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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0001178913-07-000631.txt : 20070329
<SEC-HEADER>0001178913-07-000631.hdr.sgml : 20070329
<ACCEPTANCE-DATETIME>20070329111806
ACCESSION NUMBER:              0001178913-07-000631
CONFORMED SUBMISSION TYPE:     20-F
PUBLIC DOCUMENT COUNT:         14
CONFORMED PERIOD OF REPORT:    20061231
FILED AS OF DATE:              20070329
DATE AS OF CHANGE:             20070329

FILER:

         COMPANY DATA:
                 COMPANY CONFORMED NAME:                      TEFRON
LTD
               CENTRAL INDEX KEY:                      0001044863
               STANDARD INDUSTRIAL CLASSIFICATION:     WOMEN'S,
MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS [2340]
               IRS NUMBER:                             000000000
               STATE OF INCORPORATION:                         L3
               FISCAL YEAR END:                        1231

         FILING VALUES:
                 FORM TYPE:            20-F
                 SEC ACT:              1934 Act
                 SEC FILE NUMBER:      001-14680
                 FILM NUMBER:          07726253

         BUSINESS ADDRESS:
                 STREET 1:             28 CHIDA ST
                 STREET 2:             ISRAEL
                 CITY:                 BNEI BRAK
                 ZIP:                  51371

        MAIL ADDRESS:
                STREET 1:              28 CHIDA ST
                STREET 2:              ISRAEL
                CITY:                  BNEI BRAK
                ZIP:                   51371
</SEC-HEADER>
<DOCUMENT>
<TYPE>20-F
<SEQUENCE>1
<FILENAME>zk73517.txt
<TEXT>


     AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH
29, 2007
=====================================================================
===========

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 20-F

[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES
     EXCHANGE ACT OF 1934

                                      OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
     ACT OF 1934

                 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
     EXCHANGE ACT OF 1934

              FOR THE TRANSITION PERIOD FROM ________ TO ________

                                      OR

[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
     EXCHANGE ACT OF 1934

          DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ________

                        COMMISSION FILE NUMBER 0-28878

                                  TEFRON LTD.
            (Exact name of Registrant as specified in its charter)

                                    ISRAEL
                (Jurisdiction of incorporation or organization)

         INDUSTRIAL CENTER TERADYON, P.O. BOX 1365, MISGAV 20179,
ISRAEL
                   (Address of principal executive offices)

 Securities registered or to be registered pursuant to Section 12(b)
of the Act:

Title of each class                   Name of each exchange on which
registered
- -------------------                   ----------------------------
-------------
ORDINARY SHARES,                      NEW YORK STOCK EXCHANGE
NIS 1.0 PAR VALUE PER SHARE

 Securities registered or to be registered pursuant to Section 12(g)
of the Act:
                                      NONE
                                 (Title of Class)

           Securities for which there is a reporting obligation
pursuant
                          to Section 15(d) of the Act:
                                      NONE
                                (Title of Class)

Indicate the number of outstanding shares of each of the issuer's
classes of
capital or common stock as of the close of the period covered by the
annual
report:

             20,750,168 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE


<PAGE>


Indicate by check mark if the registrant is a well-known seasoned
issuer, as
defined in Rule 405 of the Securities Act.

                                YES [_]     NO [X]

If this report is an annual or transition report, indicate by check
mark if the
registrant is not required to file reports pursuant to Section 13 or
15(d) of
the Securities Exchange Act of 1934.

                                YES [_]     NO [X]

Indicate by check mark whether the registrant (1) has filed all
reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during
the preceding 12 months (or for such shorter period that the
registrant was
required to file such reports), and (2) has been subject to such
filing
requirements for the past 90 days.

                                YES [X]     NO [_]

Indicate by check mark whether the registrant is a large accelerated
filer, an
accelerated filer, or a non-accelerated filer. See definition of
"accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check
one):

LARGE ACCELERATED FILER   [_]   ACCELERATED FILER   [X]   NON-ACCELERATED
FILER [_]

Indicate by check mark which financial statement item the registrant
has elected
to follow.
                              ITEM 17 [_]         ITEM 18 [X]

If this is an annual report, indicate by check mark whether the
registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).

                                   YES [_]        NO [X]


                                             ii
<PAGE>


                                   TABLE OF CONTENTS


Page


PART I
3

     ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
3
     ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE
3
     ITEM 3.   KEY INFORMATION
3
         A.    Selected Financial Data
3
         B.    Capitalization and Indebtedness
4
         C.    Reasons for the Offer and Use of Proceeds
4
         D.    Risk Factors
5
     ITEM 4.   INFORMATION ON THE COMPANY
16
         A.    History and Development of the Company
16
         B.    Business Overview
17
         C.    Organizational Structure
26
         D.    Property, Plants and Equipment
26
     ITEM 4A   UNRESOLVED STAFF COMMENTS
28
     ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS
29
     ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
42
         A.    Directors and Senior Management
42
         B.    Compensation
45
         C.    Board Practices
47
         D.    Employees
50
         E.     Share Ownership
51
     ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
54
         A.     Major Shareholders
54
         B.     Related Party Transactions
55
         C      Interests of Experts and Counsel
58
     ITEM 8.    FINANCIAL INFORMATION
58
     ITEM 9.    THE OFFER AND LISTING
59
         A.     Offer and Listing Details
59
         B.     Plan of Distribution
60
         C.     Markets
60
         D.     Selling Shareholders
60
         E.     Dilution
60
         F.     Expenses of the Issue
60
     ITEM 10.   ADDITIONAL INFORMATION
61
         A.     Share Capital
61
         B.     Memorandum and Articles of Association
61
         C.     Material Contracts
63
         D.     Exchange Controls
73
         E.     Taxation
73
         F.     Dividends and Payment Agents
78
         G.     Statements by Experts
78
         H.     Documents on Display
78
         I.     Subsidiary Information
78
   ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK      79
   ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
80


                                         iii
<PAGE>


PART II
81

     ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
81
     ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
                HOLDERS AND USE OF PROCEEDS
81
     ITEM 15T. CONTROLS AND PROCEDURES
81
     ITEM 16.   [RESERVED]
82
     ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
82
     ITEM 16B. CODE OF ETHICS
82
     ITEM 16C. ACCOUNTANTS' FEES AND SERVICES
82
     ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDI
               COMMITTEES
83
     ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND
               AFFILIATED PURCHASERS
83

PART III
84

     ITEM 17.   FINANCIAL STATEMENTS
84
     ITEM 18.   FINANCIAL STATEMENTS
84
     ITEM 19.   EXHIBITS
85


                                           iv
<PAGE>


                                       INTRODUCTION

     As used in this Annual Report on Form 20-F, references to "we",
"our",
"us", "Tefron" or the "Company" are references to Tefron Ltd., a
company
organized under the laws of the State of Israel, and its wholly-owned
subsidiaries, unless indicated otherwise.

     Our consolidated financial statements have been prepared in
United States
dollars and in accordance with accounting principles generally
accepted in the
United States, or U.S. GAAP. See Note 2 of the Notes to our
Consolidated
Financial Statements. All references in this Annual Report to "U.S.
dollars,"
"dollars" or "$" are to United States dollars and all references in
this Annual
Report to "NIS" or "shekels" are to New Israeli Shekels. Unless
otherwise
indicated, and when no date is specified, NIS amounts have been
translated into
U.S. dollars at NIS 4.225 to $1.00, the representative rate of
exchange
published by the Bank of Israel, the Israeli central bank, for
December 31,
2006. The representative exchange rate between the NIS and the dollar
as
published by the Bank of Israel for March 15, 2007 was NIS 4.212 to
$1.00.

     All references in this Annual Report to "Victoria's Secret" are
both to the
Victoria's Secret stores and Victoria's Secret Catalog owned and
operated by
Intimate Brands, Inc., a subsidiary of The Limited, Inc., and to Mast
Industries
Inc., a wholly-owned subsidiary of The Limited, which imports and
distributes
women's intimate apparel and related products on behalf of Victoria's
Secret
stores, Victoria's Secret Catalog and Cacique. All references in this
Annual
Report to "Warnaco/Calvin Klein" are to Warnaco Inc., the owner
worldwide of the
Calvin Klein trademarks, rights and business for women's intimate
apparel and
men's underwear. All references in this Annual Report to "Nike" are
to Nike,
Inc.

                          FORWARD-LOOKING STATEMENTS

     This Annual Report contains forward-looking statements within
the meaning
of the U.S. Securities Act of 1933, as amended, the U.S. Securities
Exchange Act
of 1934, as amended, and the safe harbor provisions of the United
States Private
Securities Litigation Reform Act of 1995. These forward-looking
statements
involve risks and uncertainties and relate to our future plans,
objectives,
expectations and intentions. The use of words such as "may," "will,"
"expect,"
"anticipate," "intend," "plan," "estimate," "believe," "continue" or
other
similar expressions often identify forward-looking statements but are
not the
only way we identify these statements. These forward-looking
statements reflect
our current expectations and assumptions as to future events that may
not prove
to be accurate.

     Our actual results are subject to a number of risks and
uncertainties and
could differ materially from those discussed in these statements.
Factors that
could contribute to these differences include, but are not limited
to, those
discussed under "Item 3. Key Information," "Item 4. Information on
the Company"
and "Item 5. Operating and Financial Review and Prospects" and
elsewhere in this
Annual Report. The uncertainties that may cause differences include,
but are not
limited to:

     o    our customers' continued purchase of our products in the
same volumes
          or on the same terms;

      o   the cyclical nature of the clothing retail industry;

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

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


                                      1
<PAGE>


     o    the potential adverse effect on our future operating
efficiency
          resulting from our expansion into new product lines with
more
          complicated products and different raw materials;

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

     o    dependence on our suppliers for our machinery and the
maintenance of
          our machinery;

      o   the fluctuating costs of raw materials;

     o    our dependence on subcontractors in connection with our
manufacturing
          process;

     o    our failure to generate sufficient cash from our operations
to pay our
          debt;

      o   fluctuations in inflation and currency rates; and

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

     In addition, you should note that our past financial and
operational
performance is not necessarily indicative of future financial and
operational
performance.

     We undertake no obligation to publicly update or revise any
forward-looking
statements, whether as a result of new information, future events or
otherwise.
In light of these risks, uncertainties and assumptions, the forward-
looking
events discussed in this annual report might not occur.


                                         2
<PAGE>


                                        PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

       Not Applicable.


ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

       Not Applicable.

ITEM 3. KEY INFORMATION

3A.    SELECTED FINANCIAL DATA

     The following selected financial data as of December 31, 2005
and 2006 and
for each of the three years ended December 31, 2004, 2005 and 2006
have been
derived from, and should be read in conjunction with, our
consolidated financial
statements and notes thereto appearing elsewhere in this Annual
Report. The
selected financial data as of December 31, 2002, 2003, and 2004 and
for each of
the years ended December 31, 2002 and December 31, 2003 have been
derived from
our audited financial statements not included in this Annual Report.

     We sold our ownership interest in AlbaHealth in April 2006.
Accordingly,
the financial statements of AlbaHealth are accounted for as
discontinued
operations, and the financial results and information described below
do not
include the financial results of AlbaHealth. We ceased to consolidate
the
financial statements of AlbaHealth commencing April 27, 2006.

<TABLE>
<CAPTION>
                                                  2002          2003
2004            2005             2006
                                              ----------     --------
--     ----------     ----------     ----------
<S>                                           <C>            <C>
<C>            <C>            <C>
STATEMENT OF INCOME DATA:
Sales                                         $ 177,986      $
124,800     $ 148,620      $ 171,336      $ 188,104
Cost of sales                                    142,904
113,622        136,424        141,621        145,144
Restructuring costs                                1,550
-              -              -              -
                                              ----------     --------
--     ----------     ----------     ----------

Gross profit                                        33,532
11,178         12,196         29,715           42,960
Selling, and marketing expenses                     10,601
9,285         11,309          8,984           11,573
General and administrative expenses                  6,151
5,017          5,603          4,595            5,504
Restructuring costs                                  3,793
-              -              -                -
                                                ----------   --------
--    ----------     ----------        ----------

Operating income (loss)                            12,987
(3,124)        (4,716)        16,136          25,883
Financing expenses, net                             5,030
4,019          3,888          3,189           1,912
Loss on issuance of subsidiary's shares to
     third party                                     2,082
-              -              -                -
                                                ----------   --------
--    ----------     ----------        ----------

Income (loss) before taxes on income                5,875
(7,143)        (8,604)        12,947          23,971
Taxes on income (tax benefit)                       4,979
(616)            83          4,297           5,711
Equity in losses (earnings) of affiliated
     companies                                       1,172
(183)             -              -               -
Pre-acquisition earnings of subsidiary
     since April 1, 2003 through May 5,
     2003                                              -
(85)             -              -              -
                                              ----------     --------
--     ----------     ----------     ----------
Income (loss) before cumulative effect of
     change in accounting principle                 (276)
(6,795)        (8,687)         8,650         18,260
Cumulative effect of change in accounting
     principle                                    17,994
-              -              -              -
                                              ----------     --------
--     ----------     ----------     ----------
Income (loss) from continuing operations         (18,270)
(6,795)        (8,687)         8,650         18,260
Income (loss) from discontinued
     operations, net of taxes (including
     impairment and other costs related to
     the exercise of the put option)                 772
2,342          1,822         (5,357)           120
                                              ----------    --------
--     ----------     ----------     ----------
Net income (loss)                             $ (17,498)    $
(4,453)    $   (6,865)    $    3,293     $   18,380
Basic and diluted net earnings (losses)
     per share from continuing operations:
Basic net earnings (losses) per share              (1.47)
(0.55)         (0.56)          0.49           0.90
                                              ==========
==========     ==========     ==========     ==========
Diluted net earnings (losses) per share            (1.47)       (0.
55)          (0.56)          0.47           0.88
                                              ----------    --------
--     ----------     ----------     ----------
Basic and diluted net earnings (loss) per
     share from discontinued operations:
Basic net earnings (losses) per share               0.06
0.19           0.12          (0.30)          0.01
                                              ----------    --------
--     ----------     ----------     ----------
Diluted net earnings (losses) per share             0.06
0.19           0.12          (0.29)          0.01
                                              ----------    --------
--     ----------     ----------     ----------
Basic and diluted net earnings (loss) per
     share:`
Basic net earnings (losses) per share              (1.41)
(0.36)         (0.44)          0.19           0.91
                                              ----------    --------
--     ----------     ----------     ----------
Diluted net earnings (losses) per share            (1.41)
(0.36)         (0.44)          0.18           0.89
                                              ----------    --------
--     ----------     ----------     ----------
Weighted average number of shares used for
     computing basic earnings (losses) per
     share                                    12,409,929
12,412,166     15,603,904     17,719,275     20,210,722
                                              ----------    --------
--     ----------     ----------     ----------
Weighted average number of shares used for
     computing diluted earnings (losses)
     per share                                12,409,929
12,412,166     15,603,904     18,542,618     20,754,566
                                              ==========
==========     ==========     ==========     ==========
</TABLE>


                                       3
<PAGE>


<TABLE>
<CAPTION>
                                                      AT DECEMBER
31,
                             ---------------------------------------
-------------------------
                                   2002            2003            2004
2005         2006*
                               ---------      ---------        ---------
---------     ---------
                                                             (in thousands)
<S>                            <C>            <C>               <C>
<C>          <C>
Cash and cash equivalents      $     5,376    $     3,784      $    2,462
$   7,652    $   3,966

Working capital (deficit)          (6,600)        (14,944)         (8,524)
7,296       35,270

Total assets                       196,411        201,591          191,531
186,514      164,656

Total debt(1)                      81,122          84,224          66,507
56,621       25,270

Shareholders' equity               40,108          36,655          46,744
54,685       82,230

Share Capital                        5,575          5,575           6,582
6,810        7,411

Additional paid in capital         62,810          62,810          79,243
83,069      101,684
</TABLE>

- ------------------
     (1) Bank debt consists of total bank debt, other loans received
and
capital lease obligations.

     * In 2006, dividends declared per share amounted to $0.4851. No
dividends
were declared in the years 2002 - 2005.

3B.    CAPITALIZATION AND INDEBTEDNESS

       Not Applicable.

3C.    REASONS FOR THE OFFER AND USE OF PROCEEDS

       Not Applicable.


                                          4
<PAGE>


3D.    RISK FACTORS

          WE DEPEND ON A SMALL NUMBER OF PRINCIPAL CUSTOMERS WHO HAVE
IN THE
     PAST BOUGHT OUR PRODUCTS IN LARGE VOLUMES. WE CANNOT ASSURE THAT
THESE
     CUSTOMERS OR ANY OTHER CUSTOMER WILL CONTINUE TO BUY OUR
PRODUCTS IN THE
     SAME VOLUMES OR ON THE SAME TERMS.
     Our sales to Victoria's Secret accounted for approximately 47.4%
of our
total sales in 2004, 40.3% of our total sales in 2005 and 38.6% of
our total
sales in 2006. Our sales to Nike accounted for approximately 8.3% of
our total
sales in 2004, 25.8% of our total sales in 2005 and 28.8% of our
total sales in
2006. Our sales to Target, Banana Republic and The Gap, J.C. Penny
and Calvin
Klein accounted in the aggregate for approximately, 32.3% of our
total sales in
2004, 22.4% of our total sales in 2005 and 18.6% of our total sales
in 2006. We
do not have long-term purchase contracts with our customers, and our
sales
arrangements with our customers do not have minimum purchase
requirements. We
cannot assure that Victoria's Secret, Nike, Target, Banana Republic
and The Gap,
J.C Penny, Calvin Klein or any other customer will continue to buy
our products
at all or in the same volumes or on the same terms as they have in
the past.
Their failure to do so may significantly reduce our sales. In
addition, we
cannot assure that we will be able to attract new customers. For
comparison
purposes, all data provided above excludes AlbaHealth, in which we
sold our
ownership in April 2006.

     A material decrease in the quantity of sales made to our
principal
customers, a material adverse change in the terms of such sales or a
material
adverse change in the financial conditions of our principal customers
could
significantly reduce our sales.

          OUR BUSINESS MAY BE MATERIALLY AFFECTED IF ANY OF OUR
PRINCIPAL
     CUSTOMERS DEFAULTS ON ITS PAYMENT TO US.

     A significant part of our sales is made to a limited number of
customers.
Our two largest customers accounted for 67.4% of our sales in 2006,
and our
largest seven customers accounted for approximately 86.0% of our
sales in 2006.
We generally do not require and do not receive collateral from those
customers.
We maintain an allowance for doubtful debts based upon factors
surrounding the
credit risk of specific customers, historical trends and other
information which
our management believes adequately covers all anticipated losses in
respect of
trade receivables. There can be no assurance that this allowance will
be
adequate. In the event that any of our major clients defaults on its
payment
obligations to us, this could have a material adverse effect on our
operating
results.

          OUR PRINCIPAL CUSTOMERS ARE IN THE CLOTHING RETAIL
INDUSTRY, WHICH IS
     SUBJECT TO SUBSTANTIAL CYCLICAL VARIATIONS. OUR REVENUES WILL
DECLINE
     SIGNIFICANTLY IF OUR PRINCIPAL CUSTOMERS DO NOT CONTINUE TO BUY
OUR
     PRODUCTS IN LARGE VOLUMES DUE TO AN ECONOMIC DOWNTURN.

     Our customers are in the clothing retail industry, which is
subject to
substantial cyclical variations and is affected strongly by any
downturn in the
general economy. A downturn in the general economy, a change in
consumer
purchasing habits or any other events or uncertainties that
discourage consumers
from spending, could have a significant effect on our customers'
sales and
profitability. Such downturns, changes, events or uncertainties could
result in
our customers having larger inventories of our products than
expected. These
events could result in decreased purchase orders from us in the
future, which
would significantly reduce our sales and profitability. For example,
the
difficult global economic environment and the continuing soft retail
market
conditions in the world and specifically in the U.S. both before and
especially
after the events of September 11, 2001 were reflected in
disappointing clothing
retail sales in the year 2001 compared to the same period in the year
2000, and
consequently decreased our order backlog and production levels. A
prolonged
economic downturn could harm our financial condition.


                                      5
<PAGE>


          THE CLOTHING RETAIL INDUSTRY IS SUBJECT TO CHANGES IN
FASHION
     PREFERENCES. IF WE OR OUR CUSTOMERS MISJUDGE A FASHION TREND OR
THE PRICE
     AT WHICH CONSUMERS ARE WILLING TO PAY FOR OUR PRODUCTS, OUR
REVENUES COULD
     BE ADVERSELY AFFECTED.

     The clothing retail industry is subject to changes in fashion
preferences.
We design and manufacture products based on our and our customers'
judgment as
to what products will appeal to consumers and what price consumers
would be
willing to pay for our products. We may not be successful in
accurately
anticipating consumer preferences and the prices that consumers would
be willing
to pay for our products. If we are not successful, our customers may
reduce the
volume of their purchases from us and/or the prices at which we sell
our
products will decline, in either case resulting in reduced revenues.

          OUR MARKETS ARE HIGHLY COMPETITIVE AND SOME OF OUR
COMPETITORS HAVE
     NUMEROUS ADVANTAGES OVER US; WE MAY NOT BE ABLE TO COMPETE
SUCCESSFULLY.

     We compete directly with a number of manufacturers of intimate
apparel,
active-wear and swimwear, many of which have a lower cost-base than
Tefron,
longer operating histories, larger customer bases, greater
geographical
proximity to customers and significantly greater financial and
marketing
resources than we do. Increased competition, direct or indirect,
could reduce
our revenues and profitability through pricing pressure, loss of
market share
and other factors. We cannot assure that we will be able to compete
successfully
against existing or new competitors, as the market for our products
evolves and
the level of competition increases. Moreover, our competitors,
especially those
from the Far East, have established relationships with our customers,
which has
caused an erosion of prices of some of the products of our Cut & Sew
Division;
current or future relationships between our existing and prospective
competitors, especially from the Far East, with existing or potential
customers,
could materially affect our ability to compete. In addition, we
cannot assure
that our customers will not seek to manufacture our products through
alternative
sources, including directly with our subcontractors, and thereby
eliminate the
need to purchase our products. See "Item 4. Information on the
Company - 4B.
Business Overview - Competition."

     Our customers operate in an intensely competitive retail
environment. In
the event that any of our customers' sales decline for any reason,
whether or
not related to us or to our products, our sales to such customers
could be
materially reduced.
     In addition, our competitors may be able to purchase seamless
knitting
machines and other equipment similar to, but less expensive than, the
Santoni
knitting machines we use to knit garments in our Hi-Tex manufacturing
process.
By reducing their production cost, our competitors may lower their
selling
prices. If we are forced to reduce our prices and we cannot reduce
our
production costs, it will cause a reduction in our profitability.
Furthermore,
if there is a weak retail market or a downturn in the general
economy,
competitors may be pressured to sell their inventory at substantially
depressed
prices. A surplus of intimate apparel at significantly reduced prices
in the
marketplace would significantly reduce our sales.

          WE FACE SEVERAL RISKS, INCLUDING POLITICAL, ECONOMIC AND
SOCIAL RISKS,
     ASSOCIATED WITH INTERNATIONAL BUSINESS.

     Approximately 90% of our sales in 2004 and in 2005 and 77% of
our sales in
2006 were made to customers in North America, and approximately 18%
of our sales
during 2006 were made to customers in Europe. (These figures exclude
AlbaHealth,
in which we sold our ownership interest in April 2006.) We also had
initial
sales to Asia constituting approximately 2% of our sales in 2006. We
intend to
continue to expand our sales to customers in the United States,
Europe and Asia.
We also aim to sell our products to the Asian market, through the
joint venture
which we are in the process of establishing in China. In addition, a
substantial
majority of our raw materials are purchased outside of Israel.
Furthermore, a
substantial majority of our sewing operation is performed in Jordan,
and
products, equipment and machinery of ours are situated in Jordan for
that
purpose. Our international sales and purchases are affected by costs
associated
with shipping goods and risks inherent in doing business in
international
markets, including:


                                      6
<PAGE>


    o    changes in regulatory requirements;

    o    export restrictions, tariffs and other trade barriers;
     o    quotas imposed by international agreements between the
United States
          and certain foreign countries;

    o      currency fluctuations;

    o      longer payment cycles;

    o      difficulties in collecting accounts receivable;

     o     political instability, hostility and seasonal reductions in
business
           activities; and

    o      strikes and general economic problems.

     Any of these risks could have a material adverse effect on our
ability to
deliver or receive goods on a competitive and timely basis and on our
results of
operations. We cannot assure that we will not encounter significant
difficulties
in connection with the sale or procurement of goods in international
markets in
the future or that one or more of these factors will not
significantly reduce
our sales and profitability. See "Item 4. Information on the Company
- 4B.
Business Overview - Manufacturing and Production."

     In addition, we may enter into joint ventures with third parties
or
establish operations outside of Israel that will subject us to
additional
operating risks. These risks may include diversion of management time
and
resources and the loss of management control over such operations and
may
subject us to the laws of such jurisdiction. For instance, due to
commercial
disputes that arose between us and the other shareholder of our
subsidiary that
managed operations in Madagascar, we no longer have production
activities in
Madagascar. In the context of these commercial disputes, the court
appointed a
liquidator to sell the company and to use the proceeds to pay third
party
creditors. We do not currently expect to incur additional material
costs in
connection with the court procedure, although we cannot be certain.

     In addition to our production facilities in Israel, we currently
have
production facilities in Jordan, we have relationships with
manufacturers in
India, China and Cambodia and we are in the process of shifting
additional
sewing production out of Israel to benefit from lower labor costs.
     We have also contracted with a Chinese company and a Japanese
company for
the formation of a Chinese joint venture for the manufacture of
seamless
underwear to the Asian market. However, the process of establishment
of the
joint venture entity has not yet been concluded.

     Our ability to benefit from the lower labor costs will depend on
the
political, social and economic stability of these countries and in
the Middle
East, Asia and Africa in general. We cannot assure that the
political, economic
or social situation in these countries or in the Middle East, Asia
and Africa in
general will not have a material adverse effect on our operations,
especially in
light of the potential for hostilities in the Middle East. The
success of the
production facilities also will depend on the quality of the
workmanship of
laborers and our ability to maintain good relations with such
laborers, in these
countries. We cannot guarantee that our operations in China,
Cambodia, Jordan or
any newer locations outside of Israel will be cost-efficient or
successful.

          OUR EXPANSION INTO NEW PRODUCT LINES WITH MORE COMPLICATED
PRODUCTS
     AND DIFFERENT RAW MATERIALS REDUCED OUR OPERATING EFFICIENCY
DURING 2003
     AND 2004 AND WE MAY ALSO FACE OPERATING EFFICIENCY DIFFICULTIES
IN THE
     FUTURE.

     In recent years, we have invested significant efforts to develop
and expand
new product lines, including active-wear products and swimwear, to
diversify our
product line and our client base. The manufacturing of new, more
complicated
products with different raw materials reduced our operating
efficiency in 2003
and 2004. Although our operating efficiency improved in 2005 and
2006, our
continued efforts to develop and expand new product lines may result
in
additional reductions in operating efficiency in the future.


                                      7
<PAGE>


         OUR EXPANSION INTO NEW PRODUCT LINES, IN PARTICULAR ACTIVE-
WEAR
     BUSINESS PRODUCTS, INVOLVES THE MANUFACTURE OF NEW PRODUCTS,
WHICH HAS AND
     MAY REQUIRE US TO PURCHASE ADDITIONAL MACHINERY ADAPTED TO
MANUFACTURE SUCH
     PRODUCTS. THE ADDITIONAL CAPITAL EXPENDITURES INCURRED IN
CONNECTION WITH
     THESE PURCHASES MAY REDUCE OUR FUTURE CASH FLOW.

     In recent years, we have invested significant efforts to develop
and expand
our new product lines, in particular active-wear products, to
diversify our
product line and our client base. Active-wear products that we
manufacture are
made in bigger sizes than intimate apparel, both because our active-
wear
products are intended for both men and women, and because our active-
wear
products involve the manufacture of more tops. As a result, we have
purchased
and may need to purchase additional knitting machines and other
equipment
adapted to manufacture new products. In addition, the manufacture of
active-wear
products at times requires equipment with new technologies. The
additional
capital expenditures that may be incurred in connection with these
purchases may
reduce our future cash flow.

          WE DEPEND ON OUR SUPPLIERS FOR MACHINERY AND THEIR
MAINTENANCE. WE MAY
     EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
     REQUIREMENTS DUE TO OUR RELIANCE ON THESE SUPPLIERS.

     We purchase machinery and equipment used in our Hi-Tex
manufacturing
process from a sole supplier. If our supplier is not able to provide
us with
maintenance, additional machinery or equipment as needed, we might
not be able
to maintain or increase our production to meet any demand for our
products.

          OUR RESULTS OF OPERATIONS WOULD BE MATERIALLY AND ADVERSELY
AFFECTED
     IN THE EVENT WE ARE UNABLE TO OPERATE OUR PRINCIPAL PRODUCTION
FACILITIES
     IN SEGEV, ISRAEL.

     All of our knitting process with respect to our Seamless
Division, which
includes the major portion of our manufacture of our active-wear
products, is
performed in a complex of production facilities located in Segev,
which is in
northern Israel. These facilities also contain a significant portion
of our
machinery and equipment, including Santoni machines and adaptations
and
configurations that we have made to the machinery and equipment, as
well as
infrastructure that we have built tailored to our needs. We have no
effective
back-up for these operations and, in the event that we are unable to
use the
production facilities located in Segev, Israel as a result of damage
or for any
other reason, our ability to manufacture a major portion of our
products and our
relationships with customers could be significantly impaired and this
would
materially and adversely affect our results of operation. During the
third
quarter of 2006, our revenues were affected by the loss of production
due to
hostilities in the northern part of Israel, and there is the risk
that further
hostilities would also impact our production in the future, leading
to a
reduction in revenues.

         WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

     We use cotton yarn, lycra, spandex, various polymeric yarn and
elastic as
primary materials for manufacturing our products. Our financial
performance
depends, to a substantial extent, on the cost and availability of
these raw
materials. The capacity, supply and demand for such raw materials are
subject to
cyclical and other market factors and may fluctuate significantly. As
a result,
our cost in securing raw materials is subject to substantial
increases and
decreases over which we have no control except by seeking to time our
purchases
of cotton and polymeric yarns, which are our principal raw materials,
to take
advantage of favorable market conditions. For example, in 2004 and
2005 the cost
of synthetic fibers increased due to rising energy costs, and there
may be a
similar increase in the future. We cannot assure that we will be able
to pass on
to customers the increased costs associated with the procurement of
raw
materials. Moreover, there has in the past been, and there may in the
future be,
a time lag between the incurrence of such increased costs and the
transfer of
such increases to customers. To the extent that increases in the cost
of raw
materials cannot be passed on to customers or there is a delay in
passing on the
increased costs to customers, we are likely to experience an increase
in the
cost of raw materials which may materially reduce our margin of
profitability.


                                      8
<PAGE>


          WE DEPEND ON SUBCONTRACTORS IN CONNECTION WITH OUR
MANUFACTURING
     PROCESS, IN PARTICULAR THE SEWING, DYEING AND FINISHING PROCESS;
WE MAY
     EXPERIENCE DELAYS OR ADDITIONAL COSTS SATISFYING OUR PRODUCTION
     REQUIREMENTS AND WE MAY BE PREVENTED FROM MEETING OUR CUSTOMERS'
ORDERS DUE
     TO OUR RELIANCE ON THESE SUBCONTRACTORS.

     We depend on subcontractors who render services to us that are
an integral
part of our manufacturing process, and in particular sewing services.
If such
subcontractors do not render the required services, we may experience
delays or
additional costs to satisfy our production requirements. We depend on
a
subcontractor who performs a major part of the dyeing and finishing
of our
Hi-Tex manufacturing process, which is an essential part of our
manufacturing
process. If that subcontractor breaches its commitments toward us or
is
otherwise not able to supply the required services, we would have
difficulty
meeting our customer orders until we find an alternative source.

          AN INCREASE IN THE MINIMUM WAGE IN ISRAEL AND IN JORDAN MAY
ADVERSELY
     AFFECT OUR OPERATING RESULTS.

     Many of our employees earn the minimum wage payable under law.
The current
minimum monthly wage in Israel is approximately NIS 3,585 and in
Jordan is
approximately JD 110. It is currently expected that the minimum
monthly wage in
Israel will increase to approximately NIS 3,850 effective as of
December 1,
2007. Such increase in the minimum wage will increase our labor
costs, and
unless we can obtain alternative labor in lower cost markets, this
increase
could adversely affect our operating results.

          WE REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SATISFY OUR DEBT
     OBLIGATIONS. IF WE FAIL TO GENERATE SUFFICIENT CASH FLOW FROM
OPERATIONS,
     WE MAY NEED TO RENEGOTIATE OR REFINANCE OUR DEBT, OBTAIN
ADDITIONAL
     FINANCING, POSTPONE CAPITAL EXPENDITURES OR SELL ASSETS.

     We depend mainly on our cash generated by continuing operating
activities
to make payments on our debts. The cash generated by continuing
operating
activities was approximately $17.8 million and $27.3 million in 2005
and 2006,
respectively. We cannot assure that we will generate sufficient cash
flow from
operations to make the scheduled payments on our debt. We have
repayment
obligations on our long-term debt of approximately $5.9 million in
2007, $5.9 in
2008 and the balance of $13.4 million from 2009 until 2012. Our
ability to meet
our debt obligations will depend on whether we can successfully
implement our
strategy, as well as on economic, financial, competitive and
technical factors.
Some of the factors are beyond our control, such as economic
conditions in the
markets where we operate or intend to operate, changes in our
customers' demand
for our products, and pressure from existing and new competitors.

     If we cannot generate sufficient cash flow from operations to
make
scheduled payments on our debt obligations, we may need to
renegotiate the terms
of our debt, refinance our debt, obtain additional financing, delay
planned
capital expenditures or sell assets. Our ability to renegotiate the
terms of our
debt, refinance our debt or obtain additional financing will depend
on, among
other things:

    o    our financial condition at the time;

    o    restrictions in agreements governing our debt; and

    o    other factors, including market conditions.

     If our lenders decline to renegotiate the terms of our debt in
these
circumstances, the lenders could declare all amounts borrowed and all
amounts
due to them under the agreements due and payable. If we are unable to
repay the
debt in these circumstances, the lenders could foreclose on our
assets that are
subject to liens and sell our assets to satisfy the debt. See "Item
5. Operating
and Financial Review and Prospects" and "Item 10. Additional
Information -10C
Material Contracts - Credit Agreement."


                                      9
<PAGE>


          OUR BUSINESS MAY BE IMPACTED BY INFLATION AND U.S. DOLLAR,
NIS AND
     EURO EXCHANGE RATE FLUCTUATIONS.

     Exchange rate fluctuations between the U.S. dollar and the NIS
and between
the Euro and the U.S. dollar, and inflation in Israel, may negatively
affect our
earnings. A substantial majority of our revenues and a substantial
portion of
our expenses are denominated in U.S. dollars and a portion of our
revenues is
denominated in Euros. However, a significant portion of the expenses
associated
with our Israeli operations, including personnel and facilities-
related
expenses, are incurred in NIS. Consequently, inflation in Israel will
have the
effect of increasing the dollar cost of our operations in Israel,
unless it is
offset on a timely basis by a devaluation of the NIS relative to the
U.S.
dollar. We cannot predict any future trends in the rate of inflation
in Israel
or the rate of devaluation of the NIS against the U.S. dollar. In
addition, we
are exposed to the risk of appreciation of the NIS vis-a-vis the U.S.
dollar.
This appreciation would cause an increase in our NIS expenses as
recorded in our
U.S. dollar denominated financial reports even though the expenses
denominated
in NIS will remain unchanged. In addition, exchange rate fluctuations
in
currency exchange rates in countries other than Israel where we
operate and do
business may also negatively affect our earnings. See "Item 11.
Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Risk."

          OUR DEBT OBLIGATIONS MAY HINDER OUR GROWTH AND PUT US AT A
COMPETITIVE
     DISADVANTAGE.

     We have a considerable amount of bank debt mainly as a result of
our
acquisition of Alba Walsensian, Inc., or Alba, in December 1999 and
the
investments made in our Hi-Tex Division. As of December 31, 2006, we
had
approximately $25.3 million of long term loans outstanding (including
current
maturities of $5.9 million). Our substantial debt obligations could
have
important consequences. For example, they could:

     o    require us to use a substantial portion of our operating
cash flow to
          repay the principal and interest on our loans, which would
reduce
          funds available to grow and expand our business, invest in
machinery
          and equipment and for other purposes;

     o    place us at a competitive disadvantage compared to our
competitors
          that have less debt;
     o    make us more vulnerable to economic and industry downturns
and reduce
          our flexibility in responding to changing business and
economic
          conditions;

    o    limit our ability to pursue business opportunities; and

     o   limit our ability to borrow money for operations or capital
in the
         future.

     Because our loans bear interest at floating rates, an increase
in interest
rates could reduce our profitability. A ten percent change on our
floating
interest rate long-term loans outstanding at December 31, 2006, would
have an
annual impact of approximately $0.2 million on our interest cost. See
"Item 5.
Operating and Financial Review and Prospectus - Liquidity and Capital
Resources"
and "Item 11. Quantitative and Qualitative Disclosures about Market
Risk."


                                      10
<PAGE>


          DUE TO RESTRICTIONS IN OUR LOAN AGREEMENTS, WE MAY NOT BE
ABLE TO
     OPERATE OUR BUSINESS AS WE DESIRE.

     Our loan agreements contain a number of conditions and
limitations on the
way in which we can operate our business, including limitations on
our ability
to raise debt, sell or acquire assets and pay dividends. Our loan
agreements
also contain various covenants which require that we maintain certain
financial
ratios related to shareholder's equity and operating results. These
limitations
and covenants may force us to pursue less than optimal business
strategies or
forgo business arrangements which could have been financially
advantageous to us
and our shareholders. See "Item 5. Operating and Financial Review and
Prospects
- - Liquidity and Capital Resources." Our failure to comply with the
covenants and
restrictions contained in our loan agreements could lead to a default
under the
terms of these agreements. For instance, during 2004 and the second
quarter of
2005, our former subsidiary, AlbaHealth, failed to comply with
certain financial
covenants contained in its credit facility with GE Capital, including
a minimum
EBITDA requirement. In April 2006, we sold our ownership interest in
AlbaHealth.
See "Item 10. Additional Information - 10C. Material Contracts -
Disposition of
Interest in AlbaHealth."

     If a default occurs and we are unable to renegotiate the terms
of our debt,
the lenders could declare all amounts borrowed and all amounts due to
them under
the agreements due and payable. If we are unable to repay the debt,
the lenders
could foreclose on our assets that are subject to liens and sell our
assets to
satisfy the debt. See "Item 10. Additional Information - 10C.
Material Contracts
- - Credit Agreement."

          WE ARE AFFECTED BY CONDITIONS TO, AND POSSIBLE REDUCTION
OF,
      GOVERNMENT PROGRAMS AND TAX BENEFITS.

     We benefit from certain Israeli Government programs and tax
benefits,
particularly as a result of the "Approved Enterprise" status of
substantially
all of our existing production facilities in Israel. As a result of
our
"Approved Enterprise" status, we have been able to receive
significant
investment grants with respect to our capital expenditures. In
addition,
following our exhaustion of our net operating loss carry forwards, we
have been
able to benefit from a reduced tax rate of 25% on earnings derived
from these
investments for which the benefit period has not expired. To maintain
eligibility for these programs and tax benefits, we must continue to
meet
certain conditions, including making certain specified investments in
fixed
assets and conducting our operations in specified "Approved
Enterprise" zones in
Israel. If we fail to meet such conditions in the future, we could be
required
to refund tax benefits and grants already received, in whole or in
part, with
interest linked to the Consumer Price Index, or CPI, in Israel from
the date of
receipt. We have granted a security interest over all of our assets
to secure
our obligations to fulfill these conditions.

     The Government of Israel has reduced the available amount of
investment
grants from up to 38% of eligible capital expenditures in 1996 to up
to 24% of
eligible capital expenditures (for projects not exceeding investments
of 140
million shekels that are submitted in any year) and up to 20% of
eligible
capital expenditures (for projects exceeding investments of 140
million shekels
that are submitted in any year) since 1997. There can be no assurance
that the
Israeli Government will not further reduce the availability of
investment
grants, and there can be no assurance that there will be any
government budget
for such grants. The termination or reduction of certain programs and
tax
benefits, particularly benefits available to us as a result of the
"Approved
Enterprise" status of some of our existing facilities in Israel,
would increase
the costs of acquiring machinery and equipment for our production
facilities and
increase our effective tax rate which, in the aggregate, could
significantly
reduce our profitability. In addition, income attributed to certain
programs is
tax exempt for a period of two years and is subject to a reduced
corporate tax
rate of 10% - 25% for an additional period of five to eight years,
based on the
percentage of foreign investment in the Company. We cannot assure
that we will
obtain approval for additional Approved Enterprises, or that the
provisions of
the Law for the Encouragement of Capital Investments, 1959, as
amended, will not
change or that the 25% foreign investment percentage will be reached
for any
subsequent year. See "Item 4. Information on the Company - 4B.
Business Overview
- - Israeli Investment Grants and Tax Incentives."

     We also benefit from exemptions from customs duties and import
quotas due
to our locations in Israel and Jordan (Qualified Industrial Zone),
and the free
trade agreements Israel maintains with the United States, Canada, the
European
Union, or EU, and the European Free Trade Association, or EFTA. If
there is a
change in such benefits or if any such agreements were terminated,
our
profitability may be reduced. Recently, there has been a worldwide
trend to
reduce quotas and customs in order to promote free trade. If other
countries
enter into similar free trade agreements and obtain similar benefits,
the price
of apparel products, including our products, may decline and our
profitability
may be reduced.


                                      11
<PAGE>
          OUR ANNUAL AND QUARTERLY OPERATING RESULTS MAY VARY WHICH
MAY CAUSE
     THE MARKET PRICE OF OUR ORDINARY SHARES TO DECLINE.

     We may experience significant fluctuations in our annual and
quarterly
operating results which may be caused by, among other factors:

    o       the timing, size and composition of orders from customers;

    o       varying levels of market acceptance of our products;

     o    the timing of new product introductions by us, our
customers or their
          competitors;

     o    economic conditions in the geographical areas in which we
operate or
          sell products; and

    o       operating efficiencies.

     When we establish a relationship with a new customer, initial
sales to such
customer are often in larger quantities of goods (to build its
initial
inventory) and we may be required to replenish such inventory from
time to time
afterwards. As a result, after a customer builds its initial
inventory, our
sales to such customer may decrease. We cannot assure that our sales
to any of
our customers will continue at the current rate. See "Item 5.
Operating and
Financial Review and Prospects."

     Our operations are affected by our principal customers'
businesses, which
businesses are subject to substantial cyclical variations. If demand
for our
products is significantly reduced, our profits will be reduced, and
we may
experience slower production, lower plant and equipment utilization
and lower
fixed operating cost absorption.

     Additionally, if, in any year, there is a significant number of
Christian,
Druse, Jewish or Muslim holidays in a particular quarter, we will
have fewer
days of operation which will result in lower levels of production and
sales
during such quarter. In certain years, a significant number of such
holidays
have occurred during the second quarter, but the dates of many of
those holidays
are based on the lunar calendar and vary from year to year.

            IF OUR ORDINARY SHARES ARE DELISTED FROM THE NEW YORK STOCK
EXCHANGE,
     THE LIQUIDITY AND PRICE OF OUR ORDINARY SHARES AND OUR ABILITY
TO ISSUE
     ADDITIONAL SECURITIES MAY BE SIGNIFICANTLY REDUCED.

     In order to maintain the listing of our Ordinary Shares on the
NYSE and the
TASE (where our Ordinary Shares began trading on September 28, 2005),
we are
required to meet specified maintenance standards. In addition, the
NYSE has
amended its continued listing criteria to require, among other
things, either a
minimum stockholders' equity of $75 million or a minimum market
capitalization
of $75 million. As of March 15, 2007, our market capitalization was
$205.3 million, and as of December 31, 2006, we had shareholders'
equity of
$82.2 million.

     In the event we fail to meet any current or revised listing
criteria of the
NYSE and the TASE, our Ordinary Shares may be delisted from trading
on the NYSE
and/or the TASE, respectively. We cannot assure that we will meet all
the
listing criteria in the future. Delisting of our Ordinary Shares
would result in
limited availability of market price information and limited news
coverage. In
addition, delisting could diminish investors' interest in our
Ordinary Shares as
well as significantly reduce the liquidity and price of our Ordinary
Shares.
Delisting may also make it more difficult for us to issue additional
securities
or secure additional financing.


                                      12
<PAGE>


         WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

     Our success is substantially dependent upon the adaptations and
configurations we make to the machinery and equipment that we
purchase and upon
the manufacturing technologies, methods and techniques that we have
developed
for our exclusive use. Only a part of the adaptations,
configurations,
technologies or techniques used in our manufacturing process is
patented.
Moreover, we purchase our machinery and equipment from third parties
and we
cannot assure that a competitor will not adapt, configure or
otherwise utilize
machinery or equipment in substantially the same manner as we do. In
addition,
our subcontractors have access to proprietary information, including
regarding
our manufacturing processes, and from time to time we also lend
machinery and
equipment to subcontractors, and there is a chance that
subcontractors may
breach their confidentiality undertakings toward us. Any replication
of our
manufacturing process by an existing or future competitor would
significantly
reduce our sales and profitability.

         WE FACE POTENTIAL COMPETITION BY OUR FORMER EMPLOYEES.

     Our trade secrets are well known to some of our employees. In
the event one
or more of our current or former employees exploit our trade secrets
in
violation of their non-competition and confidentiality obligations,
we may be
adversely affected in the competitive market and in our relationships
with our
customers and suppliers.

          WE FACE POTENTIAL CONFLICTS OF INTEREST CAUSED BY INVESTOR
INFLUENCE.

     Our principal shareholders have a great deal of influence over
the
constitution of our Board of Directors and over matters submitted to
a vote of
the shareholders. As of March 15, 2007, Norfet, Limited Partnership
had voting
power over approximately 21.8% of the outstanding Ordinary Shares of
Tefron
(excluding 997,400 Ordinary Shares held by our wholly-owned
subsidiary). In
addition, as of March 15, 2007 and based on available public
information, Meir
Shamir, one of our directors, owned approximately 40.0% in Mivtach-
Shamir, which
at such date was an approximately 34.5-% holder in Norfet. As a
result, the
corporate actions of Tefron may be significantly influenced by Mr.
Shamir.
Furthermore, as of March 15, 2007, Ishay Davidi, the Chairman of our
Board of
Directors, served as CEO of FIMI 2001 Ltd., which controls the
general partner
of Norfet, one of the Norfet limited partners (which is managed by
FIMI 2001
Ltd.) as well as the other Norfet limited partners by virtue of an
irrevocable
power of attorney. As a result, the corporate actions of Tefron may
be
significantly influenced by Mr. Davidi.

     As of March 15, 2007, Arie Wolfson, one of our directors, had
direct voting
power (through Arwol Holdings Ltd., an Israeli company wholly-owned
by Mr.
Wolfson) over approximately 4.7% of the outstanding Ordinary Shares
of Tefron
(excluding 997,400 Ordinary Shares held by our wholly owned
subsidiary). Mr.
Wolfson is also the Chairman and a significant shareholder of Macpell
Industries
Ltd., an Israeli company that owned approximately 13.5% of the
outstanding
Ordinary Shares of Tefron (excluding 997,400 Ordinary Shares held by
our
wholly-owned subsidiary) as of March 15, 2007. The controlling
shareholders of
Macpell have entered into a shareholders' agreement regarding
corporate actions
of Macpell, including the process by which Macpell votes its Ordinary
Shares of
Tefron to elect our Directors. As a result, the corporate actions of
Tefron may
be influenced significantly by Mr. Wolfson and by the other
controlling
shareholders of Macpell.

     In connection with the acquisition of Tefron Ordinary Shares by
Norfet,
Limited Partnership from the Company, Arwol Holdings Ltd. and from
Macpell, each
of Norfet, Arwol and Macpell agreed to vote all of the Tefron
Ordinary Shares
owned or controlled by each of them for the election to the Company's
nine-member Board of Directors of: (i) two members plus one
independent director
and one external director nominated by Norfet, Limited Partnership,
(ii) two
members plus one independent director and one external director
nominated by
Arwol and Macpell, and (iii) the Company's chief executive officer.


                                      13
<PAGE>


     We are party to consulting and management services agreements
with each of
(i) Mr. Wolfson and a company controlled by him and (ii) Norfet,
pursuant to
which each of them agreed to provide consultancy and management
services to
Tefron. We also lease various properties from an affiliate of
Macpell. See "Item
6. Directors, Senior Management and Employees - 6A. Directors and
Senior
Management," "Item 7. Major Shareholders and Related Party
Transactions," and
Note 17 of the Notes to the Consolidated Financial Statements.

     Israeli law imposes procedures, including, for certain material
transactions, a requirement of shareholder approval, as a
precondition to
entering into interested party transactions. These procedures may
apply to
transactions between Macpell and us and between Norfet and us.
However, we
cannot assure that we will be able to avoid the possible detrimental
effects of
any such conflicts of interest by complying with the procedures
mandated by
Israeli law. See "Item 6. Directors, Senior Management and Employees
- 6A.
Directors and Senior Management," "- 6C. Board Practices," and "Item
7. Major
Shareholders and Related Party Transactions."

          A DETERIORATION IN ISRAEL'S RELATIONSHIP WITH NEIGHBORING
COUNTRIES IN
     WHICH TEFRON HAS PRODUCTION FACILITIES COULD INTERRUPT TEFRON'S
PRODUCTION
     AND HARM ITS FINANCIAL RESULTS.

     A significant portion of our manufacturing process is performed
in Jordan.
Our operations in Jordan depend largely on its relationship with the
State of
Israel. In the past, there have been hostilities between Israel and
Jordan. In
addition, since October 2000, there has been an increase in
hostilities between
Israel and the Palestinians. A deterioration in Israel's relations
with Jordan
could interrupt our manufacturing operations and would adversely
affect our
business.

          WE ARE SUBJECT TO VARIOUS RISKS RELATING TO OPERATIONS IN
ISRAEL.

     We are incorporated under the laws of, and our main offices and
manufacturing facilities are located in, the State of Israel. We are
directly
influenced by the political, economic and security conditions in
Israel. Since
the establishment of the State of Israel in 1948, a number of armed
conflicts
have taken place between Israel and its Arab neighbors and a state of
hostility,
varying in degree and intensity, has led to security and economic
concerns for
Israel. Any major hostilities involving Israel, the interruption or
curtailment
of trade between Israel and its trading partners or a significant
downturn in
the economic or financial condition of Israel could have a material
adverse
effect on our operations. The establishment in 2006 of a government
in the
Palestinian Authority by representatives of the Hamas militant group
has created
additional unrest and uncertainty in the region. Further, during the
summer of
2006, Israel was engaged in an armed conflict with Hezbollah, a
Lebanese
Islamist Shiite militia group, which involved thousands of missile
strikes and
disrupted most day-to-day civilian activity in northern Israel. This
conflict
adversely affected our sales and increased our costs. We cannot
assure that
ongoing or revived hostilities or other factors related to Israel
will not have
a material adverse effect on us or our business.

     Generally, all male adult citizens and permanent residents of
Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days
of annual
military reserve duty. Additionally, all such residents are subject
to being
called to active duty at any time under emergency circumstances. Some
of our
officers and employees are currently obligated to perform annual
reserve duty.
No assessment can be made as to the full impact of such requirements
on our
workforce or business, and no prediction can be made as to the effect
of any
expansion or reduction of such military obligations on our business.
See "Item
4. Information on the Company - 4B. Business Overview - Conditions in
Israel."
Perry, please have this reviewed by your office.


                                      14
<PAGE>


     During 2004, a general strike at Israel's ports caused a
shortage of raw
materials and resulted in a loss to the Company of sales of
approximately $2.5
million. This shortage also resulted in a decrease in production
volume and an
increase in operating costs, which affected our ability to achieve
greater
operating efficiencies. Although Israel's Ministry of Finance, the
Histadrut
(General Federation of Labor in Israel), and the Israel Ports
Authority signed
an agreement in February 2005 which is intended to ensure five years
without
labor strikes, a further strike or labor disruption at Israel's ports
may occur
and have an adverse effect on us or our business.

          YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES IN THE
UNITED STATES
     AGAINST OUR OFFICERS AND OUR DIRECTORS.

     Most of our officers and all of our directors reside outside the
United
States. Service of process upon them may be difficult to effect
within the
United States. Furthermore, because the majority of our assets are
located
outside the United States, any judgment obtained in the United States
against us
or any of our directors and officers may not be collectible within
the United
States.


                                       15
<PAGE>


ITEM 4. INFORMATION ON THE COMPANY

4A.   HISTORY AND DEVELOPMENT OF THE COMPANY

     Tefron Ltd. was incorporated under the laws of the State of
Israel on March
10, 1977. Our principal executive offices are located at Ind. Center
Teradyon,
P.O. Box 1365, Misgav 20179, Israel and our telephone number is 972-
4-9900-881.
We are subject to the provisions of the Israeli Companies Law, 1999.
Our agent
for service of process in the United States is CSC Corporation
Service Company,
2711 Centerville Rd. Suite 400, Wilmington, DE 19808.

      Below is a summary of significant events in our development:

           1990     First bodysize cotton panty with applicated
elastics

         1997       Formation of Hi-Tex Founded by Tefron Ltd. and
production of
                    first seamless panty.

                    Initial public offering of our Ordinary Shares on
the NYSE.

           1998     Acquisition of a dyeing and finishing facility to
achieve
                    greater vertical integration of our business.

         1999       Acquisition of Alba, a manufacturer of seamless
apparel and
                    healthcare products.

         2001       Initial significant shifting of sewing production
to Jordan.

         2001       Launch of a turn-around program, including
significant cost
                    reduction, downsizing and consolidation of
operations.

         2002       Reorganization of Alba, including a spin-off of
the Health
                    Product Division and the formation of the
AlbaHealth joint
                    venture with a strategic investor, and the
initial
                    consolidation of the seamless production activity
in Hi-Tex
                    in Israel which was completed in the second
quarter of 2003.

         2003       Acquisition of all of the outstanding ordinary
shares of
                    Macro Clothing Ltd., an entity that manufactures,
markets
                    and sells swimsuits and beachwear.

                    Implementation of strategic steps to expand our
product
                    line, including active-wear products, to
diversify our
                    product line and client base.

         2004       Closing of equity investments with two groups of
investors
                    in the aggregate amount of $20 million.

         2004       Launch of a new business division, Sports
Innovation
                    Division, or SID, devoted to our growing US
customer base in
                    the performance active-wear market.

           2005     Listing of our Ordinary Shares for trading on the
TASE (in
                    addition to the listing on the NYSE).


                                      16
<PAGE>


         2006       Closing of a public offering of Ordinary Shares
and option
                    certificates on the TASE for aggregate net
proceeds of $13.8
                    million. We subsequently received approximately
$5.7 million
                    from the exercise of the option certificates,
primarily in
                    2007.

                    Disposition of our ownership interest in
AlbaHealth.

         2006       Launch of a joint Center of Excellence with Nike,
located at
                    Nike's world headquarters in Beaverton, Oregon.

           2006     Signing of an agreement to form a joint venture
in China
                    with Langsha Knitting Co., Ltd, a Chinese
company, and
                    Itochu Corporation, a Japanese company, aimed at
                    manufacturing seamless underwear for the Asian
market.
         DISPOSITION OF INTEREST IN ALBAHEALTH LLC

     In April 2006, we sold our ownership interest in AlbaHealth for
consideration of approximately $13 million, consisting of
approximately $10
million paid in cash and $3 million pursuant to the terms of an
unsecured
subordinated promissory note, the principal amount of which is due
August 31,
2009. The note bears annual interest at LIBOR plus 3%, and the
payment of the
note is subordinated in favor of AlbaHealth's senior bank lenders.
See "Item 10.
Additional Information - 10C. Material Contracts - Disposition of
Interest in
AlbaHealth."

CAPITAL EXPENDITURES

     Our capital expenditures for fixed assets (net of grants from
the
Government of the State of Israel) were $3.5 million, $4.5 million
and $7.7
million for the years ended December 31, 2006, 2005 and 2004,
respectively. The
2006 expenditures were primarily made in Israel to purchase new
knitting
machines, dyeing and finishing machines, sewing machines and other
equipment.
See Consolidated Statements of Cash Flows in the Consolidated
Financial
Statements.

     Our current capital expenditures include investments in
equipment,
machinery and leasehold improvements in our facilities in Israel and
Jordan. See
Note 6 of the Notes to the Consolidated Financial Statements. We
expect to incur
capital expenses primarily to acquire new knitting machines, dyeing
and
finishing machines, and other equipment for our Hi-Tex Division and
to shift
more labor intensive manufacturing processes of our Hi-Tex division
out of
Israel to Jordan and other locations to take advantage of lower labor
costs.

     As of the date of this Annual Report, we estimate that our
capital
expenditures for 2007 will be approximately $8.0 million. We expect
to finance
these investments primarily from cash generated from operations and
from cash on
hand. However, the actual amount of our capital expenditures will
depend on a
variety of factors, including general economic conditions, changes in
demand for
our products, increase in the sales growth of our new products, the
risks and
uncertainties involved in doing business in Jordan and our ability to
generate
sufficient cash from operations. See "Item 3. Key Information - 3D.
Risk
Factors."

4B.   BUSINESS OVERVIEW

OVERVIEW

     We manufacture intimate apparel, active-wear and swimwear sold
throughout
the world by such name-brand marketers as Victoria's Secret, Nike,
Target,
Warnaco/Calvin Klein, The Gap, Banana Republic, J.C. Penney,
lululemon
athletica, Puma, Patagonia, Reebok, Swimwear Anywhere, El Corte
Englese and
other well known American retailers and designer labels. Through the
utilization
of manufacturing technologies and techniques developed or refined by
us, we are
able to mass-produce quality garments featuring unique designs
tailored to our
customers' individual specifications. Our product line includes
knitted briefs,
bras, tank tops, boxers, leggings, crop, T-shirts, daywear,
nightwear,
bodysuits, swimwear, beach-wear, active-wear and accessories.


                                      17
<PAGE>


     We seek to apply our manufacturing technologies and techniques
to meet the
fashion and merchandising needs of our customers. With product
innovation made
possible by our manufacturing capabilities, we invest our marketing
efforts to
become a principal supplier to a more select customer base,
representing some of
the leaders in the intimate apparel and active-wear industries. As a
result of
this strategy, we successfully entered the United States market for
quality,
competitively priced intimate apparel, active-wear and swimwear.

     We are known for the technological innovation of our Hi-Tex
manufacturing
process. Our Hi-Tex manufacturing process was implemented as part of
our
strategy to streamline our manufacturing process and improve the
design and
quality of our products. The Hi-Tex manufacturing process involves
the
utilization of a single machine that transforms yarn directly into a
nearly
complete garment, replacing the knitting, cutting, and significant
sewing
functions which, in traditional manufacturing, are performed
sequentially on
separate machines at separate workstations. Following this single-
machine
operation, all the Hi-Tex manufacturing process requires to complete
the garment
is dyeing and a reduced amount of sewing and finishing. Our Hi-Tex
manufacturing
process enables us to produce a substantially wider range of fabrics,
styles and
product lines, resulting in a consistently high level of comfort,
quality and
durability. Our fabric engineering, product design and the comfort of
our
products provide us with an opportunity to expand our sales of
active-wear
products.

     We believe that our collaboration with our customers in the
design and
development of our products strengthens our relationships with our
customers and
improves the quality of our products. We began our relationship with
Victoria's
Secret in 1991, with Banana Republic and The Gap in 1993, with
Warnaco/Calvin
Klein in 1994 and with Nike and J.C. Penny in 2000. In 2000, we also
began our
relationship with Target, which was an existing customer of Alba
Waldensian,
Inc., which name was changed to Tefron USA, Inc., or Tefron USA.
These customers
accounted for approximately 88.5% and 86.0% of our total sales in
2005 and in
2006, respectively. We enjoy several strategic advantages by reason
of our
location in Israel and Jordan. Israel is one of the few countries in
the world
that has free trade agreements with the United States, Canada, the
EU, and the
EFTA. These agreements permit us to sell our products in the United
States,
Canada and the member countries of the EU and the EFTA free of
customs duties
and import quotas. Due to our locations in Israel and in Jordan we
benefit from
exemptions from customs duties and import quotas. We also currently
benefit from
substantial investment grants and tax incentives provided by the
Government of
Israel and from the availability in Israel of both skilled engineers
and
unskilled workers. See "- Israeli Investment Grants and Tax
Incentives" and "-
Conditions in Israel -Trade Agreements."

