% 5.7% 5.9%

Overhead (Delta Galil) 2,400 2,400 2,400 2,400 2,400 2,400

CAPEX 700 700 700 700 700 700

Change in working capital (10,070) 2,742 2,134 1,970 2,029 2,090

Net cash flow (Pre Tax) 26,664 17,126 19,342 20,616 21,708 22,843

Discounted Net cash flow (Pre Tax)

24,552 13,370 12,803 11,570 10,329 72,72925

4. Weighted Average Cost of Capital

4.1 Cost of Equity

The following table presents the sum of the key parameters that we used in

valuing the Company's cost of equity (Ke):

Estimation of the Company's cost of equity Parameter Value Note

Risk-free interest 1.86% 1

Market premium 5.07% 2

Beta 1.33 3

Specific risk premium 6.28% 4

The Company's cost of equity 14.90%

25 Not including overhead's (Delta Galil) growth correction

57

Notes to the table:

(1) The rate of return of a US government bond26 over a 30-year period.

(2) Average difference between the annual real return on stock indexes and

the risk free interest in the U.S.27.

(3) To determine the Company's beta, we examined a group of companies in

the same field of business. According to our examination, there are no

traded companies identical in their operations to the Company, and we

therefore chose companies with similar features as the Company.

Following is a list of peer companies used for calculating the beta28

Calculation of Levered Beta by Peer Companies Company Levered Beta Unlevered Beta D/V

Bernard Chaus 0.53 0.27 61%

Delta Apparel 0.68 0.48 41%

Fredrick's of Hollywood 2.11 1.81 22%

Hampshire Group 0.40 0.42 -7%

Hanesbrands * 1.89 1.24 46%

Jiangsu Sanyou 0.41 0.43 -7%

Oxford Industries 2.38 1.94 28%

Phillips Van Housen 1.99 1.50 35%

Unifirst Corp. 1.17 1.14 4%

Van De Velde * 0.51 0.52 -4%

Warnaco Grp 1.61 1.67 -7%

Median 1.17 1.14 22% * Peer companies not included in the valuation conducted in 2009. Due to a shortage of

data and/or bankruptcy, two peer companies previously included were omitted from the list - Hartmarx and Montaigne Fashion Group – and two other companies were included - Van de Velde, a Belgian company specializing in bras, and Hanesbrands, a large U.S. company active, among other fields, in branded apparel.

(4) The specific risk premium reflects the excess risk added for the company due

to its size in relation to the size of its markets of operation29

4.2 Weighted Average Cost of Capital (WACC)

In accordance with the standard guidelines, the discount rate should be a

pre-tax discount rate that reflects current market estimates of:

a. The time value of money;

b. Specific risks with respect to which the cash flows were adjusted.

26 Source: www.ustreas.gov

27 Source: Study published by Damodaran (as of December 2010)


29 According to the 2010 Ibbotson

58

However, although the standard guidelines prescribe applying a pre-tax

discount rate, in practice and in accordance with the notes accompanying the

standard, the result of the calculation of pre-tax cash flows discounted by a

pre-tax discount rate should be the same as the result of the calculation of

after-tax cash flows discounted using an appropriate after-tax discount rate.

For these reasons, we chose to base our calculation on after-tax cash flows

in applying an after-tax discount rate.

The discount price reflects, among other things, the business-operating risk

inherent in the Company’s activities. Some of the risk is attributed to the

nature of the market sector in which the Company operates, and some of it

stems from specific characteristics of the Company.

The Company’s cost of capital was determined based on our experience and

professional discretion as well as the accepted discount rates used by our

firm for the systematic business-operating risk to the operating cash flows in

similar sectors and the business-operating risk specific to the Company's

operations and the sector in which it operates, compounded by the fact that

the Company operates in a particularly competitive market with many

competitors.

For assessing the Company's cost of capital, the weighted average cost of

capital was estimated (using the CAPM model to calculate the cost of equity)

by comparing it to similar public companies. The resulting weighted cost of

capital from this estimation was about 11.84% (after tax) computed as

follows:

Parameters for Calculating the Company's WACC

Comments Value Parameter

1.86% Risk-free interest

1.33 Beta

5.1% Market premium

14.90% The Company's cost of equity

1 6.08% Cost of debt

2 38% Tax rate

28% D/E

11.84% WACC

59

Notes to the table:

1. Depending on the the long-terminterest rate paid by similar companies

and on the parent company's bonds U.S. interest rate.

2. The long-term corporate tax rate in the U.S.

4.3 WACC - Summary

Based on the above calculations and in using the debt to equity ratio of 28%

(taking into account the debt capital of peer companies), the WACC obtained

is between 11% - 12%.

Based on our professional judgment, the Weighted Average Cost of Capital

that we applied in the valuation is 12% (corresponding with an after-tax cost

of capital of 17.9%), similar to the cost of capital we applied in evaluating

previous years' impairments.

5. Long-term Growth

The Company's real permanent growth rate was estimated at 3%. This rate was

set taking into account population growth in the U.S., GDP annual growth rate in

the last two years, and average historic growth of the large retailers. Addressing

these factors reflects, in our opinion the projected permanent growth.

6. Enterprise Value Summary

6.1 The Company's Enterprise Value

The Company's enterprise value is equal to the net present value of the sum

of the cash flows specified above plus a residual value from 2016 and on.

The enterprise value according to the valuation that indicates value in

use approach is $144,076 thousand.

60

6.2 Sensitivity Analysis

Following is an analysis of the sensitivity of the Company's enterprise value

to changes in assumptions regarding the cost of capital and long-term growth

(US$ '000s).

Sensitivity Analysis of the Company's Enterprise Value

Discount rate

10.5% 11.0% 11.5% 12.0% 12.5% 13.0% 13.5%

Perm

an

en

t G

row

th R

ate

0.0% 140,045 134,133 128,736 123,789 119,237 115,035 111,145

1.0% 147,824 141,046 134,907 129,321 124,217 119,533 115,221

2.0% 157,434 149,495 142,378 135,961 130,145 124,849 120,007

3.0% 169,607 160,056 151,606 144,075 137,321 131,228 125,703

4.0% 185,524 173,634 163,295 154,219 146,186 139,024 132,599

5.0% 207,231 191,739 178,580 167,260 157,414 148,770 141,118

6.3 Comparison with Previous Valuations

Following is a summary of previous valuations:

DGUSA Present

Valuation Valuation in

December 2009 Valuation in

December 2008

Cost of Capital 12.0% 12.0% 11.9%

Permanent growth rate 3% 3% 3%

Enterprise value ($ 000's) 144,075 128,708 133,276

It should be noted that the comparison of this valuation to prior valuations is

inconsistent, due to the following reasons:

� This valuation includes additional two segments, that have been

developed during last 2 years and are expected to grow significantly in

2011 (As part of business development into new activities that include

branded men's activity - D2 Men's)

� An estimated $25 millions of surplus inventory that influences 2011 cash flow

� This year's valuation includes Auburn's enterprise value (valued at 5-8

millions USD), as it was merged into DGUSA as of January 1st, 2010. In last

year's valuation, Auburn's was valued by decreasing net financial liabilities

(roughly $10 millions). Therefore, by comparing Auburn's EV to its net

financial liabilities, including Auburn in this year's valuation adds no

excessive positive value

61

6.4 Peer Companies' Multiples

To assess the reasonableness of the valuation result, we compared the

EBITDA multiples obtained in the valuation to the EBITDA multiples' of peer

companies.

The EBITDA multiples of peer companies, based on statements of

September 30, 201030 (the last statements published), range between 4.8

and 10.1, as shown in the following table.

Peer Companies' Multiples

Company TEV / EBITDA

Delta Apparel 7.7

Hampshire Group* 9.6

Hanesbrands 8.8

Oxford Industries 6.8

Phillips Van Housen 10.1

Triumph* 9.3

Unifirst Corp. 4.8

Van De Velde 9.6

Warnaco Grp 6.7

Average 8.1

Median 8.8 *EBITDA data relates to end of 2010

The EBITDA multiples obtained in the valuation (enterprise value divided by

the projected EBITDA in the coming year, including reimbursement of surplus

expenses to the parent company) is 8.8. The EBITDA multiple for 2010

based on this valuation is about 15.6.

6.5 Delta's Market Value

In assessing the reasonableness of the valuation result, we compared the

Company's enterprise value, as follows from the valuation, and the enterprise

value of the parent company, Delta Galil Industries Ltd. From an analysis of

the following table, it emerges that the operations of DGUSA account for

about 52% of Delta's total market value compared to a contribution of about

49% to revenue and about 28% to EBIT.

30 In principle, the projected EBITDA is to be used to obtain the EBITDA multiple. Due to the

availability of the data, the last known EBITDA was used to obtain the peer companies' multiples. Companies which presented a negative EBITDA and/or companies whose multiples were relatively irregular were excluded from the sample of companies.