PRODUCTS

     In close collaboration with our customers, we design and
manufacture
intimate apparel, active-wear and swimwear. Through our efficient
capability, we
produce garments made of cotton and synthetic fibers for large-volume
marketers
who, in recent years, have increased retail consumer interest for
quality
intimate apparel and active-wear at affordable prices. We believe
that our
advanced technology and manufacturing processes enable us to deliver
intimate
apparel and active-wear that is comfortable to wear, fits well,
fashionable,
made of high-quality fabric and difficult to imitate. Our product
line includes
knitted briefs, bras, tank tops, boxers, leggings, crop, T-shirts,
daywear,
nightwear, bodysuits, swimwear, beach-wear, active-wear and
accessories.


                                      18
<PAGE>


     The principal markets for our products are the United States and
Europe.
For a breakdown of our sales by geographic area and operating
segments, see Note
16c. of the Notes to the Consolidated Financial Statements.

MANUFACTURING AND PRODUCTION

     We have developed manufacturing innovations for various stages
of the
production process, including improvements in the knitting of fabric
as well as
the cutting and sewing of individual garments. Our manufacturing
technologies
and techniques allow us to provide our customers with mass-produced
quality
merchandise at competitive prices. In May 1997, we introduced our Hi-
Tex
manufacturing process which consolidates a large portion of the
production steps
into a single machine, the Santoni knitting machine, and has enabled
us to
produce a substantially wider range of fabrics, styles and product
lines at a
consistently higher level of comfort, quality and durability. The
Santoni
knitting machines are seamless knitting machines that use state-of-
the-art
computer controlled circular knitting technology.

     We manufacture products principally to fill firm orders and,
therefore,
maintain limited inventory of finished goods. Customers typically
send projected
product requirements to us between six and 12 months in advance of
the delivery
requirements and place firm orders between three and six months prior
to the
desired delivery date. This lead time allows us to coordinate raw
material
procurement with its usage and to adjust production levels in order
to meet
demand.

     We currently produce intimate apparel, active-wear and swimwear
products in
different style, color and yarn combinations. We manufacture cotton
knit
products using our advanced proprietary manufacturing techniques and
also
produce fine products from synthetic fibers, including micro-fibers,
using our
cut-and-sew manufacturing process and our highly automated Hi-Tex
manufacturing
process.

     A significant portion of the manufacturing process for our
swimwear
products is outsourced to subcontractors, mostly in China and
Cambodia, but also
in Israel, that manufacture the products based on our development,
design and
specifications. In many cases, these subcontractors manufacture the
complete
garment and deliver directly to our customers. Our quality assurance
and quality
control personnel work with our subcontractors to maximize product
quality
standards.

MANUFACTURING PROCESS

     We utilize vertically integrated production processes and
automated
production techniques. These processes involve the following steps:

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

     o    RAW MATERIAL DEVELOPMENT - After a design is developed, raw
materials
          for the production of the product are purchased. Our raw
materials
          include cotton yarns, blends of cotton and synthetic yarn
(E.G.,
          cotton-spandex, cotton-lycra and cotton-viscose), micro-
fiber nylons
          and blends of micro-fiber nylon with lycra/spandex and
elastic. We
          purchase our raw materials from several international and
domestic
          Israeli suppliers and historically have not experienced any
difficulty
          in obtaining raw materials to meet production requirements.
Raw
          materials are generally purchased against actual orders,
although we
          have a policy of maintaining a minimum level of those raw
materials
          that are in repeated demand. From time to time, when market
conditions
          are favorable, we have entered into contracts with various
suppliers
          of basic yarns for delivery over a period of three to six
months. The
          costs of our raw materials are subject to fluctuations. See
"Item 3.
          Key Information - 3D. Risk Factors - We are subject to
fluctuating
          costs of raw materials."


                                        19
<PAGE>


       o    KNITTING (ONLY CUT & SEW) - The knitting needs of our Cut &
Sew
            Division are provided by subcontractors in Israel that
currently
            supply substantially all of our fabric needs in Israel. Our
            subcontractors utilize advanced and automated technology to
knit
          tubular fabric, including bodysize fabrics. Bodysize
fabrics, which
          are required for bodysize garments, enable maximum use of
fabric and
          minimize waste during cutting. We operate 115 automatic
knitting
          machines, which have capacity to produce approximately 300
tons of
          fabric per month (depending on the type of fabric). During
2006, we
          produced approximately 94 tons of fabric per month.

     o    DYEING AND FINISHING - Our Cut & Sew Division's dyeing and
finishing
          facility can satisfy a significant portion of its dyeing
and finishing
          needs in-house. The remainder is outsourced to dyeing and
finishing
          subcontractors in Israel. Almost all of the dyeing and
finishing needs
          of our Hi-Tex Division are provided by a subcontractor in
Israel. We
          have established testing procedures which examine all
fabric upon
          return to us to ensure the color consistency, stability and
durability
          of our dyed fabric.

     o    CUTTING (ONLY CUT & SEW) - Traditionally, manufacturers
manually cut
          multiple layers of fabric on a cutting table. To modernize
the
          production process, manufacturers have used computerized,
automatic
          cutting equipment. We use both this equipment and highly
advanced
          machines that automatically and continuously lay and cut
tubular
          knitted fabric to specified sizes, minimizing fabric waste
and the
          amount of sewing required, which results in a more
consistent and
          comfortable garment.

      o   SEWING (ONLY CUT & SEW) - Cut fabrics are sewn to complete
the
          garment, including the addition of accessories such as
elastic waist
          and leg bands as well as labels. Working with computerized
equipment
          and robotics, our employees and subcontractors sew garments
with far
          greater precision than if sewn entirely by hand. Our Cut &
Sew
          Division operates a sewing facility in Jordan and also
subcontracts
          sewing in Israel, China and Jordan.

     o    TESTING AND QUALITY CONTROL - We place significant emphasis
on quality
          control and use quality assurance teams at each stage of
the
          manufacturing process.

HI-TEX MANUFACTURING PROCESS

     In an effort to streamline and automate the manufacturing
process further,
we developed the Hi-Tex manufacturing process, which utilizes state-
of-the-art
technology that eliminates most stages of the manufacturing process
while
increasing efficiency, consistency and quality. We have successfully
combined
existing hosiery and apparel technologies to create this new
manufacturing
process. The Hi-Tex process includes the utilization of a single
machine, the
Santoni knitting machine, that transforms yarn directly into a nearly
complete
garment, replacing the knitting, cutting, sewing and accessorizing
functions
which, in traditional manufacturing, are performed sequentially on
separate
machines at separate workstations. Following this single-machine
operation, all
the Hi-Tex process requires to complete the garment is dyeing and a
limited
amount of sewing and finishing, which are conducted using our
proprietary
techniques. In addition to providing a higher level of manufacturing
efficiency,
Hi-Tex has enabled us to produce a substantially wider range of
fabrics, styles
and product lines at a consistently higher level of comfort, quality
and
durability. This is made possible, in large part, because the Hi-Tex
process
knits a garment directly, rather than cutting it from fabric,
allowing for the
production of any size, pattern or design with even greater precision
than
previously available.


                                      20
<PAGE>


     The Hi-Tex manufacturing process is currently being used to
produce
knit-to-size intimate apparel, active-wear and outerwear. We operate
our Hi-Tex
knitting process in our principal production facilities in Segev,
Israel. We
operate our Hi-Tex sewing process in one sewing facility in Israel
and also
subcontract sewing in Israel and in Jordan. See "Item 4. Information
on the
Company - 4D. Property, Plants and Equipment." At December 31, 2006,
we had a
total of 756 fully equipped Santoni Knitting machines at the Hi-Tex
facilities
in Israel. We also have 144 fully equipped Santoni Knitting machines
at Tefron
USA in Valdese, North Carolina, which are currently not operated, and
we intend
to transfer these machines to China as part of our contribution to
the joint
venture that we are constituting in China.

     We believe that the Hi-Tex manufacturing process represents an
innovative
combination of cutting-edge technology and technical expertise and
has further
strengthened our reputation within the industry as a leader in
automated
manufacture and design. In addition, with both the Hi-Tex
manufacturing process
and the traditional cut-and-sew process, we are able to produce
garments made
from synthetic fibers in addition to existing lines of cotton
products. We
specialize in developing and using performance yarns. The Hi-Tex
manufacturing
process was developed in-house through the adaptation and
configuration of
machinery and equipment purchased from third parties. Although
developed for its
exclusive use, only a part of these adaptations and configurations is
patented.

SALES AND MARKETING

     Our marketing strategy focuses on selling quality products to
large U.S.
marketers of intimate apparel, active-wear and swimwear. We market
our products
directly to major retailers, which sell them under their own labels
and to
several companies that market nationally advertised brands. We have
sales
offices which are located in Portland, Oregon, in New York, New York,
in London,
England and in Israel.

     We see the active-wear market as an added opportunity to promote
our
innovative production and design capabilities. Our office in
Portland, Oregon,
and the Center Of Excellence office located inside Nike's campus in
Beaverton,
Oregon, serve to advance our active-wear sales, to strengthen the
communication
with our active-wear customers, and to improve our services. In
addition, we
have dedicated a separate development and sales team in Israel for
the
active-wear customers.

INTELLECTUAL PROPERTY

     Only a part of the adaptations, configurations, technologies and
techniques
used in our manufacturing process is patented. See "Item 3. Key
Information -
3D. Risk Factors - We may not be able to protect our intellectual
property."
However, we have obtained patents for certain aspects of our
manufacturing
process and for certain products, such as the "millennium bra," the
"bonded bra"
and the "ultrasonic bra," whose fabric is joined without sewing.

     We emphasize the development of new technologies that will
enable the
manufacture of products that have an advantage over the products
currently
existing in the market.

SEASONALITY

     Although our operations are affected by the substantial cyclical
variations
of our principal customers' businesses, downturns in the general
economy, a
change in consumer purchasing habits and other events, we have not
identified a
clear seasonal pattern to our general business, other than with
respect to our
swimwear products. In the swimwear segment, most of our sales are
consummated
between December and May.

CUSTOMERS

     Our customers represent some of the leading marketers of
intimate apparel,
active-wear and swimwear in the world. More than 80% of our sales in
2006 were
derived from the worldwide sale of our products to our four largest
apparel
customers, Victoria's Secret, Nike, Target, and Banana Republic and
The Gap. In
2006, we strengthened our business relationships with our largest
active-wear
customer, Nike, and started working with a new customer, lululemon
athletica,
and maintained our business relationships with other active-wear
customers, such
as Patagonia and Reebok. In the swimwear area, we strengthened our
business
relationship with our largest swimwear customers, Swimwear Anywhere
and Target,
while we maintained our business relationships with other swimwear
customers. We
also further penetrated the European swimwear market by serving new
European
customers.


                                       21
<PAGE>


     The following table outlines the dollar amount and percentage of
total
sales to our customers:

<TABLE>
<CAPTION>
CUSTOMER                        2004                  2005
2006
                          ----------------      ----------------
-----------------
                                               (Dollars in millions)
<S>                       <C>          <C>       <C>         <C>
<C>         <C>
Victoria's Secret (1)     $ 70.4       47.4%    $ 69.0       40.3%
$ 72.6      38.6%

Nike                      $ 12.4        8.3%    $ 44.1       25.8%
$ 54.2      28.8%
Target                    $ 24.9      16.7%    $ 18.5      10.8%
$ 18.9      10.0%
The Gap/Banana Republic   $ 11.5       7.7%    $   9.2      5.4%
$ 7.9        4.2%

Others                    $ 29.4      19.9%    $ 30.5      17.7%
$ 34.5     18.4%

Total                     $148.6     100.0%    $171.3       100%
$188.1      100%
</TABLE>

(1) Includes sales to Mast Industries, Inc. on behalf of Victoria's
Secret,
     Victoria's Secret Catalog, Cacique and Abercrombie & Fitch.

     We established our relationship with our largest customer,
Victoria's
Secret, in 1991. Currently, we manufacture underwear, nightwear,
loungewear,
bodysuits and bras for Victoria's Secret. We continue to seek to
expand and
strengthen our relationship with Victoria's Secret by providing the
retailer
with a continuing line of new products. However, we cannot assure
that
Victoria's Secret will continue to buy our products in the same
volumes or on
the same terms as they did in the past. For instance, during the past
few years
we have been asked by Victoria's Secret to reduce the prices of
Victoria's
Secret's Logo program. See "Item 3. Key Information - 3D. Risk
Factors - We
depend on a small number of principal customers who have in the past
purchased
our products in large volumes. We cannot assure that these customers
or any
other customer will continue to buy our products in the same volumes
or on the
same terms."

     We began our working relationship with Nike in 2000. Currently,
we supply
them with active-wear for men and women.

     We began our relationship with Target in 2000, which was an
existing
customer of Tefron USA. Currently, we supply them with underwear for
men and
women, bras, active-wear and swimwear products.

     We began our working relationship with Banana Republic and The
Gap in 1993.
Currently, we supply Banana Republic and The Gap with underwear and
sleepwear.

     When we establish a relationship with a new customer in the
normal course
of business, our initial sales to that customer are typically in
larger
quantities of goods (to build the customer's initial inventory) and
we may be
required to replenish such inventory from time to time thereafter.
After a
customer builds its initial inventory, the rate of growth of our
sales to the
customer may decrease. The volume of products ordered by customers
are subject
to the cyclical variations in their business. See "Item 3. Key
Information - 3D.
Risk Factors - Our principal customers are in the clothing retail
industry,
which is subject to substantial cyclical variations. Our revenues
will decline
significantly if our principal customers do not continue to buy our
products in
large volumes due to an economic downturn."


                                      22
<PAGE>


     We depend on a small number of principal customers. Our
principal customers
are in the retail industry, which is subject to substantial cyclical
variations.
Our annual and quarterly results may vary which may cause our profits
and/or the
market price of our Ordinary Shares to decline. Consequently, there
can be no
assurance that sales to current customers will continue at the
current rate.

BACKLOG

     Our backlog of orders during 2006 ranged from $49.4 million to
$63.3
million, as compared to a range of $45.8 million to $64.2 million
during 2005.
This backlog is comprised of firm orders that represent the average
production
volume mainly for the subsequent three to six months. Backlog data
and any
comparison thereof as of different dates may not necessarily indicate
future
sales.

ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES

     The Israeli government has established investment and tax
incentive
programs for enterprises that invest and do business in Israel.
Israeli
government support is provided primarily to industrial and tourism
companies
that help fulfill certain economic objectives of the Israeli
government, such as
creating employment in selected locations in Israel, competing in
international
markets, utilizing innovative technologies, producing value-added
products and
generating income in foreign currency.

         LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

     Certain of our production and development facilities have been
granted
Approved Enterprise status pursuant to the Law for the Encouragement
of Capital
Investments, 1959 (the "Investment Law") under the grant track. The
Investment
Law provides that a capital investment in eligible facilities may,
upon
application to the Investment Center of the Ministry of Industry and
Trade of
the State of Israel, known as the Investment Center, be designated an
Approved
Enterprise. Each certificate of approval for an Approved Enterprise
relates to a
specific investment program delineated both by its financial scope,
including
its capital sources, and by its physical characteristics, e.g., the
equipment to
be purchased and utilized pursuant to the program. The tax benefits
derived from
any such certificate of approval relate only to taxable income
attributable to
the specific Approved Enterprise. To date, we have enjoyed Israeli
government
grants with respect to such programs for significant amounts of our
capital
expenditures. Such grants were available from 1997 to 2006 for an
amount equal
to 24% of the eligible annual capital expenditures for programs not
exceeding
investments of NIS140 million in any year, and for an amount equal to
20% of the
eligible annual capital expenditures for projects exceeding
investments of
NIS140 million. Following the exhaustion of our net operating loss
carry
forwards in 1997, we began to benefit from certain tax incentives as
a result of
the Approved Enterprise status of certain of our facilities. Approved
Enterprises related to investment programs from January 1997 onwards
in
designated areas, which include the location of our primary plants,
are exempt
from tax for the first two years of the Benefit Period commencing in
the first
year in which the taxable income is generated.

     The Company does not intend to distribute any amounts of its
undistributed
tax-exempt income derived from an "Approved Enterprise" as a
dividend. The
Company intends to reinvest its tax-exempt income and not to
distribute such
income as a dividend. No deferred income taxes have been provided on
income
attributable to the Company's Approved Enterprise programs as the
undistributed
tax exempt income is essentially permanent in duration.

         LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

     Pursuant to the Law for the Encouragement of Industry (Taxes),
1969, a
company qualifies as an "Industrial Company" if it is a resident of
Israel and
at least 90% of its gross income in any tax year (exclusive of income
from
certain defense loans, capital gains, interest and dividends) is
derived from an
"industrial enterprise" it owns. An "industrial enterprise" is
defined as an
enterprise whose major activity, in a given tax year, is industrial
manufacturing.


                                      23
<PAGE>


     We believe that we currently qualify as an Industrial Company.
Accordingly,
we are entitled to certain tax benefits, including a deduction of
12.5% per
annum on the purchase of patents or certain other intangible property
rights
(other than goodwill) used for the development or promotion of the
industrial
enterprise over a period of eight years beginning with the year in
which such
rights were first used.

     The tax laws and regulations dealing with the adjustment of
taxable income
for local inflation provide that an industrial enterprise is eligible
for
special rates of depreciation deductions. These rates vary in the
case of plant
and machinery according to the number of shifts in which the
equipment is being
operated and range from 20% to 40% on a straight-line basis, or 30%
to 50% on a
declining balance basis (instead of the regular rates which are
applied on a
straight-line basis).

     Moreover, industrial enterprises which are Approved Enterprises
(see above)
can choose between (a) the special rates referred to above and (b)
accelerated
regular rates of depreciation applied on a straight-line basis with
respect to
property and equipment, generally ranging from 200% (with respect to
equipment)
to 400% (with respect to buildings) of the ordinary depreciation
rates during
the first five years of service of these assets, provided that the
depreciation
on a building may not exceed 20% per annum. In no event may the total
depreciation exceed 100% of the cost of the asset.

     In addition, Industrial Companies may (i) elect to file
consolidated tax
returns with additional related Israeli Industrial Companies and (ii)
deduct
expenses related to public offerings in equal amounts over a period
of
three-years.

     Eligibility for benefits under the Encouragement of Industry Law
is not
contingent upon the approval of any governmental authority. No
assurance can be
given that we will continue to qualify as an Industrial Company, or
will avail
ourselves of any benefits under this law in the future or that
Industrial
Companies will continue to enjoy such tax benefits in the future.

COMPETITION

     The intimate apparel, the active-wear and swimwear markets are
highly
competitive. Our products compete with products of other
manufacturers in
Israel, Europe, the United States, South and Central America and
Asia.
Competition in our markets is generally based on price, quality and
customer
service.

     Although we have invested in Santoni knitting machines to
manufacture our
seamless products, a competitor of the Santoni brand could
manufacture similar
machines at lower prices, thereby increasing the competition we would
face in
the intimate apparel and active-wear markets. See "Item 3. Key
Information - 3D.
Risk Factors - Our markets are highly competitive and some of our
competitors
have numerous advantages over us; we may not be able to compete
successfully."

     In addition, we benefit from Israel's status as one of the few
countries in
the world that currently has free trade agreements with the United
States,
Canada, the EU and the EFTA which permit us to sell our products in
the United
States, Canada and the member countries of the EU and the EFTA free
of customs
duties and imports quotas. Finally, government incentives that reduce
the cost
of our equipment may not be available to us in other countries. We
are also able
to sell our products manufactured at our facilities in Jordan free
from customs
duties and import quotas to the United States and Europe under
certain
conditions.


                                      24
<PAGE>


CONDITIONS IN ISRAEL

     We are incorporated under the laws of, and many of our offices
and
manufacturing facilities are located in, the State of Israel.
Accordingly, we
are directly affected by political, security and economic conditions
in Israel.
Our operations would be materially adversely affected if major
hostilities
involving Israel should occur or if trade between Israel and its
present trading
partners should be curtailed.

POLITICAL CONDITIONS IN ISRAEL

     Since the establishment of the State of Israel in 1948, a number
of armed
conflicts have taken place between Israel and its Arab neighbors and
a state of
hostility, varying from time to time in intensity and degree, has led
to
security and economic concerns for Israel. A peace agreement between
Israel and
Egypt was signed in 1979, and a peace agreement between Israel and
Jordan was
signed in 1994. However, as of the date hereof, Israel has not
entered into any
peace agreement with Syria or Lebanon. No prediction can be made as
to whether
any other agreements will be entered into between Israel and its
neighboring
countries, whether a final resolution of the area's problems will be
achieved,
the nature of any such resolution or whether civil unrest will resume
and to
what extent such unrest would have an adverse impact on Israel's
economic
development or on our operations in the future.

     There is substantial uncertainty about how or whether any peace
process
will develop or what effect it may have upon us. The establishment in
2006 of a
government in the Palestinian Authority by representatives of the
Hamas militant
group has created additional unrest and uncertainty in the region.
Further,
Israel was recently engaged in an armed conflict with Hezbollah, a
Lebanese
Islamist Shiite militia group, which involved thousands of missile
strikes and
disrupted most day-to-day civilian activity in northern Israel.
Ongoing violence
between Israel and its Arab neighbors and Palestinians may have a
material
adverse effect on our business, financial condition or results of
operations.

     Certain countries, companies and organizations continue to
participate in a
boycott of Israeli firms. We do not believe that the boycott has had
a material
adverse effect on us, but there can be no assurance that restrictive
laws,
policies or practices directed towards Israel or Israeli businesses
will not
have an adverse impact on our business.

     Generally, all male adult citizens and permanent residents of
Israel under
the age of 54, unless exempt, are obligated to perform up to 36 days
of annual
military reserve duty. Additionally, all such residents are subject
to being
called to active duty at any time under emergency circumstances. Some
of our
officers and employees are currently obligated to perform annual
reserve duty.
While we have operated effectively under these requirements since we
began
operations, no assessment can be made as to the full impact of such
requirements
on our workforce or business, and no prediction can be made as to the
effect on
us of any expansion or reduction of such obligations.

ECONOMIC CONDITIONS IN ISRAEL

     Israel's economy has been subject to numerous destabilizing
factors,
including a period of rampant inflation in the early to mid-1980s,
low foreign
exchange reserves, fluctuations in world commodity prices, military
conflicts
and civil unrest. The Israeli government has, for these and other
reasons,
intervened in various sectors of the economy employing, among other
means,
fiscal and monetary policies, import duties, foreign currency
restrictions and
control of wages, prices and foreign currency exchange rates. The
Israeli
government has periodically changed its policies in all these areas.


                                      25
<PAGE>


TRADE AGREEMENTS
     Israel is a member of the United Nations, the International
Monetary Fund,
the International Bank for Reconstruction and Development, and the
International
Finance Corporation. Israel is a signatory to the General Agreement
on Tariffs
and Trade, or GATT, which provides for the reciprocal lowering of
trade barriers
among its members. In addition, Israel has been granted preferences
under the
Generalized System of Preferences from the United States, Australia,
Canada and
Japan. These preferences allow Israel to export the products covered
by such
program either duty-free or at reduced tariffs. Israel became
associated with
the European Economic Community (now known as the European Union) in
a Free
Trade Agreement concluded in 1975, which confers certain advantages
with respect
to Israeli exports to most European countries and obligates Israel to
lower its
tariffs with respect to imports from those countries over a number of
years.

     In 1985, Israel and the United States entered into an agreement
to
establish a Free Trade Area that has eliminated all tariff and
certain
non-tariff barriers on most trade between the two countries. On
January 1, 1993,
an agreement between Israel and the EFTA established a free trade
zone between
Israel and the EFTA nations. In recent years, Israel has established
commercial
and trade relations with a number of other nations (including the
People's
Republic of China, Russia, India and other nations in Asia and
Eastern Europe)
with which Israel had not previously had such relations.

     In January 1995, the GATT members entered into an agreement with
respect to
Textile and Clothing. According to this agreement, all non-tariff
barriers were
gradually decreased since the date of the agreement until their full
omission on
January 1, 2005. In 2004, in expectation of this change, the United
States
decided to extend the period of barriers relating to products
exported from
China.

     Israel is a party to Qualified Industrial Zones agreements -
since 1998
with Jordan and the United States, and since December 2004, with
Egypt and the
United States. These agreements enable us to execute part of our
manufacturing
process in defined zones in Jordan or in Egypt, and enjoy exemption
from U.S.
custom duties and quotas once exported to the United States.

U.S. GOVERNMENT REGULATION

     Our manufacturing and other facilities in USA, Israel, Europe
and Jordanare
subject to various local regulations relating to the maintenance of
safe working
conditions and manufacturing practices. Management believes that it
is currently
in compliance in all material respects with all such regulations.

4C.   ORGANIZATIONAL STRUCTURE

     Our significant subsidiaries are the following wholly-owned
subsidiaries:
(i) Hi-Tex Founded by Tefron Ltd., a company incorporated under the
laws of
Israel, (ii) Macro Clothing Ltd., a company formed under the laws of
Israel,
(iii) Tefron USA, Inc., a company formed under the laws of Delaware,
(iv)
El-Masira Textile Company Ltd., a company incorporated under the laws
of Jordan,
and (v) Tefron UK Limited, a company incorporated under the laws of
the United
Kingdom.


                                           26
<PAGE>


4D.   PROPERTY, PLANTS AND EQUIPMENT

ISRAEL

     As of December 31, 2006, we maintained manufacturing and
administrative
facilities at the following sites in Israel and Jordan

<TABLE>
<CAPTION>
                                 APPROX.
                                 SQUARE         NUMBER OF    LEASE
FACILITY IN ISRAEL               FOOTAGE        EMPLOYEES EXPIRATION (1)
FUNCTION
- -------------------------       -------         -------      ----
----------------------------
<S>                              <C>                <C>      <C>
<C>
Petach Tikva                      2,500               6      2008
Management offices
Segev:Central Factory -
  Tefron (2)(3)                  83,000             195      2012
Development, Knitting

packaging, storage and
administrative functions

Segev: Central Factory -
  Hi-Tex 1(2)(3)               143,000          306        2011
Development, Knitting,

sewing, packaging, storage

and administrative functions
Segev: Central Factory -
  Hi-Tex 2(2)(3)               178,000          381        2012
Knitting, packaging and

storage

Holon - Macro Center            12,000           73        2009
Design, development, Sewing

and administrative functions

Yarka                           23,000          381        2012
Sewing and packaging

Netanya: Dyeing Factory         68,000           35        2009
Dyeing and finishing

Segev: Delivery Warehouse       45,000           16        2007
Warehouse for finished

products
FACILITY IN JORDAN
Irbid (5)                      147,000          670        2008(4)
Sewing and packaging factory
</TABLE>

(1)   Including any renewal options.

(2)   We lease this property from a subsidiary of Macpell.

(3) Not including an additional option for a 15 year lease
exercisable every
     three years on 90 days' prior advance notice.

(4)   The agreement is renewable annually at our option.

(5)   Includes free land lease of 78,000 square feet.

     Our Hi-Tex 1, Hi-Tex 2 and Central Factory facilities in Segev,
Israel, are
leased from a subsidiary of Macpell. See "Item 7. Major Shareholders
and Related
Party Transactions - 7B. Related Party Transactions - Relationships
and
Transactions with Macpell - Lease Arrangement."

     For a description of our plans regarding our facilities, see
Note 5 of the
Notes to the Consolidated Financial Statements.

      We believe that our existing facilities in Israel and Jordan are
well-maintained, in good operating condition and provide adequate
space for our
current level of operations as well as for a significant increase in
sales
volume. We further believe that our facilities and operations are in
substantial
compliance with current Israeli governmental regulations regarding
safety,
health and environmental pollution.


                                      27
<PAGE>


UNITED STATES AND EUROPE

     As of December 31, 2006, Tefron USA maintained manufacturing and
administrative facilities at the following sites in the United
States:

<TABLE>
<CAPTION>
FACILITY IN UNITED STATES                     APPROX.      NUMBER OF
AND EUROPE                                SQUARE FOOTAGE   PERSONNEL
FUNCTION
- ------------------------                    -------         ----
--------------------------
<S>                                          <C>              <C>
<C>
Valdese, NC - Headquarter and Warehouse      157,000          17
Corporate headquarters and

Warehouse (Consumer Products)
Valdese, NC                                   52,000           -
Partly subleased
New York City - Offices                        1,500           1
Sales Offices and Showroom
Portland, OR- Offices                          2,029           4
Sales Offices and Showroom
London, England - Offices                          350         2
Sales Offices
</TABLE>

     All plants in Valdese, North Carolina are of brick and steel
construction,
and most areas have been air-conditioned. Since April 2005, we are
leasing for a
period of seven years 1,500 square feet at 150 West 30th Street New
York, New
York. The remainder of Tefron USA's physical properties are held in
fee simple.
Tefron USA's physical properties are subject to a lien pursuant to a
credit
agreement entered into in connection with the acquisition of Tefron
USA. See
"Item 10. Additional Information - 10C. Material Contracts - Credit
Agreement."
We believe our existing facilities in the United States are well-
maintained, in
good operating condition and provide adequate space for Tefron USA's
current
level of operations as well as for a significant increase in sales
volume.

     We further believe that Tefron USA is in substantial compliance
with
present United States federal, state and local regulations regarding
the
discharge of materials into the environment. Capital expenditures
required to be
made in order to achieve such compliance have had no material adverse
effect
upon Tefron USA's earnings or the competitive position of Tefron USA.
We believe
that continued compliance will not require material expenditures.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.


                                      28
<PAGE>


ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

GENERAL

    OUR BUSINESS; DEVELOPMENTS

     We manufacture intimate apparel, active-wear and swimwear sold
throughout
the world by name-brand marketers as well as well known American
retailers and
designer labels. Our product line includes knitted briefs, bras, tank
tops,
boxers, leggings, crop, T-shirts, daywear, nightwear, bodysuits,
swimwear,
beach-wear, active-wear, and accessories.

     We have two divisions: Seamless (also called Hi-Tex) and Cut &
Sew. Our
Seamless Division, which manufactures intimate apparel and active-
wear products,
generated approximately 54.3% of our revenues during 2006. Our Cut &
Sew
Division, which manufactures intimate apparel, active-wear and
swimwear
products, generated approximately 45.7% of our revenues during 2006.

     Our Hi-Tex manufacturing process involves a vertically
integrated
production process, from the design of the product to the knitting,
dyeing and
sewing of the product. However, our Hi-Tex manufacturing process
utilizes
state-of-the-art technology that eliminates a significant number of
stages of
the manufacturing process while enabling our Hi-Tex Division to
produce a
substantially wider range of fabrics, styles and product lines at a
consistently
high level of comfort, quality and durability. The Hi-Tex
manufacturing process
was developed in-house through the adaptation and configuration of
machinery and
equipment purchased from third parties. Although developed for our
exclusive
use, most of these adaptations and configurations are not patented.
The
manufacturing for our Hi-Tex Division takes place mainly in Israel,
where we
operated approximately 756 fully equipped Santoni knitting machines
as of
December 31, 2006.

     Our Cut & Sew manufacturing process also involves a vertically
integrated
production process. We are involved in all steps in the process, from
the design
of the product to the knitting, dyeing, cutting and sewing of the
product. The
knitting, dyeing and cutting processes for our intimate apparel and
active-wear
products of our Cut & Sew Division take place in Israel and most of
the sewing
for these products takes place in Jordan. Our swimwear products are
produced by
subcontractors mainly in the Far East.

    2006 DEVELOPMENTS

     In 2006, we continued to benefit from our strategy, begun at the
end of
2002, to transform from an intimate apparel company with one anchor
customer to
a more diversified active-wear, swimwear and intimate apparel company
with a
diversified customer base. Our expansion into active-wear and
swimwear has
provided us with an opportunity to increase our sales to a more
diverse customer
base, including Nike, Reebok, Puma, Target, Swimwear Anywhere and
others. During
2006, our sales of active-wear and swimwear products accounted for
approximately
46.4% of our overall sales, while sales of these products during 2005
accounted
for approximately 40.7% of our overall sales. Despite our
transformation to a
more diversified company, in 2006, our largest active-wear customer
and our
largest intimate apparel customer together accounted for
approximately 67.4% of
our sales, and we have therefore continued our efforts to diversify
our customer
base. In the third quarter of 2006, we signed an agreement with
lululemon
athletica, a new active-wear customer and we have broadened our
customer base in
Europe for swimwear products.

     Our active-wear and swimwear product lines continued to grow
during 2006,
and our intimate apparel business maintained steady revenues during
the year, in
line with our expectations. The growth in our overall sales during
2006 was
mainly due to the significant growth in sales of active-wear, and in
particular
sales to Nike for their Nike Pro and Nike + categories. Nevertheless,
active-wear sales during 2006 were below our initial expectations for
the year
due to a shift in timing of products flows by Nike. Neverthless, we
believe our
relationship with Nike is strong, and it remains a central part of
our strategy
driving our long term growth in active-wear.


                                      29
<PAGE>


     While our transformation to a more diversified company initially
reduced
operating efficiency in our Seamless division as we manufactured new,
more
complicated active-wear and swimwear products with different raw
materials,
during 2006 we improved our operating efficiency. This improved
efficiency
contributed to our higher operating and net income during 2006. We
intend to
work to maintain these efficiency levels as we expand our product
lines and
manufacture other new, more complicated active-wear and swimwear
products,
although we cannot guarantee that we will be able to do so.

     The cost structure of our Cut & Sew manufacturing process for
intimate
apparel and active-wear products, which takes place principally in
Israel and
Jordan, continues to be higher than the cost structure of many of our
competitors in the Far East, Egypt and Mexico. This competition,
mainly for the
sale of intimate apparel products, has caused an erosion of our
prices. We are
endeavoring to move additional portions of our Cut & Sew
manufacturing process
within the next few years from Israel to Jordan and other locations
to benefit
from the lower labor costs in those locations.

     Our Cut & Sew manufacturing process for swimwear products
continues to take
place principally in the Far East to keep costs low.
     In addition, the weakening of the U.S. dollar compared to the
NIS in 2006
adversely affected our operating income in 2006.

    CURRENCY; REVENUES; RAW MATERIALS

     The currency of the primary economic environment in which our
business is
conducted is the U.S. dollar. Consequently, we use the dollar as our
functional
currency. Transactions and balances denominated in dollars are
presented at
their dollar amounts. Transactions and balances in other currencies
are
converted into dollars in accordance with the principles set forth in
Statement
No. 52 of the Financial Accounting Standards Board and resulting
gains and
losses are included in the statement of income. The financial
information below
reflects our operations on a consolidated basis.

     Substantially all of our revenues are derived from the sale of
our
products, primarily in the United States. We recognize revenues from
the sale of
our products upon delivery. Our payment terms vary based on customer
and length
of relationship. We do not have any long-term supply obligations.

     We purchase our raw materials from several international and
domestic
suppliers and historically have not experienced any difficulty in
obtaining raw
materials to meet production requirements. Raw materials are
generally purchased
against actual orders, although we have a policy of maintaining a
minimum level
of those raw materials that are in repeated demand. From time to
time, when
market conditions are favorable, we have entered into contracts with
various
suppliers of basic cotton for delivery over a period of three to six
months.

SIGNIFICANT ACCOUNTING POLICIES

     We prepare our consolidated financial statements in conformity
with
accounting principles generally accepted in the U.S. As such, we are
required to
make certain estimates, judgments and assumptions that we believe are
reasonable
based upon the information available at the time they are made. These
estimates,
judgments and assumptions affect the reported amounts of assets and
liabilities
as of the date of the financial statements, as well as the reported
amounts of
expenses during the periods presented.
     Our management believes the significant accounting policies
which affect
management's more significant estimates, judgments, and assumptions
used in the
preparation of the Company's consolidated financial statements and
which are the
most critical to aid in fully understanding and evaluating the
Company's
reported financial results include the following:


                                      30
<PAGE>


    o    Inventory valuation

    o    Property, plant and equipment

    o    Income taxes and valuation allowance

    INVENTORY VALUATION

     At each balance sheet date, we evaluate our inventory balance
for excess
quantities and obsolescence. We estimate the excess inventory of
products and
raw materials which are not designated for existing or projected
orders as well
as inventory that is not of saleable quality, estimate their market
value and
reduce their carrying value accordingly. Misjudgement in planning
inventory
levels or in the assessment of the market value of the excess raw
materials and
products may require us to record inventory mark downs that would be
reflected
in cost of sales in the period the revision is made.

    PROPERTY, PLANT AND EQUIPMENT

     Our property, plant and equipment are reviewed for impairment in
accordance
with Statement of Financial Accounting Standard No. 144 "Accounting
for the
Impairment or Disposal of Long-Lived Assets," whenever events or
changes in
circumstances indicate that the carrying amount of an asset may not
be
recoverable. Recoverability of assets to be held and used is measured
by a
comparison of the carrying amount of an asset to the future
undiscounted cash
flows expected to be generated by the assets. If such assets are
considered to
be impaired, the impairment to be recognized is measured by the
amount by which
the carrying amount of the assets exceeds the fair value of the
assets. Assets
to be disposed of by way of sale are reported at the lower of the
carrying
amount and fair value less costs to sell.

       INCOME TAXES AND VALUATION ALLOWANCE

     The Company and its subsidiaries account for income taxes in
accordance
with Statement of Financial Accounting Standards No.109, "Accounting
for Income
Taxes," or SFAS No.109. This Statement prescribes the use of the
liability
method whereby deferred tax assets and liability account balances are
determined
based on differences between financial reporting and tax bases of
assets and
liabilities and are measured using the enacted tax rates and laws
that will be
in effect when the differences are expected to reverse.

     In addition, the calculation of our tax liabilities involves
uncertainties
in the application of complex tax regulations, particularly under the
Investment
Law. We estimate our tax liabilities under the various investment
programs under
the Israeli Investment Law based on a complex mix of factors,
including our
estimates of our future growth of revenues, the particular investment
program
under which revenue will be generated and the location where such
revenues will
be generated. We may need to record a charge for tax if our estimates
are
inaccurate or if we experience changes due to off-shoring certain of
our
production processes.

OPERATING RESULTS

     The following table sets forth our results of operations
expressed as a
percentage of total sales for the periods indicated:


                                        31
<PAGE>


<TABLE>
<CAPTION>
                                                         YEAR ENDED
DECEMBER 31,
                                                 2004            2005
2006
                                                -----           -----
-----
<S>                                             <C>              <C>
<C>
Sales                                           100.0%
100%            100%
Cost of sales                                    91.8            82.7
77.2
                                                -----          -----
-----
Gross profit                                      8.2           17.3
22.8
Selling, general and administrative
 expenses                                        11.4            7.9
9.0
                                                -----          -----
-----
Operating income (loss)                          (3.2)           9.4
13.8
Financial expenses, net                           2.6            1.9
1.1
                                                -----          -----
-----
Income (loss) before taxes on
income                                           (5.8)           7.5
12.7
Taxes on income                                   0.1            2.5
3.0
                                                -----          -----
-----
Income (loss) from continuing operation          (5.9)           5.0
9.7
Income (loss) from discontinued operation         1.2
(3.1)           0.1
                                                -----          -----
-----
Net income   (loss)                              (4.7)           1.9
9.8
                                                =====          =====
=====
</TABLE>

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005

    SALES

     CONSOLIDATED. Sales for the year ended December 31, 2006 were
$188.1
million, a 9.8% increase compared to sales of $171.3 million for the
year ended
December 31, 2005. Our sales of intimate apparel decreased 0.7% from
$101.6
million in 2005 to $100.9 million in 2006, our sales of active-wear
products
increased 14.3% from $52.0 million in 2005 to $59.4 million in 2006
and our
sales of swimwear increased 56.7% from $17.8 million in 2005 to $27.8
million in
2006. Below is a table that describes our 2005 and 2006 sales of
intimate
apparel, active-wear and swimwear products:

<TABLE>
<CAPTION>

SALES
                        ---------------------------------------------
-------------------------------------------
                                         2005
2006
                        ----------------------------------------
----------------------------------------
                                                         (Dollars in
thousands)
                        CUT & SEW       SEAMLESS         TOTAL
CUT & SEW        SEAMLESS        TOTAL
<S>                     <C>             <C>             <C>
<C>             <C>             <C>
Intimate Apparel        $ 37,564        $ 64,061        $101,625
$ 53,148        $ 47,742        $100,890
Active-wear                6,140          45,821          51,961
4,995          54,411          59,406
Swimwear                  17,750              --          17,750
27,808              --          27,808
TOTAL                     61,454         109,882         171,336
85,951         102,153         188,104
</TABLE>

          SEAMLESS. Sales for the year ended December 31, 2006 for
this segment
     were $102.2 million, a 7.0% decrease compared to sales of $109.9
million
     for the year ended December 31, 2005. This decrease in sales was
due to a
     decrease of 25.5% of our sales of intimate apparel products from
$64.1
     million in 2005 to $47.7 million in 2006 due to a decrease in
sales to our
     major intimate apparel customer, which was partially offset by
an increase
     of 18.7% in our sales of active-wear from $45.8 million in 2005
to $54.4
     million in 2006 which was principally due to increase in our
sales to Nike
     for their Nike Pro and Nike + categories.

          CUT & SEW. Sales for the year ended December 31, 2006 for
this segment
     were $86.0 million, a 39.9% increase compared to sales of $61.5
million for
     the year ended December 31, 2005. This increase in sales was due
to an
     increase of 41.5% in our sales of intimate apparel from $37.6
million in
     2005 to $53.1 million in 2006 due to an increase in sales to our
major
     intimate apparel customer and due to an increase of 56.7% in our
sales of
     swimwear products from $17.8 million in 2005 to $27.8 million in
2006 due
     to increased sales to our two largest swimwear customers. The
increase in
     sales of our intimate apparel and swimwear product lines was
partly offset
     by a decrease of 18.6% in our sales of active-wear products from
$6.1
     million in 2005 to $5.0 million in 2006.
                                       32
<PAGE>


    COST OF SALES

     Cost of sales consists primarily of materials, various salaries
and related
expenses, subcontracting expenses and other overhead expenses related
to our
manufacturing operations. Cost of sales increased by 2.5% to $145.1
million in
2006 as compared to $141.6 million in 2005 due to an increase in our
sales
volume. As a percentage of sales, cost of sales decreased to 77.2% in
2006 as
compared to 82.7% in 2005. This improvement in gross margin was
primarily due to
an increase in our sales volume, continued improved operating
efficiencies and
further transfer of our sewing capacity to Jordan with lower labor
costs.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily
of costs
relating to salaries to employees engaged in sales, marketing,
distribution,
administration and management activities, freight and other
administrative
costs. Selling, general and administrative expenses increased by
25.8% to $17.1
million in 2006 as compared to $13.6 million in 2005. This increase
was
primarily due to the growth in our sales volume, the expansion of our
selling
activities related to our swimwear product line and an increase in
our freight
expenses mainly due to the increase in sales of our swimwear product
line. A
number of our swimwear customers required us to be responsible for
delivering
their products directly to their distribution warehouse, which
increased our
freight expenses. As a percentage of sales, selling, general and
administrative
expenses increased from 7.9% in 2005 to 9.0% in 2006.

    OPERATING INCOME

     CONSOLIDATED. Operating income for the year ended December 31,
2006 was
$25.9 million (13.8% of sales), compared to operating income of $16.1
million
(9.4% of sales) for the year ended December 31, 2005. This increase
in operating
income was due to the increase in gross profit, as discussed above.

           SEAMLESS. Operating income for the year ended December 31,
2006 for
     this segment was $16.4 million (16.0% of sales), compared to
operating
     income of $13.3 million (12.1% of sales) for the year ended
December 31,
     2005. This improvement was due to an increased contribution of
higher
     margin products, the improvement in our operating efficiencies
and further
     transfer of sewing capacity to Jordan, as discussed above.

          CUT & SEW. Operating income for the year ended December 31,
2006 for
     this segment was $9.5 million (11.1% of sales), compared to
operating
     income of $2.9 million (4.7% of sales) for the year ended
December 31,
     2005. The increase resulted mainly from the growth in sales
volume and the
     improvement in our operating efficiencies.


                                      33
<PAGE>


    FINANCIAL EXPENSES, NET

     Financial expenses, net decreased to $1.9 million in 2006 as
compared to
$3.2 million in 2005. This decrease was mainly due to a significant
reduction of
our net bank debt over the course of the year primarily as a result
of the sale
of our interest in AlbaHealth, our public offering of securities on
the Tel-Aviv
Stock Exchange and cash provided by our operating activities. This
decrease was
partly offset by currently exchange losses resulting from the
weakening of the
U.S dollar as compared to the NIS.

    INCOME TAXES

     Tax expense for 2006 was $5.7 million as compared to tax expense
of $4.3
million for 2005. The main reason for this increase was the increase
in our
pretax profit which was $24.0 million in 2006 compared to $12.9
million in the
year 2005.

YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004

SALES

     CONSOLIDATED. Sales for the year ended December 31, 2005 were
$171.3
million, a 15.3% increase compared to sales of $148.6 million for the
year ended
December 31, 2004. Our sales of intimate apparel decreased 14.1% from
$118.2
million in 2004 to $101.6 million in 2005, our sales of active-wear
products
increased 158.4% from $20.1 million in 2004 to $52.0 million in 2005
and our
sales of swimwear increased 72.7% from $10.3 million in 2004 to $17.8
million in
2005. Below is a table that describes our 2004 and 2005 sales of
intimate
apparel, active-wear and swimwear products:

<TABLE>
<CAPTION>

SALES
                        ---------------------------------------------
-------------------------------------------
                                          2004
2005
                        ----------------------------------------
----------------------------------------
                                                         (Dollars in
thousands)
                        CUT & SEW       SEAMLESS         TOTAL
CUT & SEW       SEAMLESS         TOTAL
<S>                     <C>             <C>             <C>
<C>             <C>             <C>
Intimate Apparel        $ 47,351        $ 70,889        $118,240
$ 37,564        $ 64,061        $101,625
Active-wear                7,646          12,459          20,105
6,140          45,821          51,961
Swimwear                  10,275              --          10,275
17,750              --          17,750
TOTAL                     65,272          83,348         148,620
61,454         109,882         171,336
</TABLE>

          SEAMLESS. Sales for the year ended December 31, 2005 for
this segment
     were $109.9 million, a 31.8% increase compared to sales of $83.3
million
     for the year ended December 31, 2004. This increase in sales was
mainly due
     to the growth in sales of our active-wear seamless products, and
in
     particular in sales to Nike for their Nike Pro category.

          CUT & SEW. Sales for the year ended December 31, 2005 for
this segment
     were $61.5 million, a 5.8% decrease compared to sales of $65.3
million for
     the year ended December 31, 2004. This decrease in sales was
mainly due to
     a decrease of 20.7% of our sales of intimate apparel products
from $47.4
     million in 2004 to $37.6 million in 2005, which was partially
offset by an
     increase of 72.7% in our sales of swimwear products from $10.3
million in
     2004 to $17.8 million in 2005.
                                      34
<PAGE>


    COST OF SALES

     Cost of sales consists primarily of materials, various salaries
and related
expenses, subcontracting expenses and other overhead expenses related
to our
manufacturing operations. Cost of sales increased by 3.8% to $141.6
million in
2005 as compared to $136.4 million in 2004, primarily due to the
increase in
sales. As a percentage of sales, cost of sales decreased to 82.7% in
2005 as
compared to 91.8% in 2004. This improvement in gross profit
percentage was due
to the increased contribution of higher margin products and the
improved
operating efficiencies in our Seamless and Cut & Sew segments. These
efficiency
measures included, among others, increased production and quality
performance
and further transfer of sewing capacity to Jordan.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses consist primarily
of costs
relating to salaries to employees engaged in sales, marketing,
distribution,
administration and management activities, freight and other
administrative
costs. Selling, general and administrative expenses decreased by
19.7% to $13.6
million in 2005 as compared to $16.9 million in 2004. This decrease
was
primarily due to a reduction in air freight expenses due to improved
deliveries
to our customers and to a reduction of general and administrative
payroll
expenses. As a percentage of sales, selling, general and
administrative expenses
decreased from 11.4% in 2004 to 7.9% in 2005. This was primarily due
to the
increase in sales volume and the factors mentioned above.

    OPERATING INCOME

     CONSOLIDATED. Operating income for the year ended December 31,
2005 was
$16.1 million (9.4% of sales), compared to operating loss of $4.7
million for
the year ended December 31, 2004. This increase in operating income
was due to
the increase in gross profit and decrease in selling, general and
administrative
expenses as discussed above.
          SEAMLESS. Operating income for the year ended December 31,
2005 for
     this segment was $13.3 million (12.1% of sales), compared to
operating loss
     of $8.2 million for the year ended December 31, 2004. This
improvement was
     due to the increased contribution of higher margin products,
increased
     production volume, improvement in production and quality
performance,
     further transfer of sewing capacity to Jordan and a decrease in
freight
     expenses.

          CUT & SEW. Operating income for the year ended December 31,
2005 for
     this segment was $2.9 million (4.7% of sales), compared to
operating income
     of $3.5 million (5.4% of sales) for the year ended December 31,
2004. The
     decrease resulted primarily from a decrease in sales to a major
intimate
     apparel customer due to strengthened price competition.

    FINANCIAL EXPENSES, NET

     Financial expenses decreased to $3.2 million in 2005 as compared
to $3.9
million in 2004. This decrease was mainly due to the strengthening of
the U.S
dollar as compared to the NIS and the EUR. This decrease was partly
offset by an
increase in interest expenses on our loans and credit lines due to an
increase
in LIBOR rates.


                                      35
<PAGE>


    INCOME TAXES

     Tax expense for 2005 was $4.3 million, as compared to tax
expense of $0.1
million for 2004. The main reason for this increase was the increase
in pretax
profit which was $12.9 million in 2005 compared to a pretax loss of
$8.6 million
in the year 2004.

LIQUIDITY AND CAPITAL RESOURCES

    2006 SOURCES AND USES OF CASH

     During 2006, we generated $27.3 million in cash from continuing
operating
activities compared to $17.8 million during 2005. In addition, we
received:
     o    net proceeds of $13.8 million from our offering of
securities on the
          Tel-Aviv Stock Exchange during the first quarter,

     o    proceeds of $1.0 million from the exercise of option
certificates
          issued in such offering,

     o    proceeds of $3.2 million from exercise of stock options by
employees
          and directors,

     o    proceeds of $9.9 million in cash from the sale of our
interest in
          AlbaHealth, and

     o    $1.2 million of Israeli governmental investment grants in
respect of
          our investment in fixed assets.

     This cash flow was used to repay a net amount of $30.9 million
in bank
debt, pay dividends of $ 9.4 million, invest $4.4 million, net in
property,
plant and equipment, and together with other cash flow activities,
increase our
cash and cash equivalents, deposits and marketable securities balance
by $12.4
million from $7.7 million at December 31, 2005 to $20.1 million at
December 31,
2006.

     Cash provided by operating activities is net income (loss)
adjusted for
certain non-cash items and changes in assets and liabilities. For
2006, cash
provided by continuing operating activities was $27.3 million,
compared to $17.8
million in 2005, while our net income increased in 2006 to $18.4
million
compared to net income of $3.3 million in 2005. During 2006, the
majority of our
increase in cash flow as compared to 2005 was mainly due to an
increase in our
net income (excluding the non cash expenses).

CONTRACTUAL AND OTHER COMMITMENTS

     We have various commitments primarily related to long-term debt.
The
following tables provide details regarding our contractual cash
obligations and
other commercial commitments subsequent to December 31, 2006:

<TABLE>
<CAPTION>
CONTRACTUAL OBLIGATIONS(1) (2)        TOTAL         2007          2008
2009 -    2010 - 2012
                                      -----        -----          -----
-----      -----
<S>                                   <C>          <C>         <C>
<C>         <C>
Long-Term Bank Debt                   $25.3        $ 5.9       $ 5.9
$ 5.6       $ 7.9
Other Long-Term Obligations (3)            --         --          --
--
TOTAL CONTRACTUAL CASH
OBLIGATIONS                                --      $ 5.9       $ 5.9
$ 5.6       $ 7.9
</TABLE>


                                      36
<PAGE>


<TABLE>
<CAPTION>
OTHER COMMERCIAL COMMITMENTS       TOTAL AMOUNTS AVAILABLE
2006(4)
- ----------------------------       -----------------------
-------
<S>                                    <C>
<C>
Lines of Credit                        $21.1
$0
Guarantees/Letters of Credit           $    11
$9
TOTAL COMMERCIAL COMMITMENTS           $31.2
$9
</TABLE>

     (1) Contractual obligations are defined as agreements for
finance purposes
that are enforceable and legally binding on Tefron and that specify
all
significant terms, including fixed or minimum quantities to be
purchased, and
the approximate timing of the transaction. Because our purchase
orders are based
on our current manufacturing needs, our agreements for the purchase
of raw
materials and other goods and services are not included in the table
above.

     (2) This table does not include payments of interest on our
long-term bank
debt, due to its variable nature. Interest on our long-term bank debt
ranges
from three-month LIBOR plus 1.2% to three-month LIBOR plus 1.5% As of
March 15,
2007, the three-month LIBOR was 5.34%.

     (3) This table does not include deferred tax obligations, net,
of $11.9
million and accrued severance pay, net, in the amount of $2.5
million. We do not
know in what year these long-term obligations will be payable.

    (4) These credit lines facilities are revolving every year.
    LOAN FACILITIES

     At December 31, 2006, outstanding borrowings from banks,
comprised of long
term debt, totaled $25.3 million, including current maturities of
$5.9 million.
The bank loans bear interest at three months LIBOR plus 1.2% to 1.5%
and are
scheduled to mature during the next six years.

     Long-term loans include a term loan facility of our subsidiary,
Tefron USA,
with Bank Hapoalim B.M. and Israel Discount Bank of New York entered
into in
connection with the acquisition of Tefron USA, in the outstanding
amount of $9.2
million and payable in 12 quarterly installments commencing March 15,
2007
through December 15, 2012.

     The term loan facility is secured by a floating lien on all the
personal
property of Tefron USA and its subsidiaries, pledges of all non-
margin stock of
Tefron USA owned by our U.S. subsidiary, Tefron U.S. Holdings Corp.,
and all
subsidiary stock then owned by Tefron USA, and guaranties made by us,
Hi-Tex
Founded by Tefron Ltd. and by Tefron U.S. Holdings Corp.

     The bank loan agreements contain various covenants which
require, among
other things, that we maintain certain financial ratios related to
shareholders'
equity and operating results. In addition, the terms prohibit us and
Tefron USA
from incurring certain additional indebtedness, limit certain
investments,
advances or loans and restrict substantial asset sales, cash
dividends and other
payments to shareholders of us and of Tefron USA. These covenants and
restrictions could hinder us in operations and growth. As of December
31, 2006,
the Company was in compliance with these covenants.

    EQUITY FINANCINGS

     On April 22, 2004, we issued to Norfet, Limited Partnership, or
Norfet,
controlled by FIMI Opportunity Fund and certain other co-investors,
approximately 3.53 million Ordinary Shares at a base price of $4.25
per share
and to a group of investors represented by Mr. Zvi Limon, or Leber,
approximately 1.07 million of our Ordinary Shares at a base price of
$4.65 per
share. See "Item 10. Additional Information - C. Material Agreements
- FIMI
Agreements." We applied most of the aggregate amount of $19.7 million
from these
investments to repay short-term debt. On April 5, 2005, we issued,
with no
further consideration, additional shares to Norfet and Leber
according to share
purchase price adjustment mechanisms included in the investments
agreements with
these investors. Also, on March 9, 2004, we announced that we had
entered into
an equity line credit facility with Brittany Capital Management Ltd.,
or
Brittany, an entity advised by Southridge Capital Management LLC.
Under the
agreement, we have an option to call funds of up to the lesser of $15
million or
2,470,021 Ordinary Shares (equal to 19.9% of our outstanding share
capital on
the day we signed the agreement) over a three-year period expiring at
the end of
October 2007. Under the financing facility, we will be entitled to
issue shares
to Brittany from time to time, at our own election, subject to
certain minimum
and maximum limitations, but in no event will Brittany be obligated
to own more
than 4.99% of our Ordinary Shares at any one time. The price to be
paid by
Brittany will be at a discount of 6% to the market price of our
Ordinary Shares
(as calculated under the agreement) during a period prior to the
issuance of the
shares. Before drawing on the equity line, we must satisfy certain
closing
conditions, including the effectiveness of a registration statement
that we must
file relating to the shares to be issued to Brittany. See "Item 10.
Additional
Information - C. Material Agreements - Equity Line Credit Facility."


                                      37
<PAGE>


     On January 10, 2006, we completed a public auction of our
Ordinary Shares
and Option Certificates (Series 1) in Israel. A total of 100,000
units,
consisting of 18 Ordinary Shares and six Option Certificates each,
were issued
in the offering at a price of NIS 701.64 (approximately $151.48) per
unit. Each
Option Certificate was exercisable into one Share until January 9,
2007 at an
exercise price of $9.49 per Ordinary Share denominated in NIS
(subject to
adjustment for dividend distributions). Of the total number of Option
Certificates issued, 572,748 were exercised and 27,252 expired. Our
total net
proceeds from the offering were approximately $13.8 million for
shares plus
approximately $5.7 million generated from the exercise of the Option
Certificates. The Ordinary Shares and the shares issued upon the
exercise of the
Option Certificates are listed for trading on the Tel Aviv Stock
Exchange.

    OUTLOOK

     We currently believe that our cash flow from ongoing operations
and our
available bank credit will be sufficient to finance all of our
ongoing costs and
our planed investment in our business through 2007. We are looking to
further
expand our relationship with Nike and lululemon athletica and
continue to
increase our sales of swimwear products. We intend to broaden our
scope of
products while entering into new categories and increase the
visibility of our
Engineered For Performance EFP(TM) technology. However, we may not
generate
sufficient cash from operations to finance our ongoing costs and
service our
debt. See "Item 3. Key Information - 3D. Risk Factors," and in
particular "- We
depend on a small number of principal customers who have in the past
bought our
products in large volumes," "Our principal customers are in the
retail industry,
which is subject to substantial cyclical variations," "Our expansion
into new
product lines with more complicated products and new raw materials
reduced our
operating efficiency during 2003 and 2004. We may also face operating
efficiency
difficulties in the future," and "- Our markets are highly
competitive and some
of our competitors have numerous advantages over us; we may not be
able to
compete successfully." In the event sufficient cash from operations
is not
generated, we may need to renegotiate the terms of our debt,
refinance our debt,
obtain additional financing, postpone capital expenditures or sell
assets. See
"Item 3. Key Information - 3D. Risk Factors - Our debt obligations
may hinder
our growth and put us at a competitive disadvantage," "We require a
significant
amount of cash to pay our debt " and "Due to restrictions in our loan
agreements, we may not be able to operate our business as we desire."
See "Item
10. Additional Information - 10C. Material Contracts - Credit
Agreement."

DESIGN AND DEVELOPMENT OF PRODUCTS

     Our design and development of products department continually
strives to
improve technologies and products and develop new lines of products.
We invested
approximately $4.4 million to $4.9 million in 2004, $4.8 million to
$5.0 million
in 2005 and $5.4 million to $5.6 million in 2006 on design and
development of
products, including investments made by Tefron USA.


                                      38
<PAGE>


IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS

     Because most of our revenues in the foreseeable future are
expected to
continue to be generated in U.S. dollars, and a significant portion
of our
expenses are expected to continue to be incurred in NIS, we are
exposed to the
risk of appreciation of the NIS vis-a-vis the U.S. dollar. Part of
our expenses
are executed in Euro and, therefore, we are also exposed to the risk
of
appreciation of the Euro vis-a-vis the U.S dollar. This appreciation
would cause
an increase in our NIS or Euro expenses as recorded in our U.S.
dollar
denominated financial reports even though the expenses denominated in
NIS or
Euro will remain unchanged. A portion of our NIS denominated expenses
is linked
to changes in the Israeli cost of living index, a portion is linked
to increases
in NIS payments under collective bargaining agreements and a portion
is
unlinked.

     The dollar cost of our operations in Israel is influenced by the
extent to
which any increase in the rate of inflation in Israel is (or is not)
offset, or
is offset on a lagging basis, by the devaluation of the NIS in
relation to the
dollar. Unless inflation in Israel is offset by a devaluation of the
NIS, such
inflation will have a negative effect on our profitability because we
receive
most of our payments in dollars or NIS linked to dollar, but incur a
portion of
our expenses in NIS and NIS linked to the CPI. See "Item 11.
Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Risk"
and
"-Interest Rate Risk."

     In 2003 and 2005, the rate of devaluation of the NIS vis-a-vis
the dollar
exceeded the inflation rate in Israel. During 2003 and 2005, the rate
of
inflation was (1.9)% and 2.4%, respectively, while the NIS devalued
against the
U.S dollar by 7.6% and 6.9% in 2003 and 2005, respectively. During
2004 and
2006, the rate of inflation was 1.2% and 0.1% while the NIS
appreciated versus
the U.S dollar by 1.6 % and 8.2%, respectively and this negatively
affected our
profitability.