62

Enterprise Value of Delta Galil and DGUSA (000') USD Delta Galil DGUSA % DGUSA

Equity Value (average Dec 2010) 199,319

Net financial liabilities (30.09.2010) 75,680

Enterprise values 274,999 144,075 52%

Sales revenues 1-9 2010 466,902 229,960 49%

EBIT 1-9 2010 22,936 6,450 28%

1


Part D

Additional Information

Regarding the Corporation


2

Part D – Additional Information Regarding the Corporation

Company Name: Delta Galil Industries Ltd.

The Company’s number with the Registrar of Companies: 520025602.

Company Address: 2 Kaufman, Tel Aviv

Telephone no.: 03-5193744

Fax: 03-5193730

Balance Sheet Date: December 31, 2010

Report Date: February 16, 2011

Report Period: 2010

Email: [email protected]

Regulation 10a – Concise Quarterly Statements of Comprehensive Earnings

See Section 2.2 of the Board of Directors’ Report.

Regulation 10c – Use of Proceeds of Securities while Taking Into Account the Goals of the

Proceeds in Accordance with the Prospectus

1. Designation of the Proceeds of Debenture Issue

January 2010

According to the shelf offering report the published by the Company on January 18 2010 the

Company raised a total of 113 million NIS (gross). The proceeds of the issue were designated

for financing the Company’s business activities as decided by the Company’s Board of

Directors from time to time or according to strategies set by the Board of Directors. At the

same time, the Company regularly examines, as part of its strategy, the option of purchasing

activity or companies outside of Israel, in order to expand its activities. As the Company

reported on December 11 2009, the Company had negotiated for the purchase of assets and

brandied international activity in the field of apparel and designated the proceeds of the issue

or a portion thereof for financing this transaction, insomuch as it comes to fruition. On June

29 2010 the Company announced that it would be discontinuing negotiations in light of the

seller’s decision to stop sales proceedings.

3

The proceeds of the issue were deposited in an interest-bearing short-term deposit in a

banking institution.

December 2010

According to the shelf offering report the Company published on January December 23 2010

the Company raised a total of 98 million NIS (gross). The Company did not assign a specific

purpose for the proceeds of the issue, and they were designated for financing the Company’s

business activities as decided by the Company’s Board of Directors from time to time or

according to strategies set by the Board of Directors.

The proceeds of the issue were used to redeem short-term credit.

Regulation 11 – List of Investments in Subsidiaries and Directly and Indirectly Related

Companies as of December 31 2010

Fully-Controlled and Fully-Held

Subsidiaries (100%)

Number of Shares

Held by the

Company, of All

Types

Notation Value of the

Shares NIS/Foreign

Currency

Cost of

Investment in

Thousands of

Dollars

Balance Sheet Value

in Thousands of

Dollars

Delta Galil USA Inc. 100 10$ 39,126 83,175

Delta (Textile) London Ltd. 1,300,000 £1,300,000 2,061 3,302

Delta Galil Holland B.V. 250 21,000$ 21 32,002

Delta Egypt Sourcing Ltd.( )1 500 14,706$ 15 )199(

Peace Bridge Co. (2) / (1). 30,000 42,373$ 783 -

D.G.T. (Holdings) Ltd.(3) 1,020 1,020 NIS - -

Textured Ltd. (1) 2,000 0.2 NIS - -

Delta Galil Properties (1981) Ltd. 24,980,002 24,980 NIS 782 )92(

Delta Elastic Tapes Industries Ltd.

(905) (1)

995,646 Ordinary

8 Deferred

995,472 NIS 1,806 -

(1) The company is currently undergoing liquidation.

(2) A company in Jordan purchased as part of the purchase of Gibor in April 2009.

(3) Inactive company.

4

Regulation 12 – Changes in Investments in Subsidiaries and in Directly and Indirectly Related

Companies in the Reported Period

Date of Change Nature of Change Name of Subsidiary

January 1 2010 Merged into Delta Galil USA Inc. Auburn Hosiery Mills

5

Regulation 13 – Revenues of Subsidiaries and Related Companies and the Corporation’s

Revenues from Them as of the Report

Name of

Subsidiary

Income (Loss)

(Before Tax) in

2010, in

Thousands of

Dollars

Net Profit

(Loss) (After

Tax) in 2010 in

Thousands of

Dollars

Other

Comprehensive

Income (Loss)

Interest Income

Received from

Subsidiary in

Thousands of

Dollars (1)

Revenues from

Dividends

Received from

Subsidiary, in

Thousands of

Dollars (2)

Delta Galil

USA Inc. (3)

2,813 1,260 1,143 755 -

Delta (Textile)

London Ltd.

(3)

448 467 467 - 1,548

Delta Galil

Holland B.V.

(3)

2,545 2,161 2,161 208 120

Delta Egypt

Sourcing Ltd.

(4)

424 424 424 - -

Peace Bridge

Co. (4)

)800( )800( )800( - -

Delta Galil

Properties

(1981) Ltd (4)

7 7 7 - -

(1) Total interest received in cash was $255,000, $73,000 on March 4 2010, $121,000 on

June 11 2010 and $61,000 on December 17 2010.

(2) Total dividends received in cash were $1,578,000, $1,548,000 on December 31 2010

and $30,000 on May 28 2010.

(3) The information received in the above table includes the profits (loss) of subsidiaries of

subsidiaries as included in the profits (losses) of the subsidiaries.

(4) The company is undergoing liquidation.

6

Regulation 20 – Stock Market Trade – Securities Listed for Trade – Dates and Reasons for

Trade Discontinuation

1. According to the shelf offer report published by the Company on January 18 2010 and

revised January 19 2010 the Company offered the public, by way of a uniform offer,

113,000,000 NIS par value Company debentures (Series K), worth 1 NIS NV each. Trade of

the debentures (Series K) on the stock exchange began January 24 2010. For more details see

immediate report on the results of the debenture issue from January 21 2010 (reference no.

2010-01-362040).

2. According to the shelf offer report published by the Company on December 23 2010 and

revised December 23 2010, the Company offered the public, by way of a uniform offer,

92,189,920 NIS par value registered Company debentures (Series K), worth 1 NIS NV each.

Trade of the debentures (Series K) on the stock exchange began December 28 2010. For more

details see immediate report on the results of the debenture issue from December 23 2010

(reference no. 2010-01-731286).

3. During the reported period, trade of the Company’s securities listed for trade on the stock

exchange did not stop, except for the following cases:

Date Cause

May 24, 2010 Publication of First Quarter Financial Statements

August 11, 2010 Publication of Second Quarter Financial Statements

November 29, 2010 Publication of Third Quarter Financial Statements

Regulation 21 – Remuneration of Interested Parties and Senior Executives

a. The following are details of cost of the Company for remuneration (remuneration given in the reported year, including the Company's remuneration obligations for the reported year) for the five most highly compensated of the Company’s senior executives, in USD and NIS:

Remuneration Recipient Information Remuneration for Services 1 Other Remuneration

Name Job Title Scope of

Position

Holdings in the

Corporation’s Equity

Salary, Benefits

and Associated

Grant Option-Based

Payments 2

Management Fees

Consulting Fees

Commission Other Interest Rent Other Total in Dollars*

Total in NIS

Shlomo Doron 3

VP of Operations and Deputy CEO

100% 0.08% 486,834 621,935

335,047 1,443,816

5,102,658

Isaac Dabah 4

CEO 100% 56.08% 520,000 - 497,795 1,017,795 3,800,692

Yossi Hajaj CFO 100% - 465,042 206,163 101,250 772,455

2,846,345

Steve Klein CEO of Burlen

100% - 602,794 104,000 51,944 758,738 2,833,311

Esti Maoz VP of Marketing and Strategic Development

100% - 421,016 170,271

6,431 597,718

2,200,482

(1) In terms of cost to the Company. (2) Option-based payment includes the benefit component for options granted executives as part of the 2006 and 2009 plans, calculated according to the B&S Model, and

as included as an expense in the Company’s reported in the reported year. Note that this component was not paid in cash. The exercise prices of the options granted move between $3.02 and $8.98 per option and the value of the options moves between $1.23 and $4.01 per option, in accordance with the various issues. For further information regarding the exercise price and the value of the options see Note 14 to the Financial Statements in Part C of this periodic report.

(3) The sum of the grant includes the relative portion included as an expense this year to the amount of $250,000 for the signing bonus paid in 2009. (4) On October 20 2009, the shareholders general and special meeting approved the grant of options to Mr. Isaac Dabah, Company CEO and Director and its controlling

shareholder.

8

Mr. Dabah was granted 720,000 options at the price of $3.27 per option, which can be exercised as 720,000 Company shares. The maturing of the options in question is contingent on achieving goals pertaining to operational profits from ordinary activities, excluding the impact of one-time items (EBIT) during 2010 – 2013 as follows:

1. Subject to achieving operational profits from regular activities excluding the impact of one-time items (EBIT) to the amount of $35 million in 2010, 200,000 options will mature on March 31 2011. As of this report and in accordance with the financial results achieved in 2010, these options have not matured according to this condition – see Section 2 below. An expense was listed in the Financial Statements based on the assumption that 2010 goals will be achieved in a cumulative fashion manner across two years.

2. Subjected to achieving an accumulated EBIT of $70 million in 2010 and 2011, 200,000 options will mature on March 31 212; in this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Section (1) above (if they do not mature earlier).

3. Subjected to achieving an accumulated EBIT of $105 million in 2010–2012, 200,000 additional options will mature on March 31 2013. In this case the recipient will also be entitled, on the same date, to the maturation of the options mentioned in Sections (1) and (2) above (if they do not mature earlier).

4. An additional 50,000 options will mature on March 31 2012 if the accumulated EBIT for 2010 and 2011 will reach $75 million and 70,000 additional options will mature on March 31 2013 if the accumulated EBIT for 2010, 2011 and 2012 will reach of $121 million. If the accumulated EBIT for 2010, 2011 and 2012 will reach $121 million while the EBIT in question does not reach $75 million in 2010 2011, the recipient shall be entitled, on March 31 2013, to the maturation of the 50,000 options denoted at the beginning of this section (4).

b.

Remuneration Recipient Information Remuneration for Services 1 Other Remuneration

Name Job Title Scope of

Position

Holdings in the

Corporation’s Equity

Salary Grant Option-Based

Payment

Management Fees

Consulting Fees

Commission Other Interest Rent Other Total in Dollars*

Total in NIS

Gideon Chitayat 2

Chairman of the Board of Directors

0.20% 73,500 11,448 84,948 342,750

Directors 3

6 in number 211,000 28,620 43,616 44,999 328,235 1,225,710

Gloria Dabah

Product Manager and Development Coordinator at Delta U.S.

62,466 62,466 233,260

6

9

(1) In terms of cost to the Company. Remuneration sums for directors Shaul Ben Ze’ev and Yechezkel Dovrat are each paid to companies under their full control: “Meishar Omer Ltd.” and “Yechezkel Dovrat Consulting and Initiatives”, respectively.

(2) In addition to the yearly remuneration, Mr. Shetiat shall be entitled, above and beyond the options granted to all Company directors, to an additional 10,000 non-

tradable Company options exercisable as 10,000 regular Company shares, in return for an exercise price of $5 US for each option warrant (hereinafter: “the Additional Options for the Chairman of the Board“) At the conclusion of each full year in office as Chairman of the Board, 1/3 of the options granted shall mature. If he serves as Chairman for a period of less than 12 months, he shall not be entitled to any options from that batch. The option allocation was carried out in accordance with terms offered to all Company employees as part of the 2009 option allocation plan adopted by the Board of Directors on August 20 2009. The remuneration to the Chairman of the Board is paid to a company under his full control by the name of G.M.B.S. Ltd. – see October 20 2009 immediate report (ref: 2009-01-260757).

(3) The aforementioned remuneration includes the benefit component for options granted directors over the course of Q4 2009, the option allocation was carried out in

accordance with terms offered all Company employees as part of the 2009 option allocation plan adopted by the Board of Directors on August 20 2009; in accordance with the grant in question, directors received 10,000 options each (non-tradable), exercisable as 10,000 regular Company shares, in return for an exercise price of $5 US for each option warrant. The Ddirectors payment Shaul Ben Zeev and Yehezakel Dovrat are paid threw a Company held by them: "Meishar Omer Ltd, and Yehezakel Dovrat consulting, respectively.

10

Mr. Shlomo Doron, Deputy CEO and VP of Operations – for further details on the terms of his

employment, see immediate report dated July 23 2009, reference no. 2010-01-177156, included by

way of reference.

Mr. Doron is entitled to a yearly bonus based on the Company's policy and goals set. The yearly

bonus shall not exceed 12 of Mr. Doron's monthly salaries1. Accordingly, in 2010 Mr. Doron

received a bonus of $371,935.

Mr. Steve Klein, CEO of Burlen – the following are the key terms of Mr. Klein’s employment by

the Company:

Mr. Klein’s gross monthly salary is $48,000.

Mr. Klein is entitled to 20 paid vacation days a year and group health insurance according to

regular practice for Burlen executives and is entitled to take part ion all compensation and welfare

plans existing at Burlen regarding its employees and executives.

Mr. Klein is entitled to various expenses reimbursements including mobile telephone expenses,

land-based telephone expenses and travel expenses.

Mr. Klein’s employment agreement renews annually unless one of the parties informs the other 90

days in advance that they seek to discontinue their agreement. Furthermore, the agreement

establishes various grounds for the Company and Mr. Klein to terminate the agreement at shorter

notice, such as dismissal under exceptional circumstances by the Company, dismissal due to death

or the loss of work ability and so on. In the event that the Company terminates its commitment with

Mr. Klein “without cause” (as defined in the contract), and in the event that Mr. Klein terminates

his commitment with the Company under justified circumstances as defined in the agreement, Mr.

Klein shall be entitled to a recovery bonus to the amount of six monthly salaries, including social

benefits.

According to the agreement Mr. Klein is entitled to an annual bonus based on Company policy,

goals set and the Board of Directors’ evaluation. The annual bonus shall not exceed 50% of Mr.

Klein’s salary.2 Accordingly, in 2010 Mr. Klein received a bonus of $104,000.

1 Note that in the event that results in practice exceed the goals set, the executive shall be entitled to

additional benefits as set by management from time to time.

11

The employment agreement included a confidentiality commitment for Mr. Klein’s entire

employment period and for a period of 5 years from the conclusion of his employment.

Furthermore, the agreement includes an occupational restriction and a non-compete clause for a

period of 24 months from the end of his employment at the Company.

In May 2006 the Company granted Mr. Klein 25,002 options with an exercise price of $8.43 per

option, as part of the 2006 plan. In April 2010 Mr. Klein was granted 50,000 options with an

exercise price of $8.98 per option as part of the 2009 plan, with one half of these options contingent

on achieving goals for 2010. The contingent options (25,000) expired as a result of failing to meet

the goals set.

Mr. Isaac Dabah, Company CEO and Director

On August 20 2009 Mr. Dabah decided to end his tenure as Chairman of the Board of Directors and

the members of the Board of Directors decided to extend Mr. Dabah’s term in office, so that he may

continue to serve as the Company's CEO. The terms of Mr. Dabah's employment and service as

Company CEO were approved by the Company's Audit Committee, Board of Directors and the

Company’s general meeting in accordance with the law. Regarding the terms of his employment as

Company CEO see immediate reports published by the Company on September 6 2009 (ref: 2009-

01-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01-237762 and 2009-01-237768)

and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625) and the immediate report on the

results of the October 20 2009 general meeting (ref: 2009-01-260757), presented by way of referral.

Mr. Tim Regan, CEO of Delta USA – the following are the terms of Mr. Regan’s employment by

the Company:

Mr. Regan’s gross monthly salary is $37,500 (yearly salary of $450,000).

Mr. Regan is entitled to take part in all existing Company compensation and welfare plans

applicable to its executives and 4 weeks of vacation per year. Mr. Regan is also entitled to various

expense reimbursements, such as participation in rental payments, vehicle expenses and travel

expense reimbursements.

2 Note that in the event that results in practice exceed the goals set, the executive shall be entitled to additional

benefits as set by management from time to time.

12

Mr. Regan is entitled to an annual bonus based on Company policy and progressive goals set in its

contract with him. In accordance with these goals, the yearly bonus may reach up to 130% of Mr.

Regan’s total yearly salary.3 Accordingly, in 2010 Mr. Regan received a bonus of $50,000.

The Company allocated to Mr. Regan 50,000 non-tradable Company options exercisable as 50,000

ordinary Company shares, in accordance with the terms of the Company’s 2006 option plan.

Mr. Yossi Hajaj, Chief Financial Officer – the following are key terms of Mr. Hajaj’s employment

by the Company:

Mr. Hajaj’s gross monthly salary is 100,000 NIS.

Mr. Hajaj is entitled to social benefits set in his contract, such as 23 days of vacation, various

expense reimbursements such as telephone expenses, an education fund, executive insurance,

vehicle and mobile phone.

Mr. Hajaj is entitled to an annual bonus based on Company policy and goals set. The annual bonus

shall not exceed 6 of Mr. Hajaj’s monthly salaries.4 Accordingly, in 2010 Mr. Hajaj received a

bonus of $206,163.

The Company has allocated to Mr. Hajaj 277,502 options pursuant to the 2006 plan. In addition,

Mr. Hajaj has at his disposal 5,000 options issued as part of the 2002 plan.

Mr. Hajaj’s employment agreement is not limited in time and either of the parties may bring it to

conclusion by providing advance written notice to the other party. The Company may discontinue

Mr. Hajaj’s employment with 180 days written notice, while according to the parties’ written

agreement made after the contract was signed, Mr. Hajaj may end work at the Company with 90

days written notice.

Mr. Hajaj has signed an unlimited confidentiality agreement with the Company.