     A devaluation of the NIS in relation to the dollar would have
the effect of
decreasing the dollar value of any assets or receivables denominated
in NIS
(unless such receivables are linked to the dollar). Such devaluation
would also
have the effect of reducing the dollar amount of any of our payables
or
liabilities which are denominated in NIS (unless such payables or
liabilities
are linked to the dollar). Conversely, any increase in the value of
the NIS in
relation to the dollar will have the effect of increasing the dollar
value of
any of our unlinked NIS assets and the dollar amounts of any of our
unlinked NIS
liabilities. During 2006, we incurred expenses of approximately $1.1
million due
to the appreciation of the NIS in relation to the dollar and income
of
approximately $0.2 million due to the appreciation of the Euro in
relation to
the dollar. Hedging transactions performed by the Company during 2006
diminished
the adverse effect of the appreciation of the NIS in relation to the
dollar.
This appreciation may continue in 2007.

     Because exchange rates between the NIS and the dollar fluctuate
continuously (albeit with a historically declining trend in the value
of the
NIS), exchange rate fluctuations and especially larger periodic
devaluations
will have an impact on our profitability and on period-to-period
comparisons of
our results. This impact is recorded in our consolidated financial
statements in
accordance with applicable accounting principles. We may from time to
time
utilize derivative financial instruments to manage risk exposure to
fluctuations
in foreign exchange rates. We do not engage in any speculative or
profit
motivated hedging activities. See "Item 3. Key Information - 3D. Risk
Factors.
Since most of our revenues are generated in U.S. dollars and a large
part of our
expenses are in Israeli currency, we are subject to fluctuations in
inflation
and currency rates."

EFFECTIVE CORPORATE TAX RATE

     The taxable income of Israeli corporations was generally subject
to
corporate tax at the statutory rate of 31% in 2006. The rate is
scheduled to
decline to 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.
However, most of our manufacturing facilities in Israel have been
granted
Approved Enterprise status under the Investment Law, and consequently
income
derived from such facilities is eligible, subject to compliance with
certain
requirements, for certain tax benefits beginning when such facilities
first
generate taxable income. We have derived most of our income from our
Approved
Enterprise facilities. Subject to compliance with applicable
requirements,
income derived from our Approved Enterprise facilities will be
subject to
corporate tax at a rate of 25% for the earlier between: (i) 10 years
beginning
in the year that we had taxable income, (ii) 12 years from
commencement of
production, or (iii) 14 years from the date of approval.


                                      39
<PAGE>


     In addition, should the percentage of foreign investment exceed
25%,
Approved Enterprises would qualify for reduced tax rates for an
additional three
years beyond the initial seven-year period. The Benefit Period under
each of our
Approved Enterprises will in any event expire 14 years following the
date of the
approval of such Approved Enterprise by the Investment Center or 12
years after
production commences, whichever is earlier. In the event that the
percentage of
foreign investment is between 49% and 74%, we would be subject to a
corporate
tax rate of 20% on income derived from our Approved Enterprises. The
proportion
of foreign investment is measured annually based on the lowest level
of foreign
investment during the year. In addition, pursuant to the Investment
Law,
Approved Enterprises related to investment programs from January 1997
onwards in
designated areas, which include the location of our primary plants,
are exempt
from tax for the first two years of the Benefit Period commencing in
the first
year in which taxable income is generated.

     There can be no assurance that we will obtain approval for
additional
Approved Enterprises, or that the provisions of the Investment Law
will not
change, or that the above-mentioned foreign investment in our
Ordinary Shares
will be reached for any subsequent year. See "Item 3. Key Information
- 3D. Risk
Factors - We are affected by conditions to and possible reduction of
government
programs and tax benefits."

GOVERNMENT PROGRAMS

     We benefit from certain Israeli government programs,
particularly as a
result of the Approved Enterprise status of substantially all of our
existing
production facilities in Israel. This status has enabled us to
receive
investment grants with respect to certain of our capital
expenditures. The
Government of Israel has reduced the investment grants available to
us from 38%
of eligible annual capital expenditures in 1996 to 24% of eligible
annual
capital expenditures (for projects not exceeding investments of 140
million NIS
in any year) since 1997. Commencing in 2001, such investment grants
were reduced
by the Government of Israel to 20% of eligible annual capital
expenditures.
There can be no assurance that the Israeli government will not
further reduce
such investment grants. The termination or reduction of certain
programs
(particularly benefits available to us as a result of the Approved
Enterprise
status of certain of our facilities) would increase the costs of
acquiring
machinery and equipment for our production facilities which could
have a
material adverse effect on us. See "Item 3. Key Information - 3D.
Risk Factors -
We are affected by conditions to and possible reduction of government
programs
and tax benefits."

EXCHANGE RATES

     The following table sets forth the representative rates of
exchange
published by the Bank of Israel based on US dollar- NIS transactions
for the
periods and dates indicated.

YEAR ENDED DECEMBER 31,     AVERAGE RATE    HIGH       LOW
PERIOD END
- -----------------------    ------------    ----        ---      --
--------
                                            (NIS PER $1.00)

2002                           4.74         4.99       4.44
4.74
2003                             4.54          4.92          4.28
4.38
2004                             4.48          4.63          4.31
4.31
2005                             4.49          4.74          4.30
4.60
2006                             4.46          4.73          4.18
4.23

     The following table sets forth certain information concerning
the
representative rate of exchange between the NIS and the US dollar, as
published
for the months October 2006 through March 2007.


                                        40
<PAGE>


MONTH                             AVERAGE RATE        HIGH          LOW
PERIOD END
- -----                             ------------       ----          ---
----------
                                                      (NIS PER $1.00)
October 2006                            4.27          4.30        4.25
4.29
November 2006                           4.30          4.33          4.25
4.25
December 2006                           4.20          4.23          4.18
4.23
January 2007                            4.23          4.26          4.19
4.26
February 2007                           4.22          4.25          4.18
4.21
March (through March 15, 2007)          4.21          4.22          4.20
4.21

     On March 15, 2007, the representative rate of exchange between
the NIS and
the US dollar was NIS 4.212 per $1.00, as published by the Bank of
Israel.
Changes in the exchange rate between the NIS and the USD could
materially affect
our financial results.

     TREND INFORMATION. We have seen a significant improvement in the
operating
efficiency in our Seamless Division during 2005 and 2006, although we
cannot
assure that we will be able to maintain our current efficiency levels
in the
future. For more information, see " - General - 2006 Developments."

     We have also experienced erosion in prices of our Cut & Sew
intimate
apparel products and decrease in, sales of these products, that may
continue in
the future.
     OFF-BALANCE SHEET ARRANGEMENTS. We have no off-balance sheet
arrangements
that have or are reasonably likely to have a current or future effect
on our
financial condition, revenues or expenses, results of operations,
liquidity,
capital expenditures or capital resources that are material to
investors, except
for foreign exchange hedging contracts. See "Item 11. Quantitative
and
Qualitative Disclosures About Market Risk - Foreign Currency Risk."


                                        41
<PAGE>


ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6A.   Directors and Senior Management

     The following table sets forth certain information concerning
our current
directors, senior management and key employees as of March 15, 2007.

NAME                        AGE         POSITION
- ----                        ---         --------
Ishay Davidi                45          Chairman of the Board
Yosef Shiran                45          Chief Executive Officer and
Director
Arie Wolfson                45          Director
Micha Korman                52          Director
Meir Shamir                 56          Director
Shirith Kasher              39          Director
Avi Zigelman                50          Director
Eli Admoni                  67          External Director
Yacov Elinav                62          External Director
Asaf Alperovitz             37          Chief Financial Officer
Amit Tal                    37          Vice President of Sales and
Marketing
Itamar Harchol              48          Chief Technology Officer
Anat Barkan                 40          Manager of Human Resources
Amit Eshet                  45          Supply Chain Manager
David Gerbi                 57          Hi-Tex Division Manager
Ilan Gilboa                 40          Cut & Sew Division Manager
Ronny Grundland             53          Swimwear Division Manager
Michal Baumwald Oron        34          Company Secretary and Legal
Counsel

     ISHAY DAVIDI has served as Chairman of the Board of Directors
since
November 2005 and served as a director of the Company since June
2005. Mr.
Davidi serves as a CEO of each of First Israel Mezzanine Investors
Ltd. and FIMI
2001 Ltd., the managing general partners of the partnerships
constituting the
FIMI Private Equity Funds. Mr. Davidi also serves as a director at
Tedea
Development & Automation Ltd. and TAT Technologies Ltd. Mr. Davidi
was formerly
the CEO of the Tikvah VC Fund. Mr. Davidi holds a B.Sc in Industrial
and
Management Engineering from Tel Aviv University and an MBA from Bar
Ilan
University.

     YOSEF SHIRAN has served as Chief Executive Officer and a
Director of Tefron
since January 2001. Prior to joining Tefron, Mr. Shiran was the
general manager
of Technoplast Industries, an injection molding and extrusion
company, from 1995
to 2000. Mr. Shiran has over 15 years of management experience. Mr.
Shiran holds
a B.Sc. degree in Industrial Engineering from Ben-Gurion University
and a
masters degree in Business Administration from Bar Ilan University.

     ARIE WOLFSON joined Tefron in 1987 and served as Chairman of the
Board of
Directors from August 2002 until November 2005. He also served as
Chairman of
the Board of Directors from 1997 to 2000, and as President from 1993
to 2000.
Mr. Wolfson served as Chief Financial Officer from 1988 to 1990 and
Assistant to
the Chief Executive Officer from 1990 to 1993. Mr. Wolfson has also
served as
Chairman of Macpell Industries Ltd., a principal shareholder in
Tefron, since
1998 and served as Chief Executive Officer of Macpell from 1998 until
March
2003. Mr. Wolfson is a graduate of High Talmudical Colleges in the
United States
and in Israel.

     MEIR SHAMIR was elected as a director of the Company on March
31, 2004 and
has been the Chairman of Mivtach Shamir Holdings Ltd., an investment
company
traded on the TASE, since 1992. Mr. Shamir also serves as a director
of several
companies controlled by Mivtach Shamir Holdings Ltd.


                                      42
<PAGE>


     MICHA KORMAN has served as a director of the Company since
October 2002.
Mr. Korman leads the improving, recovery and rehabilitation process
for
companies. Mr. Korman held various senior management positions in the
Company
from 1991 until 2003. From October 2000, he served as the Executive
Vice
President of the Company. Prior to that, Mr. Korman was Chief
Financial Officer
of the Company from 1991 to September 2000. Prior to joining the
Company, Mr.
Korman held various senior financial and management positions with
companies in
the hi-tech, beverage and food and communication industries. Mr.
Korman holds a
Bachelor's degree in Economics, a Business Administration degree from
Bar-Ilan
University and an LL.B degree from Kiryat Ono College.

     SHIRITH KASHER was elected as a director of the Company on March
31, 2004
and is the head of Corporate & Structured Finance at Brack Capital
Holding Ltd.
From April 2005 until April 2006 Ms. Kasher was the CEO of Telem Ltd.
From 2001
to March 31, 2005, Ms. Kasher was the Business and Corporate Counsel
and
Secretary of The Israel Phoenix Assurance Company Ltd. and the
General Counsel
of Atara Investment Company Ltd. and Atara Technology Ventures
Limited (both
from the Phoenix Group). From 1997 to 2000, Ms. Kasher worked at S.
Horowitz &
Co., first as an Articled Clerk and then as an Advocate. Ms. Kasher
holds a
B.Sc. and an LLB, from Tel Aviv University and is admitted to
practice law in
Israel.

     AVI ZIGELMAN was elected as a director of the Company on June
28, 2005.
Since 2004 Mr. Zigelman is a financial advisor and serves as a
director in the
following companies: Plastro Irrigation Ltd., Phoenix Gemel Ltd., Fox
Vizel
Ltd.,King Ltd., Bram Industries Ltd., Ilex Medical Ltd., Migdal
Capital Markets
(1965) Ltd., Gindi Towers Investments Ltd., Osif Investment and
Development
Ltd., Simha Urieli and Sons Ltd., Milomor Trade & Communication Ltd.
and Pangea
Real Estates Ltd. Since 2000 Mr. Zigelman is a member of the
Professional
Committee of the Israeli Accounting Standard Board. Between 1996 and
2003, Mr.
Zigelman served as a Partner Head of Professional Practice Department
of KPMG
Somekh Chaikin accounting firm and Mr. Zigelman holds an M.A. in
Business
Economics, specialization in Finance, with honors, B.A in Accounting
and
Economics, Economics with honors, and Post degree Accounting Studies,
with
honors, - all from Tel-Aviv University. Mr. Zigelman is a Certified
Public
Accountant.

     ELI ADMONI has served as an External Director of Tefron since
August 10,
2006. Mr. Admoni has been the chairman of the Clalit Health Services
since 2005,
serves as a director and chairman of the finance committee of Clalit
Health
Services and served as the chairman and as a director in boards of
directors of
different companies from 2000 to 2005. Mr. Admoni served as the
president of
Biotechnology General (Israel) Ltd from 1999 to 2000, as CEO of
Caniel Israel
Can Company Ltd from 1994 to 1998, as CEO of Rafa Labs Ltd from 1989
to 1993,
and as CEO of Abic Ltd from 1982 to 1989. Mr. Admoni holds an LLB
from the
Hebrew University, Jerusalem and a Business Administration degree
from
University of Manitoba, Canada.

     YACOV ELINAV has served as an External Director of Tefron since
2004.
Between 1991 and July 2003, Mr. Elinav was a member of the Board of
Management
of Bank Hapoalim B.M. Mr. Elinav also serves as a Chairman of the
Board of DS
Securities Investment Ltd. and of the Board of DS Pension Funds Ltd
and is a
director of Middle East Tube Ltd., New Kopel Ltd, DS Trust Funds Ltd,
DS
Institutionals Ltd, Sapians Ltd., Bagir Ltd., Polar Communication Ltd
and is an
external director of Office Textile Ltd. Mr. Elinav formerly served
as a
director of other prominent Israeli companies.

     ASAF ALPEROVITZ joined Tefron in June 2005 as Chief Financial
Officer. Mr.
Alperovitz has held several management positions, including that of
Chief
Financial Officer of Corigin Ltd., an enterprise software company
from 2003
until 2005. Prior to that, Mr. Alperovitz worked as the Head of
Israeli Desk and
as High-Technology Senior Manager for Ernst & Young in both Israel
and
California. Mr. Alperovitz holds a Bachelor's degree in Accounting
and Economics
and a Master in Business Administration from Tel-Aviv University and
is a
Certified Public Accountant.

     AMIT TAL has served as Vice President of Sales and Marketing at
Tefron
since 2005 and was marketing director at Tefron from 2001 to 2005.
Before
joining Tefron, Mr. Tal was a business unit manager for a large
textile firm.
Mr. Tal holds a B.A. in economics and marketing as well as a Masters
in Business
Administration.


                                      43
<PAGE>
     ITAMAR HARCHOL joined Tefron in March 2003 as Chief Technology
Officer.
Prior to joining Tefron, from the beginning of 2001 to February 2003,
Mr.
Harchol served as the Engineering Manager of Tamuz, a manufacturer of
electronic
packaging, between 1998 and 2001 he was Products Manager for the
automotive
industry in Ortal Dye Casting and prior to that, between 1994 and
1997, he
served as the Engineering Manager of Inbar Reinforced Polyester which
is a
plastic manufacturer of composite materials products. Mr. Harchol
holds a degree
of mechanical engineering from the Nazareth College.

     ANAT BARKAN joined Tefron in 2005 as Human Resource Manager.
Prior to
joining Tefron, Ms. Barkan served as Human Resource manager in
several
companies, including Golan Plastic Products from 2001 until 2005 and
in
Glidat-Strauss Ltd. from 1995 until 2001. Ms. Barkan holds a
Bachelor's degree
in Political Science and Sociology from Haifa University, a Master in
Business
Administration from the Hebrew University and a degree in
Organizational
Consulting from Haifa University.

     AMIT ESHET joined Tefron in February 2001 and has served as Hi-
Tex division
manager since July 2004 and as Supply Chain manager since March 2005.
Prior to
that, he served as manager quality assurance of Hi-Tex division. Mr.
Eshet
served as manager in several industrial corporations. Mr. Eshet holds
a B.Sc
degree in Industrial Engineering from the Technion in Haifa.

     DAVID GERBI joined Tefron as Hi-Tex Managing director in
February 2005.
David has significant experience in management positions in the
textile
industry. Mr. Gerbi served in Nilit Ltd. from 1977 to 1985 as a
production
manager in the Textile Division, from 1985 to 1994 as a plant manager
in the
Delta Galil socks division, from 1994 to 1997 as Delta fabric
division manager,
from 1997 to 1999 established and managed his own private textile
factory,
between 1999 to 2002 served as Delta sporting managing director, and
from 2002
to 2005 was a country manager for Sara Lee in Turkey. Mr. Gerbi holds
a degree
in practical engineering from ORT in Israel.
     ILAN GILBOA joined Tefron as manager of Tefron's cut & sew
division in
March 2003. Prior to joining Tefron, Mr. Gilboa served from 1996 to
February
2003 in Kulicke & Soffa Israel, a leading supplier of semiconductor
assembly and
test innerconnect equipment, materials and technologies, first as a
manager of
industrial engineering and last as vice president of operations and
as such, was
responsible for the construction of K&S's new industrial facility in
China. Mr.
Gilboa holds a B.Sc and M.Sc degree in industrial engineering from
the Technion
in Haifa.

     RONNY GRUNDLAND joined Tefron in May 2003, following the
acquisition of
Macro Clothing Ltd, and has served since then as a Head of Tefron
Swimwear
Division. Prior to that Mr. Grundland served since 1995 until 2003 as
the
general manager of Macro, since 1993 until 1995 he served as general
manger of
Macpell Industries, Ltd. jointly with another and as its marketing
manager,
since 1990 until 1992 Mr. Grundland served as an organizational
advisor to
textile companies in Israel and Europe, and since 1980 until 1989 he
served as a
production and operational manager in Gotex, Ltd. Mr. Grundland holds
a B.Sc
degree with honors in industrial engineering form the Technion- the
Technologic
Institution in Israel, and LLB with honor from Sharei-Mishpat
College.

     MICHAL BAUMWALD ORON joined Tefron in 2003 and has served as the
company
secretary and legal counsel since August 2004. Prior to joining
Tefron, Ms. Oron
served as a lawyer and as legal counsel in a law firm, in private
practice and
in the IDF. Ms. Oron holds an LLB from Tel-Aviv University and an LLM
from
Bar-Ilan University and was admitted to practice law in Israel in
1996.

MACPELL SHAREHOLDERS' AGREEMENT

     The Macpell Shareholders Agreement relates, among other things,
to the
election of Directors of Tefron. The agreement provides, among other
things,
that subject to the agreement of the shareholders in Tefron, the
distribution of
the directors on Tefron's Board of Directors will reflect the direct
and
indirect holdings in Tefron (including through Macpell) of the
parties to the
agreement. See "Item 7 - Major Shareholders and Related Party
Transactions - 7B.
- - Related Party Transaction - Relationships and Transactions with
Macpell -
Macpell Shareholders' Agreement."


                                      44
<PAGE>


MACPELL-ARWOL- NORFET AGREEMENT

     Arwol, Macpell and Norfet are parties to an agreement pursuant
to which
they agreed to vote all of Tefron Ordinary Shares owned or controlled
by each of
them for the election to Tefron's Board of Directors of: (i) three
members (of
whom at least one will be female and at least one will qualify as an
"independent director" under the NYSE rules) plus, subject to
applicable law,
one external director, that shall be nominated by Norfet, (ii) three
members (of
whom at least one will qualify as an independent director and a
financial expert
under the NYSE rules) plus, subject to applicable law, one external
director,
that shall be nominated by Arwol and Macpell, and (iii) Tefron's
chief executive
officer. Ishay Davidi, Meir Shamir, Shirith Kasher and Yacov Elinav
were
nominated to the Board by Nofet, and Arie Wolfson, Micha Korman, Avi
Zigelman
and Eli Admoni were nominated to the Board by Arwol and Macpell. See
"Item 10.
Additional Information - C. Material Agreements - FIMI Agreements -
Macpell
Agreement" for a description of the agreement between Arwol, Macpell
and Norfet,
Limited Partnership regarding the election of members to Tefron's
Board of
Directors.

6B.   COMPENSATION

     The aggregate direct remuneration paid to all Directors and
senior
management as a group for services in all capacities for the year
ended December
31, 2006 was approximately $2.4 million, of which $104,000 was paid
to Directors
in their capacities as Directors. Negligble amounts were set aside or
accrued
for vacation and recuperation pay for all Directors and senior
management as a
group. No amounts were set aside or accrued to provide pension,
retirement or
similar benefits. The amount does not include any amounts expended by
us for
automobiles made available to our officers, expenses (including
business travel
and professional and business association dues and expenses)
reimbursed to
officers and other fringe benefits commonly reimbursed or paid by
companies in
Israel and $120,000 in management fees paid to Norfet and $120,000 in
management
fees paid to New York Delights, a company wholly owned by Arie
Wolfson.

     In 2006, we granted options for 80,000 Ordinary Shares under the
Share
Option Plan to senior managers. Such options have an average exercise
price of
$9.90 per share (including adjustments to two dividend distributions
which took
place in 2006) and expire in 2016. Options for 15,000 Ordinary Shares
under the
Share Option Plan expired or were cancelled during 2006.

    EMPLOYMENT AGREEMENTS

    CHIEF EXECUTIVE OFFICER

     Under the terms of our management services agreement with Mr.
Yosef Shiran,
our Chief Executive Officer, and with an entity controlled by him,
referred to
in this Annual Report as the Management Agreement, we pay to the
entity
controlled by Mr. Shiran: (i) compensation for management services in
the amount
of $26,888 plus NIS 2,065 per month, plus VAT as applicable by law,
and (ii)
reimbursement of any and all reasonable direct expenses including
telephone,
cellular phone and vehicle expenses. The management agreement
originally
provided for the payment of an annual grant to Mr. Shiran in an
amount not
higher than 2.5% of Tefron's Net Profit, as defined in the Management
Agreement,
and not lower than 1.5% of such Net Profit (with any annual grant
higher than
1.5% of the Net Profit subject to approvals of both the Board of
Directors and
the Tefron shareholders, unless no longer required under applicable
law).
Following approval of the Tefron shareholders, the Management
Agreement was
amended to provide for the annual grant to be 2% of the Company's Net
Profits.
Tefron shareholders have also resolved to change the definition of
"Net Profit"
for the purposes of calculating the annual bonus for 2006 and
thereafter to be
Tefron's annual net profit as set forth in Tefron's audited financial
statements, after deducting tax and without taking into consideration
special
profits or losses (except special profits which resulted from Mr.
Shiran's
actions which will be taken into consideration) or profits or losses
which are
not derived from Tefron's ordinary operations.


                                      45
<PAGE>


     The Audit Committee and the Board of Directors have approved an
increase of
Mr. Shiran's monthly compensation starting from January 1, 2007 to
$35,000 plus
VAT as applicable by law. This change is subject to shareholder
approval and
will apply retroactively to January 1, 2007, if approved by
shareholders.

     In addition, in 2001 we granted to Mr. Shiran options to
purchase 300,000
Ordinary Shares at an exercise price per share of $3.56. Of these
options,
150,000 were exercised by Mr. Shiran during 2006 and the shares
issued upon such
exercise were sold by Mr. Shiran. In 2002, we granted to Mr. Shiran
options to
purchase 15,000 Ordinary Shares with an exercise price per share of
$3.59. All
of these options are subject to the terms and conditions of our 1997
Share
Option Plan. In March 2004, the Tefron shareholders approved the
grant to Mr.
Shiran of additional options to purchase 650,000 Ordinary Shares at
an exercise
price of $ 4.25 per share issued in accordance with our 1997 Share
Option Plan.

     As of March 15, 2007, 679,583 of Mr. Shiran's options had vested
(in
addition to the 150,000 options already exercised), and the remaining
135,417
options will vest, subject to relevant tax laws, until December 31,
2007 in the
amount of 13,542 options each month. The agreement granting these
650,000
options included a provision providing for an adjustment to the
exercise price
in the event of a dividend distribution during the period that the
options
cannot be exercised, whether due to the fact that the options are not
vested or
due to the terms of Section 102 of the Israel Income Tax Ordinance.
The Audit
Committee and the Board of Directors have approved a two-year
extension of the
period (until October 22, 2008) during which the exercise price of
these options
would be adjusted for dividend distribution by Tefron, whether or not
the
options are exercisable at the time of the dividend distribution.
This change is
subject to shareholder approval and will apply retroactively to
October 2006, if
approved by shareholders.

     In the event the Management Agreement is terminated by us
without "cause"
or by Mr. Shiran, Mr. Shiran will be entitled to exercise the options
he would
otherwise be entitled to exercise as of such date for a period ending
36 months
after such termination. Notwithstanding the foregoing, in the event
we terminate
the Management Agreement because of a "Change in Control", Mr. Shiran
will be
entitled to exercise all of the 650,000 options not exercisable at
the time of
termination. In such a case, Mr. Shiran will be entitled to exercise
these
options within 30 days of the termination date. For the purpose of
this grant,
"Change of Control" means: if none of (i) FIMI Opportunity Fund, L.P.
(and its
affiliates and investors, including FIMI Israel Opportunity Fund,
Limited
Partnership), or FIMI; (ii) "Arwol"; and (iii) Macpell, will be party
to the
shareholder agreement dated March 17, 2004 between such parties
(described in
"Item 10. Additional Information - C. Material Contracts - FIMI
Agreements -
Macpell Agreement"), or will otherwise effectively have Control of
the Company.
For that purpose, the term "Control" shall have the meaning given to
that term
(in Hebrew: "Shlita") in Section 1 of the Securities Law, 1968.

    AGREEMENT WITH ARIE WOLFSON

     Under the terms of our consulting and management services
agreement with
Mr. Arie Wolfson, a Director of the Company, and with a company
controlled by
him, referred to herein as the Consulting Agreement, we pay to the
company
controlled by Mr. Wolfson: (1) compensation for consulting services
in the
amount of $15,000 per month, plus 41% cost (equivalent to the cost we
would have
paid for a similar senior management wage) (total of $253,800
annually), (2)
reimbursement of vehicle expenses, (3) reimbursement of out-of-pocket
expenses,
and (4) reimbursement of other standard expenses customarily provided
to persons
serving in such capacity in Israel. These payments replace payments
made until
2002 to Macpell in the amount of $20,000 per month. In addition, the
consulting
and management services agreement includes non-competition clauses.
                                      46
<PAGE>


     In addition, we granted to Mr. Wolfson options to purchase
225,000 Ordinary
Shares at an exercise price per share of $3.50. Such options were
exercised by
Mr. Wolfson during 2006 and the shares issued upon such exercise were
sold by
Mr. Wolfson. Pursuant to the terms of the agreement between Norfet,
Limited
Partnership and the Company, on March 31, 2004, the general meeting
of
shareholders of the Company approved an amendment to the Consulting
Agreement
which provides that as of the date on which Mr. Wolfson ceases to act
as
chairman of the board of directors of the Company, and for so long as
Mr.
Wolfson continues to provide consulting services to the Company, the
annual
amounts payable pursuant to the Consulting Agreement will be reduced
from
$253,800 to $120,000 per annum, each plus VAT. See "Item 10.
Additional
Information - 10C. Material Contracts - FIMI Agreements".

      FORMER PRESIDENT

     Under the terms of a retirement agreement we executed with Mr.
Rabinowicz
on January 10, 2005, we paid Mr. Rabinowicz during most of 2005
monthly
payments, employee benefits such as vacation, educational fund, sick
leave, and
management and disability insurance contributions and provision of a
vehicle. We
will pay Mr. Rabinowicz in accordance with the retirement agreement a
further
$162,500 during 2007. The retirement agreement also includes non-
competition
clauses.

6C.   BOARD PRACTICES

     Each Director, other than the External Directors, is generally
elected by a
vote at the Annual General Meeting of shareholders and serves for a
term of one
year or until the following Annual General Meeting. Each External
Director is
elected to serve for a period of three years from the date of the
Annual General
Meeting. Each office holder will serve until his or her removal by
the Board of
Directors or resignation from office.
     Under the Israeli Companies Law, each Israeli public company is
required to
determine the minimum number of directors with "accounting and
financial
expertise" that such company believes is appropriate in light of the
particulars
of such company and its activities. A director with "Accounting and
Financial
Expertise" is a person that, due to education, experience and
qualifications, is
highly skilled and has an understanding of business-accounting issues
and
financial statements in a manner that enables him/her to understand
in depth the
company's financial statements and stimulate discussion regarding the
manner of
presentation of the financial data. On March 8, 2006 the Board
determined that
at least two members of the board would be required to have
Accounting and
Financial Expertise. The Board believes it complies with such
requirement.

    INDEPENDENT/EXTERNAL DIRECTORS

    ISRAELI COMPANIES LAW REQUIREMENTS

     We are subject to the provisions of the Israeli Companies Law,
1999 which
requires that we have at least two External Directors. Under a recent
amendment
to the Companies Law, at least one of the external directors is
required to have
Financial Expertise and the other External Directors are required to
have
Professional Expertise. A director has "Professional Expertise" if he
or she
satisfies ONE of the following:

          (i) the director holds an academic degree in one of these
areas:
     economics, business administration, accounting, law or public
     administration;

          (ii) the director holds an academic degree or has other
higher
     education, all in the main business sector of the company or in
a relevant
     area for the board position; or

          (iii) the director has at least five years' experience in
one or more
     of the following (or a combined five years' experience in at
least two or
     more of these: (a) senior management position in a corporation
of
     significant business scope; (b) senior public office or senior
position in
     the public sector; or (c) senior position in the main business
sector of
     the company.
     The above qualifications do not apply to external directors
appointed prior
to January 19, 2006. However, an external director may not be
appointed to an
additional term unless: (i) such director has "Accounting and
Financial
Expertise"; or (ii) he or she has "Professional Expertise", and on
the date of
appointment for another term there is another external director who
has
"Accounting and Financial Expertise" and the number of "Accounting
and Financial
Experts" on the board of directors is at least equal to the minimum
number
determined appropriate by the board of directors.


                                      47
<PAGE>


     Under the Companies Law, a person may not be appointed as an
External
Director if he or his relative, partner, employer or any entity under
his
control has or had during the two years preceding the date of
appointment any
affiliation with the company, any entity controlling the company or
any entity
controlled by the company or by this controlling entity. The term
affiliation
includes: an employment relationship, a business or professional
relationship
maintained on a regular basis, control, and service as an office
holder. No
person can serve as an External Director if the person's position or
other
business creates, or may create, conflicts of interest with the
person's
responsibilities as an External Director. Until the lapse of two
years from
termination of office, a company may not engage an External Director
to serve as
an office holder and cannot employ or receive services from that
person, either
directly or indirectly, including through a corporation controlled by
that
person.

     Under the Companies Law, External Directors must be elected by a
majority
vote at a shareholders' meeting, provided that either: (1) the
majority of
shares voted at the meeting, including at least one-third of the
shares of
non-controlling shareholders who are participating in the voting at
the meeting
in person or by proxy, vote in favor of the election; or (2) the
total number of
shares voted against the election of the external director does not
exceed one
percent of the aggregate voting rights in the company. The initial
term of an
External Director is three years, which term may be extended for an
additional
three years. Each committee of a company's board of directors must
include at
least one External Director, and all External Directors must serve on
the audit
committee. The Company's External Directors are currently Arie Arieli
and Yacov
Elinav.

    NEW YORK STOCK EXCHANGE REQUIREMENTS

     The Company is subject to the rules of the New York Stock
Exchange
applicable to listed companies that are foreign private issuers.
Under such NYSE
rules, each member of the Company's audit committee must be
independent. See "-
Audit Committee" below for a description of the independence
standards under the
NYSE rules as applicable to foreign private issuers.

    AUDIT COMMITTEE

     NYSE REQUIREMENTS. Under NYSE rules as applicable to foreign
private
issuers, we are required to have an audit committee that satisfies
the
independence requirements of Rule 10A-3 of the U.S. Securities
Exchange Act of
1934, as amended.

     The requirements implement two basic criteria for determining
independence:
(i) audit committee members would be barred from accepting, directly
or
indirectly, any consulting, advisory or other compensatory fee from
the issuer
or any subsidiary of the issuer, other than in the member's capacity
as a member
of the board of directors and any board committee, and (ii) audit
committee
members may not be an "affiliated person" of the issuer or any
subsidiary of the
issuer apart from his or her capacity as a member of the board and
any board
committee.

     The SEC has defined "affiliate" for non-investment companies as
"a person
that directly, or indirectly through one or more intermediaries,
controls, or is
controlled by, or is under common control with, the person specified.
The term
"control" is intended to be consistent with the other definitions of
this term
under the U.S. Securities Exchange Act of 1934, as "the possession,
direct or
indirect, of the power to direct or cause the direction of the
management and
policies of a person, whether through the ownership of voting
securities, by
contract, or otherwise."

     Among the roles of the audit committee is to be directly
responsible for
the oversight of the work of any registered public accounting firm
engaged for
the purpose of preparing or issuing an audit report or performing
other audit,
review or attest services for Tefron, and each such registered public
accounting
firm must report directly to the audit committee.


                                        48
<PAGE>


     COMPANIES LAW REQUIREMENTS. Under the Companies Law, the board
of directors
of any company that is required to nominate external directors must
also appoint
an audit committee, comprised of at least three directors including
all of the
external directors, but excluding the chairman of the board of
directors, a
controlling shareholder and any director employed by the company or
who provides
services to the company on a regular basis.

     Among the roles of the audit committee is to examine flaws in
the business
management of the company, in consultation with the internal auditor
and the
company's independent accountants, and suggest appropriate course of
action. The
audit committee also determines whether to approve certain actions
and
transactions with related parties. Arrangements regarding
compensation of
directors require the approval of the audit committee, the board of
directors
and the shareholders.

    QUALIFICATIONS OF OTHER DIRECTORS

     Under a recent amendment to the Companies Law, the Board is
required to
determine the minimum number of board member that would be required
to have
Accounting and Financial Expertise. See " - Board Practices" above.

    DUTIES OF DIRECTORS

     The Companies Law codifies the duty of care and fiduciary duties
that an
"Office Holder" (as defined below) owes to a company. An Office
Holder's duty of
care and fiduciary duty include avoiding any conflict of interest
between the
Office Holder's position in the company and his personal affairs, any
competition with the company, avoiding exploiting any business
opportunity of
the company in order to receive personal advantage for himself or
others, and
revealing to the company any information or documents relating to the
company's
affairs which the Office Holder has received due to his position as
an Office
Holder.

     An "Office Holder" is defined as a director, managing director,
chief
business manager or chief executive officer, executive vice
president, vice
president, other manager directly subordinate to the CEO or any other
person
assuming the responsibilities of any of the foregoing positions
without regard
to such person's title. Under the Companies Law, all arrangements as
to
compensation of Office Holders who are not directors and who are not
controlling
shareholders require approval of the board of directors, unless the
articles of
association provide otherwise. Our articles require that such a
transaction
which is not irregular shall be approved by the Board of Directors or
by the
Audit Committee or by any other entity authorized by the Board of
Directors.
Arrangements regarding the compensation of directors or controlling
shareholders
also require the approval of the shareholders.

    COMMITTEES

     Our Board of Directors has established an Audit Committee,
Compensation
Committee and Contributions Committee. The Companies Law restricts
the
delegation of powers from the Board of Directors to its committees in
certain
manners. The Audit Committee exercises the powers of the Board of
Directors with
respect to our accounting, reporting and financial control practices,
including
exercising the responsibility, where appropriate, for reviewing
potential
conflicts of interest situations. The members of the Audit Committee
are Ms.
Kasher and Messrs. Admoni, Elinav and Korman. The members of the
Compensation
Committee are Mr. Wolfson, Mr. Davidi, Mr. Admoni and Mr. Shiran. The
Compensation Committee resolves the terms of employment and benefits
of the
Company's officers. The Articles of Association provide that we may
contribute
reasonable sums for worthy causes, even if the contribution is not in
the frame
of our business considerations. The Board of Directors has delegated
this power
to the Contributions Committee. The members of the Contributions
Committee are
Messrs. Davidi, Shiran, Wolfson and Admoni. See "Item 10. Additional
Information
- -10B. Memorandum and Articles of Association - Board of Directors."


                                      49
<PAGE>


6D.   EMPLOYEES

     At December 31, 2006, we employed 1,393 employees in Israel of
whom 588
were salaried employees and 805 were hourly wage employees. At
December 31,
2006, we employed 22 employees in the United States through our
subsidiary,
Alba, of whom 13 were salaried employees and nine were hourly wage
employees. At
December 31, 2006, El-masira employed 670 employees in Jordan all of
them were
salaried employees, and our subsidiary, Tefron UK, had one employee
in the U.K.
and one subcontractor.

     At December 31, 2005, we employed 1,373 employees in Israel of
whom 565
were salaried employees and 808 were hourly wage employees. At
December 31,
2005, we employed 40 employees in the United States through our
subsidiary,
Alba, of whom 19 were salaried employees and 21 were hourly wage
employees. At
December 31, 2005, El-masira employed 490 employees in Jordan all of
them were
salaried employees

     At December 31, 2004, we employed 2,082 employees in Israel of
whom 469
were salaried employees and 1,613 were hourly wage employees. At
December 31,
2004, we employed 48 employees in the United States through our
subsidiary,
Alba, of whom 19 were salaried employees and 29 were hourly wage
employees. At
December 31, 2004, El-masira employed 440 employees in Jordan, all of
whom were
salaried employees.

     To increase the motivation of the workforce, many factory
employees are
eligible for bonuses based upon the number of units such employees
produce in
any given day. We believe that relations with our employees are good.

     Certain collective bargaining agreements between the Histadrut
(General
Federation of Labor in Israel) and the Coordination Bureau of
Economic
Organizations (including the Industrialists' Association of Israel,
or the
Association) are applicable to our employees in Israel. In addition,
a
collective bargaining agreement relating to members of the
Association, which
governs employee relations in the textile and clothing industry,
applies to most
of our employees in Israel. These agreements concern, among other
things, the
maximum length of the work day and the work week, minimum wages,
contributions
to a pension fund, insurance for work-related accidents, procedures
for
dismissing employees, determination of severance pay and other
conditions of
employment. Furthermore, pursuant to certain provisions of such
agreements, the
wages of most of our employees are automatically adjusted in
accordance with
cost-of-living adjustments, as determined on a nationwide basis and
pursuant to
agreements with the Histadrut based on changes in the CPI. The
amounts and
frequency of such adjustments are modified from time to time.

     Israeli law generally requires the payment by employers of
severance pay
upon the retirement or death of an employee or upon termination of
employment by
the employer or, in certain circumstances, by the employee. We
currently fund
our ongoing severance obligations by making monthly payments to
pension funds,
employee accounts in a provident fund and insurance policies. In
addition,
according to the National Insurance Law, Israeli employees and
employers are
required to pay specified amounts to the National Insurance
Institute, which is
similar to the U.S. Social Security Administration. Since January 1,
1995, such
amounts also include payments for national health insurance payable
by
employees. The payments to the National Insurance Institute are
determined
progressively in accordance with the wages and range from 8.5% to
17.7% of
wages, of which the employer contributes 0.4% to 7.0% of wages, and
the employee
contributes the rest. A majority of our permanent employees in Israel
are
covered by general and/or individual life and pension insurance
policies
providing customary benefits to employees, including retirement and
severance
benefits. The employers generally contribute up to 15.8% (depending
on the
employee) of base wages to such plans and the permanent employees
contribute up
to 5.5% of their base wages.

     None of Tefron USA's or Tefron UK's employees are covered by a
collective
bargaining agreement.


                                      50
<PAGE>


6E.   SHARE OWNERSHIP

     As of March 15, 2007, the following directors and senior
managers
beneficially held the number of Ordinary Shares set forth in the
table below.
The information in this table is based on 21,187,986 (excluding
997,400 shares
held by our wholly owned subsidiary) Ordinary Shares outstanding as
of March 15,
2007. The number of Ordinary Shares beneficially owned by a person
includes
Ordinary Shares subject to options held by that person that were
currently
exercisable at, or exercisable within 60 days of, March 15, 2007. The
Ordinary
Shares issuable under these options are treated as if they were
outstanding for
purposes of computing the percentage ownership of the person holding
these
options but are not treated as if they were outstanding for the
purposes of
computing the percentage ownership outstanding for any other person.
Except as
disclosed below, to our knowledge, none of the directors, officers or
key
executives listed in the Directors and Senior Management table
appearing in Item
6 above beneficially owns any Ordinary Shares.

<TABLE>
<CAPTION>

% OF ORDINARY
                                                            NUMBER
OF              SHARES
NAME                                                     ORDINARY
SHARES          OUTSTANDING**
- ----                                                     ---------
------          -------------
<S>                                                        <C>
<C>
Ishay Davidi
4,613,085(5)             21.77%
Yos Shiran
706,667(2)              3.23%
Arie Wolfson
3,823,892(1)            18.04%
Meir Shamir
4,613,085(3)            21.77%
Micha Korman                                                        *
*
Shirith Kasher                                                      *
*
Avi Zigelman                                                        *
*
Eli Admoni                                                          *
*
Yacov Elinav                                                        *
*
Amit Tal                                                            *
*
Itamar Harchol                                                      *
*
Asaf Alperovitz                                                     *
*
Anat Barkan                                                         *
*
David Gerbi                                                         *
*
Ilan Gilboa                                                         *
*
Ronny Grundland                                                     *
*
Michal Baumwald Oron                                                *
*

Directors and senior managers as a group 14 persons)
9,393,109(4)            43.18%
</TABLE>

- -------------------

*   Less than 1% of the outstanding Ordinary Shares.

**   Does not take into account 997,400 Ordinary Shares held by a
wholly owned
     subsidiary of the Company.

(1) Includes (a) 2,852,510 Ordinary Shares held by Macpell, (b)
971,282 Ordinary
Shares held by Arwol Holdings Ltd., and (c) 100 Ordinary Shares held
by Mr.
Wolfson. Pursuant to Rule 13d-5 of the U.S. Securities Exchange Act
of 1934, as
amended, Mr. Wolfson may be deemed to beneficially own the 2,852,510
Ordinary
Shares held by Macpell and the 971,282 Ordinary Shares held by Arwol.
See "-6A.
Directors and Senior Management - Macpell Shareholders' Agreement"
and "Item 7.
Major Shareholders and Related Party Transactions - 7B. Related Party
Transactions - Relationships and Transactions with Macpell - Macpell
Shareholders' Agreement."
                                      51
<PAGE>


(2) Consists of 706,667 Ordinary Shares subject to options
exercisable at prices
that are between $3.563 and $4.01 per share (which expire between
2011 and
2012).

(3) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr.
Shamir may
be deemed to beneficially own due to his 40% interest in Mivtah-
Shamir, which
held an approximately 34.45% interest in Norfet as of March 15, 2007.

(4) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr.
Davidi may
be deemed to beneficially own under U.S securities laws since he
serves as CEO
of FIMI 2001 Ltd., which controls the general partner and one of the
limited
partners of Norfet and which Meir Shamir may be deemed to
beneficially own under
U.S securities laws due to his 40.02% interest in Mivtah-Shamir,
which held an
approximately 34.45% interest in Norfet as of March 15, 2007. Also
include
2,852,510 Ordinary Shares held by Macpell of which Arie Wolfson may
be deemed to
be beneficial owner under U.S. securities laws due to his beneficial
interests
in Macpell and the Macpell Shareholders' Agreement. See "Item 7.
Majority
Shareholders and Related Party Transactions - 7B. Related Party
Transactions -
Relationships and Transactions with Macpell - Macpell Shareholders'
Agreement."
Also includes 971,282 Ordinary Shares held by Arwol of which Arie
Wolfson may be
deemed the beneficial owner. Further includes options (exercisable
within 60
days) to purchase 956,132 Ordinary Shares. The exercise price of
these options
ranges from $3.195 to $11.27 per share. These options will expire
between 2007
and 2016.

(5) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr.
Davidi may
be deemed to beneficially own under U.S securities laws since he
serves as CEO
of FIMI 2001 Ltd., which controls the general partner of Norfet, one
of the
Norfet limited partners (which is managed by FIMI 2001 Ltd.) as well
as the
other Norfet limited partners by virtue of an irrevocable power of
attorney.

SHARE OPTION PLAN
     In September 1997, we adopted the Tefron Ltd. 1997 Share Option
Plan to
enable us to attract and retain qualified persons as employees,
consultants and
directors and to motivate such persons with an equity participation
in us.

    GENERAL

     The Share Option Plan authorizes the issuance of options to
purchase
2,712,323 Ordinary Shares. As of March 15, 2007, options to purchase
2,291,148
of such Ordinary Shares had been granted to our senior managers,
directors and
employees, of which 956,132 options had been granted to our senior
managers and
directors as a group. Upon the occurrence of any Ordinary Share
split, reverse
Ordinary Share split, recapitalization or rights offerings or other
substantially similar corporate transaction or event, we shall make
such
equitable changes or adjustments necessary to the number of shares
subject to
each outstanding option in order to prevent dilution or enlargement
of the
optionees' rights. Options granted to our employees shall be issued
to a trustee
nominated by the Board of Directors, which trustee shall hold the
options, and
any Ordinary Shares issued upon exercise thereof, for the benefit of
the
optionees for two years from the date of the grant. In 2006, the
exercise prices
of the options that were outstanding but had neither vested nor were
exercisable
in light of Section 102 of the Israeli Income Tax Ordinance [New
Version] 1961
at the time of the distributions of our dividends were reduced in an
amount
equal to the dividends paid per share in such distributions.

    ADMINISTRATION

     The Share Option Plan is administered directly by our Board of
Directors or
by a committee appointed by the Board of Directors which is
authorized, among
other things and, subject to the provisions of the Companies Law, to:
(i)
designate participants in the Share Option Plan; (ii) determine the
terms and
provisions of the options, including the number of Ordinary Shares to
which an
option may relate and the terms, conditions and restrictions thereof;
(iii)
accelerate the right of an optionee to exercise any previously
granted options;
(iv) construe and interpret the provisions and supervise the
administration of
the Share Option Plan; and (v) make all other determinations deemed
necessary or
advisable for the administration of the Share Option Plan.


                                        52
<PAGE>


       VESTING PERIODS

     Unless otherwise determined by our Board of Directors and, in
the case of
option grants to Directors or an interested party, approved by our
shareholders,
one-third of the options granted under the Share Option Plan are
exercisable on
each of the first three anniversaries from the date of grant. Unless
otherwise
determined by our Board of Directors and, in the case of option
grants to
Directors or an interested party, approved by our shareholders, the
options
expire on the tenth anniversary from the date of grant, and any
additional
options granted in the future shall vest in the same manner over a
three-year
period commencing on the date of their grant.

       AMENDMENT AND TERMINATION OF THE SHARE OPTION PLAN

     We may, at any time and from time to time, amend, alter or
discontinue the
Share Option Plan; PROVIDED, HOWEVER, that no amendment or alteration
of the
Share Option Plan shall adversely affect an optionee's rights under
any
outstanding option without the consent of such optionee.

       ACCOUNTING TREATMENT

     For a discussion of the accounting treatment of the Share Option
Plan, see
Note 2(k) of the Notes to the Consolidated Financial Statements.

       AMENDMENT TO THE SHARE OPTION PLAN EFFECTIVE AS OF JANUARY 1,
2003

     In December 2002, in order to comply with the new tax rules
under the
amended Israeli Income Tax Ordinance [New Version], 1961, our Board
approved an
amendment to our Share Option Plan.

     The new tax rules enable a company to issue options under three
alternative
tracks, which may generally be described as follows: (i) without a
trustee,
under which the income will be considered employment income, the
income will
continue to be taxed at regular marginal rates of up to the maximal
tax rate
plus payments to the National Insurance Institute and payment of
health tax, and
no expense is deductible by the employer; (ii) with a trustee under
the
employment income track, under which the options are held by a
trustee for a
period of twelve months from the end of the tax year in which the
grant took
place, the income is considered regular employment income taxed at
marginal
rates of up to 50% plus payments to the National Insurance Institute
and payment
of health tax, and the employer is entitled to a deductible expense
equivalent
to the income attributed to the employee; or (iii) with a trustee
under the
capital gains track, under which the options are held by a trustee
for a period
of two years from the end of the tax year in which the grant took
place, the
income is considered to be a capital gain and is taxable at a reduced
rate of
25%, and no expense is deductible by the employer.

     On February 27, 2003, in order to enable us to grant options
after January
1, 2003, we filed an amendment to the Share Option Plan with the tax
authorities
and informed them of our election of the capital gains track (the
third
alternative above). In addition, under the amendment to the Share
Option Plan,
we may also issue options under the provisions of the tax track
without a
trustee under the first alternative. The capital gains track will
apply to all
trustee-track options to be granted by us until December 31, 2004.
After this
period has ended, we may change our election.

     The new rules and the amendment to the Share Option Plan
described above
apply only to issuances of options beginning on January 1, 2003 and
thereafter.
Options issued before such date will continue to be governed by the
law in
effect prior to the amendment.


                                      53
<PAGE>


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A   MAJOR SHAREHOLDERS

     Except as noted herein, to our knowledge, we are not directly or
indirectly
owned or controlled by another corporation or by any foreign
government and no
arrangements exist the operation of which may at a subsequent date
result in a
change in control of the company.

     The following table sets forth the number of our Ordinary Shares
owned by
any person known to us to be the beneficial owner of 5% or more of
our Ordinary
Shares as of March 15, 2007. The information in this table is based
on
21,187,986 Ordinary Shares outstanding as of such date (excluding
997,400 shares
held by our wholly owned subsidiary). The number of Ordinary Shares
beneficially
owned by a person includes Ordinary Shares subject to options held by
that
person that were currently exercisable at, or exercisable within 60
days of,
March 15, 2007. The Ordinary Shares issuable under these options are
treated as
if they were outstanding for purposes of computing the percentage
ownership of
the person holding these options but are not treated as if they were
outstanding
for the purposes of computing the percentage ownership outstanding
for any other
person. None of the holders of the Ordinary Shares listed in this
table have
voting rights different from other holders of the Ordinary Shares.

<TABLE>
<CAPTION>
NAME                          NUMBER OF SHARES OWNED        PERCENT
OF ORDINARY SHARES *
- ----                          ----------------------        ------
----------------------
<S>                               <C>
<C>
Norfet, Limited Partnership
c/o Fimi 2001 Ltd.
"Rubinstein House"
37 Begin Rd
Tel Aviv, Israel                  4,613,085(1)
21.77%

Macpell Industries Ltd.
28 Chida Street
Bnei Brak, Israel 51371           2,852,510(2)
13.46%

Arie Wolfson                      3,823,892(3)
18.04%
</TABLE>

*    Does not take into account 997,400 Ordinary Shares held by a
wholly-owned
     subsidiary of the Company.
(1) Norfet Limited Partnership is an Israeli partnership. As of
March 15, 2007,
     approximately 8.82% of Norfet was held by FIMI Opportunity Fund,
LP,
     approximately 45.61% of Norfet was held by FIMI Israel
Opportunity Fund,
     Limited Partnership, approximately 34.45% was held by Mivtach
Shamir
     Holdings Ltd., approximately 3.45% was held by Migdal Insurance
Company,
     approximately 6.89% was held by First International Bank of
Israel and
     approximately 0.786% was held by Zaleznick and Butler. Pursuant
to Rule
     13d-5 of the U.S Securities Exchange Act, Norfet may also be
deemed to
     beneficially own the shares held by Macpell and Arwol due to the
     shareholders agreement between Arwol, Macpell and Norfet. See
"Item 10.
     Additional Information - 10C. Material Contracts - FIMI
Agreements." In
     addition, pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, the
Chairman of the
     Board of the Company, may be deemed to beneficially own the
shares held by
     Norfet due to his position as CEO of FIMI 2001 Ltd. and senior
partner of
     FIMI Israel, Opportunity Fund, Limited Partnership and FIMI
Opportunity
     Fund, L.P., and (ii) Mr. Meir Shamir, a director in the Company,
may be
     deemed to beneficially own the shares held by Norfet due to his
40.02%
     interest in Mivtah-Shamir.

(2) Macpell is an Israeli corporation. As of March 15, 2007, 27.8%
of Macpell
     are controlled by Arie Wolfson; 25.02% of Macpell are controlled
by Sigi
     Rabinowicz; and 25.84% of Macpell are controlled by Avi Ruimi,
representing
     78.7% of Macpell's shares in the aggregate. Pursuant to Rule
13d-5 of the
     U.S Securities Exchange Act, Macpell may also be deemed to
beneficially own
     the shares held by Norfet due to the shareholders agreement
between Arwol,
     Macpell and Norfet. See "Item 10. Additional Information - 10C.
Material
     Contracts - FIMI Agreements."


                                      54
<PAGE>


(3) Includes (i) 2,852,510 Ordinary Shares held by Macpell, (ii)
971,282
     Ordinary Shares held by Arwol, and (iii) 100 Ordinary Shares
held by Mr.
     Wolfson. Pursuant to Rule 13d-5 of the U.S. Securities Exchange
Act of
     1934, as amended, Mr. Wolfson may be deemed to beneficially own
the
     2,852,510 Ordinary Shares held by Macpell due to his beneficial
interest in
     Macpell and the Macpell Shareholders' Agreement. See "Item 10.
Additional
     Information - 10C. Material Contracts - FIMI Agreements."

     Since Norfet's acquisition of Ordinary Shares in 2004, Norfet's
percentage
ownership in the Company Ordinary Shares has decreased from
approximately 28.8%
in 2004 to approximately 21.8% as of March 15, 2007 due to Norfet's
sales of
Ordinary Shares in the public markets and the issuance by the Company
of
additional Ordinary Shares. Macpell's percentage ownership in the
Company
Ordinary Shares has decreased from approximately 36% in 2004 to
approximately
13.5% as of March 15, 2007 due to Macpell's sales of Ordinary Shares
to Norfet
and in the public markets and due to the issuance by the Company of
additional
Ordinary Shares.

     At March 15, 2007, there were 15 holders of Ordinary Shares of
record
registered with a United States mailing address, including banks,
brokers and
nominees. These holders of record represented approximately 49.45% of
the total
outstanding Ordinary Shares (excluding 997,400 shares held by our
wholly owned
subsidiary). Because these holders of record include banks, brokers
and
nominees, the beneficial owners of these Ordinary Shares may include
persons who
reside outside the United States. See "Item 7. Major Shareholders and
Related
Party Transactions - 7A. Major Shareholders."

7B.   RELATED PARTY TRANSACTIONS

     The following discussion includes summaries of the significant
terms of
various agreements and transactions. Because these are summaries,
they are
qualified by reference to the actual agreements, which are attached
as exhibits
to this Annual Report.

     The Companies Law requires that certain related party
transactions be
approved as provided for in a company's articles of association and,
in certain
circumstances, by a company's audit committee or its shareholders.
Our Audit
Committee is responsible for reviewing potential conflicts of
interest
situations where appropriate.

RELATIONSHIPS AND TRANSACTIONS WITH NORFET

     As of March 15, 2007, Norfet owned 4,613,085 Ordinary Shares,
which
represented approximately 21.77% of Tefron's outstanding Ordinary
Shares
(excluding 997,400 shares held by Tefron's wholly owned subsidiary).
Substantially all of Norfet is owned by (i) N.D.M.S. Ltd., a company
wholly
owned by FIMI Opportunity Fund L.P., (ii) FIMI Israel Opportunity
Fund, Limited
Partnership and (iii) Migdal Insurance Company, Mivtach Shamir
Holdings Ltd. and
the provident funds of First International Bank of Israel.

     Pursuant to a Share Purchase Agreement, dated February 17, 2004,
we issued
to Norfet in April 2004, 3,529,412 Ordinary Shares for a base price
of $4.25 per
share and a base aggregate consideration of $15 million. Norfet also
acquired an
additional 1,365,000 of our Ordinary Shares in the aggregate from
Arwol and
Macpell pursuant to a separate agreement. Immediately following the
closing of
these agreements, Norfet held 4,894,412, or approximately 28.8% of
our
outstanding share capital, without taking into account our Ordinary
Shares held
by our wholly-owned subsidiary. In April 2005, due to a purchase
price
adjustment agreed to with Norfet instead of the purchase price
adjustment
mechanism agreed to in the Share Purchase Agreement, we issued to
Norfet an
additional 661,765 Ordinary Shares, and Arwol transferred 106,908
additional
Ordinary Shares to Norfet.


                                      55
<PAGE>


     Under the Share Purchase Agreement, we also agreed to pay Norfet
a
management fee of approximately $172,000 plus VAT per annum until our
first
annual meeting in 2005 (which took place on June 28, 2005), and
$120,000 plus
VAT thereafter.

AGREEMENTS AMONG NORFET, MACPELL AND ARWOL

     Under an agreement among Norfet, Macpell and Arwol, the parties
agreed to
vote all of Tefron Ordinary Shares owned or controlled by each of
them for the
election of Tefron's Board of Directors of: (i) three members (of
whom at least
one will qualify as an "independent director" under the NYSE rules)
plus,
subject to applicable law - one external director, that shall be
nominated by
Norfet (one of whom shall be a woman), (ii) three members (of whom at
least one
will qualify as an independent director and a financial expert under
the NYSE
rules) plus, subject to applicable law, one external director, that
shall be
nominated by Arwol and Macpell, and (iii) Tefron's chief executive
officer.

     The Company, Norfet, Arwol and Macpell, together with Leber
Partners L.P.,
are also party to a Registration Rights Agreement, dated April 22,
2004, which
replaced the previous Registration Rights Agreements to which the
Company and
certain of these shareholders had been a party. Please see "Item 10.
Additional
Information- 10C. Material Contracts - Leber Partners L.P." for a
more complete
description of this agreement. On November 29, 2005, the Securities
and Exchange
Commission declared effective a Registration Statement on Form F-3
covering the
resale of 11,521,259 Ordinary Shares held by the shareholders party
to this
agreement.

     Please see "Item 10. Additional Information- 10C. Material
Contracts - FIMI
Agreements" for a more complete description of these agreements.

RELATIONSHIPS AND TRANSACTIONS WITH MACPELL

     As of March 15, 2007, Macpell owned 2,852,510 Ordinary Shares,
which
represented approximately 13.46% of Tefron's outstanding Ordinary
Shares
(excluding 997,400 shares held by Tefron's wholly owned subsidiary).
Macpell is
mainly a holding company that owns various companies, including
Tefron and a
partnership that mainly trades in various clothing and apparel
products. Macpell
was also engaged in the construction of industrial buildings mainly
intended for
the use of the Macpell group.

     As of March 15, 2007, 28.58% of Macpell are controlled by Arie
Wolfson, one
of our directors; 25.68% of Macpell are controlled by Sigi
Rabinowicz; and
26.52% of Macpell are controlled by Avi Ruimi, a former Director of
Tefron. The
ordinary shares of Macpell are listed and traded on the Tel Aviv
Stock Exchange.

MACPELL SHAREHOLDERS' AGREEMENT

     Arwol Holdings Ltd., Riza Holdings Ltd. and Condo Overseas Inc.
are parties
to the Macpell Shareholders' Agreement. The agreement provides, among
other
things, that subject to the agreement of the shareholders in Tefron,
the
distribution of the directors on Tefron's Board will reflect the
direct and
indirect holdings in Tefron (including through Macpell) of the
parties to the
agreement, subject to certain exceptions. Pursuant to the Macpell
Shareholders'
Agreement, the Tefron Ordinary Shares of Macpell held by the parties
thereto
will be voted at each meeting of Macpell's shareholders by the
trustee in
accordance with the resolution of the shareholders party to the
agreement, each
shareholder having one vote for each Macpell share held by such
shareholder.


                                      56
<PAGE>


     The Macpell Shareholders' Agreement contains a right of first
refusal in
the event that either party wishes to sell its shares in Macpell, and
a
tag-along right if either party finds a buyer outside of the Macpell
Shareholders' Agreement who is willing to purchase the Macpell
shares. It also
provides that the parties to the Macpell Shareholders' Agreement
shall retain
their ownership of at least 50% of the Macpell shares they own as of
the date
the agreement was executed. The Macpell Shareholders' Agreement
provides that
the vote of the holders of 75% of the Macpell shares is required for
Macpell to
(i) enter another line of business, (ii) merge, consolidate or
dispose of any of
its substantial assets, (iii) purchase, lease or acquire another
substantial
company, (iv) wind-up Macpell, (v) make decisions regarding the
allotment of
Macpell shares and (vi) declare dividends. The Macpell Shareholders'
Agreement
specifically permits the sale of Macpell shares by Arwol Holdings
Ltd. to Sigi
Rabinowicz or a company controlled by Sigi Rabinowicz, provided that
the
transferee agrees to be bound by the terms and conditions of the
Macpell
Shareholders' Agreement.
AGREEMENT WITH ARIE WOLFSON

     We are party to a consulting and management services agreement
with Mr.
Arie Wolfson, a Director of the Company and an indirect holder of
18.04% of the
Company's shares through Macpell and a company controlled by him. See
"Item 6.
Directors, Senior Management and Employees - 6B. Compensation".

RELATIONSHIPS BETWEEN SIGI RABINOWICZ AND SUPPLIERS

     We understand that Sigi Rabinowicz, our former president, who
also owns a
significant interest in Macpell, began to serve as an agent of some
of the
suppliers from whom we regularly purchased materials, and hence may
be paid a
commission with respect to such purchases. We believe that our
transactions with
these suppliers are in the ordinary course and are on customary
terms.