Ms. Esti Maoz, VP of Development and Strategic Development – the following are the key terms of

Ms. Maoz’s employment by the Company:

Ms. Maoz’s gross monthly salary is 85,000 NIS.





13

Ms. Maoz’s employment agreement is not limited in time and either of the parties may bring it to

conclusion by providing six months written notice to the other party. In the event of termination by

the Company, Ms. Maoz shall be entitled to full salary for the period in question, including social

benefits.

Ms. Maoz is entitled to social benefits as set in the agreement and various expense reimbursements.

Ms. Maoz is entitled to an annual bonus based on Company policy and goals set. The annual bonus

shall not exceed 50% of Ms. Maoz’s total salary.5 Accordingly, in 2010 Ms. Maoz received a bonus

of $170,271.

The Company allocated 47,502 options to Ms. Maoz as part of the 2006 plan. In addition, Ms.

Maoz has at her disposal 7,500 options issued as part of the 2002 plan.

Mr. Gideon Chitayat, Chairman of the Board of Directors – on August 20 2009 Mr. Chitayat was

appointed as Chairman of the Company's Board of Directors. The appointment shall remain in

effect until March 31 2011. The terms of his service as Chairman of the Board were ratified by the

General meeting on October 20 2009 (after receiving the approval of the Audit Committee and the

Company's Board of Directors. For details regarding the terms of his service see Section 1.16.10.5

to the Description of the Corporation's Business, Part A of the periodic report.

The Company's Board of Directors – the Company’s directors6 are entitled to directors'

compensation not exceeding generally accepted levels and set according to the directives of the

Companies Regulations (Rules Regarding Compensation and Expenses for Outside Directors),

2000, in accordance with the Company's rank. The Company pays its directors yearly compensation

to the amount of 60,000 NIS per year and participation compensation of 2,250 NIS per meeting.

In addition, on October 20 2009 the Company's general meeting ratified the allocation of 10,000

non-tradable options exercisable as 10,000 ordinary Company shares worth 1 NIS NV in return for

an exercise price of $5, to directors Israel Baum, Noam Lautman, Tzipporah Carmon and Gideon

Chitayat, in accordance with the 2009 option allocation plan adopted by the Board of Directors on

August 20 2009. All of the above is detailed in the immediate reports published by the Company on



6 With the exception of Chairman of the Board Mr. Chitayat, Company CEO Isaac Dabah so long as he serves

as Company CEO and Mr. Weinstock starting January 2011 so long as he serves as a COO of a subsidiary,

for whom different terms of service were set.

14

September 6 2009 (ref: 2009-01-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01-

237762 and 2009-01-237768) and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625)

and in the immediate report on the results of the meeting from October 20 2009 (ref: 2009-01-

260757), presented by way of referral. Accordingly, at the December 7 2009 general meeting in

which Mr. Dovrat was ratified as outside director at the Company, it was decided to allocate him

10,000 non-tradable options, exercisable as 10,000 ordinary Company shares worth 1 N IS NV

each, in return for an exercise price of $5, in accordance with the terms of the Company's 2009

option plan. For further details see the October 28 2009 immediate report on the material private

offer and general meeting summons (ref: 2009-01-267591, and in the immediate report on the

results of the December 7 2009 general meeting (ref: 2009-01-312165), presented by way of

referral.

Expense refund for Mr. Itzhak Weinstock – Mr. Itzhak Weinstock, a Company director, is entitled7

to active expense reimbursements pertaining to the fulfillment of his duties as Company director

including flight reimbursements and hospitality of a sum not exceeding $80,000 per year and in

accordance with Company procedure. In 2010 these expense reimbursements amounted to $45,000.

Consultation agreement with Mr. Baum – on November 15, 2007 the Company entered into an

agreement with Mr. Israel Baum, Company director (hereinafter: "the Consultation Agreement").

The Consultation Agreement was approved by the Audit Committee and by the Board of Directors

in August 2007 and was ratified by the General Assembly on Mat 22 2008

In accordance with the Consultation Agreement, Mr. Baum undertook to provide the Company and

companies under its control, from time to time, at the request of the Company's CEO, consultation

services pertaining to the Company's options regarding works it requires by way of outsourcing in

Asia, in accordance with and as detailed in the immediate report published by the Company on May

13 2008, reference no. 2008-01-132033, presented by way of referral (hereinafter: "the

Consultation Services").

In return for the Consultation Services, Mr. Baum shall be entitled to hourly pay. The Company

estimated that the total expense involved in the Consultation Agreement is not expected to be

material to the Company.

At the general meeting held October 20, 2009, after receiving the approval of the Audit Committee

and Company Board of Directors, the Consultation Agreement was revised retroactively starting

August 1 2008 so that the consultation services covered by the agreement in the field of outsourcing

7 Ratified at the general meeting held Mat 22 2008

15

would not be geographically restricted to Asia alone and so that they would include consultation on

all of the Company’s areas of manufacturing and purchasing. With the exception of the above, the

Consultation Agreement remained unchanged.

As of December 31, 2010 Mr. Baum has received 44,000 NIS for consultation services provided

from since he began providing consultation services to the Company.

Gloria Dabah, daughter of the Company’s controlling shareholder, marketing manager and product

manager at a subsidiary – for details on the terms of her employment see Regulation 22, Section (3)

below.

Regulation 22 – Transactions with the Controlling Shareholder

Transactions Listed in Section 270(4) of the Companies Law, 1999

(1) Update of directors’ compensation for Mr. Isaac Dabah (controlling shareholder) and Mr. Itzhak

Weinstock (a director in whom the controlling shareholder has a personal interest in approving his pay).

On April 14, 2008 the Audit Committee and the Board of Directors confirmed that starting April 1,

2008 Mr. Dabah and Mr. Weinstock would be paid yearly remuneration and participation remuneration

identical to the yearly remuneration and the participation remuneration the Company shall pay outside

directors serving at the Company, all as detailed in the Company’s April 2008 immediate report

(reference no. 2008-01-109833), presented by way of referral.

Note that starting from Mr. Dabah's appointment as Company CEO in August 2008, Mr. Dabah has not

received directors’ compensation. In addition, starting from the Mr. Weinstock’s appointment as chief

operations manager at a subsidiary, as detailed in Section (5) below, Mr. Weinstock has not received

directors’ compensation.

(2) Ratification of the terms of employment of Mr. Dabah, Company’s director and controlling

shareholder, as Company CEO:

The general meeting held on August 26 2008 ratified the appointment of Mr. Isaac Dabah, the

Company's controlling shareholder and Chairman of the Board of Directors, as Company CEO for a

period of up to twelve months from the general meeting’s ratification, and ratified the terms of his

employment. Details regarding the appointment and terms of employment of the Company CEO are

included in the immediate report on the transaction between the Company and its controlling

shareholder from July 20 2008 (ref: 2008-01-208110) and in the immediate report on the results on the

meeting for the ratification of the controlling shareholder from August 2008 (ref: 2008-01-246723)

which are presented by way of referral.

Seeing as Mr. Dabah informed the Company on August 20 2009 that he had decided to end his tenure

as Chairman of the Board of Directors, the members of the Board of Directors decided to extend Mr.

16

Dabah's term in office, so that he may continue to serve as the Company's CEO and lead the

Company’s activities. The terms of Mr. Dabah's employment and service as Company CEO were

approved by the Company's Audit Committee, Board of Directors and the Company’s general meeting

with accordance to the law. In this regard, see the immediate reports published by the Company on

September 9 2009 (ref: 2009-01-224304 and 2009-01-224325), September 22 2009 (ref: 2009-01-

237762 and 2009-01-237768) and October 18 2009 (ref: 2009-01-257628 and 2009-01-257625) and the

immediate report on the results of the October 20 2009 general meeting (ref: 2009-01-260757),

presented by way of referral.

(3) Ratification of the terms of employment of Ms. Gloria Dabah, the daughter of the Company

controlling shareholder, acting as product manager and merchandising manager in a subsidiary.

On October 13 2010 the Company’s Audit Committee and on November 17 2010 (following a

discussion held on October 13 2010) the Company’s Board of Directors approved the terms of the

employment of Ms. Gloria Dabah, the daughter of Mr. Isaac Dabah, the Company's CEO and

controlling shareholder as product manager and merchandising manager at Delta Galil USA Inc. The

terms of her employment were ratified at the general meeting held December 27 2010.

For further details, including on the matter of Ms. Dabah’s employment, see immediate report on the

general meeting summons report published November 18 2010, ref. 2010-01-685278, presented by way

of referral.

(4) Ratification of the terms of employment of Mr. Itzhak Weinstock, Company director, as Chief

Operations Manager of a subsidiary.

On October 13 2010 the Company’s Audit Committee and on November 17 2010 (following a

discussion held on October 13 2010) the Company’s Board of Directors approved the terms of the

employment at Delta Galil USA of Mr. Itzhak Weinstock, Company director. Starting January 1 2011,

Mr. Weinstock has served as Chief Operations officer (COO) of the Company’s activities in North

America, including the activities of the subsidiary, as a full-time job. The terms of his employment

were ratified at the general meeting held December 27 2010.