LEASE ARRANGEMENT

     We lease the following facilities from a wholly-owned subsidiary
of Macpell
(that has since merged into Macpell):

    o       On August 12, 1997, we entered into an agreement to lease
            approximately 143,000 square feet of industrial space in a
facility
            (the Hi-Tex 1 facility) adjacent to its current facilities
in Segev
            for a current monthly rent of approximately $73,000 until
2011. The
          first rental payment was made upon entrance into the
facility on
          October 1, 1999. Under an agreement approved by our
shareholders on
          August 10, 2006, the rent of this facility was reduced by
4%.

     o    On December 21, 1998, we entered into an agreement to lease
until 2012
          approximately 178,000 square feet of industrial space in a
second
          facility (the Hi-Tex 2 facility) adjacent to our existing
facilities
          in Segev from the same wholly-owned subsidiary of Macpell
for a
          monthly rent of approximately $89,000. The first rental
payment was
          made upon entrance into the facility on March 1, 2000.

          We conduct our Hi-Tex manufacturing operations in these
facilities:

     o    According to an agreement we entered into with Macpell on
August 16,
         1995, a 83,000 square foot facility in Segev under a lease
that
         expired in 2006 for a monthly rent of approximately $48,000
(the
          Headquarters Facility). Under an agreement approved by our
          shareholders on August 10, 2006, the rent for the first
65,000 square
          feet is $28,000 and the rent for the remaining 18,000
square feet is
          $2.70 per square meter.

     o    According to an agreement we entered into with Macpell on
December 10,
          1999, a 65,000 square foot warehouse under a lease that
expires in
          2012 for a monthly rent of approximately $28,000 (the
Products
          Facility). Under an agreement approved by our shareholders
on August
          10, 2006, this facility was vacated, and Macpell bore the
costs of
          Tefron's departure, which were approximately $85,000.


                                      57
<PAGE>


     The rent payable under these leases was until August 2006 50%
linked to the
Israeli and U.S. consumer product index and 50% to the exchange rate
between the
NIS and the dollar. Under the agreement approved by our shareholders
on August
10, 2006, all rent is paid in US dollars (linked to the US consumer
price
index).

     Under the original agreements, the monthly rent was increased by
5% every
3-5 years. Under the agreement approved by our shareholders on August
10, 2006,
the rent for all facilities is to be increased by 3% instead (other
than the
18,000 square feet of the Headquarters Facility, for which the rent
is $2.70 per
square meter, which is not subject to any increase).

     According to the terms of the lease agreements, we pay the
property
insurance premiums on these facilities. We entered into agreement
with Macpell
which was approved by our shareholders on August 10, 2006 which
amended the
lease agreement as described above.

     All of these facilities are subject to a long-term lease
agreement between
Macpell's subsidiary and the Israel Land Authority. Under the terms
of such
lease agreement, Macpell's affiliate was granted a 49-year lease over
such
property.

PRODUCTS PURCHASES FROM TEFRON

     An affiliate of Macpell purchases from us various products and
sells them
in the local Israeli market and abroad. In 2003, our sales to this
affiliate
were approximately $1.2 million, in 2004 approximately $0.8 million
and in 2005
and 2006 there was a negligible amount of sales. We believe that the
prices of
the products sold to Macpell were no less favorable than those were
available to
us from unaffiliated third parties. See Note 17 of the Notes to the
Consolidated
Financial Statements.

7C.   INTERESTS OF EXPERTS AND COUNSEL.

      Not Applicable.

ITEM 8. FINANCIAL INFORMATION

CONSOLIDATED FINANCIAL STATEMENTS

      See Item 18.

LEGAL PROCEEDINGS

     A former employee of the Company has filed law suits against the
Company
and three of its former or current officers, with the Israeli
District Court and
the Israeli Labor Law Court, seeking damages in the amount of
approximately $1.7
million, due to damages allegedly incurred by him as a result of his
imprisonment in Egypt. The Company is of the opinion that these law
suits are
without merit, the Company has filed statements of defense and
intends to defend
the law suits vigorously.

DIVIDEND POLICY

     Although we have no established dividend policy, in the past we
have
distributed dividends to our shareholders from our accumulated
earnings. In
2006, we twice declared and paid dividends of approximately $5
million each, and
we may distribute dividends in the future if our Board of Directors
so
determines and there are sufficient accumulated earnings in
accordance with
applicable law.


                                          58
<PAGE>


ITEM 9 THE OFFER AND LISTING

9A.    OFFER AND LISTING DETAILS

     Since the initial public offering of our Ordinary Shares on
September 24,
1997, our Ordinary Shares have been traded on the NYSE, under the
symbol "TFR."
Prior to the offering, there was no market for our Ordinary Shares.

     As reported on the NYSE, the annual high and low sales prices
for our
Ordinary Shares were as follows:

                                                 High            Low
                                                 ----            ---

2002                                         $    4.70       $
1.15
2003                                         $    4.80       $
3.10
2004                                         $    6.30       $
3.50
2005                                         $    8.75       $
3.84
2006                                         $   13.05       $
8.30

     As reported on the NYSE, the quarterly high and low sales prices
for our
Ordinary Shares for the last two years were as follows:


                        2005                     High            Low
                        ----                     ----            ---

First quarter                                $    5.35       $
3.84
Second quarter                               $    5.93       $
4.93
Third quarter                                $    7.04       $
4.96
Fourth quarter                               $    8.75       $
6.20
                        2006
First quarter                                $   11.53       $
8.30
Second quarter                               $   13.05       $
10.25
Third quarter                                $   13.00       $
11.00
Fourth quarter                               $   12.12       $
9.85
                       2007
First quarter (through March 15, 2007)       $   10.95       $
9.13
     As reported on the NYSE, the monthly high and low sales prices
for our
Ordinary Shares for the last six months were as follows:

                      2006                    High                   Low
                      ----                    ----                   ---
October                                      $ 12.12           $
11.10
November                                     $   11.53         $
9.85
December                                     $   11.61         $
10.50

                       2007
January                                      $   10.95         $
9.81
February                                     $   10.57         $
9.13
March (through March 15, 2007)               $   9.69          $
9.30

     Our Ordinary Shares have been trading on the TASE since
September 28, 2005.

     As reported on the TASE, the annual high and low sales prices
for our
Ordinary Shares were as follows:


                                      59
<PAGE>


                                              High                 Low
                                              ----                 ---

2006                                        NIS 57.80          NIS
37.33

     As reported on the TASE, the quarterly high and low sales prices
for our
Ordinary Shares since the listing of our Ordinary Shares on the TASE
were as
follows:


                      2005                    High                Low
                      ----                    ----                ---
Fourth quarter                              NIS 40.71          NIS
28.65
                      2006
First quarter                               NIS 48.61          NIS
37.33
Second quarter                              NIS 57.80          NIS
45.86
Third quarter                               NIS 54.15          NIS
47.34
Fourth quarter                              NIS 50.16          NIS
43.33
                      2007
First quarter (through March 15, 2007)        NIS 46.33      NIS
38.03

     As reported on the TASE, the monthly high and low sales price
for our
Ordinary Shares for the last six months were as follows:

                        2006                    High            Low
                        ----                    ----            ---
October                                       NIS 50.16      NIS
46.65
November                                      NIS 48.49      NIS
43.33
December                                      NIS 48.47      NIS
44.43

                       2007
January                                       NIS 46.33      NIS
41.51
February                                      NIS 44.99      NIS
38.03
March (through March 15, 2007)                NIS 39.87      NIS
38.39

     On September 8, 1998, we announced our intention to repurchase
through a
stock repurchase program up to one million of our outstanding
Ordinary Shares.
As of March 15, 2007, we had repurchased and hold in our treasury
997,400
Ordinary Shares.

9B.   PLAN OF DISTRIBUTION

      Not Applicable.

9C.   MARKETS

      Our Ordinary Shares are traded on the NYSE and on the TASE.

9D.   SELLING SHAREHOLDERS

      Not Applicable.

9E.   DILUTION

      Not Applicable.

9F.   EXPENSES OF THE ISSUE

      Not Applicable.


                                         60
<PAGE>


ITEM 10. ADDITIONAL INFORMATION

10A. SHARE CAPITAL
    Not Applicable.

10B. MEMORANDUM AND ARTICLES OF ASSOCIATION

    SECURITIES REGISTERS

     We are registered with the Israeli Registrar of Companies. Our
registration
number with the Israeli Registrar of Companies is 520043407. Section
2 of our
Memorandum of Association provides that our principal objects, among
other
things, are to engage in any business connected with manufacturing,
processing,
supplying and marketing undergarments, textiles and ready-made
clothes. Article
2A of our Articles of Association provides that we may, at any time,
carry on
business in any field or type of business permitted to us, whether
explicit or
implied, according to our Memorandum of Association.

    BOARD OF DIRECTORS

     The Companies Law requires that certain transactions, actions
and
arrangements be approved as provided for in a company's articles of
association
and in certain circumstances by the audit committee by the board of
directors
itself and by the shareholders. The vote required by the audit
committee and the
board of directors for approval of such matters, in each case, is a
majority of
the disinterested directors participating in a duly convened meeting.

     The Companies Law requires that a member of the board of
directors or
senior management of the company promptly disclose any personal
interest that he
or she may have (either directly or by way of any corporation in
which he or she
is, directly or indirectly, a 5% or greater shareholder, director or
general
manager or in which he or she has the right to appoint at least one
director or
the general manager) and all related material information known to
him or her,
in connection with any existing or proposed transaction by the
company. In
addition, if the transaction is an extraordinary transaction (that
is, a
transaction other than in the ordinary course of business, otherwise
than on
market terms, or is likely to have a material impact on the company's
profitability, assets or liabilities), the member of the board of
directors or
senior management also must disclose any personal interest held by
his or her
spouse, siblings, parents, grandparents, descendants, spouse's
descendants and
the spouses of any of the foregoing.

     Once the member of the board of directors or senior management
complies
with the above disclosure requirement, a company may approve the
transaction in
accordance with the provisions of its articles of association. If the
transaction is with a third party in which the member of the board of
directors
or senior management has a personal interest, the approval must
confirm that the
transaction is not adverse to the company's interest. Furthermore, if
the
transaction is an extraordinary transaction, then, in addition to any
approval
stipulated by the articles of association, it also must be approved
by the
company's audit committee and then by the board of directors, and,
under certain
circumstances, by a meeting of the shareholders of the company.

     Our Articles of Association provide that, subject to the
Companies Law, all
actions executed by the Board of Directors or by a committee thereof
or by any
person acting as a Director or a member of a committee of the Board
of Directors
or by the General Manager will be deemed to be valid even if, after
their
execution, it is discovered that there was a certain flaw in the
appointment of
such persons or that any one of such persons was disqualified from
serving at
his or her office.


                                       61
<PAGE>


     Our Articles of Association provide that, subject to the
Companies Law, an
officer is entitled to participate and vote in meetings concerning
the approval
of actions or transaction in which he or she has a personal interest.
Subject to
the Companies Law, a transaction between an officer of Tefron or an
entity
controlling Tefron, and us, or a transaction between any other person
in which
an officer or an entity controlling the company has a personal
interest and us,
and which is not an extraordinary transaction, shall be approved by
the Board of
Directors or by the Audit Committee or by any other entity authorized
by the
Board of Directors.

      Our Articles of Association provide that the Board of Directors
may
delegate all of its powers to such committees of the Board of
Directors as it
deems appropriate, subject to the provisions of the Companies Law.
The Audit
Committee is responsible for reviewing, among other things, potential
conflicts
of interest situations where appropriate. See "Item 6. Directors,
Senior
Management and Employees - 6C. Board Practices - Committees."

     Arrangements regarding compensation of Directors require the
approval of
the Audit Committee and the shareholders. The Board of Directors may
from time
to time, at its discretion, cause us to borrow or secure the payment
of any
money for our purposes, and may secure or provide for the repayment
of such
money in the manner as it deems fit.

DESCRIPTION OF SECURITIES

     We are authorized to issue 49,995,500 Ordinary Shares, par value
NIS 1.0
per share.

     Our Ordinary Shares do not have preemptive rights. The ownership
or voting
of Ordinary Shares by nonresidents of Israel or foreign owners is not
restricted
or limited in any way by our Memorandum of Association or Articles of
Association, or by the laws of the State of Israel.

     TRANSFER OF SHARES AND NOTICES. Fully paid Ordinary Shares are
issued in
registered form and may be freely transferred pursuant to our
Articles of
Association unless such transfer is restricted or prohibited by
another
instrument. Each shareholder of record is entitled to receive at
least seven
calendar days' prior notice of an ordinary shareholders' meeting and
at least 21
calendar days' prior notice of any shareholders' meeting in which a
special or
extraordinary resolution is to be adopted. For purposes of
determining the
shareholders entitled to notice and to vote at such meeting, the
Board of
Directors may fix the record date not more than 40 nor less than four
calendar
days prior to the date of such meeting, nor more than 40 days prior
to any other
action.

     ELECTION OF DIRECTORS. The Ordinary Shares do not have
cumulative voting
rights in the election of Directors. As a result, the holders of
Ordinary Shares
that represents more than 50% of the voting power have the power to
elect all
the Directors.

     DIVIDEND AND LIQUIDATION RIGHTS. Our Ordinary Shares are
entitled to the
full amount of any cash or share dividend, if declared. We may
declare a
dividend to be paid to the holders of Ordinary Shares according to
their rights
and interests in our profits. In the event of our liquidation, after
satisfaction of liabilities to creditors, our assets will be
distributed to the
holders of Ordinary Shares in proportion to the nominal value of
their
respective holdings. Such right may be affected by the grant of
preferential
dividend or distribution rights to the holders of a class of shares
with
preferential rights that may be authorized in the future by a special
resolution
of our shareholders. Our Board of Directors may declare interim
dividends and
propose the final dividend with respect to any fiscal year only out
of profits.
Declaration of a final dividend requires approval by an ordinary
shareholders'
resolution, which may decrease but not increase the amount proposed
by the Board
of Directors. Failure to obtain such shareholder approval does not
affect
previously paid interim dividends.

     VOTING, SHAREHOLDERS' MEETINGS AND RESOLUTIONS. Holders of
Ordinary Shares
have one vote for each Ordinary Share held on all matters submitted
to a vote of
shareholders. Such voting rights may be affected by the grant of any
special
voting rights to the holders of a class of shares with preferential
rights that
may be authorized in the future. The quorum required for an ordinary
meeting of
shareholders consists of at least two shareholders present in person
or by proxy
who hold or represent, in the aggregate, at least one-fourth of the
voting
rights of the issued share capital. A meeting adjourned for lack of a
quorum is
adjourned to the same day in the following week at the same time and
place or
any time and place as the Directors designate in a notice to the
shareholders.
At such reconvened meeting the required quorum consists of two
members present
in person or by proxy who hold or represent, in the aggregate, at
least
one-fourth of our voting power.


                                      62
<PAGE>
     Annual general meetings of shareholders are held once every year
at such
time (within a period of not more than 15 months after the last
preceding annual
general meeting) and such place as determined by the board of
directors. The
board of directors may call extraordinary general meetings of
shareholders and
are obligated to do so upon a written request in accordance with the
Companies
Law. The Companies Law provides that an extraordinary general meeting
of
shareholder may be called by the board of directors or by a request
of two
directors or 25% of the directors in office, or by shareholders
holding at least
5% of the issued share capital of the company and at least 1% of the
voting
rights, or of shareholders holding at least 5% of the voting rights
of the
company.

     An ordinary resolution (such as a resolution for the election of
directors,
the declaration of dividends or the appointment of auditors) requires
approval
by the holders of a majority of the voting rights represented at the
meeting, in
person or by proxy, and voting thereon. A special or extraordinary
resolution
(such as a resolution amending our Memorandum of Association or
Articles of
Association or approving any change in capitalization, merger,
consolidation,
winding-up, or other changes as specified in the Companies Law)
requires
approval of the holders of 75% of the voting rights represented at
the meeting,
in person or by proxy, and voting thereon. In addition, if our share
capital is
divided into different classes of shares, the approval of the holders
of 75% of
the issued shares of a particular class or a special resolution
passed at a
separate general meeting of the holders of the shares of such class
is required
to modify or abrogate the rights attached to such shares.

10C. MATERIAL CONTRACTS.

     Set forth below are summaries of our material contracts. Because
these are
summaries, they are qualified by reference to the actual agreements,
which are
attached as exhibits to this Annual Report.

    DISPOSITION OF INTEREST IN ALBAHEALTH LLC

    ALBAHEALTH OPTION AGREEMENT
     In connection with the formation of our formerly owned
subsidiary,
AlbaHealth LLC, which manufactures and sells textile health products,
in
September 2002 our subsidiary, Tefron USA, became a party to a Put
Option
Agreement. Pursuant to the provisions of the Put Option Agreement,
for a period
of three years commencing on September 2004 (or, with respect to GE
Capital,
commencing on such earlier date as the credit agreement terminates),
each of
Alba and GE Capital had an option to require AlbaHealth to purchase
all, but not
less than all, of such party's ownership interest in AlbaHealth. We
exercised
our put option and in April 2006 sold all of our ownership interests
in
AlbaHealth.

    MEMBERSHIP INTEREST REDEMPTION AGREEMENT

     The sale of our ownership interests in AlbaHealth in April 2006
was made
pursuant to an AlbaHealth Membership Interest Redemption Agreement in
consideration for approximately $13 million, consisting of
approximately $10
million paid in cash and $3 million pursuant to the terms of an
Unsecured
Subordinated Promissory Note, the principal amount of which is due
August 31,
2009. The note bears annual interest at LIBOR plus 3%, and the
payment of the
note is subordinated in favor of AlbaHealth's senior bank lenders.

     In connection with the execution of the Membership Interest
Redemption
Agreement, we entered into an amendment to the existing general
administrative
services agreement under which we provided various general
administrative
services to AlbaHealth. Pursuant to this amendment, we were to be
paid $766,000
for providing these services for the 12-month period ending January
1, 2007. We
also agreed to sell to AlbaHealth as of January 1, 2007 for the price
of
$600,000 all of the computer hardware, including related software
licenses and
hardware and software leases comprising the computer system in
Valdese, NC and
Rockwood, TN, then owned by us and used by AlbaHealth. We were also
granted the
right to designate a non-voting observer to the Board of Managers of
AlbaHealth
until payment of the promissory note in full.


                                      63
<PAGE>
    UNSECURED SUBORDINATED PROMISSORY NOTE

     Under the terms of the Unsecured Subordinated Promissory Note
issued to us
by AlbaHealth, AlbaHealth agreed to use its reasonable best efforts
to negotiate
an increase in its revolving credit facility availability with its
senior bank
lenders in order to prepay the principal amount of the note if
trailing 12-month
EBIDTA of AlbaHealth for 2006, 2007 or 2008 reaches certain minimum
amounts,
unless such increase would subject AlbaHealth to increased interest
rates or
subject AlbaHealth to materially disadvantageous terms. AlbaHealth
also agreed
on limitations on its ability to pay dividends, other than as
necessary to
enable its security holders to pay taxes.

     Upon occurrence of certain events of default, including default
in the
payment of the principal when due, we can demand principal amount and
all
accrued unpaid interest to be immediately due and payable. In
addition, upon the
default in the payment of the principal, we also have the right to
convert the
principal balance into common units of AlbaHealth at a price of
approximately
$274.20 per common unit (subject to adjustments for dividends and
other
distributions).

    SUBORDINATION AGREEMENT

     Pursuant to a Subordination Agreement we entered into with
SunTrust bank,
as administrative agent for the lenders under AlbaHealth's Senior
Credit
Facility, we subordinated our claims against AlbaHealth under the
Unsecured
Subordinated Promissory Note to the full payment by AlbaHealth to the
lenders
under its senior credit agreement; provided so long as no Default or
Event of
Default under the senior credit agreement has occurred, we may
receive (i)
regularly scheduled payments of interest under the Unsecured
Subordinated
Promissory Note and (ii) any payments of principal and interest from
AlbaHealth
after August 31, 2009. AlbaHealth recently breached certain non-
payment
covenants under its Senior Credit Facility, but the lender under the
Facility
delivered a waiver with respect to these breaches.

    FIMI AGREEMENTS
     We entered into a Share Purchase Agreement, or the Tefron
Agreement, dated
February 17, 2004, with Norfet, Limited Partnership, or the Investor,
substantially all of the interests of which are owned by (i) N.D.M.S.
Ltd., a
company wholly owned by FIMI Opportunity Fund, L.P., (ii) FIMI Israel
Opportunity Fund, Limited Partnership and (iii) Migdal Insurance
Company, Shamir
Insurers Investment Company and the provident funds of First
International Bank
of Israel, pursuant to which we issued to the Investor 3,529,412
Tefron Ordinary
Shares for a base price of $4.25 per share and a base aggregate
consideration of
$15 million. Due to purchase price adjustment provisions in the
Tefron
Agreement, Tefron issued to Norfet an additional 661,765 Ordinary
Shares in
April 2005.

     In connection with the Tefron Agreement, the Investor also
acquired an
additional 1,365,000 Tefron Ordinary Shares in the aggregate from
Arwol and
Macpell pursuant to an Agreement, or the Macpell Agreement, by and
among
Macpell, Arwol and the Investor. Following the closing of the Tefron
Agreement
and the Macpell Agreement, the Investor held 4,894,412, or
approximately 30.7%
of the outstanding share capital of Tefron, without taking into
account the
Equity Shares. Due to purchase price adjustment provisions in the
Macpell
Agreement, Arwol transferred 106,908 additional Ordinary Shares to
Norfet in
April 2005.

     Tefron, the Investor, Arwol and Macpell executed at the closing
of the
Tefron Agreement and the Macpell Agreement a Registration Rights
Agreement which
replaced the existing Registration Rights Agreement among the
Company, Arwol and
Macpell.


                                      64
<PAGE>


     Below is a description of the principal terms of these
transactions. The
Tefron Agreement, the Registration Rights Agreement, and all
transactions
contemplated by such agreements to which Tefron is a party are
collectively
referred to as the "FIMI Transactions".

    TEFRON AGREEMENT
     ISSUE PRICE ADJUSTMENT. Under the terms of the Tefron Agreement,
in the
event Tefron's earnings before income tax, depreciation and
amortization, or
EBITDA, for 2004 (excluding (i) the EBITDA of AlbaHealth to the
extent that it
exceeds zero and (ii) any increase in EBITDA of Alba Waldensian, Inc.
as a
result of the exercise of the put option by AlbaHealth described
below) as set
forth in Tefron's audited consolidated financial statements for the
year ending
on December 31, 2004 is less than $23 million, then the price per
share of $4.25
will be adjusted as follows: (i) if Tefron's EBITDA for 2004 was
equal to or
less than $16 million, then the share price per share was to be
reduced
retroactively by $0.75 (to $3.50), and if the Company's EBITDA for
2004 is
higher than $16 million but lower than $23 million, then the share
price
reduction was to be calculated in accordance with the following
formula:

    Price Per Share = 4.25 - 0.75*[x]

    Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]

     Tefron had the discretion to decide, in such instances, whether
to issue
additional shares or to refund a proportionate part of the
consideration paid by
the Investor.

     Tefron's EBDITA for 2004 was $11.809 million and pursuant to an
amendment
to the Tefron Agreement signed on March 31, 2005 Tefron issued to
Norfet an
additional 661,765 Ordinary Shares, instead of the adjustment
mechanism provided
for in the Tefron Agreement.

     Under the terms of the Tefron Agreement, the issue price per
share will be
increased in the event that, during the three-year period following
the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells
at least
20% of the total number of shares purchased on April 22, 2004 from
Tefron and
Macpell and Arwol for cash or publicly traded securities (excluding
publicly
traded securities in connection with a merger or reorganization of
Tefron), at
an average price of at least $9.22 per share (after adjustments for
dividends,
share combinations and splits). The amount of the increase will be
equal to the
difference between the average sale price and the threshold of $9.22
(as so
adjusted), provided that in any event, an upwards adjustment will be
no more
than $0.75 per each share. The amount of any increase is to be paid
by the
Investor to Tefron on the third anniversary of the closing of the
Tefron
Agreement and the Macpell Agreement.

     Since the Tefron Agreement, the Investor has sold 1,050,000
shares, which
exceeds 20% of the total number of shares that the Investor purchased
from
Tefron, at a price of more than $9.97. Therefore, Norfet is to pay us
an
additional payment under the Tefron Agreement by April 22, 2007.

     The adjustment mechanism described in the immediately preceding
paragraph
will also apply in respect of the four-year period following the
closing of the
Tefron Agreement and the Macpell Agreement, but in such event, the
Investor
average sale price must exceed $11.60 per share (rather than $9.22
per share)
for the adjustment to apply.

     LIMITS ON EQUITY LINE OF CREDIT. Tefron undertook not to
exercise any right
to cause Southridge Capital Markets LLC (or its affiliates) to
purchase any of
Tefron's shares without the written consent of the Investor, unless
such
issuance is at a price of no less than $4.60 per share or if the
issuance is
required in order for Tefron to satisfy covenants relating to
shareholders
equity under company loan agreements or if the issuance is required
for Tefron
to satisfy certain NYSE listing requirements. Notwithstanding the
foregoing,
Tefron may not issue to such third party investor (or its affiliates)
an
aggregate sum of more than 12% of Tefron's issued capital without the
consent of
the Investor.


                                      65
<PAGE>


     APPROVAL OF RELATED AMENDMENTS. For so long as the provisions of
the
Macpell Agreement described below under "- Macpell Agreement -
Agreements of the
Parties" are in effect, any change in any agreement or arrangement
between
Tefron and Arwol, Macpell or Wolfson in effect at the time of closing
or the
adoption of any new agreement or arrangement between Tefron and such
parties
will require investor's prior approval. Similarly, any amendment to
the
management fee arrangement with investor or the adoption of any new
agreement or
arrangement between Tefron and the investor will require approval of
Macpell and
Arwol.

     INCREASE IN SHARES AVAILABLE FOR ISSUANCE UNDER TEFRON LTD. 1997
SHARE
OPTION PLAN. As a result of the transactions contemplated by the
Tefron
Agreement, the shareholders of Tefron were asked to increase the plan
by 446,274
Ordinary Shares, which was approved by the shareholders of Tefron on
March 31,
2004.

    REGISTRATION RIGHTS AGREEMENT

     The Investor entered into a Registration Rights Agreement with
Tefron,
Arwol and Macpell on the date of closing with respect to the Ordinary
Shares
that the Investor acquired pursuant to the Tefron Agreement and the
Macpell
Agreement replacing the existing Registration Rights Agreement.

     The Registration Rights Agreement is substantially the same as
the
Registration Rights Agreement approved by the shareholders of Tefron
and entered
into by Company, Arwol and Macpell in November 2003, other than (i)
the
insertion of a new provision granting to the Investor, Arwol and
Macpell the
right, once every 18 months, to request a registration on Form F-3
(short form
registration statement) when the aggregate net proceeds from the sale
of such
holders' securities is at least $3,000,000, in which event Tefron
would be
obligated keep such registration statement effective so as to permit
sale of
Ordinary Shares pursuant to the Registration Statement for a period
of two
years, subject to certain limitations, and (ii) the amendment of an
existing
provision granting to the Investor, Arwol and Macpell the right to
request a
registration even though Tefron is not eligible to use Form F-3
(short form
registration statement), in which event Tefron would be obligated to
keep such
registration statement effective so as to permit sale of Ordinary
Shares
pursuant to the Registration Statement for a period of 120 days,
subject to
certain limitations.
     In connection with the execution of the Share Purchase Agreement
with Leber
Partners, L.P., we entered into a Registration Rights Agreement with
Leber
Partners, the Investor, Arwol and Macpell which replaced, and is on
substantially the same terms as, the Registration Rights Agreement
that we
agreed to execute in connection with the Tefron Agreement. We filed a
registration statement with the Securities and Exchange Commission in
accordance
with this agreement, and this registration statement has been
declared
effective. See "- Leber Partners, L.P. - Registration Rights
Agreement."

    MACPELL AGREEMENT

     At the same time as the Investor proposed to Tefron to enter
into the
Tefron Agreement, the Investor proposed to Arwol to purchase from it
an
additional amount of approximately 1.365 million Ordinary Shares at
the base
price of $5.538 per share, and concomitantly, and as a condition to
the said
purchase, to enter into a shareholders agreement. Arwol offered
Macpell to join
it and take part in the sale transaction. Under the terms of the
Macpell
Agreement among the Investor, Arwol and Macpell, it was agreed that
the base
price for purchase of the shares, would be $5.538 per share and the
aggregate
purchase price would be $7,559,370.

     PURCHASE PRICE ADJUSTMENT. The purchase price of $5.538 per
share under the
Macpell Agreement was subject to adjustment downwards or upwards on
substantially the same terms as the adjustment of the issue price
under the
Tefron Agreement, as described above; provided that if Tefron's
EBITDA for 2004
is between $16 million and $23 million, then the share price
reduction was to be
calculated in accordance with the following formula:


                                      66
<PAGE>


    Price per share = 5.538 - 0.75*[x]

    Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]

     Tefron's EBITDA for 2004 was $11.809 million, and due to
purchase price
adjustment, Arwol transferred 106,908 additional Ordinary Shares to
Norfet in
April 2005, and Macpell elected to pay Norfet cash in lieu of
transferring
additional shares to Norfet.

     Under the terms of the Macpell Agreement, the issue price per
share will be
increased in the event that, during the three-year period following
the closing
of the Tefron Agreement and the Macpell Agreement, the Investor sells
at least
20% of the total number of shares purchased on April 22, 2004 from
Tefron,
Macpell and Arwol for cash or publicly traded securities (excluding
publicly
traded securities in connection with a merger or reorganization of
Tefron), at
an average price of at least $9.22 per share (after adjustments for
dividends,
share combinations and splits). The amount of the increase will be
equal to the
difference between the average sale price and the threshold of $9.22
(as so
adjusted), provided that in any event, an upwards adjustment will be
no more
than $0.75 per each share.

    AGREEMENTS OF THE PARTIES.

     COMPOSITION OF THE BOARD OF DIRECTORS. Arwol, Macpell and the
Investor
agreed to vote all of Tefron Ordinary Shares owned or controlled by
each of them
for the election to Tefron's Board of Directors of: (i) three members
(of whom
at least one will qualify as an "independent director" under the NYSE
rules)
plus, subject to applicable law - one external director, that shall
be nominated
by the Investor (one of whom shall be a woman), (ii) three members
(of whom at
least one will qualify as an independent director and a financial
expert under
the NYSE rules) plus, subject to applicable law, one external
director, that
shall be nominated by Arwol and Macpell, and (iii) Tefron's chief
executive
officer.

     CHAIRMAN OF THE BOARD OF TEFRON. Arwol, Macpell and the Investor
confirm in
the Macpell Agreement that Arie Wolfson agreed to remain as Chairman
of the
Board until Tefron's first Annual General Meeting of Shareholders in
calendar
year 2005. Subject to the provisions of applicable law, on or before
such
shareholders meeting, Arwol, Macpell and the Investor endeavored to
agree on the
identity of the Chairman as of and following such shareholders
meeting. The
agreement provided that in the event the parties cannot agree on the
identity of
the Chairman, each of Arwol and Macpell (taken as a group) and Norfet
will be
entitled to designate the Chairman for an 18 month period, provided
that Norfet
would be the first to exercise such right for a period commencing on
and as of
the Company's first Annual General Meeting of Shareholders in 2005.
In November
2005, Arie Wolfson ceased serving as Chairman of the Board, and Ishay
Davidi
began serving as Chairman of the Board.

     EXECUTIVE COMMITTEE. Arwol, Macpell and the Investor agreed to
appoint an
Executive Committee for advisory purposes, comprised of Messrs. Arie
Wolfson and
Ishay Davidi (or, an alternate member appointed by Arwol and Macpell
(if Arie
Wolfson cannot fulfill his duties) or an alternative member appointed
by the
Investor (if Ishay Davidi cannot fulfill his duties). Decisions of
the Executive
Committee do not bind Tefron in any way.

     RIGHTS OF FIRST OFFER; TAG-ALONG. The Macpell Agreement contains
provisions
which require that if Arwol, Macpell or the Investor wishes to
transfer Ordinary
Shares of Tefron to a third party, it must first make an offer to
transfer the
shares the other parties, subject to certain exceptions. The
agreement also
gives the right to the offerees to sell certain of their Company
Ordinary Shares
to the proposed purchaser of the Ordinary Shares rather than
accepting the offer
from the transferor. Notwithstanding the foregoing, (i) any transfer
of shares
to any direct competitor of Tefron or to any controlling shareholder
of a direct
competitor will require consent of the other parties to the agreement
and (ii)
each of Arwol and Macpell (as a group) and Norfet may sell Tefron
shares, in one
or more instances, constituting in the aggregate less than 2.7% of
Tefron's
issued and outstanding share capital.


                                      67
<PAGE>


     DRAG ALONG RIGHTS. The Macpell Agreement contains provisions
which provide
that if any of Arwol, Macpell or the Investor secures a bona fide
offer from any
third party offeror to purchase all of the Ordinary Shares then held
by such
party, in cash or publicly traded securities, at a price per share
(adjusted for
allocation of dividend, bonus shares, splits etc.) of not less than
$10
(provided that such price per share shall not be lower than 80% of
the average
of the closing prices of Tefron's shares on the NYSE over the
consecutive 60
trading days immediately preceding such sale), and the offeror
conditions its
offer on the acquisition of all the shares held by the other two
parties to the
Macpell Agreement at such time, such other two parties will be
required under
certain conditions to sell all of the shares of Tefron then held by
them to such
offeror, at the same price and upon the same terms and conditions as
those to
which the sale by the initiator is subject. Notwithstanding the
foregoing, in
lieu of selling the shares as described above, the shareholders who
receive the
drag along demand may acquire all of the Tefron shares then held by
the
initiating shareholder in cash at the price per share and upon the
same terms
and conditions as those to which the sale to the offeror would have
been
subject.

     DISCUSSIONS PRIOR TO MEETINGS. Arwol, Macpell and the Investor
agreed in
the Macpell Agreement to meet regularly and in any event prior to
each General
Meeting of shareholders of Tefron and to review, discuss and attempt
to reach a
unified position with respect to principal issues on the agenda of
each such
meeting. The parties clarified that this should not be interpreted as
forcing
any party to act or vote according to any position stated at such
prior meeting.

     DIVIDEND DISTRIBUTION. The parties agreed to formulate a
mutually agreeable
dividend distribution policy for Tefron, which policy shall provide
for the
distribution of an annual amount, net after taxes (including
withholding tax),
of at least $2 million with respect to calendar year 2004, and at
least $4.5
million, effective as of calendar year 2005, and they will utilize
their best
efforts to cause Tefron to adopt such policy, subject to: (a) the
provisions of
applicable law (including NYSE requirements); (b) any undertaking and
commitment
made or to be made towards banks and other creditors; (c) the
decision of
Tefron's Board of Directors, taking into account Tefron's financial
needs,
investments and all other relevant aspects.
     MANAGEMENT FEE. Arwol, Macpell and the Investor agreed in the
Macpell
Agreement to vote all of Tefron Ordinary Shares owned or controlled
by them in
order to cause Tefron (i) to pay the Investor (or any of its
affiliates) the
Management Fees (described above under "the Tefron Agreement"), and
(ii) as of
the date on which Arie Wolfson no longer serves as the Chairman of
Tefron's
Board of Directors, to pay Arie Wolfson or his designees for their
services to
Tefron, an aggregate annual amount of $120,000.

     PURCHASE OF SHARES FROM DISCOUNT INVESTMENT COMPANY, OR DIC. Any
party to
the agreement wishing to purchase Company Ordinary Shares from DIC
will be
required to offer to the other parties the right to participate in
such
purchase, at the same price per share and upon the same terms and
conditions.

     TERM OF AGREEMENTS OF THE PARTIES. All agreements of Arwol,
Macpell and the
Investor described above under "Agreements of the Parties" above will
remain in
effect until the fifth anniversary of the closing of the transactions
under the
Macpell Agreement. The Investor will cease to have any rights under
these
agreements as of the first date on which it holds less than 10% of
Tefron's
issued share capital (on a non-diluted basis), and will cease to have
any
obligation under these agreements as of the first date on which the
Investor
holds less than 5% of Tefron's issued share capital (on a non-diluted
basis).
Each of Arwol and Macpell will cease to have any rights under
"Agreements of the
Parties" above as of the first date in which they hold (in the
aggregate) less
than 10% of Tefron's issued share capital (on a non-diluted basis),
and each of
Arwol and Macpell will cease to have any obligation under these
agreements as of
the first date on which such party holds less than 5% of Tefron's
issued share
capital (on a non-diluted basis).


                                      68
<PAGE>


LEBER PARTNERS L.P.

    SHARE PURCHASE AGREEMENT
     We also entered into a Share Purchase Agreement, dated March 3,
2004 with
Leber Partners, L.P., which is a group of investors represented by
Mr. Zvi
Limon. The investors invested $5 million in cash in Tefron in
exchange for
approximately 1.07 million Ordinary Shares of Tefron at a base price
of $4.65
per share. According to the agreement, the base price per share will
be subject
to certain adjustments and may be increased or reduced by up to $0.75
per share.

     ISSUE PRICE ADJUSTMENT. The purchase price of $4.65 per share
was subject
to adjustment downwards or upwards on substantially the same terms as
the
adjustment of the issue price under the Tefron Agreement and the
Macpell
Agreement, as described above; provided that if Tefron's EBITDA for
2004 is
between $16 million and $23 million, then the share price reduction
was to be
calculated in accordance with the following formula:

    Price per share = 4.65 - 0.75*[x]

    Where x = [(23,000,000 -2004 EBITDA)/1,000,000]/7]

     Tefron EBDITA for 2004 was $11.809 million. Pursuant to an
amendment to the
Purchase Agreement signed on March 3, 2004, Tefron issued to Leber an
additional
201,613 Ordinary Shares, instead of the adjustment mechanism provided
for in the
Purchase Agreement.

     Under the terms of the share purchase agreement, the issue price
per share
will be increased in the event that, during the three-year period
following the
closing of the agreement, the investors sell for cash or publicly
traded
securities (excluding publicly traded securities in connection with a
merger or
reorganization of Tefron) at least 20% of the total number of shares
they
purchased from Tefron at an average price of at least $9.22 per share
(after
adjustments for dividends, share combinations and splits). The amount
of the
increase will be equal to the difference between the average sale
price and the
threshold of $9.22, provided that in any event, an upwards adjustment
will be no
more than $0.75 per such sold share. The amount of any increase, up
to $0.75 per
share, is to be paid to Tefron on the third anniversary of the
closing.
     The adjustment mechanism described in the immediately preceding
paragraph
will also apply in respect of the four-year period following the
closing, but in
such event, the average sale price must exceed $11.60 per share
(rather than
$9.22 per share) for adjustment to apply.

    REGISTRATION RIGHTS AGREEMENT

     In connection with the execution of the Share Purchase Agreement
with Leber
Partners, we agreed to enter into a Registration Rights Agreement
with Leber
Partners, the Investor under the Tefron Agreement, Arwol and Macpell.
This
Registration Rights Agreement replaced, and is on substantially the
same terms
as, the Registration Rights Agreement that we agreed to execute in
connection
with the Tefron Agreement, other than as provided below. In addition
to the
rights to be granted to all of the shareholders that are to be party
to the
Registration Rights Agreement, Leber Partners would have the right to
request a
registration (even though we would not be eligible to use a short
form
registration) of all, but not less than all, of the Ordinary Shares
then held by
Leber Partners, but in any event not less than 500,000 Ordinary
Shares. This
would be below the threshold required for the other shareholders
(which would be
a request from holders of at least 25% of the aggregate number of
Ordinary
Shares subject to the agreement at such time to register a minimum of
5% of the
share capital of Tefron then outstanding but not less than 500,000
Ordinary
Shares). Leber Partners also has the right to request a registration
of all, but
not less than all, of the Ordinary Shares then held by it, but in any
event not
less than 500,000 Ordinary Shares. If the Principal Holders intend to
distribute
the Ordinary Shares by means of an underwriting, the underwriter will
be
selected by the Company and be reasonably acceptable to Principal
Holders of a
majority of the Ordinary Shares to be registered. Under certain
conditions, the
Company may defer registering such Ordinary Shares for a period not
exceeding
180 days. In addition, the Company would have no obligation to
register these
shares pursuant to requests once it has effected three effective
registrations
pursuant to requests of Principal Holders.
                                       69
<PAGE>


     The Principal Holders also have the right, once every 18 months,
to request
a registration on Form F-3 (short form registration statement) when
the
aggregate net proceeds from the sale of such holders' securities are
at least
$3,000,000. In addition, the Principal Holders also have certain
rights to
register their Ordinary Shares for sale at the time the Company
registers for
its own account any of its securities in connection with a public
offering for
cash (called "piggyback registration").

     Under the agreement, the first $50,000 of expenses in connection
with
registrations made at the request of one or more Principal Holders
will be borne
by the Company, and all expenses in excess of $50,000 will be divided
equally
between the Company, on the one hand, and the selling shareholders,
on the other
hand. All expenses incurred in connection with "piggyback
registrations" will be
borne by the Company, other than underwriting discounts and
commissions and
other fees relating to the Ordinary Shares to be sold for the account
of the
Principal Holders.

     On November 29, 2005, the Securities and Exchange Commission
declared
effective a Registration Statement on Form F-3 covering the resale of
11,521,259
Ordinary Shares held by the Principal Holders

CHINESE JOINT VENTURE AGREEMENT

     On May 8, 2006 the Company entered into Joint Venture Agreement
(the "JV
Agreement") with Langsha Knitting Co. Ltd., a company incorporated
under the
laws of the People's Republic of China ("Langsha") and Itochu Textile
Materials
(Asia) Ltd., a company incorporated under the laws of Hong Kong
("ITM") for the
establishment of a Chinese limited liability Company the name of
which would be
"Langsha Tefron Seamless Co. Ltd." (the "JV Company").

    THE OBJECTIVES OF THE JV COMPANY

     The purpose of the JV Company will be to design, develop,
manufacture,
market and sell seamless apparel for the purpose of becoming a
leading company
in the Asian seamless apparel market.
    INVESTMENTS OF THE PARTIES IN THE JV COMPANY'S CAPITAL

     The Parties will invest in the registered capital of the JV
Company a total
amount of US$4,008,016 as follows:

     o    Within 6 (six) months after the establishment date of the
JV Company,
          Tefron is to contribute to the JV Company's registered
capital 144
          machines (the "Machines"). It was agreed by the Parties
that the
          Machines would be invested in the JV Company at a value of
          US$2,008,016, all in consideration for 50.1% of the
Company's
          registered capital.

     o   No later than two months after the establishment date of
the JV
          Company, Langsha is to contribute to the JV Company's
registered
          capital the amount of US$1,600,000 in cash and eight
machines, all in
          consideration for 39.9% of the JV Company's registered
capital.

     o   No later than two months after the establishment date of
the JV
          Company, ITM is to contribute to the JV Company's
registered capital
          the amount of US$400,801 in cash in consideration for 10%
of the JV
          Company's registered capital.


                                      70
<PAGE>


    TRANSFER OF INTERESTS IN THE JV COMPANY

     Except for a transfer of interests in the JV Company by any
party to its
affiliate or among affiliates, any party who wishes to transfer any
part or all
of its interests in the registered capital of the JV Company will be
subject to
a right of first offer mechanism, pursuant to which such Party will
have to
offer its interests to the other Parties prior to offering them to
any third
party.

    RESPONSIBILITIES OF THE PARTIES

     Tefron is to principally participate and cooperate in the design
and
development of new products, provide the JV Company with managerial
consultation
and assist the JV Company in installation, testing and operation of
the
equipment.

     Langsha is to, among other of its responsibilities in accordance
with the
JV Agreement, handle the matters relating to the establishment of the
JV
Company, assist the JV Company in selling and marketing its products
in China
(excluding certain areas) and in Asia, use its best efforts in
assisting the JV
Company to obtain favorable local regulatory and financial support as
well as
incentives and tax preferential treatment, handle customs clearance
for
importing equipment, raw materials and machinery imported by the JV
Company, and
assist the JV Company in obtaining preferred rights of land use for
its
operations.

     ITM is to, among other of its responsibilities in accordance
with the JV
Agreement, assist the JV Company in selling and marketing its
products in Asia
and enhance the overall image and position of the JV Company in Asia,
provide
information on market trends in raw materials and products, and
consulting on
technology, assist the JV Company in import-export procedures and
cooperate in
product distribution, and continuously use its contacts and
acquaintances with
the Chinese and Asian market in order to enhance the JV Company's
business and
protect the JV Company's rights in China (excluding certain areas)
and in Asia.

    OTHER PROVISIONS

     The JV Company's products are to be marketed under the name
"Langsha Tefron
Seamless".

     The JV Agreement includes also non-compete, non-solicitation and
confidentiality provisions.

     The JV Company's Board of Directors is to consist of five
Directors, of
which three Directors are to be appointed by Tefron, one Director is
to be
appointed by Langsha and one Director is to be appointed by ITM. The
Chairman of
the Board is to be appointed by Tefron, and the Vice Chairman of the
Board is to
be appointed by Langsha. Certain decisions, including any merger or
division of
the Company and any increase or decrease in the registered capital of
the
JV Company, requires unanimous approval of all Board members.
     The establishment process of the JV Company has not yet been
concluded.

EQUITY LINE CREDIT FACILITY

     On March 9, 2004, we entered into an equity line credit facility
with
Brittany, an entity advised by Southridge Capital Management LLC.
Under the
agreement, we have an option to call funds of up to the lesser of $15
million or
2,470,021 Ordinary Shares (equal to 19.9% of our outstanding share
capital on
the day we signed the agreement) over a three year period expiring at
the end of
October 2007. Under the financing facility, we will be entitled to
issue shares
to Brittany from time to time, at our own election, subject to
certain minimum
and maximum limitations, but in no event will Brittany be obligated
to own more
than 4.99% of our Ordinary Shares at any one time. The price to be
paid by
Brittany will be at a discount of 6% to the market price of our
Ordinary Shares
(as calculated under the agreement) during a period prior to the
issuance of the
shares. The "market price" under the agreement is calculated to be
the average
of the lowest closing prices for any four trading days (not
necessarily
consecutive) during the ten trading day period immediately following
the date on
which we deliver a written notice to Brittany setting forth the
dollar amount
with respect to which we will require Brittany to purchase our
Ordinary Shares.


                                      71
<PAGE>


     Before drawing on the equity line, we must satisfy certain
closing
conditions, including the effectiveness of a registration statement
that we must
file relating to the shares to be issued to Brittany. In addition,
under our
agreement with Norfet, Limited Partnership described above under "-
FIMI
Agreements - Tefron Agreement", we require the consent of Norfet for
the
issuance of shares under an equity line of credit if such issuance is
at a price
of less than $4.6 per share unless the issuance is required in order
for us to
satisfy covenants relating to shareholders equity under company loan
agreements
or to satisfy certain NYSE listing requirements. Notwithstanding the
foregoing,
the issuance under the equity line of an aggregate sum of more than
12% of our
issued capital will also require the consent of Norfet.

    To date, we have elected not to draw on our equity line.

OUR CREDIT AGREEMENTS

     To finance the acquisition of Tefron USA, we entered into a
credit
agreement, dated as of December 13, 1999, with Bank Hapoalim B.M. and
the Israel
Discount Bank of New York, as subsequently amended. The Credit
Agreement
provided for a tender offer credit facility of up to $70.5 million.

     The Credit Agreement also provides for a seven-year term loan
facility of
up to $65.5 million, which was drawn down as a single borrowing at
the time of
the merger and amortizes in 11 consecutive semi-annual installments
commencing
on January 15, 2002. In addition, the Credit Agreement further
provides a
one-year revolving loan facility of up to $5 million. The proceeds
from the term
loan facility and the revolving loan facility were used to repay the
tender
offer credit facility, which was used initially to finance the
acquisition of
Alba and to refinance certain indebtedness of Alba.

     SECURITY. The term loan facility and the revolving loan facility
are
secured by the following:

            o   a floating lien on all the personal property of Alba
and its
                subsidiaries,

          o     pledges of all non-margin stock of Alba owned by
Tefron U.S.
                Holdings Corp., the parent company of AWS and a
wholly-owned
                subsidiary of Tefron, and all subsidiary stock then
owned by
                Alba, and

            o   guarantees made by Tefron U.S. Holdings Corp. and any
                subsidiaries of Alba, and the continuing guaranty of
Tefron.

     COVENANTS. Under the terms of the Credit Agreement, Alba and its
subsidiaries are restricted from, among other things, the following:

            o   incurring additional indebtedness, other than certain
permitted
                indebtedness;
          o     creating liens other than certain permitted
encumbrances;


                                       72
<PAGE>


          o     creating or assuming any guarantee obligations other
than certain
                permitted guarantee obligations;

            o   merging, consolidating, amalgamating or entering into
any other
                form of business combination with a third party, or
liquidating
                or dissolving;

          o     selling assets, subject to certain exceptions which
include sale
                of assets in the ordinary course of business or in
amounts not
                exceeding $250,000 in any twelve-month period;

          o     declaring or setting aside funds for payment of
dividends;

          o    making capital expenditures, subject to certain
exceptions such
               as capital expenditures in the ordinary course of
business;

          o     making investments, loans or advances other than as
specified; or

            o   entering into transactions with affiliates unless
certain
                requirements are satisfied.

     The Credit Agreement requires that we maintain certain financial
ratios
related to shareholders' equity and operating results. The Credit
Agreement also
contains customary events of defaults, including the failure to pay
interest or
principal, material breach of any representation or warranty or
breach of any
covenant, cross-defaults, bankruptcy, a judgment in excess of
$100,000 or a
change in control event relating to Tefron or Alba or its
subsidiaries.

     Pursuant to the amendment of our Credit Agreement, the repayment
schedule
of the loans will be spread over the period from 2007-2012.

10D. EXCHANGE CONTROLS

     Nonresidents of Israel who purchase our Ordinary Shares with
U.S. dollars
or other foreign currency will be able to convert dividends (if any)
thereon,
and any amounts payable upon the dissolution, liquidation or winding-
up of the
affairs of the company, as well as the proceeds of any sale in Israel
of the
Ordinary Shares to an Israeli resident, into freely repatriatable
dollars, at a
rate of exchange prevailing at the time of conversion, pursuant to
regulations,
provided that the Israeli income tax has been withheld with respect
to such
amounts, to the extent applicable, or an exemption has been obtained.

10E. TAXATION

     The following is a discussion of material United States federal
and Israeli
income tax consequences to U.S. Holders (defined below) of Ordinary
Shares. This
discussion is based upon existing United States federal and Israeli
income tax
laws, including legislation, regulations, administrative rulings and
court
decisions, all as in effect on the date of this Annual Report, as
well as the
Convention Between the Government of the United States of America and
the
Government of the State of Israel With Respect to Taxes on Income
(the
"Treaty"). All of these authorities are subject to change (possibly
with
retroactive effect) and to differing interpretations.

     This summary is for general information only and does not
purport to be a
complete analysis of all potential tax consequences of owning
Ordinary Shares.
This summary only addresses Ordinary Shares that are held as capital
assets
(generally, property held for investment), and does not address all
tax
considerations that may be relevant to persons in light of their
particular
circumstances, including, for example, persons who hold or at any
time have held
(actually or constructively) 10% or more of all classes of voting
stock of
Tefron, persons who acquired their Ordinary Shares before the listing
of Tefron
shares on the NYSE, persons who acquired their Ordinary Shares
pursuant to the
exercise of an employee stock option or otherwise as compensation,
and persons
subject to special tax treatment under Israeli or U.S. federal income
tax laws,
such as banks and other financial institutions, entities classified
as
partnerships for U.S. federal income tax purposes and other pass-
through
entities, insurance companies, tax-exempt entities, dealers in
securities,
persons holding Ordinary Shares as part of a hedging or conversion
transaction
or a straddle, and holders that have a functional currency other than
the U.S.
dollar. This summary does not address any aspects of state, local or
non-United
States (other than certain Israeli) tax laws, or any estate, gift or
other
non-income tax considerations.


                                        73
<PAGE>


     For purposes of this discussion, a "U.S. Holder" means a
beneficial owner
of Ordinary Shares (i) who is, for U.S. federal income tax purposes:

       o a citizen or resident of the United States;

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

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

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

(ii) who is not a resident of Israel for Israeli income tax purposes,
and whose
holding of Ordinary Shares is not in any way related to properties or
activities
located in Israel, and (iii) who is fully entitled to the benefits of
the Treaty
in respect of the Ordinary Shares.

     If an entity that is classified as a partnership for U.S.
federal tax
purposes holds Ordinary Shares, the U.S. federal income tax treatment
of its
partners will generally depend upon the status of the partners and
the
activities of the partnership. Entities that are classified as
partnerships for
U.S. federal tax purposes and persons holding Ordinary Shares through
such
entities should consult their tax advisors about the income and other
tax
consequences of purchasing, owning and disposing of the Ordinary
Shares.

     ALL PERSONS OWNING OR CONSIDERING AN INVESTMENT IN ORDINARY
SHARES
(INCLUDING PERSONS THAT ARE RESIDENT OR OTHERWISE TAXABLE IN
COUNTRIES OTHER
THAN THE UNITED STATES) ARE STRONGLY URGED TO CONSULT THEIR OWN TAX
ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN
ORDINARY SHARES
UNDER THE TAX LAWS APPLICABLE TO THEM AND ANY POTENTIAL CHANGES IN
THE TAX LAWS.

    1. CAPITAL GAINS

     U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the
discussion below
under "Passive Foreign Investment Company Rules," upon the sale or
other taxable
disposition of Ordinary Shares, a U.S. Holder generally will
recognize capital
gain or loss equal to the difference between the amount realized on
the
disposition and such holder's adjusted tax basis in the Ordinary
Shares. Such
capital gain or loss will be long-term gain or loss if, at the time
of
disposition, the U.S. Holder's holding period in the Ordinary Shares
exceeds one
year. Non-corporate taxpayers are subject to lower tax rates on long-
term
capital gains. All taxpayers are subject to certain limitations on
the deduction
of capital losses.


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<PAGE>


     Subject to complex conditions and limitations, any Israeli
capital gains
tax paid with respect to a disposition of Ordinary Shares (see
generally the
discussion below under "-Israeli Tax Considerations") will be a
foreign income
tax eligible for credit against a U.S. Holder's U.S. federal income
tax
liability (or, alternatively, for deduction against income in
determining such
tax liability). In general, gain that a U.S. Holder recognizes on the
sale or
other disposition of Ordinary Shares will be U.S.-source for purposes
of foreign
tax credit limitations, and losses generally will be allocated
against U.S.
source income. The rules governing foreign tax credits are complex,
and U.S.
Holders should consult their own tax advisors regarding the
availability of
foreign tax credits in their particular circumstances.

     ISRAELI TAX CONSIDERATIONS. Capital gain tax is imposed on the
disposal of
capital assets by an Israeli resident, and on the disposal of such
assets by a
non-Israel resident if those assets either (i) are located in Israel;
(ii) are
shares or a right to a share in an Israeli resident corporation; or
(iii)
represent, directly or indirectly, rights to assets located in
Israel. The
Israeli Tax Ordinance distinguishes between "Real Gain" and the
"Inflationary
Surplus". Real Gain is the excess of the total capital gain over
Inflationary
Surplus computed generally on the basis of the increase in the
Israeli CPI
between the date of purchase and the date of disposal.

     The capital gain accrued by individuals on the sale of an asset
purchased
on or after January 1, 2003 will be taxed at the rate of 20%.
However, if the
individual shareholder is a "Controlling Shareholder" (I.E., a person
who holds,
directly or indirectly, alone or together with other, 10% or more of
one of the
Israeli resident company's means of control at the time of sale or at
any time
during the preceding 12 month period), such gain will be taxed at the
rate of
25%. In addition, capital gain derived by an individual claiming
deduction of
financing expenses in respect of such gain will be taxed at the rate
of 25%. The
real capital gain derived by corporation will be generally subject to
tax at the
rate of 25%. However, the real capital gain derived from sale of
securities, as
defined in Section 6 of the Inflationary Adjustment Law, by a
corporation, which
was subject on December 31, 2005 to the provisions of Section 6 of
the
Inflationary Adjustment Law, will be taxed at the corporate tax rate
(31% in
2006). The capital gain accrued on the sale of an asset purchased
prior to
January 1, 2003 will be subject to tax at a blended rate. The
marginal tax rate
for individuals (up to 49% in 2006) and the regular corporate tax
rate for
corporations (31% in 2006) will be applied to the portion of the gain
amount
which bears the same ratio to the total gain realized as the ratio
which the
holding period commencing at the acquisition date and terminating on
January 1,
2003 bears to the total holding period. The remainder of the gain
realized will
be subject to capital gains tax at the rates applicable to an asset
purchased
after January 1, 2003 (see aforementioned).

     Individual and corporate shareholders dealing in securities in
Israel are
taxed at the tax rates applicable to business income (in 2006 - 31%
tax rate for
a corporation and a marginal tax rate of up to 49% for individual).
Notwithstanding the foregoing, if the shareholder is a non-Israeli
resident,
then such taxation is subject to the provision of any applicable
double tax
treaty. Moreover, capital gain derived from the sale of the Shares by
a
non-Israeli shareholder may be exempt under the Israeli income tax
ordinance
from Israeli taxation provided the following cumulative conditions
are met: (i)
the Shares were purchased upon or after the registration of the
Shares on the
stock exchange, (ii) the seller doesn't have a permanent
establishment in Israel
to which the derived capital gain is attributed and (iii) if the
seller is a
corporation, less than 25% of its means of control are held by
Israeli resident
shareholders. In addition, the sale of the Shares may be exempt from
Israeli
capital gain tax under an applicable tax treaty. Thus, the U.S.-
Israel Double
Tax Treaty exempts U.S. resident from Israeli capital gain tax in
connection
with such sale, provided (i) the U.S. resident owned, directly or
indirectly,
less than 10% of an Israeli resident company's voting power at any
time within
the 12-month period preceding such sale; (ii) the seller, being an
individual,
is present in Israel for a period or periods of less than 183 days at
the
taxable year; and (iii) the capital gain from the sale was not
derived through a
permanent establishment of the U.S. resident in Israel.

     Either the seller, the Israeli stockbrokers or financial
institution
through which the sold securities are held are obligated, subject to
the above
mentioned exemptions, to withhold tax upon the sale of securities
from the real
capital gain at the rate of 25% in respect of a corporation and 20%
in respect
of an individual.


                                      75
<PAGE>


     Generally, within 30 days of a transaction, a detailed return,
including a
computation of the tax due, should be submitted to the Israeli Tax
Authority,
and an advanced payment amounting to the tax liability arising from
the capital
gain is payable. At the sale of traded securities, the aforementioned
detailed
return may not be submitted and the advanced payment should not be
paid if all
tax due was withheld at source according to applicable provisions of
the Israeli
income tax ordinance and regulations promulgated thereunder. Capital
gain is
also reportable on the annual income tax return.

    2. DISTRIBUTIONS

     U.S. FEDERAL INCOME TAX CONSIDERATIONS. Subject to the
discussion below
under "Passive Foreign Investment Company Rules," a U.S. Holder
generally will
be required to include in gross income, as ordinary dividend income,
the amount
of any distributions paid on the Ordinary Shares (including the
amount of any
Israeli taxes withheld) to the extent that such distributions are
paid out of
Tefron's current or accumulated earnings and profits as determined
for U.S.
federal income tax purposes. Distributions in excess of Tefron's
earnings and
profits as so determined will be applied against and will reduce the
U.S.
Holder's adjusted tax basis in its Ordinary Shares and, to the extent
they are
in excess of such tax basis, will be treated as gain from a sale or
exchange of
such Ordinary Shares. Subject to certain limitations, "qualified
dividend
income" (which dividends paid by Tefron should qualify as) received
by a
non-corporate taxpayer generally is subject to U.S. federal income
tax at a
reduced rate. Dividends paid by Tefron will not qualify for the
dividends-received deduction otherwise available to U.S.
corporations.

     In the event Tefron pays dividends in a currency other than the
U.S.
dollar, such dividends will be includible in the gross income of a
U.S. Holder
in a U.S. dollar amount calculated by reference to the exchange rate
in effect
on the day they are actually or constructively received by the U.S.
Holder
(regardless of whether the U.S. Holder in fact converts the dividends
into U.S.
dollars). Any gain or loss resulting from currency exchange
fluctuations during
the period from the date the dividend is received to the date such
foreign
currency is disposed of will be treated as ordinary income or loss.

     Subject to complex conditions and limitations, any Israeli
withholding tax
imposed on dividends paid by Tefron (see generally the discussion
below under
"-Israeli Tax Considerations") will be a foreign income tax eligible
for credit
against a U.S. Holder's U.S. federal income tax liability (or,
alternatively,
for deduction against income in determining such tax liability). In
general,
dividends will be treated as foreign-source passive income, for
foreign tax
credit purposes. There are special rules for computing the foreign
tax credit
limitation of a taxpayer who receives dividends that are subject to a
reduced
rate of tax. The rules governing foreign tax credits are complex, and
U.S.
Holders should consult their own tax advisors regarding the
availability of
foreign tax credits in their particular circumstances.