For further details, including on the matter of Mr. Weinstock’s employment, see immediate report on

the general meeting summons report published November 18 2010, ref. 2010-01-685278, presented by

way of referral.

(5) Entering into a liability insurance policy for directors and executives considered Company

controlling shareholders:

In February 2011 the Company’s Audit Committee and Board of Directors, in accordance with Section

1b(5) of the Companies Regulations (Relief in Transactions with Controlling Shareholders), 2000,

approved the inclusion of Mr. Isaac Dabah, Company Director and CEO and controlling shareholder,

and Mr. Itzhak Weinstock, a director in which the controlling shareholder has a personal interest in

17

including in the liability insurance policy for directors and executives of the Company and its

subsidiaries, in the insurance policy in question. The members of the Audit Committee confirmed that

the insurance terms regarding the directors Isaac Dabah and Itzhak Weinstock were identical to the

terms of the insurance of the other Company directors and executives; that the terms of the policy are

under market conditions; and that their inclusion in the policy will have no material impact on the

Company’s profitability, property or liabilities. For further information see the immediate report

published by the Company on August 30, 2009 and February 17, 2011.

Regulation 24 – Shares and Securities Held by the Corporation’s Interested Shareholders and

Senior Executives or Those of Corporate Investee the Activity of Which is Material to the

Corporation’s Activities as Close as Possible to the Reported Date

Name of Holder Name and

Number of

Security

Number of

Shares

Non-

Tradable

Options

Holding Rates

in Capital and

Voting Rights

Fully

Diluted

Rate

Isaac Dabah (through

GMM Capital LLC)

Delta Galil –

627034 (shares)

Delta Galil –

6270086 (non-

tradable options)

12,730,873 720,000 54.41% 49.47%

Sterling Macro Fund

(fund managed by

Isaac Dabah)

Delta Galil –

620734

390,204 - 1.67% 1.52%

Dov Lautman.

through companies

under his control

Delta Galil –

627034

2,443,117 - 10.44% 9.49%

Clal Holdings

Insurance Ltd.

Delta Galil –

627034

2,841,271 - 12.14% 11.04%

Gideon Chitayat –

Chairman of the

Board of Directors

Delta Galil –

627034 (shares)

Delta Galil –

6270086 (non-

tradable options)

50,000 20,000 0.21% 0.20%

Shlomo Doron – Delta Galil – 18,775 250,000 0.08% 0.07%

18

Deputy CEO and VP

or Operations

627034 (shares)

Delta Galil –

6270078 (non-

tradable options)

Yossi Hajaj – CFO Delta Galil –

6270078 (non-

tradable options)

282,502 0% 1.10%

Esti Maoz – VP of

Marketing and

Strategic

Development

Delta Galil –

6270078 (non-

tradable options)

47,502 0% 0.23%

Miki Laxer –

Company Accountant

and Secretary

Delta Galil –

6270078/ 6270052

(non-tradable

options)

27,084 0% 0.13%

Motti Fireman – VP

of Human Resources

Delta Galil –

6270078 (non-

tradable options)

10,417 0% 0.05%

Avi Avital – IT

Manager

Delta Galil –

6270078 (non-

tradable options)

11,000 0% 0.05%

Steve Klein –

Manager of Burlen

Delta Galil –

627034 (shares)

Delta Galil –

6270052 (non-

tradable options)

24 75,002 0% 0.29%

Tim Regan –

Manager of Delta

Galil USA

Delta Galil –

6270078 (non-

tradable options)

70,000 0% 0.27%

Gil Admoni – Head of

Delta Israel segment

Delta Galil –

6270078 (non-

tradable options)

30,000 0% 0.15%

19

Regulation 24a – Listed Capital, Issued Capital and Convertible Securities

As of this report, and as of December 31 2010, the Company’s listed capital was 36,000,000 shares

worth 1 NIS NV each.

As of this report, and as of December 31 2010, the Company’s issued and paid-up share capital was

24,586,336 shares worth 1 NIS NV each. This capital is after neutralizing 1,206,971 dormant shares

held by the Company and 147,106 shares held in trust in relation to the Company’s option plans.

The following are details of the balance of the options issued pursuant to the Company’s option

plans (regarding a description of the Company's option plans see Note 14 to the Financial

Statements, Chapter C of this periodic report):

17,500 non-tradable option warrants (security number – 6270052) exercisable as 17,500 ordinary Company shares worth 1 NIS NV each.

1,384,806 non-tradable option warrants (security number – 6270078) exercisable as 1,384,806 ordinary Company shares worth 1 NIS NV each.

1,100,000 non-tradable option warrants (security number – 6270086) exercisable as 1,100,000 ordinary Company shares worth 1 NIS NV each.

Regulation 24b – Outline of the Corporation’s Shareholders

Name of Holder Name and Number of Security Number of Shares

The Bank Leumi L’Israel

Listing Company Ltd.