     ISRAELI TAX CONSIDERATIONS. A distribution of dividends from
income
attributed to an "Approved Enterprise" will be subject to tax in
Israel at the
rate of 15%, subject to a reduced rate under any applicable double
tax treaty. A
distribution of dividends from income, which is not attributed to an
Approved
Enterprise, to an Israeli resident individual will generally be
subject to
income tax at a rate of 20%. However, a 25% tax rate will apply if
the dividend
recipient is a "Controlling Shareholder" (I.E., a person who holds,
directly or
indirectly, alone or together with other, 10% or more of one of the
Israeli
resident company's means of control at the time of distribution or at
any time
during the preceding 12 month period). If the recipient of the
dividend is an
Israeli resident corporation, such dividend will be exempt from
income tax
provided that the income from which such dividend is distributed was
derived or
accrued within Israel.


                                      76
<PAGE>


     Under the Israeli income tax ordinance, a non-Israeli resident
(either
individual or corporation) is generally subject to an Israeli income
tax on the
receipt of dividends at the rate of 20% (25% if the dividends
recipient is a
"Controlling Shareholder" (as defined above)); those rates are
subject to a
reduced tax rate under an applicable double tax treaty. Thus, under
the Double
Tax Treaty concluded between the State of Israel and the U.S., the
following
rates will apply in respect of dividends distributed by an Israeli
resident
company to a U.S. resident: (i) if the U.S. resident is a corporation
which
holds during that portion of the taxable year which precedes the date
of payment
of the dividend and during the whole of its prior taxable year (if
any), at
least 10% of the outstanding shares of the voting stock of the
Israeli resident
paying corporation and not more than 25% of the gross income of the
Israeli
resident paying corporation for such prior taxable year (if any)
consists of
certain type of interest or dividends - the tax rate is 12.5%, (ii)
if both the
conditions mentioned in section (i) above are met and the dividend is
paid from
an Israeli resident company's income which was entitled to a reduced
tax rate
applicable to an "approved enterprise" under the Israeli Law for the
Encouragement of Capital Investments of 1959 - the tax rate is 15%,
and (iii) in
all other cases, the tax rate is 25%. The aforementioned rates under
the Israel
U.S. Double Tax Treaty will not apply if the dividend income was
derived through
a permanent establishment of the U.S. resident in Israel.

     An Israeli resident company whose shares are listed on a stock
exchange is
obligated to withhold tax, upon the distribution of a dividend
attributed to an
Approved Enterprise's income, from the amount distributed, at the
following
rates: (i) Israeli resident corporation - 15%, (ii) Israeli resident
individual
- - 15%, and (iii) non-Israeli resident - 15%, subject to a reduced
tax rate under
an applicable double tax treaty. If the dividend is distributed from
an income
not attributed to the Approved Enterprise, the following withholding
tax rates
will apply: (i) Israeli resident corporation - 0%, (ii) Israeli
resident
individual - 20% (iii) non-Israeli resident - 20%, subject to a
reduced tax rate
under an applicable double tax treaty.

    3. PASSIVE FOREIGN INVESTMENT COMPANY RULES
     For U.S. federal income tax purposes, Tefron will be considered
a "passive
foreign investment company" (or "PFIC") if (i) 75% or more of our
gross income
for the taxable year is passive income (the "income test") or (ii)
the average
percentage of our assets (by value) held during the taxable year that
produce
passive income (e.g., dividends, interest, royalties, rents and
annuities) or
that are held for the production of passive income is at least 50%
(the "asset
test"). A corporation that owns, directly or indirectly, at least 25%
by value
of the stock of a second corporation must take into account its
proportionate
share of the second corporation's income and assets in applying the
income test
and the asset test.

     Based on current projections concerning the composition of
Tefron's income
and assets, Tefron does not believe that it will be treated as a PFIC
for its
current or future taxable years. However, because this conclusion is
based on
our current projections and expectations as to future business
activity, Tefron
can provide no assurance that it will not be treated as a PFIC in
respect of its
current or any future taxable years.

     If Tefron is treated as a PFIC for any taxable year during which
a U.S.
Holder holds Ordinary Shares, then, subject to the discussion of the
qualified
electing fund ("QEF") and "mark-to-market" rules below, such U.S.
Holder
generally will be subject to a special and adverse U.S. income tax
regime with
respect to any gain realized on the disposition of the Ordinary
Shares and with
respect to certain "excess distributions" received from Tefron. The
adverse tax
consequences include taxation of such gain or excess distribution at
ordinary-income rates and the imposition of an interest charge on tax
liabilities with respect to such gain or excess distributions.

     In some circumstances, a U.S. Holder may avoid certain of the
unfavorable
consequences of the PFIC rules by making a QEF election in respect of
Tefron. A
QEF election effectively would require an electing U.S. Holder to
include in
income currently its pro rata share of the ordinary earnings and net
capital
gain of Tefron. However, a U.S. Holder cannot elect QEF status with
respect to
Tefron unless Tefron complies with certain reporting requirements and
there can
be no assurance that Tefron will provide such information.
     A U.S. Holder that holds "marketable" stock in a PFIC may also
avoid
certain unfavorable consequences of the PFIC rules by, instead of
making a QEF
election, electing to mark the PFIC stock to market at the close of
each taxable
year. Tefron expects that the Ordinary Shares will be "marketable"
for this
purpose. A U.S. Holder that makes the mark-to-market election will be
required
to include in income each year as ordinary income an amount equal to
the excess,
if any, of the fair market value of the stock at the close of the
year over the
U.S. Holder's adjusted tax basis in the stock. If, at the close of
the year, the
U.S. Holder's adjusted tax basis exceeds the fair market value of the
stock,
then the U.S. Holder may deduct any such excess from ordinary income,
but only
to the extent of net mark-to-market gains previously included in
income. Any
gain from the actual sale of the PFIC stock will be treated as
ordinary income,
and any loss will be treated as ordinary loss to the extent of net
mark-to-market gains previously included in income.


                                      77
<PAGE>


    4. U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING

     A U.S. Holder may be subject to U.S. Internal Revenue Service
information
reporting and U.S. backup withholding with respect to dividends
received with
respect to Ordinary Shares and proceeds from the sale of Ordinary
Shares, unless
the U.S. Holder is a corporation or within certain exempt categories
and
demonstrates that fact when so required, or (in the case of backup
withholding
only) furnishes a correct taxpayer identification number and makes
the required
certifications.

     U.S. backup withholding is not an additional tax. Any amount
withheld under
the backup withholding rules will be allowed as a credit against the
U.S.
Holder's U.S. federal income tax liability and may entitle such U.S.
Holder to a
refund, provided the required information is timely furnished to the
Internal
Revenue Service.

10F. DIVIDENDS AND PAYMENT AGENTS
    Not Applicable.

10G. STATEMENTS BY EXPERTS

    Not Applicable.

10H. DOCUMENTS ON DISPLAY

     We are currently subject to the information and periodic
reporting
requirements of the Securities Exchange Act of 1934, as amended. Our
SEC filings
are available for inspection and copying at the public reference
facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W.
Washington,
D.C. 20549, and the Commission's regional offices located in New
York, New York
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330
for further
information on the public reference rooms.

     As a foreign private issuer, we are exempt from the rules under
the
Securities Exchange Act of 1934, as amended, prescribing the
furnishing and
content of proxy statements to shareholders. Certain of our SEC
filings are also
available to the pubic on the SEC website at http://www.sec.gov.
Because we are
a foreign private issuer, we, our directors and our officers are also
exempt
from the shortswing profit recovery and disclosure regime of section
16 of the
Exchange Act.

10I. SUBSIDIARY INFORMATION

    Not Applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY RISK

     Our operating expenses are influenced by changes in the exchange
rates
between the dollar and foreign currencies, especially the NIS. Our
operational
expenses increase when the dollar is devalued against such
currencies. At
December 31, 2006, our liabilities denominated in foreign currencies
in the
amount of $24.7 million represented 29.9% of our total liabilities of
$82.4
million. At December 31, 2006, our assets denominated in foreign
currencies in
the amount of $8.4 million represented 5.1% of our total assets of
$164.7
million. We may from time to time utilize derivative financial
instruments to
manage risk exposure to movements in foreign exchange rates.
Accordingly, in
2002, a forward exchange contract was designated as hedging
instrument. We do
not engage in any speculative or profit motivated forward or
derivatives
activities. See "Item 3. Key Information - 3D. Risk Factors" and
"Item 5.
Operating and Financial Review and Prospects - Impact of Inflation
and Currency
Fluctuations.


                                      78
<PAGE>


     Most of our sales are denominated in U.S. dollars, and we incur
most of our
expenses in U.S. dollars and in NIS. According to the salient
economic factors
indicated in SFAS No. 52, "Foreign Currency Translation," our cash
flow, sale
price, sales market, expense, financing and intercompany transactions
and
arrangement indicators are predominately denominated in U.S. dollars.
In
addition, the U.S. dollar is the primary currency of the economic
environment in
which we operate, and thus the U.S. dollar is our functional and
reporting
currency.

     In our balance sheet, we re-measure into U.S. dollars all
monetary accounts
(principally cash and cash equivalents and liabilities) that are
maintained in
other currencies. For this re-measurement, we use the foreign
exchange rate at
the balance sheet date. Any gain or loss that results from this re-
measurement
is reflected in the statement of income as financial income or
financial
expense, as appropriate.

     We measure and record non-monetary accounts in our balance sheet
(principally fixed assets, prepaid expenses and share capital) in
U.S. dollars,
and we do the same with operational accounts. For this measurement,
we use the
U.S. dollar value in effect at the date that the asset or liability
was
initially recorded in our balance sheet (the date of the
transaction).

     In managing our foreign exchange risk, from time to time we
enter into
various foreign exchange hedging contracts. Our policy is to hedge
significant
net exposures in the major foreign currencies in which we operate. We
attempt to
limit our exposure resulting from liabilities and anticipated
expenses that are
denominated in NIS through forward contracts. We monitor foreign
exchange rates
and trends periodically to measure the effectiveness of our foreign
currency
hedging. If our forward contracts meet the definition of a hedge and
are so
designated, changes in the fair value of the contracts will be:

     o    offset against changes in the fair value of the hedged
assets or
          liabilities through earnings, or

     o    recognized in other comprehensive income until the hedged
item is
          recognized in earnings.

     As of December 31, 2006, there were no gains or losses
recognized in
earnings for hedge ineffectiveness. As of December 31, 2006, we had
outstanding
forward contracts in the amount of $20.2 million. We enter into
forward
contracts only with well-established institutions, and therefore we
believe that
the liabilities that were owed to us at December 31, 2006 will be
realized. In
the event that forward contracts were to become unavailable to us for
a period
of time and the dollar were devalued against foreign currencies, our
operational
expenses would increase by an amount corresponding to the devaluation
of the
dollar as a result of our inability to hedge changes in exchange
rates.

INTEREST RATE RISK

     Of our dollar-denominated financial liabilities at December 31,
2006, $25.3
million were loans denominated in dollar bearing interest at LIBOR.
As a result,
our interest expenses are sensitive to changes in LIBOR.


                                      79
<PAGE>


     Our dollar-denominated financial liabilities bear interest at
1.2% to 1.5%
over LIBOR. A hypothetical ten percent shift in interest rates would
result in a
decrease (or increase) in net income of approximately $0.2 million.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

    Not Applicable.

                                      80
<PAGE>


                                    PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

    None.

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

14A. TO E. Not Applicable.

ITEM 15T. CONTROLS AND PROCEDURES

     (a) DISCLOSURE CONTROLS AND PROCEDURES. As of the end of the
period covered
by this report, we performed an evaluation of the effectiveness of
our
disclosure controls and procedures that are designed to ensure that
the material
financial and non-financial information required to be disclosed in
the reports
that it files or submits under the Securities Exchange Act of 1934 is
recorded,
processed, summarized and reported within the time periods specified
in the
SEC's rules and forms. Disclosure controls and procedures include,
without
limitation, controls and procedures designed to ensure that
information required
to be disclosed by an issuer in the reports that it files or submits
under the
Securities Act of 1933, as amended, is accumulated and communicated
to the our
management, including our principal executive and principal financial
officers,
or persons performing similar functions, as appropriate to allow
timely
decisions regarding required disclosure. There can be no assurance
that our
disclosure controls and procedures will detect or uncover all
failures of
persons within Tefron to disclose material information otherwise
required to be
set forth in our reports. Nevertheless, our disclosure controls and
procedures
are designed to provide reasonable assurance of achieving the desired
control
objectives. Based on our evaluation, our management, including our
Chief
Executive Officer and Chief Financial Officer, have concluded that
our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d) -
15(e) of the Securities Exchange Act of 1934, as amended) as of the
end of the
period covered by this report are effective at such reasonable
assurance level.
     (b) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL
REPORTING. Our management, under the supervision of our Chief
Executive Officer
and Chief Financial Officer, is responsible for establishing and
maintaining
adequate internal control over our financial reporting, as defined in
Rules
13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The
Company's
internal control over financial reporting is designed to provide
reasonable
assurance to the Company's management and Board of Directors
regarding the
reliability of financial reporting and the preparation of financial
statements
for external purposes in accordance with generally accepted
accounting
principles. Internal control over financial reporting includes
policies and
procedures that:

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

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

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

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


                                      81
<PAGE>


     Due to its inherent limitations, internal control over financial
reporting
may not prevent or detect misstatements. In addition, projections of
any
evaluation of effectiveness to future periods are subject to the risk
that
controls may become inadequate because of changes in conditions, or
that the
degree of compliance with the policies or procedures may deteriorate.
     Under the supervision and with the participation of our
management,
including our principal executive officer and principal financial
officer, we
conducted an evaluation of the effectiveness of our internal control
over
financial reporting as of December 31, 2006 based on the framework
for Internal
Control-Integrated Framework set forth by The Committee of Sponsoring
Organizations of the Treadway Commission. Based on our assessment,
our
management concluded that the Company's internal control over
financial
reporting were effective as of December 31, 2006.

     This Annual Report does not include an attestation report of our
registered
public accounting firm regarding internal control over financial
reporting.
Management's report was not subject to attestation by our registered
public
accounting firm pursuant to temporary rules of the Securities and
Exchange
Commission that permit us to provide only management's report in this
Annual
Report.

     (c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There
were no
changes in our internal control over financial reporting that
occurred during
the year ended December 31, 2006 that have materially affected, or
are
reasonably likely to materially affect, our internal control over
financial
reporting.

ITEM 16. [RESERVED]

16A. AUDIT COMMITTEE FINANCIAL EXPERT

     The Board of Directors has determined that Yacov Elinav is an
"audit
committee financial expert" as defined in Item 16A of Form 20-F. Mr.
Elinav is
an "independent" director in accordance with applicable NYSE and SEC
regulations.

16B. CODE OF ETHICS

     We have adopted a code of ethics that applies to our Chief
Executive
Officer, Chief Financial Officer, Corporate Controller and employees.
This code
of ethics is posted on our website, www.tefron.com, and may be found
as follows:

     1. From our main web page, first click on the "meet tefron" bar
on the
left.
    2. Next, click on "code of business ethics" on the bottom.

16C. ACCOUNTANTS' FEES AND SERVICES

     The following table presents the aggregate fees for professional
services
and other services rendered by Kost, Forer Gabbay & Kasierer in
Israel, a member
of Ernst & Young Global, and by McGladrey & Pullen, LLP in the United
States to
Tefron in 2006 and 2005.

                             US$ 2005        US$ 2006
                             --------        --------

Audit Fees (1)               $108,000        $119,250
Audit-related Fees (2)       $ 53,000              --
Tax Fees (3)                 $ 19,000        $ 90,850
All Other Fees (4)           $ 58,200        $ 54,400
TOTAL                        $238,200        $264,500

     Audit Fees consist of fees billed for the annual audit services
engagement
and other audit services, which are those services that only the
external
auditor can reasonably provide, and include the group audit;
statutory audits;
comfort letters and consents; attest services; and assistance with
and review of
documents filed with the SEC.


                                        82
<PAGE>


     Audit-related Fees consist of fees billed for assurance and
related
services that are reasonably related to the performance of the audit
or review
of our financial statements or that are traditionally performed by
the external
auditor, and include consultations concerning financial accounting
and reporting
standards; internal control reviews of new systems, programs and
projects;
review of security controls and operational effectiveness of systems;
review of
plans and control for shared service centers, due diligence related
to
acquisitions; accounting assistance and audits in connection with
proposed or
completed acquisitions; and employee benefit plan audits.

     Tax Fees include fees billed for tax compliance services,
including the
preparation of original and amended tax returns and claims for
refund; tax
consultations, such as assistance and representation in connection
with tax
audits, tax advice related to mergers and acquisitions, transfer
pricing, and
requests for rulings or technical advice from taxing authority.

     All Other Fees include fees billed for training; forensic
accounting; data
security reviews; treasury control reviews and process improvement
and advice;
environmental, sustainability and advisory services.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

     Tefron's audit committee's main role is to assist the Board of
Directors in
fulfilling its responsibility for oversight of the quality and
integrity of the
accounting, auditing and reporting practices of the Company. The
Audit Committee
oversees the appointment, compensation, and oversight of the public
accounting
firm engaged to prepare or issue an audit report on the financial
statements of
the Company. The audit committee's specific responsibilities in
carrying out its
oversight role include the approval of all audit and non-audit
services to be
provided by the external auditor and quarterly review the firm's non-
audit
services and related fees. These services may include audit services,
audit-related services, tax services and other services, as described
above. The
audit committee approves in advance the particular services or
categories of
services to be provided to the Company during the following yearly
period and
also sets forth a specific budget for such audit and non-audit
services.
Additional services may be pre-approved by the audit committee on an
individual
basis during the year.

     During 2006, none of Audit-related Fees, Tax Fees or Other Fees
provided to
us by Kost, Forer Gabbay & Kasierer in Israel or by Ernst & Young or
McGladrey &
Pullen, LLP in the United States were approved by the Audit Committee
pursuant
to the de minimis exception to the pre-approval requirement provided
by
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

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

    None.

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

    None.
                                        83
<PAGE>


                                     PART III

ITEM 17. FINANCIAL STATEMENTS

       We have responded to Item 18 in lieu of this Item.

ITEM 18. FINANCIAL STATEMENTS

     Our Consolidated Financial Statements beginning on pages F-1
through F-35,
as set forth in the following index, are hereby incorporated herein
by
reference. These Consolidated Financial Statements are filed as part
of this
Annual Report.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Page

----

Index to Consolidated Financial Statements
F-1
Report of Registered Public Accounting Firm
F-2
Consolidated Balance Sheets
F-3 - F-4
Consolidated Statements of Operations
F-5
Consolidated Statements of Changes in Shareholders' Equity
F-6 - F-7
Consolidated Statements of Cash Flows
F-8 - F-10
Notes to the Consolidated Financial Statements
F-11 - F-41
Report of Independent Auditors for Alba Health LLC
for 2005 and 2004 Financial Statements
F-42


                                        84
<PAGE>


ITEM 19.        EXHIBITS

1.1.            Memorandum of Association of the Company (incorporated
by
                reference to Exhibit 3.1 to the Company's Registration
Statement
                on Form F-1 (No. 333-7538) filed on August 29, 1997).

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

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

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

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

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

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

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

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

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

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


                                      85
<PAGE>


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

2.12           The total amount of long-term debt securities of the
Company
               authorized under any instrument, other than as
exhibited hereto,
               does not exceed 10% of the total assets of the Company
on a
               consolidated basis. The Company hereby agrees to
furnish to the
               SEC, upon request, a copy of any instrument defining
the rights
               of holders of long-term debt of the Company or of its
               subsidiaries for which consolidated or unconsolidated
financial
               statements are required to be filed.

3.1            Shareholders Agreement, dated as of December 28, 1999,
between
               Arwol Holdings Ltd. and Avi Ruimi (incorporated by
reference to
               Exhibit D to the General Statement of Beneficial
Ownership of the
               Company on Schedule 13D filed by Arwol Holdings Ltd.,
Arie
               Wolfson, Sigi Rabinowicz, Riza Holdings Ltd. and
Macpell
               Industries Ltd. on February 17, 2000).

3.2            Agreement, dated February 17, 2004, by and among Arwol
Holdings
               Ltd., Macpell Industries Ltd. and Norfet, Limited
Partnership
               (incorporated by reference to Exhibit 3.4 to the
Company's Annual
               Report on Form 20-F for the fiscal year ended December
31, 2003).

4.1            Employment Agreement, dated as of August 5, 2002,
between the
               Company and Sigi Rabinowicz (incorporated by reference
to Exhibit
               4.2 to the Company's Annual Report on Form 20-F for
the fiscal
               year ended December 31, 2002).

4.2            Consulting and Management Services Agreement, dated as
of August
               5, 2002, between the Company, New York Delights Ltd.,
and Arie
               Wolfson (incorporated by reference to Exhibit 4.3 to
the
               Company's Annual Report on Form 20 F for the fiscal
year ended
               December 31, 2002).

4.3            Management and Services Agreement, effective as of
July 30, 2003,
               between the Company, Yosef Shiran and Shiran &
Partners -
               Consulting, Entrepreneurship, and Financing
(incorporated by
               reference to Exhibit 4.4 to the Company's Annual
Report on Form
               20-F for the fiscal year ended December 31, 2003).

4.4            Letter, dated March 28, 2007, from General Counsel of
Company to
               Mr. Yosef Shiran re: amendments to Management and
Services
               Agreement.

4.5.           Lease Agreement dated as of August 12, 1997, between
the Company
               and New Net Assets (1994) Ltd. and an Assignment
Agreement dated
               as of December 25, 1998 between the Company and Hi-Tex
Founded by
               Tefron Ltd. The Company and/or its subsidiary, Hi-Tex
Founded by
               Tefron Ltd., have entered in to similar lease
agreements with New
               Net Assets (1994) Ltd. (incorporated by reference to
Exhibit 4.5
               to the Company's Annual Report on Form 20-F for the
fiscal year
               ended December 31, 2001).

4.6              Membership Interest Redemption Agreement, dated April
26, 2006,
                 by and between AlbaHealth, LLC and Tefron USA, Inc.

4.7              Subordination Agreement, dated April 26, 2006, by
Tefron USA,
                 Inc. in favor of Suntrust Bank, in its capacity as
administrative
                 agent for the lenders from time to time party to the
Senior
                 Credit Agreement.

4.8            Unsecured Subordinated Promissory Note in the
principal amount of
               US $3 million, dated April 26, 2006, by AlbaHealth
LLC. in favor
               of Tefron USA, Inc.

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


                                        86
<PAGE>


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

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

4.12            Amendment to Agreement, dated March 31, 2005, by and
between the
                Company and Leber Partners, L.P (incorporated by
reference to
                Exhibit 4.13 to the Company's Annual Report on Form
20-F for the
                fiscal year ended December 31, 2004).

4.13            Private Equity Credit Agreement, dated as of March 9,
2004, by
               and between the Company and Brittany Capital
Management Limited
               (incorporated by reference to Exhibit 4.11 to the
Company's
               Annual Report on Form 20-F for the fiscal year ended
December 31,
               2003).

4.14            Registration Rights Agreement, dated as of March 9,
2004, by and
                between the Company and Brittany Capital Management
Limited
                (incorporated by reference to Exhibit 4.12 to the
Company's
                Annual Report on Form 20-F for the fiscal year ended
December 31,
                2003).

4.15            Agreement, dated as of July 5, 2006, between Macpell
Industries
                Ltd. and the Company regarding the lease of
properties.

4.16            Joint Venture Agreement, dated as of May 8, 2006, by
and between
                the Company, Langsha Knitting Co. Ltd. and Itochu
Textile
                Materials (Asia) Ltd.

8.1             List of subsidiaries of the Company.

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

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

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

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

14.(a).2        Consent of McGladrey & Pullen, LLP.


                                          87
<PAGE>



                            TEFRON LTD. AND ITS SUBSIDIARIES

                            CONSOLIDATED FINANCIAL STATEMENTS

                                AS OF DECEMBER 31, 2006

                               U.S. DOLLARS IN THOUSANDS

                                         INDEX


PAGE
                                                                    ----
----------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F - 2

CONSOLIDATED BALANCE SHEETS                                          F -
3 - F - 4

CONSOLIDATED STATEMENTS OF OPERATIONS
F - 5

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY                        F -
6 - F - 7

CONSOLIDATED STATEMENTS OF CASH FLOWS                                F -
8 - F - 10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F -
11 - F - 41

REPORT OF INDEPENDENT AUDITORS FOR ALBAHEALTH LLC
FOR 2005 AND 2004 FINANCIAL STATEMENTS
F - 42


<PAGE>

[ERNST & YOUNG LOGO]

                        o    KOST FORER GABBAY & KASIERER   o   Phone:
972-3-6232525
                         3 Aminadav St.                    Fax: 972-
3-5622555
                         Tel-Aviv 67067, Israel

            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                 TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

                                  TEFRON LTD.

      We have audited the accompanying consolidated balance sheets of
Tefron
Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and
2006, and
the related consolidated statements of operations, changes in
shareholders'
equity and cash flows for each of the three years in the period ended
December
31, 2006. These financial statements are the responsibility of the
Company's
management. Our responsibility is to express an opinion on these
financial
statements based on our audits.

      We did not audit the financial statements of Alba Health LLC
("Alba
Health"), a former subsidiary in which the Company sold its interest
on April
20, 2006, whose statements constitute 21.5% of total consolidated
assets as of
December 31, 2005, and whose revenues constitute 16.7% and 18.7% of
total
consolidated revenues for the years ended December 31, 2004 and 2005,
respectively. Those statements were audited by other auditors whose
reports have
been furnished to us, and our opinion, insofar as it relates to
amounts included
for Alba Health, is based solely on the reports of the other
auditors.

      We conducted our audits in accordance with the standards of the
Public
Company Accounting Oversight Board (United States). Those standards
require that
we plan and perform the audit to obtain reasonable assurance about
whether the
financial statements are free of material misstatement. We were not
engaged to
perform an audit of the Company's internal control over financial
reporting. Our
audit included consideration of internal control over financial
reporting as a
basis for designing audit procedures that are appropriate in the
circumstances,
but not for the purpose of expressing an opinion on the effectiveness
of the
Company's internal control over financial reporting. Accordingly we
express no
such opinion. An audit also includes examining, on a test basis,
evidence
supporting the     amounts and disclosures in the financial statements,
assessing
the accounting     principles used and significant estimates made by
management and
evaluating the     overall financial statement presentation. We believe
that our
audits and the     reports of the other auditors provide a reasonable
basis for our
opinion.

      In our opinion, based on our audits and the reports of other
auditors, the
consolidated financial statements referred to above present fairly,
in all
material respects, the consolidated financial position of the Company
and its
subsidiaries as of December 31, 2005 and 2006, and the results of
their
operations and their cash flows for each of the three years in the
period ended
December 31, 2006, in conformity with accounting principles generally
accepted
in the United States.

      As discussed in Note 2n to the consolidated financial
statements, the
Company adopted the provision of Statement of Accounting Standard No.
123(R),
"Share-Based Payment", effective January 1, 2006.

Tel-Aviv, Israel                                     KOST FORER GABBAY &
KASIERER
March 28, 2007                                     A Member of Ernst &
Young Global

                                         F - 2

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

DECEMBER 31,

---------------------

NOTE        2005        2006

----     ---------    ---------
<S>
<C>     <C>          <C>
       ASSETS
CURRENT ASSETS:
   Cash and cash equivalents
$   7,652   $   3,966
   Short term deposit
-      10,089
   Marketable securities
3             -       4,975
   Trade receivables (net of allowances of $ 273 and $ 183 at
December
      31, 2005 and 2006, respectively)
25,978      30,655
   Other accounts receivable and prepaid expenses
4         4,956       4,166
   Inventories
5        26,382      28,912

---------   ---------

TOTAL current assets
64,968      82,763

---------   ---------

LONG TERM INVESTMENTS:

Bank deposit
-       1,029
Severance pay fund
634         778
Subordinate note
-       3,000

---------   ---------

TOTAL long term investments
634       4,807

---------   ---------

PROPERTY, PLANT AND EQUIPMENT, NET
6        80,859      77,086

---------   ---------

ASSETS ATTRIBUTED TO DISCONTINUED OPERATIONS
40,053           -

---------   ---------

TOTAL assets
$ 186,514   $ 164,656

=========   =========
</TABLE>

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

                                     F - 3
<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

<TABLE>
<CAPTION>

DECEMBER 31,

---------------------

NOTE        2005     2006

----   ---------   ---------
<S>
<C>    <C>         <C>
   LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Short-term bank credit
7     $ 14,713    $       -
  Current maturities of long-term bank loans
9         6,373       5,948
  Trade payables
27,865      31,143
  Other accounts payable and accrued expenses
8         8,721      10,402

---------    ---------

TOTAL current liabilities
57,672      47,493

---------    ---------

LONG-TERM LIABILITIES:
  Long-term loans from banks (net of current maturities)
9        35,535      19,322
  Deferred taxes
13g        9,116      12,313
  Accrued severance pay
2,695       3,298

---------    ---------

TOTAL long-term liabilities
47,346      34,933

---------    ---------

LIENS, CONTINGENCIES AND COMMITMENTS
10

LIABILITIES AND MINORITY INTEREST ATTRIBUTED TO DISCONTINUED
  OPERATIONS
26,811          -

---------   ---------

SHAREHOLDERS' EQUITY:
11
   Share capital -
     Ordinary shares of NIS 1 par value - Authorized: 49,995,500
       shares; Issued: 19,010,376 and 21,747,568 shares at
       December 31, 2005 and 2006, respectively; Outstanding:
       18,012,976 and 20,750,168 shares at December 31, 2005 and
2006,
       respectively
6,810       7,411
   Additional paid-in capital
83,069     101,684
   Deferred stock-based compensation
(198)          -
   Cumulative other comprehensive income
307          55
   Accumulated deficit
(27,895)    (19,512)
   Less - 997,400 Ordinary shares in treasury, at cost
(7,408)     (7,408)

---------   ---------

 TOTAL shareholders' equity
54,685      82,230

---------   ---------

 TOTAL liabilities and shareholders' equity
$ 186,514   $ 164,656

=========   =========
</TABLE>

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

<TABLE>
<CAPTION>
    March 28, 2007
- ------------------------      --------------------------   -------
--------------------    --------------------------
<S>                                   <C>                          <C>
<C>
Date of approval of the               Ishay Davidi
Yosef Shiran                 Asaf Alperovitz
 financial statements                   Chairman                   CEO
and Director                     CFO
</TABLE>

                                     F - 4

<PAGE>
                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,

-----------------------------------------

NOTE          2004          2005              2006

----   -----------     -----------      -----------
<S>
<C>    <C>            <C>               <C>

Sales
$   148,620    $   171,336    $   188,104
Cost of sales
12a        136,424        141,621        145,144

-----------     -----------    -----------

Gross profit
12,196         29,715         42,960
Selling and marketing expenses
11,309          8,984         11,573
General and administrative expenses
5,603          4,595          5,504

-----------     -----------    -----------

Operating income (loss)
(4,716)        16,136          25,883
Financial expenses, net
12b          3,888            3,189            1,912

-----------     -----------    -----------

Income (loss) before taxes on income
(8,604)        12,947         23,971
Taxes on income
13d             83          4,297              5,711

-----------     -----------    -----------

Income (loss) from continuing operations
(8,687)         8,650         18,260
Income (loss) from discontinued operations
  (including impairment and other costs related to the exercise of
  the put option), net of taxes
1,822         (5,357)           120

-----------     -----------    -----------
Net income (loss)
$    (6,865)   $    3,293    $    18,380

===========    ===========   ===========

Basic and diluted net earnings (losses) per share
  from continuing operations:
  Basic net earnings (losses) per share
$     (0.56)   $      0.49    $      0.90

===========    ===========    ===========
  Diluted net earnings (losses) per share
$     (0.56)   $      0.47    $      0.88

===========    ===========   ===========

Basic and diluted net earnings (losses) per share
  from discontinued operations:
  Basic net earnings (losses) per share
$      0.12    $     (0.30)   $      0.01

===========    ===========    ===========
  Diluted net earnings (losses) per share
$      0.12    $     (0.29)   $      0.01

===========    ===========   ===========

Basic and diluted net earnings (losses) per share:
  Basic net earnings (losses) per share
$     (0.44)   $      0.19    $      0.91

===========    ===========    ===========
  Diluted net earnings (losses) per share
$     (0.44)   $      0.18    $      0.89

===========    ===========   ===========

Weighted average number of shares used for computing
  basic earnings (losses) per share
15,603,904     17,719,275     20,210,722

===========    ===========    ===========
Weighted average number of shares used for computing
  diluted earnings (losses) per share
15,603,904     18,542,618     20,754,566

===========    ===========   ===========
</TABLE>

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

                                     F - 5

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

CUMULATIVE
                                             ADDITIONAL    DEFERRED
OTHER                     TOTAL
                          ORDINARY DEFERRED    PAID-IN   STOCK-BASED
COMPREHENSIVE ACCUMULATED COMPREHENSIVE TREASURY
                           SHARES   SHARES     CAPITAL COMPENSATION
GAIN        DEFICIT      INCOME     SHARES     TOTAL
                          -------- -------- ---------- ------------
------------- ----------- ------------- -------- --------
<S>                       <C>      <C>       <C>        <C>
<C>           <C>         <C>           <C>       <C>

Balance as of January 1,
  2004                     $   5,575 $           1 $    62,810 $                -
$           - $   (24,323)                     $ (7,408) $ 36,655

Issuance of shares (net
  of issuance expenses in
  the amount of $ 296)         1,007             -       15,393                 -
-           -                              -   16,400
Deferred stock-based
  compensation                         -        -         1,040
(1,040)             -              -                           -            -
Amortization of deferred
  stock-based compensation             -     -          -          554
-           -                              -  554
Net loss                            -        -          -            -
-      (6,865)                        -    (6,865)
                             -------- -------- ---------- ------------
------------- -----------                  -------- --------

Balance as of December
  31, 2004                     6,582            1         79,243
(486)             -      (31,188)                        (7,408)   46,744

Settlement of the
  conditional obligation
  with respect to
  issuance of shares               200          -         3,254                 -
-           -                              -   3,454
Exercise of stock options
  related to employees
  and directors                    28           -           428                 -
-           -                              -     456
Cancellation of deferred
  shares                               -       (1)            1                 -
-           -                              -         -
Deferred stock-based
  compensation                         -        -           143
(143)             -            -                             -         -
Amortization of deferred
  stock-based compensation             -        -             -             431
-           -                              -     431
Comprehensive income:
  Unrealized gain on
    hedging derivative            -        -          -            -
307           - $          307        -       307
  Net income                      -        -          -            -
-       3,293          3,293        -     3,293
                           -------- -------- ---------- ------------
------------- ----------- ------------- -------- --------

Total comprehensive income
$       3,600

=============
Balance as of December
  31, 2005                 $ 6,810 $       - $    83,069 $
(198) $         307 $   (27,895)               $ (7,408) $ 54,685
                           -------- -------- ---------- ------------
------------- -----------                -------- --------
</TABLE>

                                      F - 6

<PAGE>

                                                 TEFRON LTD. AND ITS
SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

CUMULATIVE
                                        ADDITIONAL    DEFERRED
OTHER                     TOTAL
                              ORDINARY    PAID-IN    STOCK-BASED
COMPREHENSIVE ACCUMULATED COMPREHENSIVE TREASURY
                               SHARES     CAPITAL   COMPENSATION
GAIN        DEFICIT      INCOME      SHARES     TOTAL
                              -------- ---------- ------------         -
------------ ----------- ------------- -------- --------
<S>                           <C>       <C>         <C>
<C>            <C>        <C>            <C>       <C>

Balance as of January 1, 2006    $ 6,810 $     83,069    $    (198) $
307 $    (27,895)                 $ (7,408) $ 54,685

Issuance of shares and options
  (net of issuance expenses in
  the amount of $ 1,333)             389      13,427             -
-            -                        -    13,816
Exercise of stock options
  related to employees,
  directors and others               195         3,430           -
-            -                        -       3,625
Exercise of tradable options
  issued at the secondary
  offering                            17          955
972
Cash dividend                          -           -           -
-       (9,997)                       -    (9,997)
Reclassification of deferred
  stock compensation due to
  implementation of SFAS 123(R)        -        (198)        198
-            -                        -         -
Compensation related to options
  granted to employees                 -         555           -
-            -                        -       555
Tax benefit related to exercise
  of stock options                     -         446           -
-            -                                446
Comprehensive income:
  Realized gain on hedging
    derivative                         -           -           -
(307)           - $         (307)        -      (307)
  Unrealized gain on hedging
    derivative                         -           -           -
52            -             52         -        52
  Unrealized gain on marketable
    securities                         -           -           -
3            -              3         -         3
  Net income                           -           -           -
-       18,380         18,380         -    18,380
                                -------- ---------- ------------      -
------------ ----------- ------------- -------- --------

Total comprehensive income
$      18,128

=============
Balance as of December
  31, 2006                       $ 7,411 $ 101,684 $            -     $
55 $    (19,512)                 $ (7,408) $ 82,230
                                 ======== ========== ============
=============      ===========              ======== ========
</TABLE>

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

                                      F - 7

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                    --
----------------------------

2004        2005        2006
                                                                 --
------   --------   --------
<S>
<C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                              $
(6,865) $ 3,293     $ 18,380
  Adjustments to reconcile net income (loss) to net cash
    provided by operating activities:
    Loss (income) from discontinued operations
(1,822)     5,357       (120)
  Depreciation, amortization and impairment of property, plant
    and equipment
9,992      9,686      8,719
  Compensation related to options granted to employees
554        431        555
  Loss related to conditional obligation
150          -          -
  Increase (decrease) in severance pay, net
380       (588)       459
  Increase (decrease) in deferred taxes, net
(827)     4,670      2,128
  Realization of pre-acquisition acquired operating losses
489          -          -
  Accrual of interest on short and long-term deposits
-          -       (100)
  Gain on sale and accretion of discount on marketable
    securities
-          -        (57)
  Loss (gain) on sale of property, plant and equipment, net
23       (409)       (73)
  Decrease (increase) in trade receivables, net
3,515     (9,099)    (4,677)
  Decrease (increase) in other accounts receivable and prepaid
    expenses
(233)       884       (417)
  Decrease (increase) in inventories
(1,471)     3,740     (2,530)
  Increase in trade payables
209        793      3,278
  Increase (decrease) in other accounts payable and accrued
    expenses
(898)      (946)     1,718
                                                                 --
------   --------   --------

Net cash provided by continuing operating activities
3,196     17,812     27,263
Net cash provided by discontinued operating activities
3,714      2,999        507
                                                                 --
------   --------   --------

Net cash provided by operating activities
6,910     20,811     27,770
                                                                 --
------   --------   --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, plant and equipment
(8,637)    (4,960)    (4,688)
  Investment grants received
1,156        452      1,218
  Proceeds from sale of property, plant and equipment
422        475        335
  Dividend received from discontinued operations
662        484        140
  Proceeds from sale of subsidiary, net
-          -      9,917
  Investment in short and long-term deposits and marketable
    securities
-          -    (22,894)
  Proceeds from sale of marketable securities
-          -      6,961
  Proceeds from the Company's insurance policy for plant and
    machinery damage
-        619          -
  Earn out payments related to acquisition of Macro Clothing (b)
(106)      (261)         -
                                                                   --
------   --------   --------

Net cash used in continuing investing activities
(6,503)    (3,191)    (9,011)
Net cash used in discontinued investing activities
(975)      (779)      (172)
                                                                   --
------   --------   --------

Net cash used in investing activities
(7,478)    (3,970)    (9,183)
                                                                   --
------   --------   --------
</TABLE>

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

                                        F - 8

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                   --
----------------------------

2004        2005     2006
                                                                   --
------   --------   --------
<S>
<C>         <C>         <C>

CASH FLOWS FROM FINANCING ACTIVITIES:

  Repayment of long-term bank loans                                $
(9,854) $ (6,038) $(21,188)
  Proceeds from long-term bank loans
-          -      5,000
  Payments under capital lease
1,412       (206)         -
  Decrease in short-term bank credit, net
(9,276)    (3,642)   (14,713)
  Excess tax benefit from exercise of stock options related to
    employees and directors
-          -        446
  Proceeds from exercise of stock options related to employees
    and directors
-        456      3,175
  Exercise of tradable options issued at the secondary offering
-          -        972
  Proceeds from issuance of shares and options, net
19,704          -     13,816
  Dividend paid to shareholders
-          -     (9,446)
                                                                   --
------     --------    --------

Net cash provided by (used in) continuing financing activities
1,986     (9,430)   (21,938)
Net cash used in discontinued financing activities
(3,606)    (2,768)      (544)
                                                                   --
------     --------    --------

Net cash used in financing activities
(1,620)   (12,198)   (22,482)
                                                                   --
------     --------    --------

Increase (decrease) in cash and cash equivalents
(2,188)     4,643     (3,895)
Decrease in cash and cash equivalents attributed to discontinued
  operations
867        548        209
                                                                   --
------     --------    --------

Increase (decrease) in cash and cash equivalents attributed to
  continuing operations
(1,321)     5,191     (3,686)
Cash and cash equivalents at beginning of year
3,782      2,461      7,652
                                                                   --
------     --------    --------

Cash and cash equivalents at end of year                           $
2,461   $ 7,652    $ 3,966

========    ========    ========
</TABLE>
The accompanying notes are an integral part of the financial
statements.

                                         F - 9

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                       --
----------------------------

2004          2005           2006
                                                                       --
------   --------           --------
<S>   <C>
<C>        <C>               <C>

(a)     CASH PAID DURING THE YEAR FOR:

             Interest                                                  $
1,479       $ 3,139     $    2,504

========      ========       ========

             Income taxes, net of refunds received                     $
272     $      204   $    996

========      ========       ========

(b)     ACQUISITION OF MACRO CLOTHING:

             Goodwill                                                  $
(367)    $        -   $      -
             Accrued payments
261           (261)         -
                                                                       --
------       --------       --------

                                                                       $
(106)    $    (261)     $       -

========      ========       ========

(c)     SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
          ACTIVITY:

          Purchase of property, plant and equipment by credit,
            net of investment grants receivable                        $
(490)    $ 1,418   $    266
========       ========   ========

           Unsecured subordinated promissory note as a partial
             consideration of the sale of Alba Health                   $
-   $        -   $ 3,000

========       ========   ========

           Exercise of options in exchange for a bank loan              $
-   $        -   $    450

========       ========   ========

           Deferred tax asset related to tax benefit derived from
             exercise of options by employees                           $
-   $        -   $    446

========       ========   ========
</TABLE>

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

                                       F - 10

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:    -   GENERAL

            a.       Tefron Ltd, a company organized under the laws of
the State of
                     Israel ("the Company") and its subsidiaries are
engaged in the
                     design, manufacture and sale of knitted intimate
apparel,
                     swimwear and active wear, which are manufactured
using two
                     different techniques (seamless and cut and sew)
(see also Note
                     16). The Company's principal markets are the United
States and
                     Europe.

                     The Company's significant subsidiaries are Hi-Tex,
founded by
                     the Company ("Hi-Tex"), which commenced operations
in 1997,
                     Tefron USA, Inc., and Macro Clothing Ltd. ("Macro")
which was
                     purchased in April 2003.
              b.   During 2004, 2005 and 2006, 72.4%, 76.9% and 77.4%,
                   respectively, were derived from the three largest
customers
                   all located in the United States. The Company's
arrangements
                   with its customers do not contain minimum purchase
                   requirements and there can be no assurance that the
principal
                   customers will continue to purchase the Company's
products in
                   the same volumes or on the same terms as they have
done in the
                   past. A material decrease of purchases made by the
major
                   customers or a material adverse change in the terms
of such
                   purchases could have a material adverse effect on
the
                   Company's results of operations.

              c.   Discontinued operations:

                   The Company had a put option to sell its ownership
interest in
                   Alba Health, one of its subsidiaries, to Alba
Health. On
                   December 22, 2005, the Company delivered a notice
of exercise
                   to Alba Health and the other parties to the put
option
                   agreement. On April 26, 2006, the Company finalized
the sale
                   of its interest in Alba Health. Under the terms of
the
                   transaction, the Company received an aggregate
consideration
                   of approximately $ 13,000, consisting of
approximately $
                   10,000 in cash and $ 3,000 pursuant to the terms of
an
                   unsecured subordinated promissory note, the
principal amount
                   of which will be due on August 31, 2009. The note
will bear
                   annual interest at the rate of LIBOR plus 3%
payable
                   quarterly, and the payment of the note will be
subordinated in
                   favor of Alba Health's senior bank lenders. Since
the closing
                   date of the sale, Alba Health business has been
treated as a
                   discontinued operation in the Company's financial
statements.
                   This transaction was accounted for in accordance
with
                   Statement of Financial Accounting Standard No. 144,
                   "Accounting for the Impairment or Disposal of Long-
Lived
                   Assets" ("SFAS No. 144"), and EITF 03-13, "Applying
the
                   Conditions in Paragraph 42 of FASB Statement No.
144 in
                   Determining Whether to Report Discontinued
Operations".

                   The results of operations including sales, cost of
sales,
                   operating expenses, financial expenses, taxes on
income and
                   impairment and other costs related to the exercise
of the put
                   option for the years ended December 31, 2004 and
2005, and for
                  the period ended April 26, 2006, have been
reclassified in the
                  accompanying statements of income and presented as
                  discontinued operations. The Company's balance
sheet as of
                  December 31, 2005, reflects the net assets of Alba
Health as
                  total assets and total liabilities of discontinued
operations
                  within long-term liabilities and long-term assets.
The Company
                  had previously reported its Alba Health business as
a separate
                  segment (Healthcare USA) as required by Statement
of Financial
                  Standards No. 131, "Disclosures About Segments of
an
                  Enterprise and Related Information" ("SFAS No.
131"). Separate
                  financial information regarding AlbaHealth, which
was
                  accounted for as discontinued operations as
follows:

                                     F - 11

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:   -   GENERAL (CONT.)

<TABLE>
<CAPTION>

FOR THE

YEAR ENDED           PERIOD

DECEMBER 31,           ENDED

--------------------     APRIL 26,
2004         2005        2006

--------     --------    ---------
<S>
<C>          <C>         <C>

             Sales
$ 34,199     $ 34,249    $   7,474
             Cost of sales
23,513       24,596        5,524

--------     --------    ---------

              Gross profit
10,686         9,653        1,950
              Selling and marketing expenses
4,199         4,542        1,076
              General and administrative expenses
1,276         1,308          338
              Impairment and other expenses related to the put
                option exercise
-         6,073            -

--------     --------    ---------

             Operating income (loss)
5,211       (2,270)         536
             Financial expenses, net
1,324        1,182          243

--------     --------    ---------

              Income (loss) before taxes on income
3,887        (3,452)         293
              Taxes on income
120         3,521            9
              Minority interest in losses (earnings) of subsidiaries
(1,945)        1,616         (164)

--------     --------    ---------

             Net income (loss)
$   1,822    $ (5,357)   $     120

========     ========    =========
</TABLE>

<TABLE>
<CAPTION>

DECEMBER 31,

---------------------

2005           2006

--------     ---------
<S>
<C>          <C>
                Current assets
$   8,660       $       -
                Other assets
31,393                -

--------        ---------

                Total assets
$ 40,053        $       -

========        =========

                Current liabilities
$   7,153       $       -
                Long term liabilities
5,499                -
                Minority interest
14,159                -

--------        ---------

                Total liabilities and minority interest
$ 26,811        $       -

========        =========
</TABLE>

                                        F - 12

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:     -   GENERAL (CONT.)

                d.   Acquisition of Macro Clothing Ltd. ("Macro"):

                     In April 2003, the Company agreed to acquire 100%
of the
                     outstanding Ordinary shares of Macro from Macpell
Industries
                     Ltd. ("Macpell"). Macro manufactures, markets and
sells
                     swimsuits and beachwear. The purchase has
diversified the
                     Company's line of products. Under the terms of the
acquisition
                     agreement, contingent payments based on certain
financial
                     performance criteria amounting to $ 367 were
recorded in 2004
                     out of which $ 106 were paid in 2004 and $ 261 in
2005. As a
                  result, the Company recorded an additional
consideration which
                   increased the purchase price and was allocated to
income tax
                   expenses, due to realization of tax losses derived
from
                   pre-acquisition.

                   The acquisition has been treated using the purchase
method of
                   accounting in accordance with SFAS No. 141,
"Business
                   Combination". The purchase price has been allocated
to the
                   assets acquired and to the assumed liabilities
based on their
                   estimated fair value at the date of acquisition.
The excess of
                   the purchase price over the estimated fair value of
the net
                   assets acquired has been recorded as goodwill.

NOTE 2: -    SIGNIFICANT ACCOUNTING POLICIES

            The consolidated financial statements have been
reclassified for
            AlbaHealth, which qualified as discontinued operations
through
            December 31, 2006 in accordance with Statement of
Financial
            Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment
            or Disposal of Long-Lived Assets.

              The consolidated financial statements have been prepared
in
              conformity with accounting principles generally accepted
in the
              United States of America ("U.S. GAAP"). The significant
accounting
              policies followed in the preparation of the financial
statements,
              applied on a consistent basis, are:

              a.   Use of estimates:

                   The preparation of financial statements in
conformity with
                   accounting principles generally accepted in the
United States
                   of America requires management to make estimates
and
                   assumptions that affect the amounts reported in the
financial
                   statements and accompanying notes. Actual results
could differ
                   from those estimates.

              b.   Financial statements in U.S. dollars:

                   The accompanying consolidated financial statements
have been
                   prepared in U.S. dollars, as the currency of the
primary
                   economic environment in which the operations of the
Company
                   and its subsidiaries are conducted is the U.S.
dollar. The
                   majority of sales is made in U.S. dollars, and a
significant
                   portion of purchases of materials and property,
plant and
                   equipment is denominated U.S. dollars. Thus, the
functional
                   and the reporting currency of the Company is the
U.S. dollar.

                                       F - 13

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:   -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                   Accordingly, monetary accounts maintained in
currencies other
                   than the dollar are remeasured into U.S. dollars in
accordance
                   with Statement No. 52 of the Financial Accounting
Standards
                   Board ("FASB"), "Foreign Currency Translation". All
                   transactions gains and losses from the
remeasurement of
                   monetary balance sheet items are reflected in the
statements
                   of operations as financial income or expenses as
appropriate.

              c.   Principles of consolidation:

                   The consolidated financial statements include the
accounts of
                   the Company and its subsidiaries. Intercompany
balances and
                   transactions have been eliminated in consolidation.

              d.   Cash equivalents:

                   Cash equivalents are short-term highly liquid
investments that
                   are readily convertible to cash with maturities of
three
                   months or less from the date acquired.

              e.   Short-term deposit:
                   A short-term bank deposit has a maturity of more
than three
                   months but less than one year. The deposit is in
U.S. dollars
                   and bears an average interest of 5.34%. The short-
term deposit
                   is presented at cost, including accrued interest.

              f.   Inventories:

                   Inventories are stated at the lower of cost or
market value.
                   Inventory write-offs are provided to cover risks
arising from
                   slow-moving items, discontinued products, and items
with a
                   market price that is lower than cost. Cost is
determined as
                   follows:

                   Raw materials, accessories and packaging materials
- using the
                   "moving average cost" method.

                   Work-in-progress and finished products - using the
"moving
                   average cost" method, based on standard costs which
are
                   adjusted to actual costs.

              g.   Marketable securities

                   The Company accounts for its investments in
marketable
                   securities in accordance with SFAS No. 115,
"Accounting for
                   Certain Investments in Debt and Equity Securities".

                  Management determines the appropriate
classification of its
                  investments in marketable debt securities at the
time of
                  purchase and reevaluates such determinations at
each balance
                  sheet date. Debt securities are classified as
available for
                  sale at fair value, with the unrealized gains and
losses,
                  net of tax, reported in other comprehensive income,
                  amortization of premiums and accretion of discounts
and
                  interest are included in financial expenses, net.
As of
                  December 31, 2006, no impairment losses have been
                  identified.

                                     F - 14

<PAGE>
                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               h.   Long-term deposit:

                    A long-term bank deposit is a deposit with a
maturity of more
                    than one year. The deposit is in NIS and bears an
average
                  interest of 5.31%. The long-term deposit is
presented at cost,
                  including accrued interest.

               i.   Goodwill:

                    Goodwill attributable to Alba Health, a former
subsidiary (see
                    Note 1c in reference to discontinued operations),
is measured
                    as the excess of the cost of an acquired company
over the
                    total of the amounts assigned to tangible and
identifiable
                    intangible assets acquired less liabilities
assumed. Goodwill
                  is not amortized, but rather reviewed for
impairment at least
                  annually in accordance with the provisions of SFAS
No. 142.

                    SFAS No.142 requires goodwill to be tested for
impairment on
                    adoption and at least annually thereafter or
between annual
                    tests in certain circumstances, and written down
when
                    impaired, rather than being amortized as previous
accounting
                    standards required. Goodwill attributable to each
of the
                  reporting units is tested for impairment by
comparing the fair
                  value of each reporting unit with its carrying
value. The
                  Company performed annual impairment tests during
2004 and no
                  impairment losses were identified. However, the
annual
                  impairment test performed in 2005 resulted in an
impairment of
                  $ 5,683 to the goodwill related to Alba Health, a
former
                  subsidiary (see Note 1c).
               j.   Property, plant and equipment, net:

                    Property, plant and equipment are stated at cost,
net of
                    accumulated depreciation and investment grants.
Investment
                    grants are recorded at the time the Company is
entitled to
                    such grants. Depreciation is calculated by the
straight-line
                    method over the estimated useful lives of the
assets at the
                    following annual rates:

<TABLE>
<CAPTION>

%

--------
<S>
<C>

                    Buildings
2.5
                    Machinery and equipment
7
                    Installations and leasehold improvements
5 - 10      (mainly 5)
                    Furniture and office equipment
6 - 25      (mainly 6)
                    Motor vehicles
15
</TABLE>

                                       F - 15

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                    Leasehold improvements are amortized over the term
of the
                    lease, including reasonably assured renewal
options, or the
                    useful lives of the assets, whichever is shorter.
The
                    Company's long-lived assets and certain
identifiable
                    intangibles are reviewed for impairment in
accordance with
                    SFAS No. 144, "Accounting for the Impairment or
Disposal of
                   Long-Lived Assets" whenever events or changes in
circumstances
                   indicate that the carrying amount of an asset may
not be
                   recoverable. Recoverability of assets to be held
and used is
                   measured by a comparison of the carrying amount of
an asset to
                   the future undiscounted cash flows expected to be
generated by
                   the assets. If such assets are considered to be
impaired, the
                   impairment to be recognized is measured by the
amount by which
                   the carrying amount of the assets exceeds the fair
value of
                   the assets. Assets to be disposed of by sale are
reported at
                   the lower of the carrying amount or fair value less
costs to
                   sell. The impairment for the year ended December
31, 2004, was
                   $ 771. There was no impairment for the years 2005
and 2006.

              k.   Severance pay:

                   The Company's liability for severance pay in Israel
is
                   calculated pursuant to Israel's Severance Pay Law
based on
                   the most recent salary of the employees multiplied
by the
                   number of years of employment as of the balance
sheet date.
                   Employees are entitled to one month's salary for
each year
                   of employment or a portion thereof. The Company's
liability
                   for all of its Israeli employees, is fully provided
by
                   monthly deposits with insurance policies, pension
and
                   severance pay funds and by an accrual. The
deposited funds
                   include profits accumulated up to the balance sheet
date.
                   The deposited funds may be withdrawn only upon the
                   fulfillment of the obligation pursuant to Israel's
Severance
                   Pay Law or labor agreements. The value of the
deposited funds
                   is based on the cash surrendered value of these
funds.
                   Severance pay expenses amounted to $ 1,708, $ 1,221
and $
                   1,505 for the years ended December 31, 2004, 2005
and 2006,
                   respectively.

              l.   Revenue recognition:
                    Revenues from sales are recognized in accordance
with Staff
                    Accounting Bulletin No. 104, "Revenue Recognition
in Financial
                    Statements" ("SAB No. 104"), when delivery has
occurred,
                    persuasive evidence of an agreement exists, the
vendor's fee
                    is fixed or determinable, no further obligation
exists and
                    collectibility is probable.

                    Alba Health, a former subsidiary (see Note 1d in
reference to
                    discontinued operations), maintains a provision for
                    charge-backs and returns, in accordance with
Statement of
                    Financial Accounting Standard No. 48, "Revenue
Recognition
                    When a Right of Return Exists". The provision for
charge-backs
                    and returns amounted to $ 122 and $ 244 for the
years ended
                    December 31, 2004 and 2005, respectively.

                                       F - 16

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               m.   Income taxes:

                    The Company and its subsidiaries account for income
taxes in
                    accordance with Statement of Financial Accounting
Standards
                    No.109, "Accounting for Income Taxes". This
Statement
                    prescribes the use of the liability method whereby
deferred
                    tax assets and liability account balances are
determined based
                    on the differences between the financial reporting
and tax
                    bases of assets and liabilities and are measured
using the
                    enacted tax rates and laws that will be in effect
when the
                    differences are expected to reverse. The Company
and its
                   subsidiaries provide a valuation allowance, if
necessary, to
                   reduce deferred tax assets to their estimated
realizable
                   value.

              n.   Accounting for stock-based compensation:

                   At December 31, 2006, the Company has a stock-based
                   compensation plan, which is described more fully in
Note 11d.
                   Prior to January 1, 2006, the Company has elected
to follow
                   Accounting Principles Board Opinion No. 25,
"Accounting for
                   Stock Issued to Employees" ("APB No. 25") and FASB
                   Interpretation No. 44, "Accounting for Certain
Transactions
                  Involving Stock Compensation" ("FIN 44") in
accounting for its
                  employee stock option plans. Under APB No. 25, when
the
                  exercise price of the Company's stock options is
less than the
                  market price of the underlying shares on the date
of grant,
                  compensation expense is recognized. No stock-based
                  compensation cost was recognized in the statement
of
                  operations for the years ended December 31, 2005
and 2004, as
                  all options granted under those plans had an
exercise price
                  equal to the market value of the underlying common
stock on
                  the date of grant.

                   Prior to January 1, 2006, the Company adopted the
disclosure
                   provisions of Statement of Financial Accounting
Standards No.
                   148, "Accounting for Stock-Based Compensation -
Transition and
                   Disclosure" ("SFAS No. 148"), which amended certain
provisions
                   of Statement of Financial Accounting Standards No.
123,
                   "Accounting for Stock-Based Compensation" ("SFAS
No. 123") to
                   provide alternative methods of transition for an
entity that
                   voluntarily changes to the fair value based method
of
                   accounting for stock-based employee compensation.
The Company
                   continues to apply the provisions of APB No. 25 in
accounting
                   for stock-based compensation.

                   SFAS No. 123(R) requires the cash flows resulting
from the tax
                    deductions in excess of the compensation costs
recognized for
                    those stock options to be classified as financing
cash flows.
                    The $ 446 excess tax benefit classified as
financing cash
                    inflows would have been classified as an operating
cash flow
                    if the Company had not adopted SFAS No. 123(R).

                                       F - 17

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                    The following table illustrated the effect on net
income and
                    earnings per share if the Company has applied the
fair value
                    recognition provisions of Statement 123 to options
granted
                    under the Company's stock option plans in all
periods
                    presented prior to the adoption of Statement
123(R). For
                    purposes of this pro forma disclosure, the value of
the
                    options is estimated using a Black-Scholes-Merton
                    option-pricing formula and amortized to expense
over the
                    options' vesting periods.

                    The following table illustrates the effect on net
income
                    (loss) and net earnings (losses) per share,
assuming that the
                    Company had applied the fair value recognition
provision of
                    SFAS No. 123 on its stock-based employee
compensation:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,

-----------------------

2004            2005

----------      ---------
<S>
<C>             <C>

                      Net income (loss) from continuing operations, as
reported                  $   (8,687)   $   8,650
                      Add: Stock-based compensation expense included in
the
                        determination of net income (loss) as reported
554             431
                    Deduct: Stock-based compensation expense related to
                       employee stock options
(1,359)          (888)

----------      ---------

                      Net income (loss), including the effect of stock-
based
                         compensation expense from continuing operations
$     (9,492)   $     8,193
                      Income (loss) from discontinued operations, net of
taxes                   $    1,822    $ (5,357)

----------      ---------

                      Net income (loss), including effect of stock-based
                         compensation expense
$     (7,670)   $     2,836

==========      =========

                      Basic and diluted net earnings (losses) per share,
as reported:
                        Basic net earnings (losses) per share
$     (0.44)    $     0.19

==========      =========
                       Diluted net earnings (losses) per share
$     (0.44)    $    0.18

==========      =========

                      Basic and diluted net earnings (losses) per share,
including
                        the effect of stock-based compensation expenses:

                        From continuing operations:
                           Basic net earnings (losses) per share
$     (0.61)    $     0.46

==========      =========
                             Diluted net earnings per share
$     (0.61)    $     0.44

==========      =========

                         From discontinued operations:
                            Basic net earnings (losses) per share
$       0.12    $     (0.30)

==========      =========
                          Diluted net earnings(losses) per share
$       0.12    $   (0.29)

==========      =========

                       From total operations:
                          Basic net earnings (losses) per share
$     (0.49)    $    0.16

==========      =========
                            Diluted net earnings (losses) per share
$     (0.49)    $    0.15

==========      =========
</TABLE>

                                        F - 18

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                    Effective January 1, 2006, the Company adopted
Statement of
                    Financial Accounting Standards No. 123 (revised
2004),
                    "Share-Based Payment" ("SFAS 123R") which requires
the
                    measurement and recognition of compensation
expenses based on
                    estimated fair values for all share-based payment
awards made
                    to employees and directors. SFAS 123R supersedes
Accounting
                    Principles Board Opinion No. 25, "Accounting for
Stock Issued
                    to Employees" ("APB 25"), for periods beginning in
fiscal
                    2006. In March 2005, the Securities and Exchange
Commission
                    issued Staff Accounting Bulletin No. 107 ("SAB
107") relating
                    to SFAS 123R.