Delta Galil – 627034 21,599,028

GMM Capital LLC Delta Galil – 627034 625,000

Adinoam Properties Delta Galil – 627034 1,429,993

N.D.R.L Investments 1988 Ltd. Delta Galil – 627034 715,000

Delta Galil Industries Ltd. Delta Galil – 627034 165,862

Jack Thekkekara Delta Galil – 627034 74,006

Vinokor Holdings Ltd. Delta Galil – 627034 63,501

Diana Baradarian Delta Galil – 627034 30,646

20


Francis Tam Delta Galil – 627034 14,195

Steve Lockcuff Delta Galil – 627034 10,292

Kristina Nettesheim Delta Galil – 627034 5,392

Textured Ltd. in trust for the

holders of Muller shares

Delta Galil – 627034 4,861

Various employees Delta Galil – 627034 2,703

The Mastan Company INC. Delta Galil – 627034 2,263

Sigler & Co. C/O

Manufacturers Hanno

Delta Galil – 627034 1,222

Tamara Bliss Delta Galil – 627034 904

PHASE I. Louis I. Waldman Delta Galil – 627034 891

Paula Alice Moss Delta Galil – 627034 788

Sylvia Morris Bernfel Delta Galil – 627034 563

Idan Irit Delta Galil – 627034 452

Derishevitz Mordechai Delta Galil – 627034 357

Margalit Eilat Delta Galil – 627034 328

Abd Alalatif Kwider

Massalmani

Delta Galil – 627034 315

Weissman David Delta Galil – 627034 296

Villager Moshe Delta Galil – 627034 192

Estreicher Kennedy Delta Galil – 627034 185

Levirrer Franz Delta Galil – 627034 192

Bar Menucha Delta Galil – 627034 231

21


Goral Zvi Aharon Delta Galil – 627034 181

Simchon Miriam Delta Galil – 627034 181

Eilon Israel Delta Galil – 627034 177

Hajiabi Malka by Shoshana

Hakimi


Berber Oscar Delta Galil – 627034 94

Golan Moshe and/or Lillith Delta Galil – 627034 94

Harlaf Amiram Delta Galil – 627034 94

Harlaf Shifra Delta Galil – 627034 94

Broida Alon Delta Galil – 627034 85

Halperen Tova Delta Galil – 627034 85

Michael Bady Delta Galil – 627034 85

Rest Home for Lonely Adults Delta Galil – 627034 79

Bialystoker Center and Home

for the Aged


Nathan Schooler Delta Galil – 627034 75

Levi Pike Delta Galil – 627034 70

Alter Ludvika through the Gan

Shalva Sanitarium


Kozalik Zvi Delta Galil – 627034 63

Levinson Miriam Delta Galil – 627034 75

Henrietta Cummings and Paul

M. Cummings


22


Greenberg Avraham Delta Galil – 627034 53

Armon Batya Delta Galil – 627034 49

Elimelech Avraham Delta Galil – 627034 40

Rosman Eliezer Delta Galil – 627034 40

Gannie A. Abbell Delta Galil – 627034 38

Sternberg Adiel Delta Galil – 627034 33

Friedman Sima Delta Galil – 627034 40

Ganger Shlomo Delta Galil – 627034 31

Rothenberg Yehuda Delta Galil – 627034 30

Fozzie Yossef Delta Galil – 627034 27

Peleg Adi Delta Galil – 627034 27

Borishensky Yossef Delta Galil – 627034 25

Helia Shibley Delta Galil – 627034 24

Avneri Shai Delta Galil – 627034 17

Nir Roth Delta Galil – 627034 17

Yaakovi Dalia Delta Galil – 627034 12

Kalina Shmuel Delta Galil – 627034 12

Hanut Aida Delta Galil – 627034 12

Daibas Maadi Delta Galil – 627034 12

Duabi Ayesha Delta Galil – 627034 12

Harbawi Kamil Delta Galil – 627034 12

23


Nathsaru Samira Delta Galil – 627034 12

Mona Abud Dao Delta Galil – 627034 12

Hen Lulu Delta Galil – 627034 9

Warman Zohar Hadassah Delta Galil – 627034 8

Zohar Avraham Delta Galil – 627034 8

Palkovsky Eliyahu Delta Galil – 627034 8

Schwartz Penny Delta Galil – 627034 6

Diav Kamela Delta Galil – 627034 6

Zuabi Fatma Delta Galil – 627034 6

Sibley Basma Delta Galil – 627034 6

Halaila Spa Delta Galil – 627034 6

Elran Uziel Delta Galil – 627034 3

Zuabi Nagach Delta Galil – 627034 3

Cohen Yardena Delta Galil – 627034 3

Cohen Hanna Delta Galil – 627034 3

Kase Ibrahim Delta Galil – 627034 3

Grete Goldhill Delta Galil – 627034 3

Jan Solomon C/O Jenal

Industries


Jehuda Wattenburg Delta Galil – 627034 3

Grumberg Shamai Delta Galil – 627034 2

Neumann David Delta Galil – 627034 2

24


Shamai Chaim Delta Galil – 627034 2

Bar-Lev Yehuda Delta Galil – 627034 1

Gevla Greta Delta Galil – 627034 1

Goldsmith Yonatan Delta Galil – 627034 1

Margalit Eilat Delta Galil – 627034 1

Percy Azkiel at Bengara Zion Delta Galil – 627034 1

Regulation 26 – Corporate Directors on the Report Date

a. Members of the Board of Directors

Director Name ID No. Address Appointment Date

Last Name First Name Town Street House No.

Year Month Day

Chitayat Gideon 72644339 Tel-Aviv, Israel Ben Yossef 32 05 11 15Dabah Isaac 054907852 NYC, NY,

USA Broadway 1450 05 11 15

Ben Ze’ev Shaul 006347702 Omer, Israel Erez 50 09 10 20Dovrat Yechezkel 007627649 Ramat

Hasharon, Israel

Nachshon 1 09 12 16

Baum Israel 005172796 Tel-Aviv, Israel Feinstein 10 05 12 26Lautman Noam 24407280 Tel-Aviv, Israel Harav Amiel 34 01 11 30Weinstock Itzhak 6139265 NJ, USA Meadowland

Parkway 150 07 10 21

Carmon Tzipporah 51528933 Savyon, Israel Hatichon 9 09 10 20

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c. Additional Information Regarding Board Members

Director Name Gideon Chitayat – Chairman of the Board of Directors

Citizenship Israeli

Date of Birth August 29 1939

Membership in Board of Directors Committees

Chair of Remuneration Committee

Accounting and Financial Competency or Professional Qualifications

Yes – expertise in accounting and finance

Employee of the Company, a Subsidiary, a Related Company or of an Interested Party

No

Education and Occupation in Past Five Years Education:

M.A., PhD – Business Administration– Wharton School

M.B.A. – Hebrew University, Jerusalem

B.A. – Economics – Hebrew University, Jerusalem

Employment:

Chairman and President of BMBS Consultants Ltd.

Consultant to Chairs and CEOs of leading companies in the Israeli industry bin the field of business strategy.

Senior outside lecturer at the Rekanati School of Business Administration at Tel Aviv University

Director at a number of companies

Other Corporations in Which He Serves as Director

Machteshim Agan

Paz Petroleum Industries Ltd.

The Tel Aviv Museum

BATM – traded in London.

Melisseron

Family Member of Other Interested Party in the Corporation

No

Director with Accounting and Financial Expertise For the Purpose of Meeting the Minimum Number Set by the Board of Directors as per Section 92(a)(12) of the Companies Law

No

Director Name Isaac Dabah

Citizenship Israeli, U.S.A.

Date of Birth August 11 1957


None


No


Yes – Company CEO

26


Attended Baruch College of the City University of NY

Employment:

January 1 2005-now – CEO of GMM Capital LLC.

2003-2004 – CEO of Denim Division, Jones Apparel Group


Yes– Delta Galil USA, Delta UK, Delta Egypt.


No


No

Director Name Shaul Ben Ze’ev – External Director

Citizenship Israeli

Date of Birth September 3 1946


Chairman of the Audit Committee, Financial Statement Examination Committee, Remuneration Committee


Yes – has expertise in accounting and finance


No


B.A. – Economics and Statistics –Hebrew University, Jerusalem

M.B.A – New York University

Employment:

2001-now – Chief Business Manager, Avraham Livnat Ltd.


IDB Holdings, Discount Investments, IDB Tourism, Hamashbir Holdings, Ahava Holdings, Ahava Dead Sea Laboratories, H&O Hamashbir Fashion, Peanut Marketing, Tnuvot Sadeh Vemata, Tnuvot Sadeh Marketing, Tnuvot Tene, Migdalei Ha’arava Exports, Tikshuvim – Business Communications Center, Sempal Investments, Meishar Omer, S. Angel, Grand Automotive Limited Partnership, Aquitel. Y.O.E.L. Jerusalem Oil Exploration, Nafta Israeli Oil Company, Grand Auto D.O.O.

Field Produce Int. B.V.


No


Yes

27

Director Name Yechezkel Dovrat – External Director

Citizenship Israeli

Date of Birth February 13 1946


Chair of the Financial Statement Examination Committee, Audit Committee


Yes – has expertise in accounting and finance


No


B.A. – Economics and Accounting – Tel-Aviv University

Certified Public Accountant

Employment:

2002-now – economic consultant and director at private and public companies.

- Chairman of Ta’avura Holdings Ltd.

- Acting Chairman of Tamig Tire Marketing Ltd. (of the Ta’avura Group).

- Acting Chairman of the Bonei Arim Group Ltd. - until May 2005

- Chairman of Kabiran (1991) Ltd. – until September 2006

- Ma’alot – the Israeli Securities Rating Company Ltd. (outside director) – until January 2008.

- Shlomo A. Angel Ltd. (outside director) – until September 2008.

- Pangaea Real Estate Ltd. (outside director) – until July 2010.


Clal Industries and Investments Ltd., Mivtach Shamir Holdings Ltd. – Chairman, H&O Fashion Ltd., Y.O.E.L. Jerusalem Oil Exploration Ltd., Efcon Industries Ltd., Hamashbir Holdings (1999) Ltd., Yechezkel Dovrat Consulting and Initiatives Ltd., Peanut and Cotton Marketing Ltd., Tnuvot Sadeh Vemata Ltd., H&O Fashion Chains (2003) Ltd., Migdalei Ha’arava Exports Ltd., Yozma Galil Shipping Company (1983) Ltd., Yozma Galil Holdings Ltd., Haroshet Explosive Industries (1997) Ltd., Haroshet Explosives Ltd.


No


Yes

Director Name Itzhak Weinstock

Citizenship Israeli; U.S.A.

Date of Birth November 25 1946


Remuneration Committee

28


No


Head of Operations at subsidiary Delta Galil USA starting January 1 2011.


1971 – M.B.A. – Columbia University

1979 – Certified Public Accountant

Employment:

2005-2010 – GMM Capital LLC

2003-2004 – ANG


No


No


No

Director Name Tzipporah Carmon

Citizenship Israeli

Date of Birth December 7 1952


Remuneration Committee


No


No


B.A. – Sociology and Education – Hebrew University, Jerusalem

M.B.A. –International Marketing and Trade – UCLA, California

Employment:

1993-now – Manager and owner of T.C. Export

Other Corporations in Which She Serves as Director

None


No


No

29

Director Name Israel Baum

Citizenship Israeli

Date of Birth January 24 1938


No


No


No


B.S.C – Manufacturing Engineer - Temple University, Philadelphia

Employment:

Provides consulting services to the Company


None


No


No

Director Name Noam Lautman

Citizenship Israeli

Date of Birth April 16 1969


Audit Committee, Financial Statement Examination Committee


No


No


1995 – B.Sc. – Mathematics and Computer Sciences – Tel-Aviv University

2000 – M.B.A. – New York University

Employment:

2006-now – 2gether Capital Ltd – CEO

2002-2006 – Teva Pharmaceutical Industries Ltd. – Director of New Initiatives and Strategic Planning


Browzwear

Cedar Design Group

30


Yes – son of Dov Lautman


No

Regulation 26a – Company Senior Executives

Name of Senior Executive Yossi Hajaj

ID Number 023543572

Date of Birth June 15 1968

Start of Term in Office March 2004

Position in the Corporation, a Subsidiary, a Related Company or

with an Interested Party

Chief Financial Officer



B.A. in Accounting and Economics – Tel-Aviv University

Employment:

2004-now – CFO

1999-2004 – Accountant and Secretary

Company Interested Party or Family Member of Other

Interested Party or Senior Executive in the Corporation

No

Name of Senior Executive Esti Maoz

ID Number 61019840

Date of Birth June 26 1947

Start of Term in Office January 2003



VP of Marketing and Strategic Development


Marketing – Certificate Studies – Haifa University

Employment:

1991-2002 – Manager, Delta New York



No

31

Name of Senior Executive Miki Laxer

ID Number 24557480

Date of Birth October 24 1969




Accountant and Secretary



B.A. – Accounting and Business Education – Tel-Aviv

College of Management

M.B.A. – Tel-Aviv College of Management

Employment:

Deputy Accountant – June 1999-March 2004



No

Name of Senior Executive Gil Admoni

ID Number 059183434

Date of Birth May 12 1965

Start of Term in Office August 9 2009



Head of Operating Segment, Delta Israel


B.A. – Economics and Business Administration – Hebrew

University, Jerusalem

M.A. – Marketing and Finance – Hebrew University,

Jerusalem

Employment:

2007-2009 – CEO – Hed Artzi Group and Tower Records

Retail Chain.