                    SFAS 123R requires company to estimate the fair
value of
                    equity-based payment awards on the date of grant
using an
                    option-pricing model. The value of the portion of
the award
                    that is ultimately expected to vest is recognized
as an
                    expense over the requisite service periods in the
Company's
                    consolidated income statement.

                    The Company elected to use the modified prospective
transition
                    method as permitted by SFAS 123R and therefore has
not
                    restated its financial results for prior periods.
Under this
                    transition method, stock-based compensation expense
for the
                    year ended December 31, 2006 includes compensation
expense for
                    all stock-based compensation awards granted prior
to, but not
                    yet vested as of January 1, 2006, based on the
grant date fair
                    value estimated in accordance with the original
provisions of
                    SFAS 123. Stock-based compensation expense for all
stock-based
                    compensation awards granted subsequent to January
1, 2006 was
                    based on the grant date fair value estimated in
accordance
                    with the provisions of SFAS 123R.

                    The Company recognizes compensation expenses for
the value of
                    its awards granted subsequent to January 1, 2006,
based on the
                    straight-line method, and for awards granted
previously, based
                    on the accelerated attribution method, over the
requisite
                    service period of each of the awards, net of
estimated
                    forfeitures.

                    As a result of adopting SFAS 123R on January 1,
2006, the
                    Company's income before income taxes and net income
for the
                    year ended December 31, 2006 is $ 414 lower than if
it had
                    continued to account for stock-based compensation
under APB
                    25. Basic and diluted net income per share for the
year ended
                    December 31, 2006, are $ 0.02 higher than if the
Company had
                    continued to account for share-based compensation
under APB
                    25.

                                      F - 19

<PAGE>
                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                    The following table sets forth the total stock-
based
                    compensation expense resulting from stock options
included in
                    the consolidated statements of operation.

                                                                     YEAR
ENDED

DECEMBER 31,

2006
                                                                   -----
-------

                    Cost of sales                                  $
75
                    Selling and marketing expenses
48
                    General and administrative expenses
432
                                                                   -----
-------

                    Total stock-based compensation expense         $
555

============

                    Net cash proceeds from the exercise of stock
options were
                    $ 456 and $ 3,175 for the years ended December 31,
2005 and
                    2006, respectively. Income tax benefits from stock
option
                    exercises were $0 and $446 for the years ended
December 31,
                    2005 and 2006, respectively.

                    The fair value of stock-based awards was estimated
at the date
                    of grant using the Black-Scholes model with the
following
                    weighted-average assumptions for the years ended
December 31,
                    2004, 2005 and 2006:

                                                          2004     2005
2006
                                                          ----     ----
----
                    Risk-free interest rate                2%       4.4%
4.8%
                    Expected dividend yield                0%        0%
0%
                    Expected volatility                    36%       37%
37%
                    Expected lives (years)                 3        3.5
4

                    The weighted average fair values at grant dates of
options
                    granted during 2006, 2005 and 2004, were $ 3.7, $
2.3 and $
                    2.4, respectively. All options were granted with an
exercise
                    price equal to the market value at the date of
grant.

                    The Company's computation of expected volatility
for the years
                    ended December 31, 2006, 2005 and 2004 is based on
its
                    historical market-based volatility. The computation
of
                    expected life is based on historical exercise
patterns. The
                    interest rate for periods within the contractual
life of the
                    award is based on the U.S. Treasury yield curve in
effect at
                    the time of grant.

              o.    Fair value of financial instruments:

                    The carrying amount reported in the balance sheet
for cash and
                    cash equivalents, bank deposits, marketable
securities, trade
                    receivables, short-term bank credit and trade
payables
                    approximates their fair values due to the short-
term
                    maturities of such instruments. Values of long-term
loans
                    approximate their fair values due to the variable
interest
                    rates of these loans.

                                         F - 20

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               p.   Basic and diluted earnings (losses) per share:

                    Basic earnings (losses) per share are computed
based on the
                  weighted average number of Ordinary shares
outstanding during
                  the year. Diluted earnings (losses) per share are
computed
                  based on the weighted average number of Ordinary
shares
                  outstanding during the year, plus dilutive
potential Ordinary
                  shares considered outstanding during the year, in
accordance
                  with SFAS No. 128, "Earnings per Share".

               q.   Concentrations of credit risk:

                    Financial instruments that potentially subject the
Company and
                    its subsidiaries to concentrations of credit risk
consist
                    principally of cash and cash equivalents, bank
deposits,
                    marketable securities and trade receivables. Cash
and cash
                    equivalents are invested mainly in U.S. dollars
with major
                    banks in Israel. Accordingly, the Company's
management
                    believes that minimal credit risk exists with
respect to cash
                    and cash equivalents. Trade receivables are derived
from sales
                    to major customers located primarily in the U.S.
The allowance
                    for doubtful accounts comprises specific accounts
the
                    collectibility of which, based upon management's
estimate, is
                    doubtful. The doubtful account expenses for the
years ended
                    December 31, 2004, 2005 and 2006, were $ 16, $ 181
and $ (6),
                    respectively.

                    The Company's management believes that since the
                    abovementioned activities were transacted with
                    well-established institutions, the liabilities owed
to the
                    Company will be fulfilled.

               r.   Derivatives and hedging:

                    The Company accounts for derivatives and hedging
based on
                    Statement of Financial Accounting Standards No.
133,
                 "Accounting for Derivative Instruments and Hedging
Activities"
                 ("SFAS No. 133"). SFAS No. 133 requires the Company
to
                 recognize all derivatives on the balance sheet at
fair value.
                 If the derivatives meet the definition of a cash
flow hedge
                 and is so designated, changes in the fair value of
derivatives
                 will either be offset against the change in fair
value of the
                 hedged assets, liabilities, or firm commitments
through
                 earnings, or recognized in other comprehensive
income until
                 the hedged item is recognized in earnings. The
ineffective
                 portion of a derivative's change in fair value is
recognized
                 in earnings depending on the exposure being hedged.
During
                 2004, 2005 and 2006, there were no gains or losses
recognized
                 in earnings for hedge ineffectiveness.

                 In 2005 and 2006, the Company entered into forward
                 transactions in order to hedge the variability of
                 anticipated expenses and balances denominated in
new Israeli
                 shekels ("NIS") and, in 2006 only, of revenues
denominated
                 in Euro, both due to changes of the U.S. dollar
against the
                 NIS and Euro as applicable. The net profits
(losses) that
                 resulted from these contracts and were recognized
in
                 earnings during 2005 and 2006 were ($ 145) and $
1,765,
                 respectively.

                 As of December 31, 2006, unrealized gains on
hedging
                 derivative instruments amounted to $ 52. This
unrealized
                 gain is included in accumulated other comprehensive
income.

                                    F - 21

<PAGE>

                                               TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 2:    -   SIGNIFICANT ACCOUNTING POLICIES (CONT.)

            s.      Impact of recently issued accounting
pronouncements:

                    In June 2006, the FASB issued Interpretation No.
48,
                    "Accounting for Uncertainty in Income Taxes" ("FIN
48"). FIN
                    48 creates a single model to address uncertainty in
tax
                    positions. FIN 48 clarifies the accounting for
income taxes by
                    prescribing the minimum recognition threshold a tax
position
                    is required to meet before being recognized in the
financial
                    statements. FIN 48 also provides guidance on
derecognition,
                    measurement, classification, interest and
penalties,
                    accounting in interim periods, disclosure and
transition. In
                    addition, FIN 48 clearly scopes out income taxes
from
                    Financial Accounting Standards Board Statement No.
5,
                    "Accounting for Contingencies." FIN 48 utilizes a
two-step
                    approach for evaluating tax positions. Recognition
(step one)
                    occurs when an enterprise concludes that a tax
position, based
                    solely on its technical merits, is more-likely-
than-not to be
                    sustained upon examination. Measurement (step two)
is only
                    addressed if step one has been satisfied (i.e., the
position
                    is more-likely-than-not to be sustained). FIN 48
applies to
                    all tax positions related to income taxes subject
to Financial
                    Accounting Standards Board Statement No. 109,
"Accounting for
                    Income Taxes." This includes tax positions
considered to be
                    "routine" as well as those with a high degree of
uncertainty.
                    Derecognition of a tax position that was previously
recognized
                    would occur when a company subsequently determines
that a tax
                    position no longer meets the more-likely-than-not
threshold of
                    being sustained. FIN 48 specifically prohibits the
use of a
                  valuation allowance as a substitute for
derecognition of tax
                  positions. FIN 48 is effective for fiscal years
beginning
                   after December 15, 2006. Management is in the
process of
                   evaluating the possible impact of the adoption of
FIN 48 on
                   its consolidated financial statements.

                   In September 2006, the Financial Accounting
Standards Board
                  ("FASB") issued SFAS No. 157, "Fair Value
Measurements." This
                  Standard defines fair value, establishes a
framework for
                  measuring fair value in generally accepted
accounting
                  principles and expands disclosures about fair value
                  measurements. SFAS No. 157 is effective for
financial
                  statements issued for fiscal years beginning after
November
                  15, 2007 and interim periods within those fiscal
years. The
                  Company has not yet determined the effect that the
adoption of
                  SFAS No. 157 will have on its consolidated
financial
                  statements.

                   In February 2007, the FASB issued SFAS No. 159,
"The Fair
                   Value Option for Financial Assets and Financial
Liabilities"
                   ("SFAS No. 159"), which permits companies to choose
to measure
                   certain financial instruments and other items at
fair value
                   that are not currently required to be measured at
fair value.
                   SFAS No. 159 is effective for fiscal years
beginning after
                   November 15, 2007. The Company will adopt SFAS No.
159 no
                   later than January 1, 2008. The Company has not yet
determined
                   the effect that the adoption of SFAS No. 159 will
have on its
                   consolidated financial statements.

              t.   Reclassification:

                   Certain prior year amounts were reclassified to
conform to
                   current year financial statement presentation.

                                       F - 22

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 3:   -   MARKETABLE SECURITIES

              As of December 31, 2006, the Company's securities are
classified
              into available for sale marketable securities.

              The following is a summary of marketable securities:

<TABLE>
<CAPTION>

DECEMBER 31, 2006
                                                                            --
---------------------------------------------------------------

GROSS

UNREALIZED          ACCRETION            MARKET

COST              GAINS          OF DISCOUNT             VALUE
                                                                            --
----------     --------------    ---------------      ---------------
<S>
<C>                   <C>                <C>              <C>

              Available for sale:

               Debt securities
4,952                 3                  20               4,975

============    ==============      ===============    ===============
</TABLE>

NOTE 4:   -   OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES


DECEMBER 31,
                                                                 -----------
----------
                                                                     2005
2006
                                                                 ---------
---------
              Government authorities:
                 VAT, customs and other levies recoverable       $   1,508
$       996
                Investment grant receivable                          1,130
-
                Government participation in extraordinary
                expenses due to the war                                     -
710
              Deferred income taxes (see Note 13g)                      360
459
              Advances to suppliers                                     380
556
              Prepaid expenses                                       1,030
484
              Other                                               548
961
                                                            ---------
---------

                                                            $   4,956
$     4,166
                                                            =========
=========

NOTE 5:   -   INVENTORIES


DECEMBER 31,
                                                            -----------
----------
                                                                2005
2006
                                                            ---------
---------

              Raw materials, accessories and
              packaging materials                           $   9,189
$   12,832
              Work-in progress                                  10,165
10,632
              Finished products                                 7,028
5,448
                                                            ---------
---------

                                                            $   26,382
$   28,912
                                                            =========
=========

              In the years ended December 31, 2004, 2005 and 2006, the
Company
              recorded inventory write-downs in the amount of $ 969, $
660 and $
              815, respectively. These write-downs were recorded as
cost of
              sales.

                                      F - 23

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 6:   -   PROPERTY, PLANT AND EQUIPMENT, NET

              Composition of assets grouped by major classifications,
are as
              follows:
DECEMBER 31,
                                                           -----------
----------
                                                               2005
2006
                                                           ---------
---------
              Cost:
                 Buildings (2)                             $    4,303
$     3,566
                Machinery and equipment                        175,458
178,682
                Installation and leasehold improvements         5,403
5,943
                Motor vehicles                                    442
446
                Furniture and office equipment                  1,757
2,683
                Investment grants                              (33,130)
(33,217)
                                                           ---------
---------

                                                               154,233
158,103
                                                           ---------
---------
              Accumulated depreciation:
                 Buildings                                        942
529
                Machinery and equipment                        86,352
95,528
                Installation and leasehold improvements         3,804
4,071
                Motor vehicles                                    386
407
                Furniture and office equipment                    963
1,624
                Investment grants                              (19,073)
(21,142)
                                                           ---------
---------

                                                               73,374
81,017
                                                           ---------
---------

              Depreciated cost                             $   80,859
$   77,086
                                                           =========
=========

              (1)   Depreciation, amortization and impairment expenses
for the
                    years ended December 31, 2004, 2005 and 2006 were $
9,992, $
                    9,686 and $ 8,719, respectively.
               (2)    During 2004, the Company had decided to dispose of
five
                      buildings of the seamless segment. The buildings
were
                      classified as held-for-sale and were presented in
other
                      accounts receivable, in accordance with Statement
of Financial
                      Accounting Standard No. 144, "Accounting for the
Impairment or
                      Disposal of Long-Lived Assets" ("SFAS No. 144").
Accordingly,
                      these buildings were measured at the lower of their
carrying
                      amount or fair value less costs to sell. In respect
of the
                      above, the Company recorded a loss in the amount of
$ 771,
                      resulting from the adjustment of the carrying
amount of the
                      buildings to their fair value less costs to sell.
In November
                      2004, two of the buildings were sold for proceeds
of $ 160.

                      As for liens, see Note 10.

                                        F - 24

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 7:    -   SHORT-TERM BANK CREDIT

<TABLE>
<CAPTION>
                                                           WEIGHTED
AVERAGE
                                                            INTEREST
RATE
                                                         ---------------
------
                                                              DECEMBER
31,              DECEMBER 31,
                                                         ---------------
------     ---------------------
                                                           2005
2006           2005       2006
                                                         ---------     ---
------     ---------    ---------
                                                                    %
                                                         ---------------
------
<S>                                                           <C>
<C>       <C>            <C>

               Short-term bank credit                         6.5
-         $   14,713   $       -

=========       =========
</TABLE>

                As for collateral, see Note 10.

NOTE 8:   -     OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

<TABLE>
<CAPTION>

DECEMBER 31

---------------------

2005            2006

---------       ---------
<S>
<C>             <C>

              Employees and payroll accruals
$     3,377   $   3,407
              Accrued expenses
3,694         2,937
              Equipment suppliers
650           925
              Tax payable
-         3,133
              Short-term deferred taxes (see Note 13g)
1,000             -

---------       ---------


$     8,721     $    10,402

=========       =========
</TABLE>

NOTE 9:   -     LONG-TERM LOANS

                a.     Composition:

<TABLE>
<CAPTION>
                                                              WEIGHTED
AVERAGE
                                                               INTEREST
RATE
                                                         ---------------
------
                                                               DECEMBER
31,             DECEMBER 31,
                                                         ---------------
------    ---------------------
                                                               2005
2006          2005          2006
                                                         ---------    ---
------    ---------     ---------
                                                                   %
                                                         ---------------
------
<S>                                                      <C>          <C>
<C>           <C>

                   Loans in U.S. dollars:
                     Banks (variable interest
                       LIBOR plus 1.2%-2.75%)            5.9 - 6.8    5.9
- 6.9     $   41,908   $ 25,270

                  Less - current maturities:
                    Loans from banks and others
6,373         5,948

---------     ---------


$   35,535    $    19,322

=========     =========
</TABLE>

                                           F - 25

<PAGE>

                                                    TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 9:   -   LONG-TERM LOANS (CONT.)

              b.     The loans as of December 31, 2006 mature as follows:

                     DECEMBER 31,
                     ----------------------------------------------------
---

                     2007 (current maturities)                  $
5,947
                     2008
5,947
                     2009
5,544
                     2010
2,749
                     2011 and thereafter
5,083
                                                                ---------
---
                                                            $
25,270

============

             c.   Upon the closing of the Share Purchase Agreement
with the
                  investor controlled by FIMI (see Note 11), the
Company entered
                  into new financing arrangements with its bank
creditors. The
                  new financing arrangements contain different
financial
                  covenants and ratios from those in the Company's
previous bank
                 loan agreements. As of December 31, 2006, the
Company met those
                 covenant criteria. During 2006, the Company entered
into a
                 better financing arrangement with new bank
creditors.

             d.   As for collateral, see Note 10.

NOTE 10: -   LIENS, CONTINGENCIES AND COMMITMENTS

             a.   All bank debt is collateralized by a floating charge
(a
                  continuing charge on the Company's present and
future assets
                  but permitting the Company to dispose of such assets
in the
                  ordinary course of business) on all of the assets of
the
                  Company and its subsidiaries.

             b.   In accordance with the provisions of the Law for the
                  Encouragement of Capital Investments, 1959, the
Company and its
                  subsidiaries in Israel received grants from the
State of Israel
                  in respect of investments in their plants. The
conditions in
                  the letters of approval extending the grants from
the State of
                 Israel primarily include, among others, the
requirements that
                 the investments be made according to the approved
plan and that
                 at least 30% of the investments be financed by
outstanding
                 share capital. Non-fulfillment of these conditions
would
                 require the refund of the grants to be linked to the
Consumer
                 Price Index in Israel from the date of receipt plus
interest.
                 To guarantee fulfillment of the conditions for
receipt of the
                 grants, the Company and its subsidiaries have
recorded floating
                   charges on all of their assets in favor of the State
of Israel.

                                         F - 26

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10: -    LIENS, CONTINGENCIES AND COMMITMENTS (CONT.)

              c.   The facilities of the Company and most of its
Israeli
                   subsidiaries are located in buildings leased for
various
                   periods ending between 2007 and 2024, including
renewal
                   options.

                   The significant leases are from a related party
ending between
                   2007 and 2024 (including renewal options which the
Company
                   intends to renew) at an annual rent of $ 2,383,
linked to the
                   U.S. CPI. The remaining lease payments are in, or
linked to,
                   the U.S. dollar.

                   The aggregate minimum rental commitments under non-
cancelable
                   leases, based on the above agreements as of December
31, 2006,
                   are as follows:

                   2007                                      $   3,080
                   2008                                          2,773
                   2009                                          2,670
                   2010                                          2,518
                   2011 and thereafter                           2,943
                                                             ---------

                                                             $ 13,984
                                                             =========

                   Rental expenses for the years ended December 31,
2004, 2005 and
                   2006, amounted to $ 3,163, $ 3,345 and $ 3,174,
respectively.

              d.   Legal proceedings:

                   A former employee of the Company has filed lawsuits
against the
                   Company and three of its former or current officers,
with the
                   Israeli District Court and the Israeli Labor Law
Court, seeking
                   damages in the amount of approximately $ 1,700, in
connection
                   with damages allegedly incurred by him as a result
of his
                 imprisonment in Egypt. The matter is at a
preliminary stage and
                 the Company's management believes that the claim is
without
                 merit and should be dismissed, and thus no accrual
was made in
                 the financial statements.

                   Except as provided above, there are no material
pending legal
                   proceedings, other than litigation incidental in the
ordinary
                   course of business to which the Company or any of
its
                   subsidiaries are subject.

                                      F - 27

<PAGE>

                                                 TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11: -    SHAREHOLDERS' EQUITY

              a.   On September 28, 2005, the Company's shares were
also listed
                   for trade on the Tel-Aviv Stock Exchange ("TASE").

                   On December 27, 2005, Tefron published a prospectus
in Israel
                   in connection with a proposed underwritten offering
to the
                   public in Israel of either Ordinary shares or a
combination of
                   Ordinary shares and options exercisable into
Ordinary shares.
                   The publication of the prospectus was approved by
the Israeli
                   Securities Authority and by the Tel-Aviv Stock
Exchange. The
                   offering was made only by Tefron, and not by any
selling
                   shareholder. As a result of the offering completed
on January
                   10, 2006, the Company raised a net amount of $
13,816 composed
                   of a combination of 1,800,000 Ordinary shares and
600,000
                   options to purchase the Company's Ordinary shares at
an
                   exercise price of $ 9.49 (denominated in NIS and
subject to
                   dividend adjustments). The options are exercisable
until
                   January 9, 2007. As of December 31, 2006, 142,263 of
theses
                   options were exercised and 457,737 options remained
                   unexercised.

              b.   On April 22, 2004, the transactions pursuant to the
Share
                   Purchase Agreement with a partnership controlled by
FIMI
                   Opportunity Fund ("Fimi") and pursuant to the Share
Purchase
                   Agreement with Leber Partners, L.P., a limited
partnership
                   ("the Investor") were closed. Under the agreements,
the Company
                   issued 3.53 million and 1.07 million Ordinary shares
of the
                   Company to Fimi and the Investor, respectively, at a
price per
                 share of $ 4.25 and $ 4.65 ("the PPS"),
respectively, for a
                 total cash consideration of $ 15,000 and $ 5,000,
respectively.
                 The number of shares received may be adjusted, based
on a
                 certain formula set forth in the agreement which
determines the
                 adjusted price per share ("adjusted PPS").

                   In the event that the adjusted PPS is not equal to
the PPS, the
                   Company, at its sole discretion, shall either (i)
deliver Fimi
                   and the Investor, a number of additional Ordinary
shares that
                   is equal to the difference between the number of
purchased
                   shares issued and the number of Ordinary shares that
would have
                   been issued to Fimi and the Investor at the closing
date had
                   the original PPS been equal to the adjusted PPS, or
(ii) pay
                   Fimi and the Investor, a cash amount equal to the
difference
                   between the price per share and the adjusted PPS per
each share
                   purchased.

                   The agreements include two instruments: shares and a
                   conditional obligation that is freestanding of the
shares and
                 can be settled in shares at the Company's
discretion. Therefore
                 the conditional obligation is a liability and not
equity since
                 the value of the payout is based on the performance
condition
                 and not based on the shares. As a result, the
conditional
                 obligation was measured at fair value on transaction
date and
                 on each balance sheet date. The difference between
the initial
                 values assigned to the liability component and the
final payout
                 was charged to the statement of operations.

                   On March 31, 2005, the Company signed an amendment
to the Share
                   Purchase Agreement with its investors approved by
the Company's
                   Board of Director's on that date. Accordingly, on
April 7,
                   2005, the Company issued 863,378 Ordinary shares
with respect
                   to the conditional obligation in the amount of $
3,454 pursuant
                   to a purchase price adjustment mechanism based on
the Company's
                   2004 EBITDA.

                                         F - 28

<PAGE>

                                                  TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11: -    SHAREHOLDERS' EQUITY (CONT.)

              c.   Equity credit line:

                   On March 9, 2004, the Company entered into a Private
Equity
                   Credit Agreement with funds advised by Southridge
Capital
                   Management LLC ("Southridge"). Under the agreement,
the Company
                   has an option to call funds from an equity credit
line facility
                   provided by Southridge of up to the lower of $
15,000 or 19.9%
                   of the Company's outstanding share capital over the
next three
                   years.
                   Under the financing agreement, the Company will be
entitled to
                   issue shares to Southridge from time to time, at its
own
                   election, subject to certain minimum and maximum
limitations,
                   but in no event will Southridge be obligated to own
more than
                   4.99% of the Company's Ordinary shares at any time.
The price
                   to be paid by Southridge will be at a discount of 6%
on the
                   market price of the Company's Ordinary shares (as
calculated
                   under the agreement) during a period prior to the
issuance of
                   the shares. Before drawing on the equity line, the
Company must
                   satisfy certain closing conditions, including the
effectiveness
                   of a registration statement to be filed by the
Company,
                   relating to the shares to be issued to Southridge.
As of
                   December 31, 2006, no funds were called.

              d.   Stock options:

                   In September 1997, the Company's Board of Directors
adopted a
                   Share Option Plan in which 1,166,049 Ordinary shares
were
                   reserved for issuance to directors, officers and
employees of
                   the Company. At general meetings of shareholders in
August
                   1999, July 2001 and March 2004, it was resolved to
increase the
                   number of shares reserved for issuance under the
Share Option
                   Plan by 600,000, 500,000 and 446,274 Ordinary
shares,
                   respectively. The options vest over a period of
three to four
                   years and expire after 10 years from the grant date
or upon
                   termination of employment.

                   On April 22, 2004, upon the completion of the
Purchase
                   Agreement described in a. above, the Company granted
the
                   Company's CEO 650,000 options ("the Options"), which
may be
                   exercised to purchase up to 650,000 Ordinary shares
of the
                   Company, at an exercise price of $ 4.25 per share.
The Options
                   vest over four years commencing January 1, 2004 and
expire 10
                  years from the date of the grant. The market price
of the
                  Company's shares on the date of grant was $ 5.85.
Accordingly,
                  the Company recorded compensation expenses of $ 554
and $ 303
                 in 2004 and 2005, respectively, using the
acceleration method
                 according to FIN 28, "Accounting for Stock
Appreciation Rights
                 and Other Variable Stock Option or Award Plans an
                 interpretation of APB Opinions No. 15 and 25" ("FIN
28"). This
                 expense was presented under general and
administrative
                 expenses.


                                     F - 29

<PAGE>

                                                TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11: -   SHAREHOLDERS' EQUITY (CONT.)

                  Except for these options, all other options are
granted with an
                  exercise price equal to the market value at the date
of grant.
                  The weighted average fair values of the options
granted during
                  2004, 2005 and 2006 were $ 2.0, $ 2.2 and $ 3.7,
respectively.

                  As of December 31, 2006, 29,663 options were
available for
                  future grants under the aforementioned plan.

                  A summary of the Company's share option activity
under the plan
                  is as follows:

<TABLE>
<CAPTION>
                                                                 YEAR
ENDED DECEMBER 31,
                                        -----------------------------
-------------------------------------------
                                                  2004
2005                     2006
                                        ----------------------    ---
-------------------   ---------------------
                                                      WEIGHTED
WEIGHTED                WEIGHTED
                                                        AVERAGE
AVERAGE                   AVERAGE
                                            NUMBER      EXERCISE
NUMBER       EXERCISE      NUMBER     EXERCISE
                                          OF OPTIONS     PRICE         OF
OPTIONS       PRICE     OF OPTIONS     PRICE
                                          ----------    --------       ---
-------      --------   ----------   --------
<S>                                        <C>          <C>
<C>           <C>          <C>         <C>

                   Options outstanding
                      at beginning of
                      year                 1,817,323    $     4.54
2,422,805      $   4.48    2,477,054   $   4.70
                   Changes during the
                      year:
                      Granted                730,000    $     4.26
210,000      $   6.34       80,000   $ 10.13
                      Forfeited or
                      canceled              (124,518)   $     4.23
(23,000)     $   4.16       (6,250) $    3.50
                      Exercised                    -    $        -
(132,751)     $   3.72     (719,929) $    3.93
                                          ----------                   ---
-------                 ----------

                    Options outstanding
                       at end of year      2,422,805    $     4.48
2,477,054     $     4.70    1,830,875   $  5.24
                                          ==========    ========
==========     ========    ==========   ========

                    Options exercisable
                       at the end of the
                       year                1,422,551    $     4.83
1,911,388     $     4.70    1,417,542   $  5.02
                                          ==========    ========
==========     ========    ==========   ========
</TABLE>

                    The following table summarizes significant ranges of
                    outstanding and exercisable options as of December
31, 2006:

<TABLE>
<CAPTION>
                                                OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
                                 ---------------------------------------
--------------      ----------------------------------
                                                WEIGHTED-
WEIGHTED-                               WEIGHTED-
                                                 AVERAGE         AVERAGE
AVERAGE
                    RANGE OF                   REMAINING
EXERCISE      AGGREGATE                EXERCISE    AGGREGATE
                    EXERCISE    NUMBER OF   CONTRACTUAL LIFE     PRICE
PER      INTRINSIC   NUMBER OF   PRICE PER    INTRINSIC
                     PRICES      OPTIONS       (IN YEARS)            SHARE
VALUE        OPTIONS      SHARE        VALUE
                     ----------    ---------    ----------------    --------
--     ---------     ---------    ----------    ---------
                         $                                             $
$
                     ----------                                     --------
--                                ----------
<S>                  <C>           <C>                       <C>        <C>
<C>           <C>                 <C>     <C>

                   3. 20-4.31   1,303,375                    5.85
3.89     $   8,617   1,137,542         3.84   $      7,577
                   5.34-5.37      140,000                    8.56
5.34           722      17,500         5.35             90
                      7.2          60,000                    8.83
7.14           201      15,000         7.14             50
                   8.13-9.50      228,500                    2.34
8.80           390     188,500         8.85            310
                     11.28         40,000                  9.33
11.27             -           -            -              -
                     15.00         59,000                  3.46
15.00             -      59,000        15.00              -
                                ---------
---------     ---------                ---------

                                 1,830,875               5.72
5.24     $   9,930    1,417,542         5.02   $   8,027
                                 =========   ================
==========     =========    =========   ==========   =========
</TABLE>

                                         F - 30

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11: -    SHAREHOLDERS' EQUITY (CONT.)

                     The aggregate intrinsic value in the table above
represents
                     the total intrinsic value (i.e., the difference
between the
                     Company's closing stock price on the last trading
day of the
                     year of fiscal 2006 and the exercise price, times
the number
                     of shares) that would have been received by the
option holders
                     had all option holders exercised their options on
December 31,
                     2006. This amount changes based on the fair market
value of
                     the Company's share. Total intrinsic value of
options
                      exercised is $ 5,429 for the year ended December
31, 2006.
                      Total fair value of options vested is $ 607 for the
year ended
                      December 31, 2006.

                      As of December 31, 2006, $ 570 of total
unrecognized
                      compensation cost related to stock options is
expected to be
                      recognized over an approximate weighted-average
period of 1.4
                      years.

              e.      Dividend distribution:

                      On August 8, 2006 and on November 7, 2006, the
Company's Board
                      of Directors declared a dividend of $ 5,000 each,
payable to
                      shareholders on record as of August 31, 2006 and as
of
                      November 30, 2006, respectively, out of earnings
that are not
                      attributable to an "Approved Enterprise" (see Note
13c). The
                      dividends were paid on September 14, 2006 and on
December 14,
                      2006, respectively. The dividend distributed from
income
                      attributable to sources other than the "Approved
Enterprise"
                      programs.

NOTE 12: -    SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                      -----
-----------------------------

2004          2005             2006
                                                                      -----
----     ----------    ---------
<S>                                                                   <C>
<C>            <C>
              a.      Cost of sales:

                    Materials                                         $
70,170    $    74,568   $ 76,031
                    Salaries and related expenses
31,690         26,414      23,310
                    Subcontracting
10,152         11,337      18,785
                    Other production costs
17,163         17,730      17,971
                    Depreciation
8,292          8,751       7,934
                    Decrease (increase) in work-in progress and
                            finished products
(1,043)            2,821         1,113
                                                                     -----
----     ----------        ---------

                                                                     $
136,424       $   141,621      $ 145,144

=========         ==========    =========
</TABLE>

                                            F - 31

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12: -        SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
(CONT.)

                  b.     Financial expenses:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                     -----
-----------------------------

2004              2005          2006
                                                                     -----
----     ----------        ---------
<S>                                                                  <C>
<C>               <C>

                      Interest on long-term loans                    $
1,847     $      2,777   $   2,245
                      Interest on short-term loans
384              533          42
                      Interest on tax assessment
-              300           -
                      Interest income on bank deposits and others
-                -        (837)
                      Exchange rate differences, net
450           (1,057)        538
                      Bank expenses and other, net
1,057              491         289
                      Loss (profit) from forward exchange
                         transactions
-              145        (365)
                      Loss related to conditional obligation
150                -           -
                                                                     -----
----     ----------        ---------
                                                                   $
3,888     $    3,189   $   1,912

=========     ==========   =========
</TABLE>

NOTE 13: -    TAXES ON INCOME

              a.   Reduction in corporate tax rate:

                   On July 25, 2005, the Knesset (Israeli Parliament)
passed the
                   Law for the Amendment of the Income Tax Ordinance
(No. 147),
                   2005, which prescribes, among others, a gradual
decrease in
                   the corporate tax rate in Israel to the following
tax rates:
                   in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in
2009 - 26% and
                   in 2010 and thereafter - 25%.

              b.   Applicable tax laws:

                   The Company and its subsidiaries in Israel are
"industrial
                   companies" in conformity with the Law for the
Encouragement of
                   Industry (Taxes) 1969. The principal benefits to
which the
                  companies are entitled under this Law are
accelerated rates of
                  depreciation, consolidated tax returns and a
deduction for tax
                  purposes, over a three year period, of costs
incurred in
                  issuance of shares.

              c.   Tax benefits under the Law for the Encouragement of
Capital
                   Investments, 1959 ("the Law"):

                   Certain production facilities in Israel have been
granted the
                   status of "Approved Enterprise" under the Law, for
several
                   investment programs ("the Programs").

                                        F - 32

<PAGE>

                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 13: -    TAXES ON INCOME (CONT.)
                  In accordance with the Law, the Company and certain
                  subsidiaries in Israel received grants from the
State of
                  Israel in respect of investments in their plants.
The
                  conditions in the letters of approval extending the
grants
                  from the State of Israel primarily include the
requirements
                  that the investments be made according to the
approved plan
                  and that at least 30% of the investments be
financed by
                  outstanding share capital. In addition, income
attributed to
                  certain Programs is tax exempt for a period of two
years and
                  is subject to a reduced corporate tax rate of 10% -
25% for an
                  additional period of five to eight years, based on
the
                  percentage of foreign investment in the Company.

                  The duration of tax benefits for each of the
Programs is
                  subject to limitations of the earlier of 12 years
from
                  commencement of investment, or 14 years from
receipt of
                  approval, as an "Approved Enterprise" under the
Law.

                  Tax-exempt income attributable to the "Approved
Enterprise"
                  cannot be distributed to shareholders without
subjecting the
                  Company to taxes except upon complete liquidation
of the
                  Company. If such retained tax-exempt income is
distributed in
                  a manner other than upon the complete liquidation
of the
                  Company, it would be taxed at the reduced corporate
tax rate
                  applicable to such profits (between 10%-25%). The
Company does
                  not intend to distribute any amounts of its
undistributed
                  tax-exempt income as a dividend. The Company
intends to
                  reinvest its tax-exempt income and not to
distribute such
                  income as a dividend. No deferred income taxes have
been
                  provided on income attributable to the Company's
Approved
                  Enterprise programs as the undistributed tax exempt
income is
                  essentially permanent in duration.
                  The entitlement to the above benefits is
conditional upon the
                  Company's fulfilling the conditions stipulated by
the Law,
                  regulations published thereunder and the
certificates of
                  approval for the specific investments in approved
enterprises.

                 Should the Company and its subsidiaries in Israel
fail to meet
                  such requirements in the future, income
attributable to its
                  "Approved Enterprise" programs could be subject to
the
                  statutory Israeli regular corporate tax rate and
the Company
                  could be required to refund a portion of the tax
benefits
                  already received, with respect to such programs.
Income from
                  sources other than the "Approved Enterprise" is
subject to tax
                  at regular Israeli corporate tax rate.

                 On April 1, 2005, an amendment to the Investment
Law came into
                 effect ("the Amendment") and has significantly
changed the
                 provisions of the Investment Law. The Amendment
limits the
                 scope of enterprises which may be approved by the
Investment
                 Center by setting criteria for the approval of a
facility as a
                  Beneficiary Enterprise, such as provisions
generally requiring
                  that at least 25% of the Beneficiary Enterprise's
income will
                  be derived from export. Additionally, the Amendment
enacted
                  major changes in the manner in which tax benefits
are awarded
                  under the Investment Law so that companies no
longer require
                  Investment Center approval in order to qualify for
tax
                  benefits.

                                    F - 33

<PAGE>

                                               TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
NOTE 13: -      TAXES ON INCOME (CONT.)

                        However, the Investment Law provides that terms and
benefits
                        included in any certificate of approval already
granted will
                        remain subject to the provisions of the law as they
were on
                        the date of such approval. Therefore, the Israeli
companies
                        with Approved Enterprise status will generally not
be subject
                        to the provisions of the Amendment. As a result of
the
                        amendment, tax-exempt income generated under the
provisions of
                        the new law, will subject the Company to taxes upon
                        distribution or liquidation and the Company may be
required to
                        record deferred tax liability with respect to such
tax-exempt
                        income. As of December 31, 2006, the Company did
not generate
                        income subject to the provision of the new law.

                d.      Taxes on income included in the statements of
operations:

<TABLE>
<CAPTION>
                                                                YEAR ENDED
DECEMBER 31,
                                                          -----------------
-------------
                                                              2004          2005
2006
                                                          --------      ------
--     --------
<S>                                                       <C>           <C>
<C>

                        Current taxes                     $     572     $
422     $   3,583
                        Deferred taxes                          (853)
3,666           2,128
                        Taxes in respect of prior years         364
209              -
                                                          --------      ------
--     --------

                                                          $      83     $
4,297       $   5,711
                                                          ========
========        ========

                        Domestic                          $     (476)   $
4,190       $   5,603
                        Foreign                                 559
107             108
                                                          --------      ------
--     --------
                                                        $     83   $
4,297     $    5,711
                                                        ========
========       ========
</TABLE>

                                            F - 34

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 13: -     TAXES ON INCOME (CONT.)

               e.      Effective tax:

                       Reconciliation between the theoretical tax expense,
assuming
                       all income is taxed at the statutory tax rate
applicable to
                       income of the Company and the actual tax expense as
reported
                       in the statement of operations is as follows:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                       -----
-----------------------------

2004           2005           2006
                                                                       -----
----     ----------       ---------
<S>                                                                    <C>
<C>             <C>

                     Income (loss) before taxes, as reported in
                       the consolidated statements of operations       $
(8,604)    $    12,947   $ 23,971

=========      ==========     =========

                       Statutory tax rate
35%             34%           31%

=========      ==========     =========

                    Taxes (tax saving) calculated at the
                      Israeli statutory tax rate                       $
(3,011)    $    4,402   $   7,431
                    Increase (decrease) in taxes resulting from
                      "Approved Enterprise" benefits
676         (1,297)     (1,581)
                      Deferred taxes on losses and temporary
                        differences for which valuation allowance
                        was provided
1,982              736           -
                      Nondeductible expenses
88              181         124
                      Change in tax rate used for computation of
                        deferred taxes
(83)               -           -
                      Taxes in respect of prior years
366              209        (125)
                      Other
65               66        (138)
                                                                     -----
----       ----------    ---------

                        Actual tax expenses                          $
83     $     4,297      $   5,711

=========       ==========    =========

                f.      Income before taxes on income is comprised
                          as follows:

                     Israel                                          $
(5,681)     $   14,410   $ 24,243
                     Foreign
(2,923)         (1,463)      (272)
                                                                     -----
----       ----------    ---------

                     Total                                           $
(8,604)     $   12,947   $    23,971

=========       ==========    =========
</TABLE>

                                          F - 35

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 13: -      TAXES ON INCOME (CONT.)

                g.      Deferred taxes:

                        Deferred income taxes reflect the net tax effect of
temporary
                        differences between the carrying amounts of assets
and
                        liabilities for financial reporting purposes and
the amounts
                        used for income tax purposes. Significant
components of the
                      Company's deferred tax liabilities and assets are
as follows:

<TABLE>
<CAPTION>

DECEMBER 31,

----------------------

2005           2006

---------      ---------
<S>
<C>            <C>
                    Asset (liability) in respect of:
                      Property, plant and equipment
$ (12,898)     $ (12,799)
                      Allowances and provisions
820            887
                      Expected realization of foreign subsidiary
(1,000)          (150)
                      Net operating loss carryforward
3,352            208

---------      ---------

                    Net deferred tax assets before valuation allowance
(9,726)       (11,854)
                    Valuation allowance (1)
-              -

---------      ---------

                    Net deferred tax liability
$   (9,726)    $ (11,854)

=========      =========

                 Presented in balance sheet:
                   Long-term liability
$ (9,116)   $ (12,313)
                   Other liabilities
(1,000)          -
                   Short-term assets
-         459
                   Other receivables
390           -

---------      ---------

                    Net deferred tax liability
$   (9,726)    $ (11,854)

=========      =========

                    Domestic
$   (8,726)    $ (11,704)
                    Foreign
(1,000)          (150)
---------      ---------

                    Net deferred tax
$    (9,726)   $ (11,854)

=========      =========
</TABLE>

                    (1)     The net change in the total valuation
allowance for the
                            years ended December 31, 2004, 2005 and 2006
is $ 1,949,
                            $ 5,551 and $ 0, respectively.

                    (2)     The deferred taxes are computed based on
enacted tax
                            rates expected to apply at the time of
reversal (average
                            rate of 22%).

               h.   Final tax assessments:

                    The Company and Hi-Tex, one of the Company's
Israeli
                    subsidiaries, received final tax assessments
through 1999.

                                        F - 36

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 14: -     CUMULATIVE OTHER COMPREHENSIVE INCOME

                                                                  DECEMBER
31,
                                                             --------------
-----
                                                                 2005
2006
                                                             --------       ---
-----

               Net income                                    $   3,293      $
18,380
               Realized gain on hedging derivative                      -
(307)
               Unrealized gain from hedging derivative             307
52
               Unrealized gain on marketable securities                 -
3
                                                             --------       ---
-----
                                                           $   3,600   $
18,128
                                                           ========
========

NOTE 15: -      EARNINGS (LOSS) PER SHARE

                The following table sets forth the computation of basic
and diluted
                net earnings (losses) per share ("EPS"):

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                       ---
-------------------------------------------

2004                2005              2006
                                                                       ---
----------       -------------      -------------
<S>                                                                    <C>
<C>                <C>

                Income (loss) from continuing operations               $
(8,687)     $         8,650   $      18,260

=============    =============   =============
            Income (loss) from discontinued operations
               (including impairment and other costs related to
               the exercise of the put option)
1,822           (5,357)            120
                                                                       ---
----------       -------------      -------------

                Net income (loss)                                      $
(6,865)     $         3,293   $       18,380

=============       =============     =============

                Weighted average Ordinary shares outstanding -
                   Basic EPS                                           $
15,603,904        $ 17,719,275    $ 20,210,722

                Dilutive effect:
                Employee and directors stock options
-              823,343         543,844
                                                                       ---
----------       -------------      -------------

                Weighted average Ordinary shares outstanding -
                   Diluted EPS
15,603,904           18,542,618      20,754,566

=============       =============     =============

                Basic and diluted net earnings (losses) per share
                   from continuing operations:
                Basic net earnings (losses) per share                  $
(0.56)     $          0.49   $        0.90
=============    =============   =============
            Diluted net earnings (losses) per share                  $
(0.56)   $        0.47   $        0.88

=============       =============   =============

               Basic and diluted net earnings (losses) per share
                  from discontinued operations:
               Basic net earnings (losses) per share                 $
0.12     $         (0.30) $         0.01

=============    =============   =============
            Diluted net earnings (losses) per share                  $
0.12    $       (0.29) $         0.01

=============       =============   =============

               Basic and diluted net earnings (losses) per share:
               Basic net earnings (losses) per share                 $
(0.44)     $         0.19   $        0.91

=============    =============   =============
            Diluted net earnings (losses) per share                  $
(0.44)   $        0.18   $        0.89

=============       =============   =============
</TABLE>

                                       F - 37

<PAGE>

                                                    TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 15: -     EARNINGS (LOSS) PER SHARE (CONT.)

               The total weighted average number of outstanding options
excluded
               from the calculation of diluted earnings per share, since
they would
            have an anti-dilutive effect, were 342,500 and 169,000
for the year
            ended December 31, 2005 and 2006, respectively.

               In 2004, all outstanding stock options were excluded from
the
            calculation of the diluted net loss per Ordinary share
because they
            had an anti-dilutive effect.

NOTE 16: -     SEGMENT REPORTING

               a.   General information:
                    The Company has two production lines: knitted
apparel ("Cut
                    and Sew") and seamless apparel ("Seamless"). Unlike
the Cut
                    and Sew process, the Seamless process includes the
utilization
                    of a single machine that transforms yarn directly
into a
                    nearly complete garment.

                    The Company has two reportable segments:

                    -       Intimate apparel and active wear manufactured
using the
                            Seamless process.

                    -       Intimate apparel, active wear and swim wear
manufactured
                            using the Cut and Sew Process, mainly
performed in
                            Israel and through the purchase of finished
products in
                            China and Cambodia.

                    The accounting policies of the reportable segments
are the
                    same as those described in Note 2. Selling, general
and
                    administrative expenses are allocated according to
                    management's assessment. Management evaluates
performance
                    based upon operating income (loss) before interest
and income
                    taxes.

              b.    Reportable segments:

<TABLE>
<CAPTION>
                                                                    YEAR
ENDED DECEMBER 31, 2006
                                                            ------------
--------------------------
                                                            CUT & SEW -
                                                              ISRAEL
SEAMLESS     CONSOLIDATED
                                                            -----------
---------     ------------
<S>                                                         <C>
<C>           <C>

                     Sales to unaffiliated customers        $       85,951
$ 102,153     $     188,104
                                                            ===========
=========     ============

                    Operating income                        $       9,517
$   16,366    $     25,883
                                                            ===========
=========
                     Financial expenses, net
1,912

------------

                     Income before taxes on income
$       23,971

============

                     Depreciation and amortization           $     2,170
$   6,549    $        8,719
                                                             ===========
=========    ============

                     Identifiable and total assets at
                       December 31, 2006                     $    33,986
$ 102,667    $      136,653
                                                             ===========
=========
                     Assets attributed to discontinued
                       operations
-
                     Corporate assets
28,003

------------

                     Total assets
$   164,656

============
</TABLE>

                                            F - 38

<PAGE>

                                                     TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 16: -   SEGMENT REPORTING (CONT.)

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 2005
                                                                     ----
----------------------------------
                                                                     CUT
& SEW -

ISRAEL           SEAMLESS    CONSOLIDATED
                                                                     ----
-------     ----------      ------------
<S>                                                                 <C>
<C>            <C>

               Sales to unaffiliated customers                      $
61,454    $    109,882 $     171,336

===========      ==========   ============

               Operating income                                     $
2,877     $    13,259 $      16,136

===========      ==========
               Financial expenses, net
3,189

------------

              Income before taxes on income
$       12,947

============

               Depreciation and amortization                        $
3,082     $     6,604 $       9,686

===========      ==========   ============

               Identifiable and total assets at December 31, 2005   $
37,697    $     95,522 $     133,219

===========      ==========
               Assets attributed to discontinued operations
40,053
               Corporate assets
13,242

------------

             Total assets
$     186,514

============
</TABLE>

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 2004
                                                                    ----
----------------------------------
                                                                    CUT
& SEW -

ISRAEL          SEAMLESS    CONSOLIDATED
                                                                    ----
-------       ----------   ------------
<S>                                                                 <C>
<C>            <C>

               Sales to unaffiliated customers                      $
65,272    $     83,348 $     148,620
===========        ==========   ============

                  Operating income (loss)                               $
3,497     $       (8,213) $     (4,716)

===========         ==========
                  Financial expenses, net
3,888

------------

              Income (loss) before taxes on income
$       (8,604)

============

                  Depreciation and amortization                         $
2,824     $        7,168 $       9,992

===========        ==========   ============
</TABLE>

                  c.    The Company's sales by geographic area are as
follows:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                        ----
----------------------------------

2004               2005         2006
                                                                        ----
-------       ----------    ------------
<S>                                                                     <C>
<C>               <C>

                        North America                                   $
134,715       $    153,984 $     145,205
                        Europe
8,044             11,074        34,050
                        Israel
2,892              3,865         4,906
                        Other
2,969              2,413         3,943
                                                                        ----
-------       ----------    ------------

                                                                        $
148,620       $   171,336   $   188,104

===========        ==========   ============
</TABLE>

                                            F - 39

<PAGE>
                                                   TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 16: -    SEGMENT REPORTING (CONT.)

              d.      Sales to major customers:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                     ----
----------------------------------

2004           2005              2006
                                                                     ----
-------     ----------    ------------

%
                                                                     ----
----------------------------------
<S>
<C>          <C>           <C>

                      A
47.4           40.3              38.6
                      B
8.3           25.8           28.8
                      C
16.7           10.8              10.0
                                                                     ----
-------     ----------    ------------


72.4           76.9              77.4

===========    ==========    ============
</TABLE>

                      As of December 31, 2005 and 2006, major customer's
balances
                      were $ 19,795 and $ 18,575, respectively.

              e.      The Company's long-lived assets by geographic area
are as
                      follows:

                                                                  DECEMBER
31,
                                                          --------------
----------
                                                              2005
2006
                                                          -----------
----------
                       Israel                              $    74,812
$   71,777
                       Other countries                           6,047
5,309
                                                           -----------
----------

                                                           $    80,859
$   77,086
                                                           ===========
==========

                f.     Revenues are generated by the following products:

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                      ----
----------------------------------

2004            2005            2006
                                                                      ----
-------     ----------    ------------
<S>                                                                   <C>
<C>             <C>

                     Intimate apparel                                 $
118,240     $   101,625 $     100,890
                     Active wear
20,105          51,961        59,406
                     Swimwear
10,275          17,750        27,808
                                                                      ----
-------     ----------    ------------

                                                                      $
148,620     $   171,336   $     188,104

===========      ==========     ============
</TABLE>

                                          F - 40

<PAGE>

                                                    TEFRON LTD. AND ITS
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
-------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 17: -      RELATED PARTIES

                Transactions with related parties (shareholders and
companies
                controlled by shareholders):

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31,
                                                                      ----
----------------------------------

2004             2005          2006
                                                                      ----
-------      ----------    ------------
<S>                                                                   <C>
<C>              <C>

                 Sales to related parties (1)                         $
796     $          24 $          12

===========       ==========   ============

                 Cost of sales (2) (3)                                $
(2,602)      $    (2,832) $     (2,574)

===========       ==========   ============

                 Selling, general and administrative expenses (2)     $
(684)    $        (387) $       (240)

===========       ==========   ============
</TABLE>

                 (1)    Related parties trade receivables in 2005 and 2006
were $ 83
                        and $ 10, respectively.

            (2)         Related parties trade payables in 2005 and 2006
were $ 174 and
                        $ 43, respectively.

            (3)         Including primarily rental payments to a company
controlled by
                        shareholders.

NOTE 18: -       SUBSEQUENT EVENTS (UNAUDITED)

            During January 2007, 437,818 tradable options were
exercised into
            the Company's Ordinary shares, for a total consideration
of
            approximately $ 4,300.


                                          F - 41

<PAGE>


                                 [McGladrey & Pullen Logo]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
AlbaHealth, LLC
Valdese, North Carolina
We have audited the accompanying balance sheets of AlbaHealth, LLC
(the
"Company") as of December 31, 2005 and 2004, and the related
statements of
operations, members' equity and cash flows for the years then ended.
These
financial statements are the responsibility of the Company's
management. Our
responsibility is to express an opinion on these financial statements
based on
our audits.

We conducted our audits in accordance with the standards of the
Public Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes
examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial
statements. An audit also includes assessing the accounting
principles used and
significant estimates made by management, as well as evaluating the
overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in
all material respects, the financial position of AlbaHealth, LLC as
of December
31, 2005 and 2004, and the results of its operations and its cash
flows for the
years then ended, in conformity with United States generally accepted
accounting
principles.


/s/ McGladrey & Pullen, LLP

Charlotte, North Carolina
February 2, 2006

                                    F - 42
<PAGE>


                                  SIGNATURES

     The Company hereby certifies that it meets all of the
requirements for
filing on Form 20-F and that it has duly caused and authorized the
undersigned
to sign this annual report on its behalf.


                                                        TEFRON LTD.
                                                          By: /s/
Yosef Shiran
                                                          ------------
--------
                                                          Yosef Shiran
                                                          Chief
Executive Officer


                                                          By: /s/ Asaf
Alperovitz
                                                          ------------
-----------
                                                          Asaf
Alperovitz
                                                          Chief
Financial Officer

March 29, 2007

<PAGE>


                                   EXHIBIT INDEX

1.1.             Memorandum of Association of the Company (incorporated
by
                 reference to Exhibit 3.1 to the Company's Registration
Statement
                 on Form F-1 (No. 333-7538) filed on August 29, 1997).

1.2.             Amended and Restated Articles of Association of the
Company.

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

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

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

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

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

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

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

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

<PAGE>


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

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

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

2.12           The total amount of long-term debt securities of the
Company
               authorized under any instrument, other than as
exhibited hereto,
               does not exceed 10% of the total assets of the Company
on a
               consolidated basis. The Company hereby agrees to
furnish to the
               SEC, upon request, a copy of any instrument defining
the rights
               of holders of long-term debt of the Company or of its
               subsidiaries for which consolidated or unconsolidated
financial
               statements are required to be filed.

3.1            Shareholders Agreement, dated as of December 28, 1999,
between
               Arwol Holdings Ltd. and Avi Ruimi (incorporated by
reference to
               Exhibit D to the General Statement of Beneficial
Ownership of the
               Company on Schedule 13D filed by Arwol Holdings Ltd.,
Arie
               Wolfson, Sigi Rabinowicz, Riza Holdings Ltd. and
Macpell
               Industries Ltd. on February 17, 2000).

3.2            Agreement, dated February 17, 2004, by and among Arwol
Holdings
               Ltd., Macpell Industries Ltd. and Norfet, Limited
Partnership
               (incorporated by reference to Exhibit 3.4 to the
Company's Annual
               Report on Form 20-F for the fiscal year ended December
31, 2003).

4.1            Employment Agreement, dated as of August 5, 2002,
between the
                 Company and Sigi Rabinowicz (incorporated by reference
to Exhibit
                 4.2 to the Company's Annual Report on Form 20-F for
the fiscal
                 year ended December 31, 2002).

4.2              Consulting and Management Services Agreement, dated as
of August
                 5, 2002, between the Company, New York Delights Ltd.,
and Arie
                 Wolfson (incorporated by reference to Exhibit 4.3 to
the
                 Company's Annual Report on Form 20 F for the fiscal
year ended
                 December 31, 2002).

4.3            Management and Services Agreement, effective as of
July 30, 2003,
               between the Company, Yosef Shiran and Shiran &
Partners -
               Consulting, Entrepreneurship, and Financing
(incorporated by
               reference to Exhibit 4.4 to the Company's Annual
Report on Form
               20-F for the fiscal year ended December 31, 2003).

4.4              Letter, dated March 28, 2007, from General Counsel of
Company to
                 Mr. Yosef Shiran re: amendments to Management and
Services
                 Agreement.

4.5.             Lease Agreement dated as of August 12, 1997, between
the Company
               and New Net Assets (1994) Ltd. and an Assignment
Agreement dated
               as of December 25, 1998 between the Company and Hi-Tex
Founded by
               Tefron Ltd. The Company and/or its subsidiary, Hi-Tex
Founded by
               Tefron Ltd., have entered in to similar lease
agreements with New
               Net Assets (1994) Ltd. (incorporated by reference to
Exhibit 4.5
               to the Company's Annual Report on Form 20-F for the
fiscal year
               ended December 31, 2001).

4.6              Membership Interest Redemption Agreement, dated April
26, 2006,
                 by and between AlbaHealth, LLC and Tefron USA, Inc.

<PAGE>


4.7              Subordination Agreement, dated April 26, 2006, by
Tefron USA,
                 Inc. in favor of Suntrust Bank, in its capacity as
administrative
                 agent for the lenders from time to time party to the
Senior
                Credit Agreement.

4.8            Unsecured Subordinated Promissory Note in the
principal amount of
               US $3 million, dated April 26, 2006, by AlbaHealth
LLC. in favor
               of Tefron USA, Inc.

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

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

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

4.12            Amendment to Agreement, dated March 31, 2005, by and
between the
                Company and Leber Partners, L.P (incorporated by
reference to
                Exhibit 4.13 to the Company's Annual Report on Form
20-F for the
                fiscal year ended December 31, 2004).

4.13            Private Equity Credit Agreement, dated as of March 9,
2004, by
               and between the Company and Brittany Capital
Management Limited
               (incorporated by reference to Exhibit 4.11 to the
Company's
               Annual Report on Form 20-F for the fiscal year ended
December 31,
               2003).

4.14            Registration Rights Agreement, dated as of March 9,
2004, by and
                between the Company and Brittany Capital Management
Limited
                 (incorporated by reference to Exhibit 4.12 to the
Company's
                 Annual Report on Form 20-F for the fiscal year ended
December 31,
                 2003).

4.15             Agreement, dated as of July 5, 2006, between Macpell
Industries
                 Ltd. and the Company regarding the lease of
properties.

4.16             Joint Venture Agreement, dated as of May 8, 2006, by
and between
                 the Company, Langsha Knitting Co. Ltd. and Itochu
Textile
                 Materials (Asia) Ltd.

8.1              List of subsidiaries of the Company.

<PAGE>


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

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

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

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

14.(a).2         Consent of McGladrey & Pullen, LLP.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-1.2
<SEQUENCE>2
<FILENAME>exhibit_1-2.txt
<TEXT>



EXHIBIT 1.2

                                 ARTICLES OF ASSOCIATION
                                      OF

                                   TEFRON LTD.

                          A COMPANY LIMITED BY SHARES

                                   PRELIMINARY

1.   CANCELLED

2.   INTERPRETATION

     In these Articles, the following words shall have the meanings,
if not
     inconsistent with the subject or context;

     "The Company" - TEFRON LTD.

     "The Companies Law" or "The Statutes" - The Companies Law, and
every other
     Israeli Law or statute in force concerning companies limited by
shares and
     affecting the Company.

     "These Articles" - These Articles of Association as originally
adopted or
     as amended from time to time by Special Resolution.

     "The Office" - The current registered office from time to time
of the
     Company.

     "Year" and "Month" - a Gregorian month or year.

     "Office Holder" - a director, general manager, chief business
manager,
     president, executive vice president, vice president, other
manager directly
     subordinate to the general manager or any other person assuming
the
     responsibilities of any of the foregoing positions without
regard to such
     person's title.

     "The Companies Law" - The Companies Law, 5759 - 1999, as will be
in force
     from time to time, and any regulations enacted thereof.

     "In Writing" - in hand writing, print, typewriter, photocopy,
telex,
     facsimile or any other readable form.

     "Person", "Man" or `Human Being" - including corporation.

     "Corporation" - company, partnership, cooperative, ottoman
association
     amuta, and any body of persons, whether incorporated or not.


<PAGE>
     "Ordinary Majority' - a majority of the total voting power
represented at
     the meeting in person or by proxy or by voting instrument,
entitled to vote
     thereon and that voted thereon, without taking into account the
votes that
     abstained.

     "Special Majority" - a majority of 75% (seventy five percent) of
the total
     voting power represented at the meeting in person or by proxy or
by voting
     instrument, entitled to vote thereon and that voted thereon,
without taking
     into account the votes that abstained.

     "Special Resolution" - a resolution adopted by a Special
Majority.

       "Shareholder" or "Member" - the holder of shares on the record
date
     determined according to section 182 of the Companies Law, if a
record date
     exists for that matter.

     "Registered Shareholder" - a Shareholder registered in the
Company's
     register of shareholders.

     "Unregistered Shareholder" - a Shareholder according to section
177(1) of
     the Companies Law.

     "Register" or "Register of Members" or "Shareholder's Register"
- the
     register of Shareholders that must be kept by the Company
according to the
     Companies Law.

     Any term in these Articles of Association that was not defined
in this
     article 2, shall have the meaning known to that term according
to the
     Companies Law, unless inconsistent with the subject or context.
The name of
     the Company, its goals and objects and the liability if its
shareholders
     are as determined in the Company's Memorandum of Association.

2A.    BUSINESS

     The Company may, at any time, carry on business in any field or
type of
     business permitted to the Company, whether explicit or implied,
according
     to its Memorandum of Association. The Company may cease to be
engaged in
     any such business, whether it began to be engaged in that
business field or
     type of business, and whether not.
2B    CONTRIBUTIONS

     The Company may contribute reasonable sums for worthy causes,
even if the
     contribution is not in the frame of the Company's business
considerations.
     The Board of Directors or whoever the Board of Directors
delegated its
     powers to for this purpose, will be authorized to determine,
according to
     its discretion, the amounts of the contributions, their
purposes, the
     entity receiving the contribution and any other condition
connected
     thereof.