2003-2007 – VP of Marketing and Sales – DBS Satellite

Services (1998) Ltd. (YES).



No

32

Name of Senior Executive Shlomo Doron

ID Number 047091046

Date of Birth July 28 1948

Start of Term in Office November 2 2009



Deputy CEO and VP of Operations and Manager of Global

Division Upper Market Segment Area of Activity


Textile Graduate – Shenkar College

Employment:

2006-2009 – VP and Head of Business Development DIM

Brands Apparel – Paris.

2006-2002 – General Manager, Undergarments Area of

Activity – Sara Lee Courtaulds – London



No

Name of Senior Executive Motti Feuerman

ID Number 055602106


Start of Term in Office January 2 2008



VP of Human Resources


Graduate of Managerial Program in Human Resources,

Technion

B.A. in Philosophy and Geography – Tel-Aviv University

Employment:

2006-2008 –VP of Human Resources, Nilit.

1999-2006 –VP of Human Resources, Strauss Ice Cream



No

33

Name of Senior Executive Steve Klein

ID Number 126-54-3581


Start of Term in Office December 8 2004



Manager, Burlen


B.A. in Economics - Clark University

Employment:

Managing Burlen (in the period in question)



No

Name of Senior Executive Timothy Regan

ID Number 210629910

Date of Birth November 15 1951

Start of Term in Office July 3 2008



Manager, Delta Galil USA


Anthropology at Auckland University, USA

Employment:

2007-2008 – President Pleasure State

2004-2007 – Global Vice President, Vanity Fair Corporation



No

34

Name of Senior Executive Avi Avital

ID Number 55090567


Start of Term in Office July 3 2008



IT Manager


Graduate, School of Computer Engineering – Technion

Employment:

IT Manager (period in question)

1998-2008 – Company Deputy IT Manager



No

Name of Senior Executive Oren Groupi

ID Number 24120735





Auditor


M.A. in Law LLM – Bar Ilan University

B.A. in Business Administration (Accounting and Finance) –

College of Management

Employment:

2004-2011 – Head of Internal Auditing and Risk Management

Division and KPMG Somekh Chaykin Accountants



No

35

Regulation 26b – Independent Authorized Signatory

N/A.

Regulation 27 – the Company’s CPAs

Name of Accountant: Kesselman and Kesselman

Office Address: 25 Hamered, Tel Aviv

Regulation 28 – Changes to Bylaws or Articles of Association

N/A.

Regulation 29 – Director Recommendations Before the General Meeting and their Resolutions Not Requiring General Meeting Ratification; Special General Meeting Decisions

A special and annual general meeting from December 27 2010 in which it was decided (a) to ratify

the appointment of all directors serving at the Company who are not outside directors, Israel Baum,

Isaac Dabah, Itzhak Weinstock, Noam Lautman, Dr. Gideon Chitayat, and Ms. Tzipporah Carmon

for an additional term in office until the next general meeting; (b) to ratify the appointment of

accounting firm Kesselman and Kesselman as the Company’s auditing accountant for 2011 and

authorize the Company’s Board of Directors to set its pay according to the nature and scope of

services granted the Company in 2011; (c) to ratify the terms of the employment of Ms. Gloria

Dabah, daughter of Mr. Isaac Dabah, the Company's CEO and controlling shareholder, as product

manager and merchandising manager at Delta Galil USA Inc. starting March 8 2010, as detailed in

the General November 18 2011 General Meeting Summoning Report; (d) to ratify the terms of

employment of Mr. Itzhak Weinstock, Company director, as Chief Operations Officer for all of the

Company's activity in North America, as a full-time position, starting January 1 2011, as detailed in

the General November 18 2011 General Meeting Summoning Report. For further details regarding

the issues on the general meeting’s agenda and its results see the immediate reports published by

the Company on November 18 2010 (reference no. 2010-01-685278) and December 27 2010

(reference no. 2010-01-732738), presented by way of referral.

Regulation 29a – Company Resolutions

The following are the Company's resolutions regarding exemptions, insurance or commitments to compensate executives, in effect from the report date:

Director and Executive Liability Insurance Policy

On May 25 2008 the Company’s general meeting ratified a framework agreement according to

which the Company may, from time to time, enter into policies insuring the liability of Company

directors and executives (with the exception of directors and executives considered controlling

shareholders). Insurance coverage shall be of a sum no greater than twenty (20) million dollars US

36

for all Company executives and the yearly premium shall not exceed one hundred thousand

(100,000) dollars US and shall be in effect for a period of five years from ratification. For further

information see the immediate report published by the Company on May 13 2008 (reference no.:

2008-01-132033) and the immediate report on the results of the May 25 2008 meeting (reference

no.: 2008-01-143748), presented by way of referral.

On February 23 the Company's Audit Committee and Board of Directors ratified the extension of

the insurance policy in accordance with the terms ratified by the general meeting. It also approved

the inclusion of Mr. Isaac Dabah, Company Director and CEO and controlling shareholder, and Mr.

Itzhak Weinstock, a director in which the controlling shareholder has a personal interest in

including in the liability insurance policy for directors and executives of the Company and its

subsidiaries, in the insurance policy in question. The members of the Audit Committee confirmed

that the insurance terms regarding the directors Isaac Dabah and Itzhak Weinstock were identical to

the terms of the insurance of the other Company directors and executives; that the terms of the

policy are under market conditions; and that their inclusion in the policy will have no material

impact on the Company’s profitability, property or liabilities. For further details see the immediate

report published by the Company on February 17 2011.

In accordance with the above, the Company has a policy covering the liability of directors and

executives serving in it and in its subsidiaries. The policy has a liability limit of $10 million US, for

all insurance incidents and for the accumulated insurance period. The insurance period is between

January 1 and December 31. The total premium the Company will pay for the policy in question in

2011 is $38,900 (some $42,000 in 2010).

Advance Indemnity for Directors and Executives

The Company’s Audit Committee and Board of Directors on January 16 2003 and the Company

general meeting on March 25 approved an indemnity arrangement for executives serving today or

who have served in the Company in the past or will serve in the future including executives at

companies in which the Company holds at least 25% of their stock capital and letter of indemnity

expenses in accordance with the following principles.

In accordance with the above indemnity agreement, the Company shall compensate executives for

actions carried out/to be carried out by them by virtue of serving as director or executive, directly

or indirectly related to events which the Company's Board of Directors believes are expected in

light of the Company's activity in practice upon granting the indemnity commitment.

The Company shall compensate the executive for any financial liability applicable to the executive

in Israel and/or abroad in favor of any person or legal entity in accordance with the ruling

(including a ruling issued as part of a settlement or an arbitrator’s ruling ratified by a court). The

37

indemnity obligation shall apply to reasonable litigation expenses, including legal fees borne by the

executives or which the executive has been compelled to pay by the court as a result of proceedings

against the executive by the Company or for the Company or by any other individual or entity, or

legal charges for which the executive was acquitted, or criminal charges for which the executive

was found guilty of a crime that does not involve criminal intent.

The sum paid by the Company to the executive pursuant to the indemnity arrangement was limited

to a total of $15 million U.S. (less any sum paid the executive in accordance with the directors’ and

executives; insurance policy) and under the condition that the sum of the compensation does not

exceed 25% of the Company's equity on the date of payment.

The indemnity obligation as per Section 7.6.1 shall apply to the following events:

a. An act or failure to act pertaining to transactions conducted by the Company or a subsidiary

with other companies before or after a transaction including the act of signing the transaction,

its implementation and actions carried out by the executives for the Company.

b. The issue of securities, including, but without detracting from the generality of the above,

offering securities to the public in accordance with a prospectus, private offer, an offer for sale,

issue of bonus shares or offering securities in some other manner, carrying out purchase offers

and all related matters.

c. An event deriving from the fact that the Company is a public company or deriving from the fact

that its shares have been offered the public or deriving from the fact that the Company’s shares

are traded on the stock exchange.

d. An action or transaction as defined in Section 1 of the Companies Law including negotiations

for entry into a transaction or action, transfer, sale, purchase or lien on assets or liabilities

(including securities), or granting or receiving rights to any of them, receiving credit and

granting securities, as well as any action directly or indirectly related to the transaction or

action in question.

e. A report or announcement filed in accordance with the Companies Law or the Securities Law,

1968, including resulting regulations, or according to rules or guidelines practiced in stock

exchanges in Israel or abroad, or the law of some other country arranging similar matters and/or

avoidance of submittal of such a report or announcement.

f. Acts or decisions (including failures to act or decide) on the matter of hedging Company assets

or liabilities.

g. Sale, purchase or holding of negotiable securities.