                                        2
<PAGE>


3.    PUBLIC COMPANY

      This Company is a Public Company, as such a term is defined in
the
      Companies Law, and accordingly:

     a)   fully paid-up shares may be transferred freely and such
transfers do
          not require the approval of the board of directors, however
the board
          of directors may refuse, without giving any reasons
therefor, to
          register any transfer of shares which have not been fully
paid-up or
          where the Company has a lien on the share, constituting the
subject
          matter of the transfer;

     b)   the number of members of the Company for the time being
shall not be
          limited.

     c)   the Company may issue shares, debentures or any other
security to the
          public;

                                  SHARE CAPITAL

4.    SHARE CAPITAL

     a)   The authorized share capital of the Company is NIS
50,000,000 (fifty
          million) divided into 49,995,500 (forty nine million nine
hundred
          ninety five thousand five hundred) Ordinary Shares, NIS
1.00 (one) par
          value per share, and 4,500 (four thousand five hundred)
Ordinary B
          Shares, which are described in subparagraph 4(d) below.
    b)     The Ordinary Shares all rank pari passu in all respects.

     c)   The Deferred Shares entitle their holders, upon the
liquidation of the
          Company, the par value of these shares but no other rights.
The
          Deferred Shares are non-transferable.

    d)     Ordinary B Shares

          (1)    The holders of each Ordinary B Share shall only have
the right to
               dividends calculated on the basis of one one-
thousandth (1/1000%)
               percent of the Company's Annual "B" Shares Profit, as
defined
               below. For purpose of this section and the Ordinary B
Shares, the
               Company's Annual "B" Shares Profit shall be the
profits from the
               Company's ordinary business operations, thus excluding
capital
               gains and profits from nonrecurring activities in
accordance with
               the Company's consolidated Statement of Income, which
ordinary
               business profits shall be net of financing and taxes,
but prior
               to setoffs for prior year loss carry forwards
commencing in 1995.

           (2)   Calculation of the Company's Annual "B" Shares Profit
shall be
               based on the Company's annual audited statements,
approved by the
               Company's Board of Directors, for the relevant year,
which shall
               be presented in US Dollars.


                                        3
<PAGE>


          (3) The Company's Ordinary B Shares may not be
transferred, including
               either by operation of law or by testamtary or
intestated
               descent, assigned, hypothecated, pledged, mortgaged,
or otherwise
               encumbered, and shall not be subject to a power of
attorney or a
               deed of transfer, whether immediate or in future,
except that the
               Ordinary B Shares may be transferred pursuant to an
agreement
               between the Company, the Trustee, and the holder of
the Ordinary
               B Shares seeking to make the transfer, which agreement
was
                  entered into in connection with the issuance of the
Ordinary B
                  Shares (the "Ordinary "B" Shares Agreement").

            (4)   In the event that a holder, or a person entitled to be
a holder,
                  of Ordinary B Shares (hereafter the "Holder") is an
employee of
                  the Company or is part of the Company's management,
and such
                  employee's employment or management position with the
Company
                  ceases, for any reason, including termination, the
Holder's
                  Ordinary B Shares, whether held or to which the Holder
is
                  entitled, shall be converted to Deferred Shares.

            (5)   Upon the consummation of the initial public offering
of the
                  Company's Shares or in the event that the Company
sells,
                  transfers, or issues its Ordinary Shares to anyone
that is not a
                  holder of the Ordinary Shares of the Company as of
November 24,
                  1996, the Ordinary B Shares shall automatically
convert to
                  Deferred Shares.

          (6)     Notwithstanding the foregoing, the Ordinary B Shares
shall bear
                  the right to their relative share of the profits of
the Company
                  that are reflected in the Company's Statement of
Income
                  immediately prior to the occurrence of either of the
events
                  described in sub-paragraphs (4) and (5) above.

            (7)   Payment of dividends under this section shall only be
made upon
                  the resolution of the Company's Board of Directors.

5.   INCREASE OF AUTHORIZED SHARE CAPITAL

     a)   The Company may, from time to time, by Special Resolution
(as defined
          in Article 28(a) below), whether or not all the shares then
authorized
          have been issued and whether or not all the shares
theretofore issued
          have been called up for payment, increase its authorized
share
          capital. Any such increase shall be in such amount and
shall be
          divided into shares of such nominal amounts, and such
shares shall
          confer such rights and preferences, and shall be subject to
such
          restrictions, as the Special Resolution shall provide.
                                        4
<PAGE>


     b)   Except to the extent otherwise provided in the Special
Resolution, any
          new shares included in the authorized share capital
increased as
          aforesaid shall be subject to all the provisions of these
Articles
          which are applicable to shares of the same class included
in the
          existing share capital (and, if such new shares are of the
same class
          as a class of shares included in the existing share
capital, to all of
          the provisions which are applicable to shares of such class
included
          in the existing share capital).

6.   SPECIAL RIGHTS; MODIFICATION OF RIGHTS

     a)     Subject to the provisions of the Memorandum of Association
of the
          Company, and without prejudice to any special rights
previously
          conferred upon the holders of existing shares in the
Company, the
          Company may, from time to time, by Special Resolution,
provide for
          shares with such preferred or deferred rights or rights of
redemption
          or other special rights and/or restrictions, whether in
regard to
          dividends, voting, repayment of share capital or otherwise,
as may be
          stipulated in such Special Resolution.

     b)   (i)    If at any time the share capital is divided into
different
                 classes of shares, the rights attached to any class,
unless
                 otherwise provided by these Articles, may be modified
or
                 abrogated by the Company, by Special Resolution,
subject to the
                 consent in writing of the holders of seventy-five
percent (75%)
                 of the issued shares of such class or the adoption of
a Special
                 Resolution passed at a separate General Meeting of the
holders of
                 the shares of such class.

     c)     (ii) The provisions of these Articles relating to General
Meetings
                 shall, mutatis mutandis, apply to any separate General
Meeting of
                 the holders of the shares of a particular class,
provided
               however, that the requisite quorum at any such
separate General
               Meeting shall be two or more members present in person
or by
               proxy or by voting instrument and holding not less
than twenty
               five (25%) percent of the issued shares of such class.

     d)   (iii) Unless otherwise provided by these Articles, the
enlargement of
               an authorized class of shares, or the issuance of
additional
               shares thereof out of the authorized and unissued
share capital,
               shall not be deemed, for purposes of this Article
6(b), to modify
               or abrogate the rights attached to previously issued
shares of
               such class or of any other class.


                                        5
<PAGE>


7.   CONSOLIDATION, SUBDIVISION, CANCELLATION AND REDUCTION OF SHARE
CAPITAL

     a)   The Company may, from time to time, by Special Resolution
(subject,
          however, to the provisions of Article 6(b) hereof and to
applicable
          law):

           (i)   consolidate and divide all or part of its issued or
unissued
                 authorized share capital into shares of a per share
nominal value
                 which is larger than the per share nominal value of
its existing
                 shares;

          (ii) subdivide its shares (issued or unissued) or any of
them, into
               shares of smaller nominal value than is fixed by the
Memorandum
               of Association (subject, however, to the provisions of
Section
               144(4) of the Companies Law);

           (iii) cancel any shares which, at the date of the adoption
of such
                 Special Resolution, have not been taken or agreed to
be taken by
                 any person, and diminish the amount of its share
capital by the
                 amount of the shares so canceled; or
          (iv) reduce its share capital in any manner, and with and
subject to
               any incident authorized, and consent required, by law;

     b)   With respect to any consolidation of issued shares into
shares of a
          larger nominal value per share, and with respect to any
other action
          which may result in fractional shares, the Board of
Directors may
          settle any difficulty which may arise with regard thereto,
as it deems
          fit, and, in connection with any such consolidation or
other action
          which could result in fractional shares, may, without
limiting its
          aforesaid power:

         (i)   determine, as to the holder of shares so consolidated,
which
               issued shares shall be consolidated into a share of a
larger
               nominal value per share.

          (ii) allot, in contemplation of or subsequent to such
consolidation or
               other action, shares or fractional shares sufficient
to preclude
               or remove fractional share holdings;

          (iii) redeem, in the case of redeemable preference shares,
and subject
               to applicable law, such shares or fractional shares
sufficient to
               preclude or remove fractional share holdings;

          (iv) cause the transfer of fractional shares by certain
shareholders
               of the Company to other shareholders thereof so as to
most
               expediently preclude or remove any fractional
shareholdings, and
               cause the transferees of such fractional shares to pay
the
               transferors thereof the fair value thereof, and the
Board of
               Directors is hereby authorized to act in connection
with such
               fractional shares, with full power of substitution,
for the
               purposes of implementing the provisions of this sub-
Article
               7(b)(iv).


                                          6
<PAGE>


8.   ISSUANCE OF SHARE CERTIFICATES; REPLACEMENT OF LOST CERTIFICATES
     a)     Share Certificates shall be issued under the corporate seal
of the
            Company and shall bear the signature of one Director, or of
any other
          person or persons authorized therefor by the Board of
Directors.

     b)   Each member shall be entitled to one or several numbered
          certificate(s) for all the shares of any class registered
in his name,
          each for one or more of such shares. Each certificate shall
specify
          the serial numbers of the shares represented thereby and
may also
          specify the amount paid up thereon.

     c)     A share certificate registered in the names of two or more
persons
          shall be delivered to the person first named in the
Register of
          Members in respect of such co-ownership.

     d)   A share certificate which has been defaced,   lost or
destroyed, may be
          replaced, and the Company shall issue a new   certificate to
replace
          such defaced, lost or destroyed certificate   upon payment of
such fee,
          and upon the furnishing of such evidence of   ownership and
such
          indemnity, as the Board of Directors in its   discretion
deems fit.

9.   REGISTERED HOLDER

     9.1. Except as otherwise provided in these Articles, a
Shareholder is the
          registered holder of each share in the Company's Register,
and whoever
          is registered with a Stock Exchange member as entitled to
shares of
          the Company, and such shares are included amongst the
shares
          registered in the Company's Register in the name of a
registration
          company.

     9.2. A Shareholder who is a trustee will be registered in the
Register,
          together with a reference to his trust, and will be deemed
for any
          matter connected with the Companies Law, as a shareholder.
Without
          derogating from the above, the Company will recognize the
trustee, as
          above, as a Shareholder, for all intents and purposes, and
shall not
          recognize any other person, including the beneficiary, as
the owner of
          any right in the share.
     9.3. Without derogating from the above, and subject to these
Articles of
          Association, except for Shareholders according to articles
9.1 and 9.2
          above, the Company shall not, except as ordered by a court
of
          competent jurisdiction, or as required by statute,
recognize any other
          Person as the owner of any right in a share or any part of
a share and
          the Company shall not be bound by and shall not recognize
any
          equitable or other claim to, or interest in, future or
partial, in any
          such share or any part thereof, on the part of any other
person.


                                      7
<PAGE>


10.   ALLOTMENT OF SHARES

     10.1. The unissued shares from time to time shall be under the
control of
          the Board of Directors, who shall have the power to allot,
issue or
          otherwise dispose of shares to such persons, on such terms
and
          conditions (including inter alia terms relating to calls as
set forth
          in Article 12(f) hereof), and either at par or at a
premium, or,
          subject to the provisions of the Companies Law, at a
discount and/or
          with payment of commission, and at such times, as the Board
of
          Directors deems fit, and the power to give to any person
the option to
          acquire from the Company any shares, either at par or at a
premium,
          or, subject as aforesaid, at a discount and/or with payment
of
          commission, during such time and for such consideration as
the Board
          of Directors deems fit.

     10.2. The Board of Directors may issue shares and other
securities,
          convertible or exercisable to shares, in an amount up to
the Company's
          registered share capital. For this matter, convertible
securities that
          could be converted or exercised into shares will be deemed
converted
          or exercised at the time of their issuance. Without
derogating from
          the above, the Board of Directors is entitled to issue the
shares and
            the other securities, as above, to grant alternative rights
for their
          purchase, including options or the purchase thereof in
other ways, all
          to whoever will be determined by the Board of Directors and
at times,
          prices and terms as determined by the Board of Directors,
and to
          determine any other instruction connected thereto,
including
          instructions concerning the ways to distribute the shares
and the
          securities issued by the Company between their purchasers,
including,
          in the event of excess subscription, and all, according to
the
          discretion of the Board of Directors.

     10.3. Without derogating from the above, and subject to the
Companies Law
          and to these Articles of Association, the Board of
Directors is
          entitled to determine that the consideration for the shares
shall be
          paid in cash or in assets, including securities or any
other way,
          according to it's consideration, or that the shares shall
be issued as
          bonus shares or that the shares shall be issued in
consideration equal
          to or higher than their nominal value, whether in units or
as stock,
          all according to the terms and the time as determined by
the Board of
          Directors, according to it's consideration.

     10.4. In the resolution to increase the registered share capital
of the
          Company, the general meeting may determine that, the new
shares
          included in the amount which increase the registered share
capital
          (the "New Shares") or any part thereof, shall be offered
first, in
          their nominal value or at a premium, to all the
shareholders holding
          shares at that time, at a rate proportional to the nominal
value of
          their shares in the Company or to determine other
instructions
          concerning the issuance and the allotment of the New
Shares. But, if
          the General Meeting has not so determined in its resolution
to
          increase the registered share capital of the Company, the
Board of
          Directors may offer the shares according to Article 10.2
above.


                                        8
<PAGE>


     10.5. The Board of Directors is entitles to decide to pay
underwriting
          commissions or broker fees to any person, at the time of
underwriting
          or agreement to underwrite or achievement of underwriting
or ensurence
          of underwriting on shares, or debentures or other
securities of the
          Company. In any event of issuance of securities of the
Company, the
          Board of Directors is also entitled to determine the
payment of
          commissions, by means of cash, or shares of the Company, or
other
          securities issued by the Company, or any other way, or part
of the
          payment in one way and part in another, and all subject to
any
          applicable law.

11.   PAYMENT IN INSTALLMENTS

     If, pursuant to the terms of   allotment or issue of any share,
all or any
     portion of the price thereof   shall be payable in installments,
every such
     installment shall be paid to   the Company on the due date thereof
by the
     then registered holder(s) of   the share or the person(s) then
entitled
     thereto.

12.   CALLS ON SHARES

      a)   The Board of Directors may, from time to time, as it, in
its
          discretion, deems fit, make calls for payment upon members
in respect
          of any sum which has not been paid up in respect of shares
held by
          such members and which is not pursuant to the terms of
allotment or
          issue of such shares or otherwise, payable at a fixed time.
Each
          member shall pay the amount of every call so made upon him
(and of
          each installment thereof if the same is payable in
installments), to
          the Company at the time(s) and place(s) designated by the
Board of
          Directors, as any such time(s) may be thereafter extended
or place(s)
          changed. Unless otherwise stipulated in a resolution of the
Board of
          Directors (and in the notice hereafter referred to), each
payment in
          response to a call shall be deemed to constitute a pro rata
payment on
          account of all the shares in respect of which such call was
made.

     b)   Notice of any call for payment by a member shall be given
in writing
          to such member not less than fourteen (14) days prior to
the time of
          payment fixed in such notice, and shall specify the time
and place of
          payment. Prior to the time for any such payment fixed in a
notice of a
          call given to a member, the Board of Directors may in its
absolute
          discretion, by notice in writing to such member, revoke
such call in
          whole or in part, extend the time fixed for payment
thereof, or
          designate a different place of payment. In the event of a
call payable
          in installments, only one notice thereof need be given.


                                      9
<PAGE>


     c)   If pursuant to the terms of allotment or issue of a share
or
          otherwise, an amount is made payable at a fixed time
(whether on
          account of such share or by way of premium), such amount
shall be
          payable at such time as if it were payable by virtue of a
call made by
          the Board of Directors and for which notice was given in
accordance
          with paragraphs (a) and (b) of this Article 12, and the
provisions of
          these Articles with regard to calls (and the non-payment
thereof)
          shall be applicable to such amount (and the non-payment
thereof).

     d)   Joint holders of a share shall be jointly and severally
liable to pay
          all calls for payment in respect of such share and all
interest
          payable thereon.

     e)   Any amount called for payment which is not paid when due
shall bear
          interest from the date fixed for payment until actual
payment thereof,
          at such rate (not exceeding the then prevailing interest
rate charged
          by leading commercial banks in Israel), and payable at such
time(s) as
          the Board of Directors may prescribe.

     f)   Upon the allotment of shares, the Board of Directors may
provide for
          differences among the allottees of such shares as to the
amounts and
          times for payment of calls in respect of such shares.

13.   PREPAYMENT

     With the approval of the Board of Directors, any member may pay
to the
     Company any amount not yet payable in respect of his shares, and
the Board
     of Directors may approve the payment by the Company of interest
on any such
     amount until the same would be payable if it had not been paid
in advance,
     at such rate and time(s) as may be approved by the Board of
Directors. The
     Board of Directors may at any time cause the Company to repay
all or any
     part of the money so advanced, without premium or penalty.
Nothing in this
     Article 13 shall derogate from the right of the Board of
Directors to make
     any call for payment before or after receipt by the Company of
any such
     advance.

14.   FORFEITURE AND SURRENDER

     a)     If any member fails to pay an amount payable by virtue of a
call, or
            interest thereon as provided for in accordance herewith, on
or before
          the day fixed for payment of the same, the Board of
Directors may at
          any time after the day fixed for such payment, so long as
such amount
          (or any portion thereof) or interest thereon (or any
portion thereof)
          remains unpaid, resolve to forfeit all or any of the shares
in respect
          of which such payment was called for. All expenses incurred
by the
          Company in attempting to collect any such amount or
interest thereon,
          including, without limitation, attorney's fees and costs of
legal
          proceedings, shall be added to, and shall, for all purposes
(including
          the accrual of interest thereon), constitute a part of, the
amount
          payable to the Company in respect of such call.


                                        10
<PAGE>


     b)     Upon the adoption of a resolution as to the forfeiture of a
member's
            share, the Board of Directors shall cause notice thereof to
be given
         to such member, which notice shall state that, in the event
of the
          failure to pay the entire amount so payable by a date
specified in the
          notice (which date shall be not less than fourteen (14)
days after the
          date such notice is given and which may be extended by the
Board of
          Directors), such shares shall be ipso facto forfeited,
provided,
          however, that, prior to such date, the Board of Directors
may nullify
          such resolution of forfeiture, but such nullification shall
not stop
          the Board of Directors from adopting a further resolution
of
          forfeiture in respect of the non-payment of the same
amount.

     c)   Without derogating from Articles 54 and 59 hereof, whenever
shares are
          forfeited as herein provided, all dividends, if any,
theretofore
          declared in respect thereof and not actually paid shall be
deemed to
          have been forfeited at the same time.

     d)   The Company, by resolution of the Board of Directors, may
accept the
          voluntary surrender of any share not fully paid for.

     e)   Any share forfeited or surrendered as provided herein,
shall become
          the property of the Company, and the same, subject to the
provisions
          of these Articles, may be sold, re-allotted or otherwise
disposed of
          as the Board of Directors deems fit.

     f)   Any member whose shares have been forfeited or surrendered
shall cease
          to be a member in respect of the forfeited or surrendered
shares, but
          shall, notwithstanding, be liable to pay, and shall
forthwith pay, to
          the Company, all calls, interest and expenses owing upon or
in respect
          of such shares at the time of forfeiture or surrender
together with
          interest thereon from the time of forfeiture or surrender
until actual
          payment, at the rate prescribed in Article 12(e) above, and
the Board
          of Directors, in its discretion, may, but shall not be
obligated to,
          enforce the payment of such moneys, or any part thereof. In
the event
          of such forfeiture or surrender, the Company, by resolution
of the
          Board of Directors, may accelerate the date(s) of payment
of any or
          all amounts then owing to the Company by the member in
question (but
          not yet due) in respect of all shares owned by such member,
solely or
          jointly with another.

     g)   The Board of Directors may at any time, before any share so
forfeited
          or surrendered shall have been sold, re-allotted or
otherwise disposed
          of, nullify the forfeiture or surrender on such conditions
as it deems
          fit, but such nullification shall not stop the Board of
Directors from
          re-exercising its powers of forfeiture pursuant to this
Article 14.


                                         11
<PAGE>


15.   LIEN

      a)     Except to the extent the same may be waived or subordinated
in
             writing, the Company shall have a first and paramount lien
upon all
             the shares registered in the name of each member (without
regard to
          any equitable or other claim or interest in such shares on
the part of
          any other person), and upon the proceeds of the sale
thereof, for his
          debts, liabilities and engagements to the Company arising
from any
          amount payable by such member in respect of any unpaid or
partly paid
          share, whether or not such debt, liability or engagement
has matured.
          Such lien shall extend to all dividends from time to time
declared or
          paid in respect of such share. Unless otherwise provided,
the
          registration by the Company of a transfer of shares shall
be deemed to
          be a waiver on the part of the Company of the lien (if any)
existing
          on such shares immediately prior to such transfer.

     b)   The Board of Directors may cause the Company to sell a
share subject
          to such a lien when the debt, liability or engagement
giving rise to
          such lien has matured, in such manner as the Board of
Directors deems
          fit, but no such sale shall be made unless such debt,
liability or
          engagement has not been satisfied within fourteen (14) days
after
          written notice of the intention to sell shall have been
served on such
          member, his executors or administrators.

     c)   The net proceeds of any such sale, after payment of the
costs thereof,
          shall be applied in or toward satisfaction of the debts,
liabilities
          or engagements of such member in respect of such share
(whether or not
          the same have matured), and the remaining balance (if any)
shall be
          paid to the member, his executors, administrators or
assigns.

16.   SALE AFTER FORFEITURE OR SURRENDER OR IN ENFORCEMENT OF LIEN

     Upon any sale of a share after forfeiture or surrender of for
enforcing a
     lien, the Board of Directors may appoint any person to execute
an
     instrument of transfer of the share so sold and cause the
purchaser's name
     to be entered in the Register of Members in respect of such
share. The
     purchaser shall be registered as the shareholder and shall not
be bound to
     see to the regularity of the sale proceedings, or to the
application of the
     proceeds of such sale, and after his name has been entered in
the Register
     of Members in respect of such share, the validity of the sale
shall not be
     impeached by any person, and the remedy of any person aggrieved
by the sale
     shall be in damages only and against the Company exclusively.

17.   REDEEMABLE SHARES

     The Company may, subject to applicable law, issue redeemable
shares and
     redeem the same, according to the terms and the fashion
determined by the
     Board of Directors, at it's discretion.


                                        12
<PAGE>


18.   CONVERSION OF SHARES INTO STOCK

     a)   The Board of Directors may, with the approval of the
members
          previously given by Special Resolution, convert any paid-up
shares
          into stock, and may, with like sanction, reconvert any
stock into
          paid-up shares of any denomination.
     b)   The holders of stock may transfer the same, or any part
thereof, in
          the same manner and subject to the same regulations, as the
shares
          from which the stock arose might have been transferred
prior to
          conversion, or as near thereto as circumstances admit,
provided,
          however, that the Board of Directors may from time to time
fix the
          minimum amount of stock so transferable, and restrict or
forbid the
          transfer of fractions of such minimum, but the minimum
shall not
          exceed the nominal value of each of the shares from which
such stock
          arose.

     c)    The holders of stock shall, in accordance with the amount
of stock
           held by them, have the same rights and privileges as
regards
          dividends, voting at meetings of the Company and other
matters as if
          they held the shares from which such stock arose, but no
such right or
          privilege, except participation in the dividends and
profits of the
          Company, shall be conferred by any such aliquot part of
such stock as
          would not, if existing in shares, have conferred that right
or
          privilege.

     d)    Such of the Articles of the Company as are applicable to
paid-up
          shares shall apply to stock, and the words "share" and
"shareholder"
          (or "member") therein shall include "stock" and
"stockholder".

                                 TRANSFER OF SHARES

19.   REGISTRATION OF TRANSFER

     a)   No transfer of shares shall be registered unless a proper
writing or
          instrument of transfer (in any customary form or any other
form
          satisfactory to the Board of Directors) has been submitted
to the
          Company (or its transfer agent), together with the share
          certificate(s) and such other evidence of title as the
Board of
          Directors may reasonably require. Until the transferee has
been
          registered in the Register of Members in respect of the
shares so
          transferred, the Company may continue to regard the
transferor as the
          owner thereof.
     b)    The Board of Directors may, in its discretion to the extent
it deems
           necessary, close the Register of Members for registrations
of
           transfers of shares during any year for a period determined
by the
          Board of Directors, and no registrations of transfers of
shares shall
          be made by the Company during any such period during which
the
          Register of Members is so closed.


                                       13
<PAGE>


20.   RECORD DATE FOR NOTICES OF GENERAL MEETINGS AND OTHER ACTION

     Subject to the Companies Law and any other applicable law, and
     notwithstanding any provision of these Articles to the contrary,
and to
     allow the Company to determine the members entitled to notice
of, or to
     vote at, any Annual or Extraordinary General Meeting or any
adjournment
     thereof, or to express consent to or dissent from any corporate
action in
     writing without a meeting, or entitled to receive payment of any
dividend
     or other distribution or allotment of any rights, or entitled to
exercise
     any rights in respect of, or to take or be subject to, any other
action,
     the Board of Directors may fix in advance, a record date (the
"Record
     Date"). A determination of members of record entitled to notice
of or to
     vote at a meeting shall apply to any adjournment or the meeting:
provided,
     however, that the Board of Directors may fix a new record date
for the
     adjourned meeting.

21.   DECEDENTS' SHARES

     a)   In case of the death of a registered holder of a share
registered in
          the names of two or more holders, the Company may recognize
the
          survivor(s) as the sole owner(s) thereof unless and until
the
          provisions of Article 21(b) have been effectively invoked.

     b)   Any person becoming entitled to a share in consequence of
the death of
          any shareholder, upon producing evidence of the grant of
probate or
          letters of administration or declaration of succession (or
such other
          evidence as the Board of Directors may reasonably deem
sufficient),
          shall be registered as a member in respect of such share,
or may,
          subject to the regulations as to transfer herein contained,
transfer
          such share.

22.   RECEIVERS AND LIQUIDATORS

     a)   The Company may recognize any receiver, liquidator or
similar official
          appointed to wind-up, dissolve or otherwise liquidate a
corporate
          member, and a trustee, manager, receiver, liquidator or
similar
          official appointed in bankruptcy or in connection with the
          reorganization of, or similar proceeding with respect to a
member or
          its properties, as being entitled to the shares registered
in the name
          of such member.

     b)    Such receiver, liquidator or similar official appointed to
wind-up,
           dissolve or otherwise liquidate a corporate member and such
trustee,
          manager, receiver, liquidator, or similar official
appointed in
          bankruptcy or in connection with the reorganization of, or
similar
          proceedings with respect to a member or its properties,
upon producing
          such evidence as the Board of Directors may deem sufficient
as to his
          authority to act in such capacity or under this Article,
shall with
          the consent of the Board of Directors (which the Board of
Directors
          may grant or refuse in its absolute discretion), be
registered as a
          member in respect of such shares, or may, subject to the
regulations
          as to transfer herein contained, transfer such shares.


                                       14
<PAGE>


23.   GENERAL MEETING

     Resolutions of the Company in the following matters shall be
adopted by the
     General Meeting:

     23.1. Changes in the Company's Articles of Association or
Memorandum of
          Association.
     23.2. Execution of the authorities of the Board of Directors by
the General
          Meeting. if the Board of Directors is incapable of
executing it's
          authorities and the execution of such authority is
essential for the
          proper administration of the Company, according to section
52(a) of
          the Companies Law.

    23.3. Appointment of the Company's auditors and their dismissal.

     23.4. Election of the directors of the Company and their
dismissal.

     23.5. Confirmation of actions and transactions that require the
approval of
          the General Meeting according to sections 255 and 268 up to
275 of the
          Companies Law.

     23.6. The increase of the registered share capital and its
decrease
          according to sections 286 and 297 of the Companies Law and,
changes in
          the share capital according to article 7 hereof.

    23.7. Merger according to section 320(a) of the Companies Law.

     23.8. Any resolution that according to these Articles of
Association, is
          required to be adopted by the General Meeting

                                GENERAL MEETINGS

23A. ANNUAL GENERAL MEETING

     a)   An Annual General Meeting shall be held once in every
calendar year at
          such time (within a period of not more than fifteen (15)
months after
          the last preceding Annual General Meeting) and at such
place, either
          within or outside the State of Israel, as may be determined
by the
          Board of Directors.

     b)    Subject to the provisions of these Articles, the function
of the
           Annual General Meeting shall be to elect the members of the
Board of
          Directors; to receive the Financial Statements, the
ordinary reports
          and accounts of the Company's directors and auditors; to
approve final
          annual (pursuant and subject to Articles 52, 53, 54 and 57)
dividends;
          to appoint the Company's auditors and to fix their
remuneration; and
          to transact any other business which under these Articles
or the
           Statutes are to be transacted at a General Meeting.


                                       15
<PAGE>


     c)    Subject to any applicable law, all resolutions concerning
all the
          business that may come before the Annual General Meetings,
          Extraordinary Meetings or any adjournments thereof, shall
be adopted
          by Members who either chose to attend and vote their shares
in person
          at such meetings or to vote thereon by means of a proxy.

24.   EXTRAORDINARY GENERAL MEETINGS

     All General Meetings other than Annual General Meetings shall be
called
     "Extraordinary General Meeting". The Board of Directors may,
whenever it
     thinks fit, convene an Extraordinary General Meeting, at such
time and
     place, within or out-side the State of Israel, as may be
determined by the
     Board of Directors, and shall be obliged to do so upon a request
in writing
     in accordance with Section 63(b) of the Companies Law.

25.   NOTICE OF GENERAL MEETINGS; OMISSION TO GIVE NOTICE

     a)    Not less than seven (7) days' prior notice shall be given
of every
          General Meeting, provided, however, that a Special
Resolution shall
          not be passed unless at least twenty one (21) days' prior
notice shall
          have been given of the meeting at which it is proposed to
pass the
          same unless all shareholders entitled to vote agree on a
shorter
          period. Each such notice shall specify the place and the
day and hour
          of the meeting, and the general nature of each item to be
acted upon
          thereat, said notice to be given to all members who would
be entitled
          to attend and vote at such meeting. No separate notice
shall be given
          to Registered Shareholders. Anything therein to the
contrary
          notwithstanding, with the consent of all members entitled
to vote
          thereon, a resolution may be proposed and passed at such
meeting
          although a lesser notice than hereinabove prescribed has
been given.

     b)   The accidental omission to give notice of a meeting to any
member, or
          the non-receipt of notice sent to such member, shall not
invalidate
          the proceedings at such meeting.

                         PROCEEDINGS AT GENERAL MEETINGS

26.   QUORUM

      a)   No business shall be transacted at a General Meeting, or at
any
           adjournment thereof, unless the quorum required under these
Articles
           for such General Meeting or such adjourned meeting, as the
case may
           be, is present when the meeting proceeds to business.


                                       16
<PAGE>


     b)   In the absence of contrary provisions in these Articles,
two or more
          members (not in default in payment of any sum referred to
in Article
          32(a) hereof), present in person or by proxy or by voting
instrument
          and holding shares conferring in the aggregate not less
than twenty
          five (25%) percent of the voting power of the Company,
shall
          constitute a quorum of General Meeting.

     c)   If within half an hour from the time appointed for the
meeting a
          quorum is not present, the meeting, if convened upon
requisition under
          Section 63(b)(2) of the Companies Law, shall be dissolved,
but in any
          other case it shall be adjourned to the same day in the
next week, at
          the same time and place, or to such day and at such time
and place as
          the Chairman may determine with the consent of the holders
of a
          majority of the voting power present at the meeting in
person or by
          proxy or by voting instrument and voting on the question of
          adjournment. No business shall be transacted at any
adjourned meeting
          except business which might lawfully have been transacted
at the
          meeting as originally called. At such adjourned meeting
(other than an
          adjourned separate meeting of a particular class of shares
as referred
          to in Article 6 of these Articles), any two (2) members
(not in
          default as aforesaid) present in person or by proxy or by
voting
           instrument, and holding shares conferring in the aggregate
not less
           than twenty five (25%) percent of the voting power of the
Company,
           shall constitute a quorum.

27.   CHAIRMAN

     The Chairman, if any, of the Board of Directors, shall preside
as Chairman
     at every General Meeting of the Company. If, at any meeting, the
Chairman
     is not present within fifteen (15) minutes after the time fixed
for holding
     the meeting or is unwilling to act as Chairman, the Co-Chairman
shall
     preside at the meeting. If at any such meeting both the Chairman
and the
     Co-Chairman are not present or are unwilling to act as Chairman,
the
     members present shall choose someone of their number to be
Chairman. The
     office of Chairman shall not, by itself, entitle the holder
thereof to vote
     at any General Meeting nor shall it entitle such holder to a
second or
     casting vote (without derogating, however, from the rights of
such Chairman
     to vote as a shareholder or proxy of a shareholder if, in fact,
he is also
     a shareholder or such proxy).

28.   ADOPTION OF RESOLUTIONS AT GENERAL MEETINGS

     a)   (i) An Ordinary Resolution shall be deemed adopted if
approved by an
               Ordinary Majority.

          (ii) A Special or Extraordinary Resolution shall be deemed
adopted if
               approved by a Special Majority.


                                        17
<PAGE>


     b)   Every question submitted to a General Meeting shall be
decided by a
          show of hands, but if a written ballot is demanded by any
member
          present in person or by proxy or by voting instrument and
entitled to
          vote at the meeting, the same shall be decided by such
ballot. A
          written ballot may be demanded before the proposed
resolution is voted
          upon or immediately after the declaration by the Chairman
of the
          results of the vote by a show of hands. If a vote by
written ballot is
           taken after such declaration, the results of the vote by a
show of
           hands shall be of no effect, and the proposed resolution
shall be
          decided by such written ballot. The demand for a written
ballot may be
          withdrawn at any time before the same is conducted, in
which event
          another member may then demand such written ballot. The
demand for a
          written ballot shall not prevent the continuance of the
meeting for
          the transaction of business other than the question on
which the
          written ballot has been demanded.

     c)   A declaration by the Chairman of the meeting that a
resolution has
          been carried unanimously, or carried by a particular
majority, or
          lost, and an entry to that effect in the minute book of the
Company,
          shall be conclusive evidence of the fact without proof of
the number
          or proportion of the votes recorded in favor of or against
such
          resolution.

29.   RESOLUTIONS IN WRITING

     A resolution in writing signed by all members of the Company
then entitled
     to attend and vote at General Meetings or to which all such
members have
     given their written consent (by letter, telegram, telex,
facsimile or
     otherwise) shall be deemed to have been unanimously adopted by a
General
     Meeting duly convened and held.

30.   POWER TO ADJOURN

     The Chairman of a General Meeting at which a quorum is present
may, with
     the consent of the holders of a majority of the voting power
represented in
     person or by proxy or by voting instrument and voting on the
question of
     adjournment (and shall if so directed by the meeting), adjourn
the meeting
     from time to time and from place to place, but no business shall
be
     transacted at any adjourned meeting except business which might
lawfully
     have been transacted at the meeting as originally called.

31.   VOTING POWER

     Subject to provisions of Article 32(a) and subject to any
provision hereof
     conferring special rights as to voting, or restricting the right
to vote,
     every member shall have one vote for each share held by him of
record, on
     every resolution, without regard to whether the vote thereon is
conducted
     by a show of hands, by written ballot or by any other means.


                                       18
<PAGE>


32.    VOTING RIGHTS

     a)    No member shall be entitled to vote at any General Meeting
(or be
           counted as a part of the quorum thereat), unless all calls
then
          payable by him in respect of his shares in the Company have
been paid,
          but this Article 32(a) shall not apply to separate General
Meetings of
          the holders of a particular class of shares pursuant to
Article 6(b).

     b)   A company or other corporate body being a member of the
Company may
          duly authorize any person to be its representative at any
meeting of
          the Company or to execute or deliver a proxy on its behalf.
Any person
          so authorized shall be entitled to exercise on behalf of
such member
          all the power which the latter could have exercised if it
were an
          individual shareholder. Upon the request of the Chairman of
the
          meeting, written evidence of such authorization (in form
acceptable to
          the Chairman) shall be delivered to him.

     c)   Any member entitled to vote may vote either in person or by
proxy (who
          need not be a member of the Company) or by voting
instrument, or, if
          the member is a company or other corporate body, by a
representative
          authorized pursuant to Article 32(b) or by voting
instrument. Votes
          may be given by a voting instrument on any issue for which
voting by
          voting instrument is required to be offered under the
Companies Law
          and on any other issue for which the Board of Directors has
approved
          voting by voting instrument, either generally or
specifically. The
          form of the voting instrument shall be set by the corporate
secretary
          or anyone so authorized by the Board of Directors.
     d)   If two or more persons are registered as joint holders of
any share,
          the vote of the senior who tenders a vote, in person or by
proxy or by
          voting instrument, shall be accepted to the exclusion of
the vote(s)
          of the other joint holder(s). For the purpose of this
Article 32(d),
          seniority shall be determined by the order of registration
of the
          joint holders in the Register of Members.

                                     PROXIES

33.   INSTRUMENT OF APPOINTMENTS

     a)    An instrument appointing a proxy shall be in writing and
shall be
           substantially in the following form:

           "I _____________________ of ________________________
              (Name of Shareholder)    (Address of Shareholder)

           being a member of TEFRON LTD. hereby appoint
           _____________________ of ______________________
              (Name of Proxy)         (Address of Proxy)

     as my proxy to vote for me and on my behalf at the General
Meeting of the
     Company to be held on the ____ day of _______, 200_ and at any
     adjournment(s) thereof.

      Signed this ____ day of ______, 200_.

     or in any usual or common form or in such other form as may be
approved by
     the Board of Directors. Such proxy shall be duly signed by the
appointor or
     such person's duly authorized attorney or, if such appointor is
a company
     or other corporate body, under its corporate seal or stamp or
the hand of
     its duly authorized agent(s) or attorney(s).


                                       19
<PAGE>


     b)   The instrument appointing a proxy (and the power of
attorney or other
          authority, if any, under which such instrument has been
signed) shall
          either be presented to the Chairman at the meeting at which
the person
          named in the instrument proposes to vote or be delivered to
the
          Company (at its Registered Office, at its principal place
of business,
          or at the offices of its registrar or transfer agent, or at
such place
          as the Board of Directors may specify) not less than two
(2) hours
          before the time fixed for such meeting, except that the
instrument
          shall be delivered forty-eight (48) hours before the time
fixed for
          the meeting where the meeting is to be held outside of
Israel and the
          instrument is delivered to the Company's registrar or
transfer agent.
          Notwithstanding the above, the Chairman shall have the
right to waive
          the time requirement provided above with respect to all
instruments of
          proxies and to accept any and all instruments of proxy
until the
          beginning of a General Meeting.

34.   EFFECT OF DEATH OF APPOINTOR OR TRANSFER OF SHARE OR REVOCATION
OF
      APPOINTMENT

     a)   A vote cast in accordance with an instrument appointing a
proxy shall
          be valid notwithstanding the prior death or bankruptcy of
the
          appointing member (or of his attorney-in-fact, if any, who
signed such
          instrument), or the transfer of the share in respect of
which the vote
          is cast, unless written notice of such matters shall have
been
          received by the Company or by the Chairman of such meeting
prior to
          such vote being cast.

     b)    An instrument appointing a proxy shall be deemed revoked
(i) upon
          receipt by the Company or the Chairman, subsequent to
receipt by the
          Company of such instrument, of written notice signed by the
person
          signing such instrument or by the member appointing such
proxy
          canceling the appointment thereunder (or the authority
pursuant to
          which such instrument was signed) or of an instrument
appointing a
          different proxy (and such other documents, if any, required
under
          Article 33(b) for such new appointment), PROVIDED such
notice of
          cancellation or instrument appointing a different proxy
were so
          received at the place and within the time for delivery of
the
          instrument revoked thereby as referred to in Article 33(b)
hereof, or
          (ii) if the appointing member is present in person at the
meeting for
          which such instrument of proxy was delivered, upon receipt
by the
          Chairman of such meeting of written notice from such member
of the
          revocation of such appointment, or if and when such member
votes at
          such meeting. A vote cast in accordance with an instrument
appointing
          a proxy shall be valid notwithstanding the revocation or
purported
          cancellation of the appointment, or the presence in person
or vote of
          the appointing member at a meeting for which it was
rendered, unless
          such instrument of appointment was deemed revoked in
accordance with
          the foregoing provisions of this Article 34(b) at or prior
to the time
          such vote was cast.


                                      20
<PAGE>


                               BOARD OF DIRECTORS

35.   POWERS OF BOARD OF DIRECTORS

      (a)   GENERAL

     The management of the business of the Company shall be vested in
the Board
     of Directors, which may exercise all such powers and do all such
acts and
     things as the Company is authorized to exercise and do, and are
not hereby
     or by law required to be exercised or done by the Company by
action of its
     members at a General Meeting. The authority conferred on the
Board of
     Directors by this Article 35 shall be subject to the provisions
of the
     Companies Law, these Articles, and any regulation or resolution
consistent
     with these Articles adopted from time to time by the Company by
action of
     its members at a General Meeting, PROVIDED, however, that no
such
     regulation or resolution shall invalidate any prior act done by
or pursuant
     to a decision of the Board of Directors which would have been
valid if such
     regulation or resolution had not been adopted.

      (b)   BORROWING POWER

     The Board of Directors may from time to time, at its discretion,
cause the
     Company to borrow or secure the payment of any sum or sums of
money for the
     purposes of the Company, and may secure or provide for the
repayment of
     such sum or sums in such manner, at such times and upon such
terms and
     conditions as it deems fit, and, in particular, by the issuance
of bonds,
     perpetual or redeemable debentures, debenture stock, or any
mortgages,
     charges, or other securities on the undertaking or the whole or
any part of
     the property of the Company, both present and future, including
its
     uncalled or called but unpaid capital for the time being.

      (c)   RESERVES

     The Board of Directors may, from time to time, set aside any
amount(s) out
     of the profits of the Company as a reserve or reserves for any
purpose(s)
     which the Board of Directors, in its absolute discretion, shall
deem fit,
     including without limitation, capitalization and distribution of
bonus
     shares, and may invest any sum so set aside in any manner and
from time to
     time deal with and vary such investments and dispose of all or
any part
     thereof, and employ any such reserve or any part thereof in the
business of
     the Company without being bound to keep the same separate from
other assets
     of the Company, and may subdivide or redesignate any reserve or
cancel the
     same or apply the funds therein for another purpose, all as the
Board of
     Directors may from time to time think fit.


                                        21
<PAGE>


36.   EXERCISE OF POWERS OF BOARD OF DIRECTORS

     a)     A meeting of the Board of Directors duly convened and at
which a
          quorum is present shall be competent to exercise all the
authorities,
          powers and discretion vested in or exercisable by the Board
of
          Directors.

     b)   A resolution proposed at any meeting of the Board of
Directors shall
          be deemed adopted if approved by a majority of the
Directors present
          when such resolution is put to a vote and voting thereon.
     c)    The board of directors may adopt resolutions without
actually
          convening, provided that all the directors then in office
entitled to
          participate in a discussion and vote on a matter brought
for
          resolution have agreed to a resolution in writing (by
letter,
          facsimile, electronic mail or otherwise). A resolution
adopted by the
          board of directors without actually convening shall require
the
          approval of at least 75% of the members of the board of
directors
          entitled to vote thereon and thus approved, shall be deemed
to have
          been adopted by a meeting of the Board of Directors duly
convened and
          held.

37.   DELEGATION OF POWERS

     a)   The Board of Directors may, subject to the provisions of
the Companies
          Law, delegate any or all of its powers to committees, each
consisting
          of one or more persons, and it may from time to time revoke
such
          delegation or alter the composition of any such committee.
Any
          Committee so formed (in these Articles referred to as a
"Committee of
          the Board of Directors"), shall, in the exercise of the
powers so
          delegated, conform to any regulations imposed on it by the
Board of
          Directors. The meetings and proceedings of any such
Committee of the
          Board of Directors shall, mutatis mutandis, be governed by
the
          provisions herein contained for regulating the meetings of
the Board
          of Directors, so far as not superseded by any regulations
adopted by
          the Board of Directors under this Article. Unless otherwise
expressly
          provided by the Board of Directors in delegating powers to
a Committee
          of the Board of Directors, such Committee shall not be
empowered to
          further delegate such powers.

     b)    Without derogating from the provisions of Article 50, the
Board of
          Directors may from time to time appoint a Secretary to the
Company, as
          well as officers, agents, employees and independent
contractors, as
          the Board of Directors deems fit, and may terminate the
service of any
          such person. The Board of Directors may, subject to the
provisions of
          the Companies Law, determine the powers and duties, as well
as the
          salaries and emoluments, of all such persons, and may
require security
          in such cases and in such amounts as it deems fit.


                                       22
<PAGE>


     c)   The Board of Directors may from time to time, by power of
attorney or
          otherwise, appoint any person, company, firm or body of
persons to be
          the attorney or attorneys of the Company at law or in fact
for such
          purpose(s) and with such powers, authorities and
discretions, and for
          such period and subject to such conditions, as it deems
fit, and any
          such power of attorney or other appointment may contain
such
          provisions for the protection and convenience of persons
dealing with
          any such attorney as the Board of Directors deems fit, and
may also
          authorize any such attorney to delegate all or any of the
powers,
          authorities and discretions vested in him.

38.   ELECTION OF DIRECTORS

     a)   The Board of Directors of the Company shall consist of such
number of
          Directors (not less than two (2) nor more than fifteen (15)
as may be
          fixed, from time to time, by ordinary Resolution of the
Company.

     b)   The Board of Directors may, from time to time, elect an
additional
          director or directors to the Company, whether to fill a
vacancy,
          however created, or as an additional director or directors,
only that
          the total number of directors may not be higher than the
maximum
          number determined in Article 38(a) hereof. A director thus
elected,
          would terminate his service at the first Annual General
Meeting that
          shall be held after his appointment, and could be re-
elected as a
          director.

     c)    The General Meeting or the Board of Directors may determine
that the
          service term of a director elected by them, accordingly,
may begin at
          a date later than the date of such director's election as a
director.

     d)   The Company shall appoint at least two External Directors,
and the
          provisions of the Companies Law in this matter shall apply.

39.   ELECTION AND REMOVAL OF DIRECTORS

     Directors shall be elected at the Annual General Meeting,
Extraordinary
     Meeting or General Meeting of the Company by the vote of the
holders of a
     majority of the voting power represented at such meeting in
person or by
     proxy or by voting instrument and voting on the election of
directors, and
     each Director shall serve, subject to Article 42 hereof, and,
with respect
     to a Director appointed pursuant to Article 41 hereof, subject
to such
     Article, until the Annual General Meeting next following the
Annual General
     Meeting or General Meeting at which such Director was elected
pursuant to
     this Article or Article 41 hereof, or his earlier removal
pursuant to this
     Article 39. The holders of a majority of the voting power
represented at a
     General Meeting in person or by proxy or by voting instrument
and voting
     thereon at such Meeting shall be entitled to remove any
Director(s) from
     office, to elect Directors instead of Directors so removed, or
to fill any
     vacancy, however created, in the Board of Directors.


                                          23
<PAGE>


40.   QUALIFICATION OF DIRECTORS

     No person shall be disqualified to serve as a Director by reason
of his not
     holding shares in the Company or by reason of his having served
as a
     Director in the past.

41.   CONTINUING DIRECTORS IN THE EVENT OF VACANCIES

      In the event of one or more vacancies in the Board of Directors,
the
     continuing Directors may continue to act in every matter, and,
pending the
     filling of any vacancy pursuant to the provisions of Article 39,
may
     appoint Directors to temporarily fill any such vacancy,
provided, however,
     that if they number less than a majority of the number provided
for
     pursuant to Article 38 hereof, they may only act in an emergency
or to fill
     the office of director which has become vacant up to the minimum
number or
     in order to call a General Meeting of the Company for the
purpose of
     electing Directors to fill any or all vacancies, so that at
least a
     majority of the number of Directors provided for pursuant to
Article 38
     hereof are in office as a result of said meeting.

42.   VACATION OF OFFICE

     a)   The office of a Director shall be vacated, ipso facto, upon
his or her
          death, or if he or she be found lunatic or become of
unsound mind, or
          if he or she becomes bankrupt, or if the Director is a
company, upon
          its winding-up.

     b)   The office of a Director shall be vacated by his, her or
its written
          resignation. Such resignation shall become effective on the
date fixed
          therein, or upon the delivery thereof to the Company,
whichever is
          later.

43.   REMUNERATION OF DIRECTORS

     A Director shall be paid remuneration by the Company for his
services as
     Director to the extent such remuneration shall have been
approved by a
     General Meeting of the Company.


                                       24
<PAGE>


44.   CONFLICT OF INTEREST

     a)    Subject to the provisions of the Companies Law, no Director
shall be
          disqualified by virtue of his office from holding any
office or place
          of profit in the Company or in any company in which the
Company shall
          be a shareholder or otherwise interested, or from
contracting with the
          Company as vendor, purchaser or otherwise, nor shall any
such
          contract, or any contract or arrangement entered into by or
on behalf
          of the Company in which any Director shall be in any way
interested,
          be avoided, nor, other than as required under the Companies
Law, shall
          any Director be liable to account to the Company for any
profit
          arising from any such office or place of profit or realized
by any
          such contract or arrangement by reason only of such
Director's holding
          that office or of the fiduciary relations thereby
established, but the
          nature of his interest as well as any material fact of
document, must
          be disclosed by him at the meeting of the Board of
Directors at which
          the contract or arrangement is first considered, if his
interest then
          exists, or, in any other case, at no later than the first
meeting of
          the Board of Directors after the acquisition of his
interest.

     b)    Subject to the Companies law, all actions executed by the
Board of
          Directors or by a committee of the Board of Directors or by
any person
          acting as a director or a member of a Committee of the
Board or by the
          General Manager, accordingly - shall be valid even if after
their
          execution it will be discovered that there was a certain
flaw in the
          appointment of the Board of Directors, the Committee, the
Director,
          the Committee's member or the General Manager, accordingly,
or that
          any one of the above officers was disqualified from serving
at his
          office.

     c)   Subject to the Companies law, an officer holding shares of
the Company
          and having an interest or holding another office in any
other
          corporation, including a corporation in which the Company
has an
          interest or that holds shares of the Company, shall not
disqualify the
          officer from being an officer in the Company. Nor shall an
officer of
          the Company be disqualified from being an officer of the
Company as a
          result of the execution of an agreement between such an
officer or any
          such corporation and the Company in any matter and in any
fashion.

     d)    Subject to the Companies law, an officer shall be entitled
to
          participate and to vote in meetings concerning the approval
of actions
          or transactions in which he has personal interest.

     e)   Subject to the Companies law, a transaction between the
Company and an
          officer of the Company or an entity controlling the Company
or a
          transaction between the Company and another person that an
officer of
          the Company or that an entity controlling the Company have
personal
          interest thereof, and which are not irregular transactions,
shall be
          approved in the following manner:

          (i)   Such a transaction, which is not irregular, shall be
approved by
                the Board of Directors or by the Audit Committee or by
any other
                entity authorized by the Board of Directors, whether
according to
                a specific resolution or to a general authorization,
an
                authorization to a certain category of transactions or
an
                authorization to a certain transaction.


                                        25
<PAGE>


            (ii) The approval of transactions which are not irregular,
as
                aforesaid, may be made by granting a general approval
to a
                certain category of transactions or by approving one
specific
                transaction.

     f)     Subject to the Companies law, a general notice given to the
Board of
            Directors by an officer or an entity controlling the
Company,
          concerning their personal interest in a certain entity,
specifying
          such personal interest, shall be deemed as the revelation
by such
          officer or controlling entity to the Company of such
personal
          interest, in connection with the entrance into a
transaction which is
          not irregular with any such entity

45.    ALTERNATE DIRECTORS

     a)   A Director may, by written notice to the Company given in
the manner
          set forth in Article 45(b) below, appoint any individual
(whether or
         not such person is then a member of the Board of directors)
as an
          alternate for himself (in these Articles referred to as
"Alternate
          Director"), remove such Alternate Director and appoint
another
          Alternate Director in place of any Alternate Director
appointed by him
          whose office has been vacated for any reason whatsoever.
The
          appointment of an Alternate Director shall be subject to
the consent
          of the Board of Directors if the appointee is not then a
member of the
          Board of Directors. Unless the appointing Director, by the
instrument
          appointing an Alternate Director or by written notice to
the Company,
          limits such appointment to a specified period of time or
restricts it
          to a specified meeting or action of the Board of Directors,
or
          otherwise restricts its scope, the appointment shall be for
all
          purposes, and for a period of time concurrent with the term
of the
          appointing Director.

     b)   Any notice to the Company pursuant to Article 45(a) shall
be given in
          person to, or by sending the same by mail to the attention
of the
          General Manager of the Company at the principal office of
the Company
          or to such other person or place as the Board of Directors
shall have
          determined for such purpose, and shall become effective on
the date
          fixed therein, or upon the receipt thereof by the Company
(at the
          place as aforesaid), whichever is later, subject to the
consent of the
          Board of Directors if the appointee is not then a member of
the Board
          of Directors, in which case the notice will be effective as
of the
          date of such consent.

     c)   An Alternate Director shall have all the rights and
obligations of the
          Director who appointed him, provided however, that (i) he
may not in
          turn appoint an alternate for himself (unless the
instrument
          appointing him otherwise expressly provides), and (ii) that
an
          Alternate Director shall have no standing at any meeting of
the Board
          of Directors or any committee thereof while the Director
who appointed
           him is present, and (iii) hat the Alternate Director is not
entitled
           to remuneration.

     d)   Any natural person, whether or not he or she be a member of
the Board
          of Directors, may act as an Alternate Director. One person
may act as
          Alternate Director for several Directors, and in such event
he or she
          shall have a number of votes (and shall be treated as the
number of
          persons for purposes of establishing a quorum) equal to the
number of
          Directors for whom he acts as Alternate Director. If an
Alternate
          Director is also a Director in his own right, his rights as
an
          Alternate Director shall be in addition to his rights as a
Director.


                                       26
<PAGE>


     e)    An Alternate Director shall alone be responsible for his or
her own
          acts and defaults, and he or she shall not be deemed the
agent of the
          Director(s) who appointed him.

      f)   The office of an Alternate Director shall be vacated under
the
           circumstances, mutatis mutandis, set forth in Article 42,
and such
          office shall ipso facto be vacated if the Director who
appointed such
          Alternate Director ceased to be a Director.

                      PROCEEDINGS OF THE BOARD OF DIRECTORS

46.   MEETINGS

     a)   The Board of Directors may meet and adjourn its meetings
and otherwise
          regulate such meetings and proceedings as the Directors
think fit.

     b)   Any Director may at any time, and the Secretary, upon the
request of
          such Director, shall, convene a meeting of the Board of
Directors, but
          not less than two (2) days notice shall be given of any
meetings so
          convened. Notice of any such meeting shall be given to all
the
          Directors and may be given orally, by telephone, in writing
or by
          mail, telex, cablegram or facsimile. Notwithstanding
anything to the
            contrary herein, failure to deliver notice to a director of
any such
            meeting in the manner required hereby may be waived by such
Director,
            and a meeting shall be deemed to have been duly convened
            notwithstanding such defective notice if such failure of
defect is
            waived prior to action being taken at such meeting, by all
Directors
            entitled to participate at such meeting to whom notice was
not duly
            given as aforesaid.

47.   QUORUM

     Until otherwise unanimously decided by the Board of Directors, a
quorum at
     a meeting of the Board of Directors shall be constituted by the
presence in
     person or by telephone conference of half (50%) of the Directors
then in
     office who are lawfully entitled to participate in the meeting.
No business
     shall be transacted at a meeting of the Board of Directors
unless the
     requisite quorum is present (in person or by telephone
conference) when the
     meeting proceeds to business.


                                         27
<PAGE>


48.   CHAIRMAN OF THE BOARD OF DIRECTORS

     The Board of Directors may from time to time, elect one of its
members to
     be the Chairman of the Board of Directors, and another of its
members as
     Co-Chairman, remove such Chairman and Co-Chairman from office
and appoint
     others in their place. The Chairman of the Board of Directors
shall preside
     at every meeting of the Board of Directors, but if there is no
such
     Chairman, or if at any meeting he is not present within fifteen
(15)
     minutes of the time fixed for the meeting or if he is unwilling
to take the
     chair, the Co-Chairman shall preside. If both the Chairman and
the
     Co-Chairman are not present within such fifteen (15) minutes or
are
     unwilling to take the chair the Directors present shall choose
one of their
     number to be the Chairman of such meeting.

49.   VALIDITY OF ACTS DESPITE DEFECTS
     All acts done bona fide at any meeting of the Board of
Directors, or of a
     Committee of the Board of Directors, or by any person(s) acting
as
     Director(s), shall, notwithstanding that it may afterwards be
discovered
     that there was some defect in the appointment of the
participants in such
     meetings or any of them or any person(s) acting as aforesaid, or
that they
     or any of them were disqualified, be as valid as if there were
no such
     defect or disqualification.

                      CHIEF EXECUTIVE OFFICER AND PRESIDENT

50.   CHIEF EXECUTIVE OFFICER AND PRESIDENT

     The Board of Directors may from time to time appoint one or more
persons,
     whether or not Directors, as Chief Executive Officer or
Officers, General
     Manager or Managers, or President of the Company and may confer
upon such
     person(s), and from time to time modify or revoke, such title(s)
and such
     duties and authorities of the Board of Directors as the Board of
Directors
     may deem fit, subject to such limitations and restrictions as
the Board of
     Directors may from time to time prescribe. Unless otherwise
determined by
     the Board of Directors, the Chief Executive Officer(s) shall
have authority
     with respect of the management of the Company in the ordinary
course of
     business. Such appointment(s) may be either for a fixed term or
without any
     limitation of time, and the Board of Directors may from time to
time
     (subject to the provisions of the Companies Law and of any
contract between
     any such person and the Company) fix his or their salaries and
emoluments,
     remove or dismiss him or them from office and appoint another or
others in
     his or their place or places.


                                       28
<PAGE>


MINUTES

51.      MINUTES

     a)    Minutes of each General Meeting and of each meeting of the
Board of
          Directors shall be recorded and duly entered in books
provided for
          that purpose, and shall be held by the Company at its
principal place
          of office or its Registered Office or such other place as
shall have
          been determined by the Board of Directors. Such minutes
shall, in all
          events, set forth the names of the persons present at the
meeting and
          all resolutions adopted thereat.

     b)    Any minutes as aforesaid, if purporting to be signed by the
chairman
           of the meeting or by the chairman of the next succeeding
meeting,
          shall constitute prima facie evidence of the matters
recorded therein.

                                    DIVIDENDS

52.   DECLARATION OF DIVIDENDS

     The Board of Directors may from time to time declare, and cause
the Company
     to pay, such interim dividend as may appear to the Board of
Directors to be
     justified by the profits of the Company. The final dividend in
respect of
     any fiscal year shall be proposed by the Board of Directors and
shall be
     payable only after the same has been approved by Ordinary
Resolution of the
     Company, but no such resolution shall provide for the payment of
an amount
     exceeding that proposed by the Board of Directors for the
payment of such
     final dividend, and no such resolution or any failure to approve
a final
     dividend shall affect any interim dividend theretofore declared
and paid.
     The Board of Directors shall determine the time for payment of
such
     dividends, both interim and final, and the record date for
determining the
     shareholders entitled thereto.

53.   FUNDS AVAILABLE FOR PAYMENT OF DIVIDEND

     The Company may pay dividends subject to and according to the
provisions of
     the Companies Law.

54.   AMOUNT PAYABLE BY WAY OF DIVIDENDS

     Subject to the provisions of these Articles and subject to any
rights or
     conditions attached at that time to any share in the capital of
the Company
     granting preferential, special or deferred rights or not
granting any
     rights with respect to dividends, the profits of the Company
which shall be
     declared as dividends shall be distributed according to the
proportion of
     the nominal value paid up on account of the shares held at the
date so
     appointed by the Company, without regard to the premium paid in
excess of
     the nominal value, if any. No amount paid or credited as paid on
a share in
     advance of calls shall be treated for purposes of this Article
as paid on a
     share.


                                       29
<PAGE>


55.   INTEREST

      No dividend shall carry interest as against the Company.