38

h. Reports to, announcements to and requests for approval from (including actions pertaining to

said reports or requests) legal and administrative authorities in Israel and abroad including the

Securities Authority in Israel or abroad, securities exchanges in Israel or abroad, antitrust

authorities, the Registrar of Information, the Registrar of Companies and Trademarks, the

Registrar of Pledges, the Real Estate Registry etc.

i. Acts pertaining to trade and marketing relations, including actions and agreements with

contractors, customers, insurers, insurance agents and other agents, suppliers, service providers,

orders and purchases for the Company.

j. Any action that caused an error or failure to take appropriate security or safety measures.

k. Any announcement including presenting a position or opinion in good faith by the executive

over the course of their work and by virtue of their position as executive including in Board of

Directors or Board Committee meetings.

l. Alterations to the Company's structure or its restructuring or any related decision, including, but

without detracting from the generality of the above, mergers, spin-offs, arrangements between

the Company and its shareholders and/or creditors in accordance with the Companies Law,

changes in the Company’s capital, establishing subsidiaries, liquidating them or selling them,

their allocation or their distribution.

m. An action or decision pertaining to employer-employee relations including negotiations,

commitments and implementation of personal or group work agreements, employee benefits,

including allocating securities to employees.

n. Events pertaining to the Company’s information system.

o. An act leading to personal harm, illness, death or damage to property including loss of use of

property.

p. Any of the events detailed above, regarding the executives' service at Company subsidiaries.

Part E Yearly Report on the Effectiveness of

Internal Control on Financial Reporting and Disclosure as per Regulation 9.b.(a) of the

Securities Regulations (Periodic and Immediate Reports), 1970:

Attached herein is a yearly report on the effectiveness of internal controls on financial reporting and disclosure as per Regulation 9.b.(a) of the Securities Regulations (Periodic and Immediate Reports), 1970 as well as according to the guiding principles for implementing an evaluation of the effectiveness of internal controls on financial reporting and disclosure on the Board of Directors and management, as published by the Securities Authority in Legal Position 199-9 from November 23, 2010:

Management, under the supervision of the Board of Directors of Delta Galil Industries Ltd. (hereinafter – the Corporation), is responsible for establishing and maintaining adequate internal controls for financial reporting and disclosure in the corporation.

In this regard, senior executives and members of management consist of:

1. Mr. Isaac Dabah, CEO and director;

2. Shlomo Doron, Deputy CEO, Chief Operations Officer and Head of Global Upper Market Segment;

3. Yossi Hajaj, Chief Financial Officer;

4. Esti Maoz, VP of Marketing and Strategic Development;

5. Tim Regan, Manager, Delta Galil USA;

6. Steve Klein, Manager, Burlen;

7. Gil Admoni, Head of Delta Israel Segment;

8. Motti Fireman, VP of Human Resources;

9. Avi Avital, VP of Information Systems;

10. Gil Shimon, Head of Sock and Seamless Activity

11. Miki Laxer, Controller and Secretary;

Internal control of financial reporting and disclosure includes existing Corporation controls and procedures, designed by the CEO and the senior finance executive or under their supervision, or by the parties serving in the positions in question, under the supervision of the Corporation’s Board of Directors, which were designed to provide a reasonable level of certitude regarding the reliability of financial reporting and the preparation of the reports in accordance with the law, and to guarantee that information the corporation is required to disclose that it is publishing according to the law has been collected, processes, summarized and reported on the date and in the format set in law.

Internal control includes, among other things, controls and procedures designed to ensure that this information the corporation is required to disclose has been accumulated and passed on to the Corporation's management, including the CEO, the COO and the senior executive from the field of finance or whoever carries out these duties in practice, in order to allow decisions to be made in a timely manner, taking the disclosure requirements into account.

Due to its structural limitations, internal control of financial reporting and disclosure is not intended to provide absolute certainty that misrepresentation or omission of information in the reports will be avoided or discovered.

Management, under the supervision of the Board of Directors, conducted an examination of the control and an evaluation of the internal control of financial reporting and disclosure in the corporation and its effectiveness. Based on the aforementioned evaluation, the Corporation’s Board of Directors and management have reached the conclusion that the Corporation's internal controls on financial reporting and disclosure as of December 31, 2010 are effective.

Executive statements:

(a1) CEO Statement According to Regulation 9.b.(d).(1)

Managers’ Statement

Chief Business Manager’s Statement

I, Isaac Dabah, to hereby state that:

1. I have studied the periodic reports of Delta Galil Industries Ltd. (hereinafter – the Corporation) for 2010 (hereinafter – the Reports).

2. In my opinion, the Reports do not contain any untrue statement of a material fact nor omit to state a material fact necessary so that the statements included therein, in light of the circumstances under which such statements were made, will not be misleading with respect to the reported period.

3. In my opinion, the financial statements and any other financial information included therein, adequately reflect, in all material aspects, the financial standing, operating results and cash flows of the Corporation for the dates and periods referred to in the Reports.

4. I have disclosed, to the Bank’s independent auditor, the Board of Directors and the Audit Committee of the Corporation's Board of Directors, based on my most up-to-date evaluation on internal controls for financial reporting and disclosure:

a. All significant deficiencies and material weaknesses in the determination or operation of internal controls over financial reporting and disclosure that are reasonably likely to negatively impact the Corporation’s ability to record, process, summarize and report financial information in such a manner so as to cast doubt on the reliability of financial reporting and the preparation of the Financial Statements in accordance with the law, and –

b. Any fraud, material or not, involving the CEO or his direct subordinate or other employees who have a significant role in internal controls over the financial reporting and disclosure;

5. I, by myself or along with others in the Corporation:

a. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, intended to ensure that material information referring to the Corporation, including its subsidiaries as defined in the Securities Regulations (Yearly Financial Statements), 2010, has been brought to my attention by others in the Corporation and in its subsidiaries, particularly over the course of the preparation of the reports; and –

b. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, designed to provide reasonable assurance of the reliability of financial reporting and preparation of the Financial Statements in accordance with the law, including in accordance with generally accepted accounting practices;

c. Have assessed the effectiveness of internal controls on financial reporting and disclosure, and presented in this report the conclusions of the Board of Directors and Management regarding the effectiveness of internal controls as of the reports.

The above does not detract from my responsibility or the responsibility of any other person according to the law .

February 16 2011 Isaac Dabah– CEO

(b) Statement of the Most Senior Executive from the Field of Finance as per Regulation 9.(b)(d).(2).

Managers’ Statement

Statement of the Most Senior Executive from the Field of Finance

I, Yossi Hajaj, do hereby state that:

1. I have studied the periodic reports of Delta Galil Industries Ltd. (hereinafter – the Corporation) for 2010 (hereinafter – the Reports).

2. In my opinion, the Reports do not contain any untrue statement of a material fact nor omit to state a material fact necessary so that the statements included therein, in light of the circumstances under which such statements were made, will not be misleading with respect to the reported period.

3. In my opinion, the financial statements and any other financial information included therein, adequately reflect, in all material aspects, the financial standing, operating results and cash flows of the Corporation for the dates and periods referred to in the Reports.

4. I have disclosed, to the Bank’s independent auditor, the Board of Directors and the Audit Committee of the Corporation's Board of Directors, based on my most up-to-date evaluation on internal controls for financial reporting and disclosure:

a. All significant deficiencies and material weaknesses in the determination or operation of internal controls over financial reporting and disclosure that are reasonably likely to negatively impact the Corporation’s ability to record, process, summarize and report financial information in such a manner so as to cast doubt on the reliability of financial reporting and the preparation of the Financial Statements in accordance with the law, and –

b. Any fraud, material or not, involving the CEO or his direct subordinate or other employees who have a significant role in internal controls over the financial reporting and disclosure;

5. I, by myself or along with others in the Corporation:

a. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, intended to ensure that material information referring to the Corporation, including its subsidiaries as defined in the Securities Regulations (Yearly Financial Statements), 2010, has been brought to my attention by others in the Corporation and in its subsidiaries, particularly over the course of the preparation of the reports; and –

b. Have established controls and procedures, or confirmed that the establishment and existence of controls and procedures under my supervision, designed to provide reasonable assurance of the reliability of financial reporting and preparation of the Financial Statements in accordance with the law, including in accordance with generally accepted accounting practices;

c. Have assessed the effectiveness of internal controls on financial reporting and disclosure, and presented in this report the conclusions of the Board of Directors and Management regarding the effectiveness of internal controls as of the reports.

The above does not detract from my responsibility or the responsibility of any other person according to the law .

February 16 2011 Yossi Hajaj –Chief Financial Officer

annual report 2010 1

Documents