56.   PAYMENT IN SPECIE

     Upon the recommendation of the Board of Directors approved by
Ordinary
     Resolution of the Company, the Company (i) may cause any monies,
     investments, or other assets forming part of the undivided
profits of the
     Company, standing to the credit of a reserve fund, or to the
credit of a
     reserve fund for the redemption of capital, or in the hands of
the Company
     and available for dividends, or representing premiums received
on the
     issuance of shares and standing to the credit of the share
premium account,
     to be capitalized and distributed among such of the shareholders
as would
     be entitled to receive the same if distributed by way of
dividend and in
     the same proportion, on the basis that they become entitled
thereto as
     capital, or may cause any part of such capitalized fund to be
applied on
     behalf of such shareholders in paying up in full, either at par
or at such
     premium as the resolution may provide, any unissued shares or
debentures or
     debenture stock of the Company, which shall be distributed
accordingly or
     in payment, in full or in part, of the uncalled liability on all
issued
     shares or debentures or debenture stock if such liability
exists, on a pro
     rata basis, and (ii) may cause such distribution or payment to
be accepted
     by such shareholders in full satisfaction of their interest in
the said
     capitalized sum. In case of a stock dividend, holders of each
class of
     shares can receive shares of one class whether such class
existed prior
     thereto or was created therefor or shares of the same class
which conferred
     upon the holder the right to receive such dividend.

57.   IMPLEMENTATION OF POWERS UNDER ARTICLE 56

     For the purpose of giving full effect to any resolution under
Article 56,
     and without derogating from the provisions of Article 7(b)
hereof, the
     Board of Directors may settle any difficulty which may arise in
regard to
     the distribution as it thinks expedient, and, in particular, may
issue
     fractional certificates, and may fix the value for distribution
of any
     specific assets, and may determine that cash payments shall be
made to any
     members upon the basis of the value so fixed, or that fractions
of less
     value than the nominal value of one share may be disregarded in
order to
     adjust the rights of all parties, and may vest any such cash,
shares,
     debentures, debenture stock or specific assets in trustees upon
such trusts
     for the persons entitled to the dividend or capitalized fund as
may seem
     expedient to the Board of Directors. Where requisite, a proper
contract
     shall be filed in accordance with Section 291 of the Companies
Law, and the
     Board of Directors may appoint any person to sign such contract
on behalf
     of the persons entitled to the dividend or capitalized fund as
may seem
     expedient to the Board of Directors. Where requisite, a proper
contract
     shall be filed in accordance with Section 291 of the Companies
Law, and the
     Board of Directors may appoint any person to sign such contract
on behalf
     of the persons entitled to the dividend or capitalized fund.


                                       30
<PAGE>


58.   DIVIDEND ON UNPAID SHARES

     Without derogation from Article 54 hereof, the Board of
Directors may give
     an instruction which shall prevent the distribution of a
dividend to the
     registered holders of share the full nominal amount of which has
not been
     paid up.
59.   RETENTION OF DIVIDENDS

     a)   The Board of Directors may retain any dividend or other
monies payable
          or property distributable in respect of a share on which
the Company
          has a lien, and may apply the same in or towards
satisfaction of the
          debts, liabilities, or engagements in respect of which the
lien
          exists.

     b)   The Board of Directors may retain any dividend or other
monies payable
          or property distributable in respect of a share in respect
of which
          any person is, under Article 21 or 22, entitled to become a
member, or
          which any person, is, under said Articles, entitled to
transfer, until
          such person shall become a member in respect of such share
or shall
          transfer the same.

60.   UNCLAIMED DIVIDENDS

     All unclaimed dividends or other moneys payable in respect of a
share may
     be invested or otherwise made use of by the Board of Directors
for the
     benefit of the Company until claimed. The payment by the
Directors of any
     unclaimed dividend or such other moneys into a separate account
shall not
     constitute the Company a trustee in respect thereof. The
principal (and
     only the principal) of an unclaimed dividend or such other
moneys shall be,
     if claimed, paid to a person entitled thereto.

61.   MECHANICS OF PAYMENT

     The Board of Directors may fix the mechanics for payment of
dividends as it
     deems fit. However, if nothing to the contrary in the resolution
of the
     Board of Directors, then all dividends or other moneys payable
in cash in
     respect of a share may be paid by check or warrant sent through
the post
     to, or left at, the registered address of the person entitled
thereto or by
     transfer to a bank account specified by such person (or, if two
or more
     persons are registered as joint holders of such share or are
entitled
     jointly thereto in consequence of the death or bankruptcy of the
holder or
     otherwise, to the joint holder whose name is registered first in
the
     Register of Members or his bank account or the person who the
Company may
     then recognize as the owner thereof or entitled thereto under
Article 21 or
     22 hereof, as applicable, or such person's bank account), or to
such person
     and at such other address as the person entitled thereto may by
writing
     direct. Every such check or warrant shall be made payable to the
order of
     the person to whom it is sent, or to such person as the person
entitled
     thereto as aforesaid may direct, and payment of the check or
warrant by the
     banker upon whom it is drawn shall be a good discharge to the
Company.


                                      31
<PAGE>


62.   RECEIPT FROM A JOINT HOLDER

     If two or more persons are registered as joint holders of any
share, or are
     entitled jointly thereto in consequence of the death or
bankruptcy of the
     holder or otherwise, any one of them may give effectual receipts
for any
     dividend or other moneys payable or property distributable in
respect of
     such share.

                                    ACCOUNTS

63.   BOOKS OF ACCOUNT

     The Board of Directors shall cause accurate books of account to
be kept in
     accordance with the provisions of the Companies Law and of any
other
     applicable law. Such books of account shall be kept at the
Registered
     Office of the Company, or at such other place or places as the
Board of
     Directors may think fit, and they shall always be open to
inspection by all
     Directors. No member, not being a Director, shall have any right
to inspect
     any account or book or other similar document of the Company,
except as
     conferred by law or authorized by the Board of Directors or by
Ordinary
     Resolution of the Company.

64.   AUDIT

     At least once in every fiscal year the accounts of the Company
shall be
     audited and the correctness of the profit and loss account and
balance
     sheet certified by one or more duly qualified auditors.

65.   AUDITORS

     The appointment, authorities, rights and duties of the
auditor(s) of the
     Company, shall be regulated by applicable law, provided,
however, that in
     exercising its authority to fix the remuneration of the
auditor(s), the
     members in General Meeting may, by Ordinary Resolution, act (and
in the
     absence of any action in connection therewith shall be deemed to
have so
     acted) to authorize the Board of Directors to fix such
remuneration subject
     to such criteria or standards, if any, as may be provided in
such Ordinary
     Resolution, and if no such criteria or standards are so
provided, such
     remuneration shall be fixed in an amount commensurate with the
volume and
     nature of the services rendered by such auditor(s).


                                         32
<PAGE>


                                  BRANCH REGISTERS

66.   BRANCH REGISTERS

     Subject to and in accordance with the provisions of Sections 138
to 139,
     inclusive, of the Companies Law and to all orders and regulation
issued
     thereunder, the Company may cause branch registers to be kept in
any place
     outside Israel as the Board of Directors may think fit, and,
subject to all
     applicable requirements of law, the Board of Directors may from
time to
     time adopt such rules and procedures as it may think fit in
connection with
     the keeping of such branch registers.

                                INDEMNITY AND INSURANCE

67.   INDEMNITY AND INSURANCE

     a)   Subject to the provisions of the Companies Ordinance, the
Company may
          enter into a contract for the insurance of the Liability,
in whole or
          in part, of any of its Office Holders with respect to: (i)
a breach of
          his duty of care to the Company or to another person; (ii)
a breach of
           his fiduciary duty to the Company, provided that the Office
Holder
           acted in good faith and had reasonable cause to assume that
his act
          would not prejudice the interests of the Company; or (iii)
a financial
          liability imposed upon him in favor of another person in
respect of an
          act performed by him in his capacity as an Office Holder of
the
          Company.

     b)   The Company may indemnify an Office Holder against: (i) a
financial
          liability imposed on him in favor of another person by any
judgment,
          including a settlement or an arbitrator's award approved by
a court in
          respect of an act performed in his capacity as an Office
Holder of the
          Company, and (ii) reasonable litigation expenses, including
attorneys'
          fees, expended by such Office Holder or charged to him by a
court, in
          proceedings instituted against him by the Company or on its
behalf or
          by another person, or in a criminal charge, from which he
was
          acquitted, all in respect of an act performed in his
capacity as an
          Office Holder of the Company, and (iii) liabilities,
obligations and
          expenses in respect of which in the future the Company may
be legally
          permitted to indemnify under the Companies Ordinance.

     c)    The Company may indemnify an Office Holder in accordance
with the
           provisions of article 67(b) for any liabilities and/or
expenses
          incurred by such an Office Holder. Such indemnification
shall include
          reasonable litigation expenses, as specified in Article
67(b) above,
          that were incurred by or charged to such an Office Holder
if convicted
          in a criminal charge for an offense that does not require
the proof of
          criminal thought. In addition to the above, the Company may
also
          undertake to indemnify such an Office Holder in advance,
for
          liabilities and/or expenses that were not yet incurred,
provided that
          such a commitment shall be restricted to types of events
that in the
          opinion of the Board of Directors can be foreseen at the
time that the
          commitment is made and to an amount that the Board of
Directors deems
          reasonable, in view of the circumstances. Such
indemnification may
          include any other liability or event permitted by any
applicable law.


                                      33
<PAGE>


     d)   The Company may release an Office Holder in advance from
liability -
          whether totally or partially - for damages arising from the
breach of
          the duty of such an Office Holder to act with due skill and
care
          towards the Company.

     e)   Subject to the Companies law - the Company may indemnify
any employee
          of the Company who is not an Office Holder of the Company,
from any
          liability or expense imposed on such an employee in his
capacity as an
          employee of the Company, while defending from any
litigation, whether
          criminal or civil, that resulted, accordingly, by an
acquittal or a
          judgment in the employee's favor.

     f)   The company may commit to indemnify such an employee,
including in
          advance, for any financial liability imposed on such an
employee in
          favor of another person in respect of an act performed bona
fide in
          his capacity as an employee of the Company.

     g)   Subject to the Companies Law, these Articles of Association
shall not
          limit the Company in any way from entering into a contract
for the
          insurance, or the granting of exemptions or indemnification
(i) in
          connection with an Office Holder in the Company or any
person
          designated by the Company to serve as a director in another
company in
          which the Company has any interest or holds shares,
directly or
          indirectly ("a Director In Another Company"), to the extent
that the
          insurance, exemption or indemnification are not forbidden
by any
          applicable law, and (ii) in connection with whoever is not
an Office
          Holder in the Company or a Director In Another Company,
including but
          not limited to, employees, contractors and consultants.

                                  WINDING UP
68.   WINDING UP

     If the Company is wound up, then subject to applicable law and
to the
     rights of the holders of shares with special rights upon winding
up, the
     assets of the Company available for distribution among the
members shall be
     distributed to them in proportion to the respective holdings of
the shares
     in respect of which such distribution is being made.


                                       34
<PAGE>


                      RIGHTS OF SIGNATURE, STAMP, AND SEAL

69.   RIGHTS OF SIGNATURE, STAMP, AND SEAL

     a)   The Board of Directors shall be entitled to authorize any
person or
          persons (who need not be Directors) to act and sign on
behalf of the
          Company, and the acts and signature of such person(s) on
behalf of the
          Company shall bind the Company insofar as such person(s)
acted and
          signed within the scope of his or their authority.

      b)   The Board of Directors may provide for a seal. If the Board
of
           Directors so provides, it shall also provide for the safe
custody
          thereof. Such seal shall not be used except by the
authority of the
          Board of Directors and in the presence of the person(s)
authorized to
          sign on behalf of the Company, who shall sign every
instrument to
          which such seal is affixed.

     c)   The Company may exercise the powers conferred by Section
102 of the
          Companies Law regarding a seal for use abroad, and such
powers shall
          be vested in the Board of Directors.

                                     NOTICES

70.   NOTICES

     a)   Any written notice or other document may be served by the
Company upon
          any member either personally or by sending it by prepaid
mail (airmail
          if sent internationally) addressed to such member at his
address as
          described in the Register of Members. Any written notice or
other
          document may be served by any member upon the Company by
tendering the
          same in person to the Secretary or the General Manager or
Chief
          Executive Officer of the Company at the principal office of
the
          Company or by sending it by prepaid registered mail
(airmail if posted
          outside Israel) to the Company at it Registered Address.
Any such
          notice or other document shall be deemed to have been
served five (5)
          business days after it has been posted (7) business days if
posted
          internationally), or when actually tendered in person, to
such member
          (or to the Secretary or the General Manager). Notice sent
by
          cablegram, telex, or facsimile shall be deemed to have been
served two
          business days after the notice is sent to the addressee, or
when in
          fact received, whichever is earlier, notwithstanding that
it was
          defectively addressed or failed, in some other respect, to
comply with
          the provisions of this Article 70(a).

     b)   All notices to be given to the members shall, with respect
to any
          share to which persons are jointly entitled, be given to
whichever of
          such persons is named first in the Register of Members, and
any notice
          so given shall be sufficient notice to the holders of such
share.

     c)   Any member whose address is not described in the Register
of Members,
          and who shall not have designated in writing delivered to
the Company
          an address for the receipt of notices, shall not be
entitled to
          receive any notice from the Company.


                                      35

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.4
<SEQUENCE>3
<FILENAME>exhibit_4-4.txt
<TEXT>



EXHIBIT 4.4
                                MARCH 28, 2007

TO
MR. YOSEF SHIRAN

Dear Yos,

     RE: AMENDMENTS TO THE MANAGEMENT SERVICES AGREEMENT BETWEEN
TEFRON LTD
    (THE "COMPANY") AND SHIRAN & PARTNERS - CONSULTING,
ENTREPRENUERSHIP AND
         FINANCING LTD. (THE "MANAGEMENT COMPANY") DATED JULY 30,
2003
                           (THE "ORIGINAL AGREEMENT")

     For the sake of good order, the amendments to the Original
Agreement are
hereby put in writing in the manner described below:

     1. Whereas, on July 30, 2003, the General Meeting of the
Company's
Shareholders resolved to approve the entering into by the Company of
a
management and consulting agreement with you or with an entity
controlled by
you, pursuant to which agreement the compensation to be provided by
the Company
was to be at substantially the same cost to the Company as the cost
to the
Company of the base salary and other benefits (including automobile
and other
benefits) then provided to you under your personal employment
agreement; and
Whereas, following such approvals, the Original Agreement was
executed; and
Whereas the audit committee and the board of directors resolved on
August 7,
2005 and on August 9, 2005, respectively, that the cost to Tefron of
the base
salary and other benefits provided to you under your previous
personal
employment agreement was inaccurately calculated in the Original
Agreement; and
Whereas it was agreed that the use of an automobile was inadvertently
omitted
from the Original Agreement; Therefore, the Management Company's
monthly
consideration, starting from July 30, 2003 and thereafter, is
US$26,888 (twenty
six thousand eight hundred and eighty eight) plus NIS 2,065 (two
thousand and
sixty five), plus VAT as applicable by law.

     2. In accordance with the Company's audit committee's and board
of
directors' resolutions from February 11, 2004, and with the
shareholders'
approval from March 31, 2004 the Original Agreement was amended,
starting from
March 31, 2004, by fixing your annual bonus rate to be 2% of the
Company's net
profits, and such rate is no longer be subject to the discretion of
the
Company's audit committee.

     3. In accordance with the Company's audit committee's and board
of
directors' resolutions from July 5, 2006 and with the shareholders'
approval
from August 10, 2006 the Original Agreement was amended to provide
that the
definition of "net profits" for purposes of calculating the annual
bonus for
2006 and thereafter would be the Company's annual net profit as set
forth in the
Company's audited financial statements, after deducting tax and
without taking
into consideration special profits or losses (except special profits
which
resulted from your actions, which would be taken into consideration)
or profits
or losses which are not derived from the Company's ordinary
operation.


<PAGE>


Unless expressly set forth herein, all other terms and conditions set
forth in
the Original Agreement are in full force and effect.


                                                    Sincerely,
                                                    /s/ Michal
Baumwald Oron
                                                    ----------------
--------
                                                    Michal Baumwald
Oron,
                                                    General Counsel,
Tefron Ltd


I approve all of the above:

/s/ Yosef Shiran                   28/03/07
- ----------------                   --------
Yosef Shiran                       Date

CC: Mr. Ishay Davidi, Chairman of the Board of Directors


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.6
<SEQUENCE>4
<FILENAME>exhibit_4-6.txt
<TEXT>
EXHIBIT 4.6

                   MEMBERSHIP INTEREST REDEMPTION AGREEMENT

THIS MEMBERSHIP INTEREST REDEMPTION AGREEMENT (this "AGREEMENT") is
made and
entered into effective as of the 26 day of April, 2006, by and
between
AlbaHealth, LLC, a Delaware limited liability company (the
"COMPANY"), and
Tefron USA, Inc., a Delaware corporation formerly known as Alba-
Waldensian, Inc.
("SELLER").

                               R E C I T A L S:

     A. Seller is a member of the Company, owning 48,325 common units
in the
Company. The common units owned by Seller are hereinafter referred to
as the
"SELLER UNITS."

     B. Pursuant to an option set forth in that certain Put Option
Agreement
dated September 6, 2002 by and among the Company, Seller, Encompass
Group,
L.L.C. ("Encompass") and General Electric Capital Corporation ("GE"),
as amended
by Amendment No. 1 to the Put Option Agreement dated December 13,
2004
(collectively, the "PUT OPTION AGREEMENT"), Seller has elected to
sell all of
the Seller Units to the Company.

     C. The parties have agreed to terms and conditions of sale of
the Seller
Units that differ in certain respects from those described in the Put
Option
Agreement, and they desire to execute this Agreement to confirm the
terms
pursuant to which the Seller Units will be redeemed by the Company
effective as
of the Closing Date (as defined below).

     NOW, THEREFORE, in consideration of the foregoing premises and
for other
good and valuable consideration, the receipt and sufficiency of which
are hereby
acknowledged, the parties hereby agree as follows:

     1. REDEMPTION OF SELLER UNITS. Effective as of the Closing Date,
the
Company shall redeem from Seller, and Seller shall sell, transfer,
assign and
deliver to the Company, the Seller Units on the terms and conditions
set forth
herein.
     2. PURCHASE PRICE AND PAYMENT TERMS. The aggregate consideration
payable by
the Company for the Seller Units (the "PURCHASE PRICE") shall be
Thirteen
Million Two Hundred Fifty Thousand and 00/100 Dollars
($13,250,000.00). The
Purchase Price shall be payable as follows:

          a. Ten Million Two Hundred Fifty Thousand and 00/100
Dollars
     ($10,250,000.00) (the "CLOSING PAYMENT") shall be payable in
cash at
     Closing (as defined below); and

          b. Three Million and 00/100 Dollars ($3,000,000.00) shall
be payable
     pursuant to the terms of a subordinated promissory note in the
form
     attached hereto as EXHIBIT A (the "PROMISSORY NOTE").

     3. REPRESENTATIONS AND WARRANTIES OF SELLER. As a material
inducement to
the Company to enter into this Agreement, Seller represents and
warrants as
follows:


<PAGE>


          a. UNENCUMBERED TITLE. The Seller Units are free and clear
of all
     liens, encumbrances or other charges of any kind whatsoever
except those
     restrictions imposed by (i) that certain Limited Liability
Company
     Agreement of AlbaHealth, LLC dated as of September 6, 2002 (the
"LIMITED
     LIABILITY COMPANY AGREEMENT"), and (ii) that certain Borrower
Stockholder
     Pledge Agreement dated as of September 6, 2002 among Encompass,
Seller, GE,
     as a member of the Company, and GE, as Agent for the Lenders
(the "PLEDGE
     AGREEMENT"), and at Closing, upon payment of the Purchase Price,
Seller
     will transfer to the Company good and valid title to the Seller
Units, free
     and clear of all liens, encumbrances or other charges of any
kind
     whatsoever, subject to the terms of the Limited Liability
Company
     Agreement. The Seller Units represents all of Seller's interest
in the
     Company of any kind whatsoever, whether debt or equity.

         b. EXECUTION AND DELIVERY. Seller has the requisite power
and
     authority to enter into this Agreement all documents and
instruments
     contemplated hereby, and to sell the Seller Units. This
Agreement has been
     duly and validly executed and delivered by Seller, and
constitutes a valid
     and binding agreement of Seller enforceable against Seller in
accordance
     with its terms, except as may be limited by bankruptcy,
liquidation,
     receivership, conservatorship, insolvency or other similar laws
affecting
     the rights of creditors generally and by general equitable
principles.

         c. AUTHORITY. The execution, delivery and performance of
this
     Agreement and all documents and instruments contemplated hereby,
and the
     consummation by Seller of the transactions contemplated hereby
and thereby,
     have been duly authorized by all necessary action on the part of
Seller.

     4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a material
inducement
to Seller to enter into this Agreement, the Company represents and
warrants as
follows:

          a. EXECUTION AND DELIVERY. The Company has the requisite
power and
     authority to enter into this Agreement, the Promissory Note and
all
     documents and instruments contemplated hereby and thereby
(collectively,
     the "TRANSACTION DOCUMENTS"), to redeem the Seller Units and to
otherwise
     perform its obligation under the Transaction Documents. The
Transaction
     Documents have been duly and validly executed and delivered by
the Company,
     and each constitutes a valid and binding obligation of the
Company
     enforceable against the Company in accordance with its terms,
except as may
     be limited by bankruptcy, liquidation, receivership,
conservatorship,
     insolvency or other similar laws affecting the rights of
creditors
     generally and by general equitable principles.

         b. AUTHORITY. The execution, delivery and performance of
the
     Transaction Documents and the consummation by the Company of the
     transactions contemplated hereby and thereby have been duly
authorized by
     all necessary action on the part of the Company.

         c. NO CONFLICTS. The execution, delivery and performance of
the
     Transaction Documents by the Company and the consummation by the
Company of
     the transactions contemplated hereby and thereby, including the
issuance of
     Common Units to Seller under clause (b) of Section 11 of the
Promissory
     Note, do not and will not (i) conflict with or violate any
provision of its
     organizational documents, including the Limited Liability
Company
     Agreement, (ii) conflict with, or constitute a default (or an
event that,
     with notice or lapse of time or both, would become a default)
under, or
     give to others any rights of termination, amendment,
acceleration, or
     cancellation of, any agreement or instrument to which the
Company is a
     party or by which any of its property is subject, or (iii)
result in a
     violation of any law, rule, regulation, order, judgment,
injunction, decree
     or other restriction of any court or governmental authority to
which the
     Company is subject or by which any property of the Company is
subject.


                                      2
<PAGE>


    5. ADDITIONAL AGREEMENTS AND COVENANTS.

          a. POST-CLOSING ACTIONS. On or after the Closing Date, each
party
     shall prepare, execute and deliver such further instruments and
take such
     further action as the other party hereto shall reasonably
request at any
     time or from time to time in order to perfect, confirm or
evidence in the
     Company title (as such title is conveyed pursuant to this
Agreement) to all
     or any of the Seller Units or to consummate, in any other
manner, the terms
     and conditions of this Agreement.

          b. GENERAL ADMINISTRATIVE SERVICES AGREEMENT. On the
Closing Date,
     Seller and the Company shall enter into an amendment to that
certain
     General Administrative Services Agreement between the Company
and Seller
     dated September 6, 2002 (the "ADMINISTRATIVE SERVICES
AGREEMENT"), pursuant
     to which the amount payable by the Company to Seller for the 12-
month
     period commencing January 1, 2006 will be $766,000. The
amendment shall be
     in the form attached hereto as EXHIBIT B (the "AMENDMENT TO
ADMINISTRATIVE
     SERVICES AGREEMENT").
          c. COMPUTER SYSTEM. On January 1, 2007, the Company agrees
to purchase
     from Seller, and Seller agrees to sell to the Company, or its
assigns, for
     a price of $600,000, all of the computer hardware and software,
including
     all related software licenses and hardware and software leases,
comprising
     the computer system located in Valdese, North Carolina and
Rockwood,
     Tennessee that is currently owned by Seller and used by the
Company in its
     regular business activities and for preparation of its internal
financial
     statements, all of which hardware and software are described on
Schedule I
     hereto. The purchase and sale of the computer system is
expressly
     conditioned upon (i) the Closing of the redemption transaction
contemplated
     by this Agreement, (ii) the equipment and software comprising
the computer
     system being free and clear of all liens and encumbrances and in
reasonable
     working order, and (iii) the delivery by Seller of any necessary
consents
     from Seller's software licensors; provided, that (i) any fees
payable to
     software licensors and to hardware and software lessors required
in
     connection with the assignment of the software licenses and the
hardware
     and software leases to the Company shall be paid by the Company
and (ii)
     the Company assumes those obligations of Seller under the
hardware and
     software leases assigned to the Company which accrue on and
after the
     purchase and sale of the computer system. At the time of the
Company's
     purchase of the computer system from Seller, Seller will deliver
to the
     Company a Bill of Sale including customary warranties of
Seller's title and
     reasonable working condition of the computer system. Upon
consummation of
     such purchase, the Administrative Services Agreement will be
terminated.


                                      3
<PAGE>


          d. MUTUAL RELEASE. At Closing, Seller and the Company shall
execute
     and deliver to each other a Mutual Release in the form attached
hereto as
     EXHIBIT C (the "MUTUAL RELEASE").
          e. CONVERSION RIGHTS. The Company shall not, directly or
indirectly,
     enter into, incur or permit to exist any agreement that
prohibits,
     restricts or imposes any condition upon the ability of Seller to
exercise
     its conversion rights and receive Common Units, free and clear
of any
     restriction, lien or encumbrance of any kind, in accordance
clause (b) of
     Section 11 of the Promissory Note.

     6. DATE AND PLACE OF CLOSING. The purchase and sale of the
Seller Units
shall take place (the "CLOSING") at the offices of Winthrop &
Weinstine, P.A. at
10:00 a.m., local time, within five (5) business days after
satisfaction (or
waiver) of the conditions to Closing described in Section 7 of this
Agreement
(the "CLOSING DATE"). In the event the Closing has not occurred by
April 25,
2006, or such later date as the parties may agree upon, either party
hereto
shall have the right to terminate this Agreement on notice to the
other party,
unless the failure of the Closing to occur by such date is due to the
failure of
the terminating party to comply with its obligations hereunder.
Termination of
this Agreement shall not relieve a party from responsibility for
damages
resulting from its breach. Each party hereto agrees to use its
reasonable best
efforts to satisfy any conditions to Closing that are within its
control.

    7. CONDITIONS TO CLOSING.

          a. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation
of the
     Company to close the transactions contemplated hereby shall be
subject to
     and is contingent upon the satisfaction at or before the Closing
Date of
     the following conditions (unless waived in writing by the
Company):

               (i) REPRESENTATIONS AND WARRANTIES. The
representations and
          warranties of Seller set forth in SECTION 3 of this
Agreement shall
          have been true and correct in all material respects when
made and
          shall be true and correct in all material respects at the
Closing Date
          as if such representations and warranties were made at such
time, and
          Seller shall deliver to the Company at Closing a
certificate of an
          authorized officer of Seller certifying to this condition.
               (ii) PERFORMANCE OF AGREEMENT. All covenants,
conditions and
          other obligations under this Agreement which are to be
performed or
          complied with by Seller on or before the Closing Date shall
have been
          fully performed and complied with in all respects on or
before the
          Closing Date.

               (iii) GE RELEASE. GE shall have provided a release of
the Seller
          Units from the Pledge Agreement.

               (iv) SUBORDINATION AGREEMENT. Seller and SunTrust Bank
shall have
          executed the Subordination Agreement in the form attached
hereto as
          EXHIBIT D (the "SUBORDINATION AGREEMENT").


                                      4
<PAGE>


               (v) NO DEFAULT. Immediately after giving effect to the
payment of
          the Purchase Price, the fair value of the assets of the
Company will
          exceed all liabilities of the Company, other than
liabilities to
          Company members on account of their membership interests
and
          liabilities for which the recourse of creditors is limited
to
          specified property of the Company.

          In the event that any one or more of the conditions in this
SECTION
     7.A. have not been satisfied (or waived) by the Closing Date,
the Company
     shall have the right to terminate this Agreement by notice to
Seller.

          b. CONDITIONS TO OBLIGATIONS OF SELLER. The obligation of
Seller to
     close the transactions contemplated hereby shall be subject to
the
     satisfaction at or before the Closing Date of the following
conditions
     (unless waived in writing by Seller):

               (i) REPRESENTATIONS AND WARRANTIES. The
representations and
          warranties of the Company set forth in SECTION 4 of this
Agreement
          shall have been true and correct in all respects when made
and shall
          be true and correct in all material respects at the Closing
Date as if
          such representations and warranties were made at such time,
and the
          Company shall deliver to Seller a certificate of an
authorized officer
          of the Company certifying to this condition.

               (ii) PERFORMANCE OF AGREEMENT. All covenants,
conditions and
          other obligations under this Agreement that are to be
performed or
          complied with by the Company shall have been fully
performed and
          complied with in all respects on or prior to the Closing
Date.

               (iii) GE RELEASE. GE shall have provided a release of
the Seller
          Units from the Pledge Agreement.

               (iv) PROMISSORY NOTE. The Company shall have executed
the
          Promissory Note.

               (v) SUBORDINATION AGREEMENT. The Company and SunTrust
Bank shall
          have executed the Subordination Agreement.

               (vi) SUNTRUST LETTER. SunTrust Bank shall have
executed a letter
          in the form attached hereto as EXHIBIT F in which it agrees
to
          consider increasing by $3,000,000 the Revolving Commitment
under its
          loan agreement with the Company under certain circumstances
(the
          "SunTrust Letter").

      8. CLOSING DELIVERIES.

          a. DELIVERIES BY SELLER. At or prior to the Closing Date,
Seller shall
     deliver the following items and documents to the Company, each
duly and
     properly executed:

               (i) One (1) original of the Membership Interest Power
in the form
          attached hereto as EXHIBIT E conveying, selling,
transferring and
          assigning to the Company all of Seller's right, title and
interest in
          the Seller Units;


                                      5
<PAGE>


               (ii) Four (4) counterpart originals of the Amendment
to
          Administrative Services Agreement;
               (iii) Four (4) counterpart originals of the Mutual
Release;

               (iv) Four (4) counterpart originals of the
Subordination
          Agreement;

               (v) A written resignation from each of Seller's
designees to the
          Company's Board of Managers;

               (vi) Certified copies of the corporate resolutions of
Seller
          authorizing the transactions contemplated hereby, and
authorizing the
          execution, delivery and performance of this Agreement and
all other
          documents and agreements contemplated hereby; and

               (vii) Seller's Certificate dated as of the Closing
Date
          confirming that (i) the representations and warranties of
Seller were
          true and correct in all material respects when made and
remain true
          and correct in all material respects on and as of the
Closing Date,
          and (ii) all covenants, agreements and conditions required
to be
          performed or complied with by Seller prior to or at the
Closing Date
          have been performed or complied with by Seller.

          b. DELIVERIES BY THE COMPANY. At the Closing Date, the
Company shall
     deliver the following items and documents to Seller, each duly
and properly
     executed:

                (i) Four (4) counterpart originals of the Amendment to
           Administrative Services Agreement;

               (ii) Four (4) counterpart originals of the Mutual
Release;

               (iii) Certified copies of the resolutions of the
Company
          authorizing the transactions contemplated hereby, and
authorizing the
          execution, delivery and performance of this Agreement and
all other
          documents and agreements contemplated hereby;

               (iv) The Company's Certificate dated as of the Closing
Date
          confirming that (i) the representations and warranties of
the Company
          were true and correct in all material respects when made
and remain
            true and correct in all material respects on and as of the
Closing
          Date, and (ii) all covenants, agreements and conditions
required to be
          performed or complied with by the Company prior to or at
the Closing
          Date have been performed or complied with by the Company;

               (v) A written release by GE of the Seller Units from
the Pledge
          Agreement;

                (vi) The Closing Payment, via wire transfer, to an
account
            designated by Seller;

                (vii) The Promissory Note;


                                        6
<PAGE>


                (viii) The Subordination Agreement; and

                (ix) The SunTrust Letter executed by SunTrust Bank.

     9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The statements,
representations, warranties, covenants and agreements of the parties
hereto
contained in this Agreement and in any certificate, instrument or
document
delivered by or on behalf of any of the parties hereto pursuant to
this
Agreement and the transactions contemplated hereby shall survive the
Closing and
the consummation of the transactions contemplated hereby.

     10. OBSERVER RIGHTS. Until the Promissory Note is paid in full,
Seller
shall be entitled to designate a non-voting observer to attend and
participate
in (but not vote at) all meetings of the Board of Managers of the
Company and
all Board committees. The Company shall provide the observer with
copies of all
notices, minutes, consents, financial information and other materials
that it
provides to its managers at the same time and in the same manner as
provided to
such managers. Seller may, at any time, substitute or replace the
observer. The
observer shall be entitled to the same indemnification from the
Company as is
provided to all other members of the Board.

    11. INDEMNIFICATION.

            a. INDEMNITY BY SELLER. Seller agrees to indemnify, defend,
exonerate
     and hold the Company and its managers, officers, members,
affiliates,
     representatives, agents, successors and assigns, free and
harmless from and
     against any and all actions, causes of action, suits, losses,
liabilities,
     demands, damages, claims and expenses, of whatever type or
nature,
     including reasonable attorneys' fees and disbursements
(collectively
     "LOSSES"), incurred in any capacity by any of the indemnitees as
a result
     of or relating to any breach or misrepresentation of any of the
     representations, warranties, covenants or agreements of Seller
set forth in
     this Agreement; provided that Seller shall not be liable for any
loss of
     profits or consequential damages suffered by the Company or any
other
     indemnitee under this Section 11.a.

          b. INDEMNITY BY THE COMPANY. The Company agrees to
indemnify, defend,
     exonerate and hold Seller and its officers, directors,
shareholders,
     affiliates, representatives, agents, successors and assigns,
free and
     harmless from and against any and all Losses, incurred in any
capacity by
     any of the indemnitees as a result of or relating to any breach
or
     misrepresentation of any of the representations, warranties,
covenants or
     agreements of this Company set forth in any of this Agreement;
provided
     that the Company shall not be liable for any loss of profits or
     consequential damages suffered by Seller or any other indemnitee
under this
     Section 11.b.

     12. TERMINATION OF INTERESTS. From and after the Closing Date,
and except
for Seller's rights under this Agreement and under the Promissory
Note, Seller
shall have no further interest in the assets, profits or management
of the
Company, and all obligations of the Company to Seller, including the
return of
any capital contribution, loan or advance, and all obligations of
Seller to the
Company, including those under the Limited Liability Company
Agreement, shall be
deemed satisfied and discharged.


                                      7
<PAGE>


    13. MISCELLANEOUS.
           a. INCORPORATION OF RECITALS. The recitals set forth above
are
     incorporated herein and are made a part of this Agreement as if
fully set
     forth herein and shall constitute an expression of the intent of
the
     parties and as an aid in the construction of this Agreement.

           b. ENTIRE AGREEMENT; AMENDMENT. This Agreement, including
the
       schedules and exhibits, constitutes the entire agreement between
the
     parties and supersedes all prior discussions, negotiations and
     understandings relating to the subject matter hereof, whether
written or
     oral. This Agreement may not be amended, altered, enlarged,
supplemented,
     abridged, modified, or any provisions waived, except by a
writing duly
     signed by all of the parties (in the case of an amendment) and
by the
     waiving party (in the case of a waiver).

          c. COUNTERPARTS. This Agreement may be executed in any
number of
     counterparts, each of which shall be deemed an original, but all
of which
     taken together shall constitute one and the same instrument.

          d. HEADINGS. The headings of the paragraphs of this
Agreement are
     included for purposes of convenience only and shall not affect
the
     construction or interpretation of any of its provisions.

           e. NO THIRD-PARTY RIGHTS. Nothing expressed or implied in
this
     Agreement is intended, nor may be construed, to confer upon or
give any
     person, firm or corporation, other than the parties hereto, any
rights or
     remedies under or by reason of this Agreement.

          f. REMEDIES. The rights, remedies, powers and privileges
provided in
     this Agreement are cumulative and not exclusive and are in
addition to any
     and all rights, remedies, powers and privileges granted by law,
rule,
     regulation or instrument. The parties agree that, in addition to
any other
     relief afforded under the terms of this Agreement, the parties
may enforce
     this Agreement by injunctive or mandatory relief to be issued by
or against
     the other parties, it being understood that both damages and
specific
     performance will be proper modes of relief and are not to be
understood as
     alternative remedies.
          g. GOVERNING LAW. This Agreement shall be deemed to be a
contract made
     under the laws of the State of Delaware and for all purposes it,
plus any
     related or supplemental documents and notices, shall be
construed in
     accordance with and governed by the laws of such State; provided
that the
     Subordination Agreement and the Promissory Note shall be
governed by the
     laws of the State of Georgia.

          h. WAIVER. No failure on the part of either party to
exercise, and no
     delay in exercising, any right or remedy hereunder shall operate
as a
     waiver thereof; nor shall any single or partial exercise of any
right or
     remedy hereunder preclude any other or further exercise thereof
or the
     exercise of any other right or remedy granted hereby or by any
related
     document or by law.


                                      8
<PAGE>


          i. SUCCESSORS AND ASSIGNS. This Agreement and all documents
related
     hereto shall be binding upon and inure to the benefit of the
parties hereto
     and their respective successors and assigns. No party shall have
the right
     to assign this Agreement without the prior written consent of
each other
     party hereto.

          j. NOTICES. All notices and communications required or
permitted under
     this Agreement shall be in writing and shall be delivered by
hand, by
     registered or certified mail, postage prepaid, by overnight
courier, or by
     facsimile transmission, in each case addressed as follows:

         If to the Company:                 AlbaHealth, LLC
                                            Attn: David A. Huelsbeck
                                            615 Macon Road
                                            McDonough, GA 30253
                                            Telephone: (800) 284-
4540
                                            Facsimile: (770) 957-
6728

         With a copy to:                    Winthrop & Weinstine,
P.A.
                                            ATTN: Timothy M.
Barnett, Esq.
                                            225 South Sixth Street,
Suite 3500
                                            Minneapolis, MN 55402-
4629
                                            Telephone: (612) 604-
6400
                                            Facsimile: (612) 604-
6800

           If to Seller:                    Tefron USA, Inc.
                                            ATTN: Yosef Shiran
                                            Industrial Center
                                            Teradyon, P.O. Box 1365,
                                            Misgav 20179, Israel
                                            Telephone: (972)4-990-
0803
                                            Facsimile: (972) 4-990-
0054

           With a copy to:                  Dewey Ballantime LLP
                                            ATTN: Morton A. Pierce,
Esq.
                                            1301 Avenue of the
Americas
                                            New York, NY 10019

Telephone:_______________
                                            Facsimile: (212) 259-
6333

          and to:                           Gross, Kleinhendler,
Hodak, Halevy,
                                            Greenberg & Co.
                                            ATTN: Richard Mann,
Adv.
                                            One Azrieli Center
                                            Tel Aviv, 67021 Israel
                                            Telephone: (972) 3-607-
4444
                                            Facsimile: (972) 3-607-
4411


                                      9
<PAGE>


     All notices and communications shall be effective as follows: if
delivered
by mail, on the earlier of the day of actual receipt or ten business
days after
deposit in mail; if sent by overnight courier, three business days
after sent by
a reputable overnight courier; if delivered in person, upon actual
receipt or,
if delivery is refused, upon tender of delivery; if sent by facsimile
transmission, immediately upon dispatch to the facsimile numbers
shown above if
a business day at the location of receipt and confirmation of
successful
transmission is received.
                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]


                                       10
<PAGE>


          [SIGNATURE PAGE TO MEMBERSHIP INTEREST REDEMPTION
AGREEMENT]

     IN WITNESS WHEREOF, the parties have executed this Membership
Interest
Redemption Agreement as of the date and year first written above.

ALBAHEALTH, LLC


By: /s/ A. William Ott
- ----------------------
A. William Ott
Its PRESIDENT

TEFRON USA, INC.


By: /s/ Yosef Shiran
- --------------------
Yosef Shiran
Its Chief Executive Officer

By: /s/ Asaf Alperovitz
- -----------------------
ASAF ALPEROVITZ
Its Senior Vice President


                                       11
<PAGE>


                                    EXHIBIT A

                      FORM OF SUBORDINATED PROMISSORY NOTE

                                 [See attached]


<PAGE>


                                    EXHIBIT B

         FORM OF AMENDMENT TO GENERAL ADMINISTRATIVE SERVICES
AGREEMENT

            AMENDMENT TO GENERAL ADMINISTRATIVE SERVICES AGREEMENT

THIS AMENDMENT, made and entered into this ___ day of _____________,
2006, by
and between AlbaHealth, LLC, a Delaware limited liability company
(the
"COMPANY"), and Tefron USA, Inc., a Delaware corporation formerly
known as
Alba-Waldensian, Inc. ("TEFRON").

                             W I T N E S S E T H :

WHEREAS, the Company and Tefron previously entered into that certain
General
Administrative Services Agreement dated September 6, 2002 (the
"Administrative
Services Agreement"); and

WHEREAS, the parties wish to amend the Administrative Services
Agreement to
modify the services, compensation and termination provisions thereof.

NOW THEREFORE, in consideration of the mutual covenants contained
herein, the
sufficiency of which is hereby acknowledged, the parties hereto agree
to the
following terms and conditions:

     1. All references in the Agreement to "Alba" shall now read
"Tefron".

     2. Section 3(a) of the Agreement is hereby amended to provide
that the
Service Fee shall be Seven Hundred Sixty-Six Thousand and 00/100
Dollars
($766,000.00) for the 12-month period commencing January 1, 2006.

     3. Section 4 of the Agreement is hereby amended by adding a new
subsection
(c) thereto, which subsection (c) shall provide in its entirety as
follows:

          (c) This Agreement shall expire on December 31, 2006,
unless the
     parties hereto agree to extend the Agreement in writing.

     4. Except as otherwise amended herein, the Administrative
Services
Agreement is hereby ratified and remains valid and in full force and
effect. The
amended portion of the Administrative Services Agreement shall be
read, wherever
reasonable to do so, to be consistent with the portions not so
amended; provided
that the amended portion shall be deemed to control and any conflict
shall be
resolved in favor of such amended portion.

     5. This Amendment may be executed in two or more counterparts,
all of which
shall be considered one and the same agreement and shall become
effective when
one or more counterparts have been signed by each of the parties and
delivered
to the other parties.
                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]


<PAGE>


   [SIGNATURE PAGE TO AMENDMENT TO GENERAL ADMINISTRATIVE SERVICES
AGREEMENT]

IN WITNESS WHEREOF, the parties have executed this Amendment as of
the date
first above written.

ALBAHEALTH, LLC


By: ___________________
Its:___________________

TEFRON USA, INC.


By:
- ---------------------------
Yosef Shiran
Its Chief Executive Officer


                                         2
<PAGE>


                                     EXHIBIT C

                             FORM OF MUTUAL RELEASE

                                  MUTUAL RELEASE

     THIS MUTUAL RELEASE is made and entered into effective as of the
____day of
___________, 2006, by and between Tefron USA, Inc., a Delaware
corporation
formerly known as Alba-Waldensian, Inc. ("TEFRON"), and AlbaHealth,
LLC, a
Delaware limited liability company (the "COMPANY").

                                W I T N E S S E T H :

     WHEREAS, prior to the date hereof, Tefron was a member of the
Company;

     WHEREAS, Tefron and the Company have entered into a Membership
Interest
Redemption Agreement and ancillary documents referenced therein
(collectively,
the "REDEMPTION AGREEMENT") pursuant to which, among other things,
the Company
is consummating the redemption from Tefron of all of its membership
interest in
the Company; and
     WHEREAS, consummation of the transactions contemplated by the
Redemption
Agreement is conditioned upon the execution of this Mutual Release by
the
parties hereto.

     NOW, THEREFORE, in consideration of the mutual covenants,
promises and
agreements of the parties herein contained and in consideration of,
and as a
condition to, consummation of the transactions contemplated by the
Redemption
Agreement, it is mutually agreed as follows:

1.   The Company, for itself and for each of its agents,
representatives and
     assigns and others claiming through or under it, hereby releases
and
     forever discharges Tefron, and each and all of its past, present
and future
     officers, employees, directors, owners, agents and
representatives, and
     each and all of their respective subsidiaries, affiliates,
agents,
     representatives, predecessors, successors, assigns, associated
companies,
     corporate parents and all of their respective past, present and
future
     officers, employees, directors, owners, agents and
representatives, of and
     from any and all manner of action or actions, cause or causes of
action, in
     law or in equity, statutory or in common law, of any nature
whatsoever,
     known or unknown, fixed or contingent, which the Company has,
had or may
     hereafter have against each such persons or entities for or by
reason of
     any matter, cause or thing whatsoever arising out of acts or
events
     occurring from the beginning of time up to and through the date
of this
     Mutual Release; except any claims arising out of the Redemption
Agreement
     or the agreements entered into pursuant to the Redemption
Agreement.


                                      1
<PAGE>


2.   Tefron, for itself and for each of its agents, representatives
and assigns
     and others claiming through or under it, hereby releases and
forever
     discharges the Company and each and all of its past, present and
future
     officers, employees, managers, owners, agents and
representatives, and each
     and all of their respective subsidiaries, affiliates, agents,
     representatives, predecessors, successors, assigns, associated
companies,
     corporate parents and all of their respective past, present and
future
     officers, employees, managers, directors, owners, agents and
     representatives, of and from any and all manner of action or
actions, cause
     or causes of action, in law or in equity, statutory or in common
law, of
     any nature whatsoever, known or unknown, fixed or contingent,
which Tefron
     has, had or may hereafter have against such persons or entities
for or by
     reason of any matter, cause or thing whatsoever arising out of
acts or
     events occurring from the beginning of time up to and through
the date of
     this Mutual Release; except any claims arising out of the
Redemption
     Agreement, the subordinated promissory note executed by the
Company
     pursuant thereto or the agreements entered into pursuant to the
Redemption
     Agreement.

3.   The provisions of this Mutual Release are severable, and if any
part of it
     is found to be unenforceable, the other paragraphs shall remain
fully valid
     and enforceable. This Mutual Release shall survive the
termination of any
     arrangements contained in it.

4.   All parties acknowledge that they have read all of the terms of
this Mutual
     Release and have had an opportunity to discuss it with their
respective
     attorneys. Each understands the terms of this Mutual Release.
All parties
     execute this Mutual Release of their own free will in exchange
for the
     consideration to be given, which each acknowledges is adequate
and
     satisfactory.

     PLEASE READ CAREFULLY. This Mutual Release is a release of all
known and
unknown claims.

                 [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]


                                       2
<PAGE>


                      [SIGNATURE PAGE TO MUTUAL RELEASE]

     IN WITNESS WHEREOF, the parties hereto have executed this Mutual
Release
effective as of the date and year first indicated above.

TEFRON USA , INC.                               AlbaHealth, LLC


By:______________________________
By:______________________________
   __________________(Print Name)
__________________(Print Name)
   Its:__________________________
Its:__________________________



                                       3
<PAGE>


                                    EXHIBIT D

                        FORM OF SUBORDINATION AGREEMENT

                                [See attached]


<PAGE>


                                    EXHIBIT E

                       FORM OF MEMBERSHIP INTEREST POWER

                           MEMBERSHIP INTEREST POWER

     FOR VALUE RECEIVED, TEFRON USA, INC., a Delaware corporation
formerly known
as Alba-Waldensian, Inc., hereby assigns and transfers unto
ALBAHEALTH, LLC, a
Delaware limited liability company, FORTY-EIGHT THOUSAND THREE
HUNDRED
TWENTY-FIVE (48,325) Common Units of ALBAHEALTH, LLC standing in its
name on the
books of said limited liability company represented by certificate
number 1
herewith.

Dated as of April ____, 2006.                        TEFRON USA, INC.


                                                     By:
                                                     ----------------
--------
                                                     Yosef Shiran
                                                     Its Chief
Executive Officer


<PAGE>


                                    EXHIBIT F
                            FORM OF SUNTRUST LETTER

                                [See attached]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.7
<SEQUENCE>5
<FILENAME>exhibit_4-7.txt
<TEXT>



EXHIBIT 4.7

                            SUBORDINATION AGREEMENT

     This Subordination Agreement (this "AGREEMENT"), dated as of
April 26,
2006, is entered into by TEFRON USA, INC., a Delaware corporation
("SUBORDINATED
CREDITOR") in favor of SUNTRUST BANK ("SUNTRUST"), in its capacity as
administrative agent ("ADMINISTRATIVE AGENT") for the Lenders from
time to time
party to the Senior Credit Agreement (as defined in the Senior Credit
Agreement
defined and described below; such Lenders being called herein,
together with
Administrative Agent, individually, a "SENIOR LENDER" and
collectively, "SENIOR
LENDERS") to determine the parties' respective rights, remedies and
interests
with respect to certain debts, liabilities or obligations owing to
each by
ALBAHEALTH, LLC, a Delaware limited liability company ("BORROWER").
This
Agreement is made with respect to the following facts:

     A.   Subordinated Creditor is a current (or former) shareholder,
partner or
          member of, or an investor in, Borrower, or is otherwise
affiliated
          with Borrower; and has obtained, or hereafter may obtain,
certain
          claims against Borrower in the nature of money owed.

     B.   Senior Lenders are proposing to extend a revolving credit
facility to
          Borrower for the purposes of, among others, refinancing
existing
          indebtedness and funding transaction costs and working
capital needs;
          however, Senior Lenders are unwilling to provide or
continue such
          credit facility to Borrower unless Subordinated Creditor
subordinates
          its claims against Borrower in the manner set forth below.
          Subordinated Creditor hereby acknowledges and affirms that
Senior
           Lenders' financial accommodations to Borrower constitute
valuable
           consideration to Subordinated Creditor.

     NOW, THEREFORE, for good and valuable consideration, the receipt
and
sufficiency of which are hereby acknowledged by the parties hereto,
and to
induce Senior Lenders to extend such financial accommodations to
Borrower as
they may determine, and to better secure Senior Lenders with respect
to the
foregoing, the parties hereby agree as follows:

    1. SUBORDINATION AND STANDBY.

     a. INDEBTEDNESS. Except as otherwise expressly set forth in
Section 4,
unless and until all "SENIOR INDEBTEDNESS" (as hereinafter defined)
has been
fully paid and satisfied in cash, and this Agreement has ceased to be
effective,
Subordinated Creditor shall not accept or receive, by setoff or in
any other
manner, from Borrower or any Subsidiary of the Borrower (an
"AFFILIATE
GUARANTOR") the whole or any part of any sums which may now or
hereafter be
owing to Subordinated Creditor by Borrower, or any of its
predecessors,
successors or assigns, including, without limitation, a receiver,
trustee or
debtor in possession (the term "BORROWER," as used hereinafter, shall
include
any such predecessors, successors or assigns) under or in connection
with the
"SUBORDINATED INDEBTEDNESS" (as hereinafter defined).

<PAGE>


     b. LIENS AND SECURITY INTERESTS. As of the date of this
Agreement,
Subordinated Creditor has no security interests or liens over any
property of
Borrower or any subsidiary of Borrower, and Subordinated Creditor
hereby agrees
that, until the termination of this Agreement, it shall not create
any security
interests or liens over any property of Borrower or any subsidiary of
Borrower.
Without limitation of the foregoing, but in furtherance thereof, so
long as this
Agreement shall remain in effect:

     (1) Subordinated Creditor shall not commence, prosecute or
participate in
any other action, whether private, judicial, equitable,
administrative or
otherwise, including, without limitation, any bankruptcy case against
Borrower
or any of the Affiliate Guarantors or any of its (or their) assets,
provided
that, (i) as more fully set forth in Section 5 hereof, Subordinated
Creditor may
file a proof of claim in a bankruptcy or insolvency proceeding
involving
Borrower or any of the Affiliate Guarantors, which proof of claim
shall indicate
Subordinated Creditor's subordination hereunder and (ii) should any
default
occur in the payment of any amounts of accrued interest which,
pursuant to
Section 4 below, Borrower is permitted to pay to Subordinated
Creditor, and
Subordinated Creditor is permitted to receive from Borrower,
Subordinated
Creditor may sue on the Subordinated Note in respect of such default
and obtain
judgment thereon, but Subordinated Creditor shall not execute upon or
otherwise
enforce such judgment except with the prior written consent of
Administrative
Agent and the other Senior Lenders or unless this Agreement has been
terminated;

     (2) Subordinated Creditor shall have no right either to possess
any such
assets, enforce any security interests in, foreclose, levy or execute
upon, or
collect or attach any such assets, whether by private or judicial
action or
otherwise; and

     (3) Subordinated Creditor shall neither take, nor consent to or
acquiesce
in the taking of, any action hereafter to set aside, challenge or
otherwise
dispute the existence or priority of any Senior Indebtedness or the
creation,
attachment, perfection or continuation of any lien or security
interest of any
Senior Lender in any assets of Borrower or any Affiliate Guarantor.

    c. DEFINITIONS.

     (1) "SENIOR INDEBTEDNESS". The term "SENIOR INDEBTEDNESS" shall
mean,
collectively, all "Obligations," as that term is defined under that
certain
Declining Revolving Credit Agreement, dated as of April 26, 2006,
among
Borrower, the Lenders and Administrative Agent (as it may be amended,
restated,
refinanced, replaced, supplemented or modified from time to time, the
"SENIOR
CREDIT AGREEMENT"), whether for principal, premium, interest
(including all
interest accruing after the initiation of any bankruptcy case,
whether or not
allowed), fees, expenses, indemnities or otherwise; PROVIDED,
HOWEVER, that for
purposes of this Agreement, the maximum aggregate principal amount of
Senior
Indebtedness shall not exceed $13,500,000.


                                        2
<PAGE>


     (2) "SUBORDINATED INDEBTEDNESS". The term "SUBORDINATED
INDEBTEDNESS" shall
mean all indebtedness of Borrower to Subordinated Creditor, whether
consisting
of principal, interest or otherwise, evidenced by and arising under
that certain
Unsecured Subordinated Promissory Note, dated April 26, 2006, in the
original
principal amount of $3,000,000, issued by Borrower to the order of
Subordinated
Creditor (together with any extensions or renewals thereof, or
amendments
thereto, called herein the "SUBORDINATED NOTE").

    2. MODIFICATIONS OF INDEBTEDNESS.

     a. SENIOR INDEBTEDNESS. Subject to the right of the Subordinated
Creditor
to receive the payments permitted under clause (ii) of Section 4,
Senior Lenders
shall have the right, without notice to Subordinated Creditor, to
amend,
restate, supplement or otherwise modify the Senior Indebtedness, in
accordance
with the terms of the Senior Credit Agreement, including, without
limitation,
any extensions or shortening of time of payments (even if such
shortening causes
any Senior Indebtedness to be due on demand or otherwise), any
revision of any
amortization schedule with respect thereto, and any increase in the
amount of
the Senior Indebtedness (provided that no more than $13,500,000
outstanding
principal amount of indebtedness incurred under the Senior Credit
Facility will
be deemed to be Senior Indebtedness for purposes of this Agreement),
and
Subordinated Creditor consents and agrees to any such amendment,
restatement,
supplement or other modification.

     b. SUBORDINATED INDEBTEDNESS. Subordinated Creditor understands
and agrees
that, other than the Subordinated Indebtedness referred to in clause
(2) of
Section 1(c) above, no Subordinated Indebtedness may be created
hereafter except
as may be permitted under the Senior Credit Agreement, and no
document,
instrument or agreement evidencing all or any part of any
Subordinated
Indebtedness so created may be modified or amended except as
permitted under the
Senior Credit Agreement.

    3. SUBORDINATED INDEBTEDNESS OWED ONLY TO SUBORDINATED CREDITOR.

     a. Subordinated Creditor warrants and represents that it has not
previously
assigned any interest in the Subordinated Indebtedness, that no other
party owns
an interest in any of the Subordinated Indebtedness (whether as joint
holders,
participants or otherwise), and that the entire Subordinated
Indebtedness is
owing only to Subordinated Creditor.

     b. Subordinated Creditor covenants and agrees that the entire
Subordinated
Indebtedness shall continue to be owing only to it; PROVIDED that
Subordinated
Creditor may assign some or all of its interest in the Subordinated
Indebtedness
after the assignee has executed and delivered to Senior Lenders an
agreement
subordinating, in the manner set forth herein, all rights, remedies
and
interests with respect to the assigned Subordinated Indebtedness.

     4. PAYMENTS RECEIVED BY SUBORDINATED CREDITOR. Notwithstanding
the terms of
Section l.a. and 2.a., Borrower may pay, and Subordinated Creditor
may receive
if and so long as no Default or Event of Default (as those terms are
defined in
the Senior Credit Agreement) has occurred and is continuing or would
result
after giving effect to such payment, (i) regularly scheduled payments
of
interest on the Subordinated Note at the rate and the times set forth
in the
Subordinated Note as in effect on the date hereof and (ii) at any
time after
August 31, 2009, payments of principal and interest (including
regularly
scheduled payments of principal and interest, voluntary prepayments
and
mandatory prepayments, in whole or in part). If any other payment,
distribution
or any collateral proceeds thereof are received by Subordinated
Creditor from
Borrower or any Affiliate Guarantor with respect to the Subordinated
Indebtedness prior to the full payment and satisfaction of all the
Senior
Indebtedness and termination of this Agreement, Subordinated Creditor
shall
receive and hold the same in trust as trustee for the benefit of
Senior Lenders
and shall forthwith deliver such assets to Administrative Agent, for
the benefit
of Senior Lenders, in precisely the form received (except for the
endorsement or
assignment by Subordinated Creditor where necessary), for application
on any of
the Senior Indebtedness, due or not due. In the event of the failure
of
Subordinated Creditor to make any such endorsement or assignment to
Administrative Agent, Administrative Agent and Administrative Agent's
officers
or agents are hereby irrevocably authorized to make such endorsement
or
assignment.


                                      3
<PAGE>


Subject to the prior payment in full in cash of the Senior
Indebtedness, the
Subordinated Creditor shall be subrogated to the rights of the
holders of Senior
Indebtedness to receive payments or distributions of cash, property
or
securities of the Company applicable to the Senior Indebtedness until
the
Subordinated Indebtedness shall be paid in full; and, for the
purposes of such
subrogation, no such payments or distributions to the holders of the
Senior
Indebtedness by or on behalf of the Company or by or on behalf of the
Subordinated Creditor by virtue of this Section 4 or Section 5 which
otherwise
would have been made to the Subordinated Creditor shall, as between
the Company
and the Subordinated Creditor, be deemed to be a payment by the
Company to or on
account of the Senior Indebtedness, it being understood that the
provisions of
this Agreement are and are intended solely for the purpose of
defining the
relative rights of the Subordinated Creditor, on the one hand, and
the holders
of the Senior Indebtedness, on the other hand.

This section 4 shall not restrict the ability of the Subordinated
Creditor to
convert the Subordinated Indebtedness to Common Units in accordance
with section
11 of the Subordinated Note, and the holders of the Senior
Indebtedness shall
not have any rights in or to such Common Units by virtue of this
section 4.

     5. CLAIMS IN BANKRUPTCY. In the event of any bankruptcy,
assignment for the
benefit of creditors or similar proceedings against Borrower or any
Affiliate
Guarantor, Subordinated Creditor shall file all claims it may have
against
Borrower, and shall direct the debtor in possession or trustee in
bankruptcy, as
appropriate, to pay over to Administrative Agent, for the benefit of
Senior
Lenders, all amounts due to Subordinated Creditor on account of the
Subordinated
Indebtedness until the Senior Indebtedness has been paid in full in
cash. If
Subordinated Creditor fails to file such claims as requested by
Administrative
Agent, Administrative Agent may file such claims on Subordinated
Creditor's own
behalf.

     6. POSTPETITION FINANCING; LIENS. In the event of any bankruptcy
case
against Borrower or any Affiliate Guarantor or any of the assets of
Borrower or
any Affiliate Guarantor, Subordinated Creditor hereby expressly
consents to the
granting by Borrower or any Affiliate Guarantor to any or all Senior
Lenders of
senior liens and priorities in connection with any post-petition
financing of
Borrower or any Affiliate Guarantor by any or all Senior Lenders.

     7. SALE OF ASSETS. In the event of a sale of some or all of the
assets of
Borrower or any Affiliate Guarantor, whether initiated by any Senior
Lender;
i.e., as part of a liquidation of its liens and security interests,
or initiated
by Borrower with Senior Lenders' consent, Subordinated Creditor
agrees to
release any security interest, lien or claim in such assets, or any
of them,
upon the request of any Senior Lender, whether or not Subordinated
Creditor will
receive any proceeds from such sale. Should Subordinated Creditor
fail to do so
within five (5) business days after its receipt of any Senior
Lender's request,
Administrative Agent or such Senior Lender may, acting as
Subordinated
Creditor's attorney-in-fact, do so itself in Subordinated Creditor's
name.


                                      4
<PAGE>


     8. LEGEND. Any instrument at any time evidencing any
Subordinated
Indebtedness, including the Subordinated Note (herein, a
"SUBORDINATED
INSTRUMENT") will be forthwith inscribed with a provision
conspicuously
indicating that payment thereon is subordinated to the claims of
Senior Lenders
under the Senior Credit Agreement, and copies thereof will forthwith
be
delivered to Senior Lenders. Any instrument evidencing any of the
Subordinated
Indebtedness or any portion thereof which is hereafter executed will,
on the
date thereof, be inscribed with the aforesaid legend, and copies
thereof will be
delivered to Senior Lenders on the date of its execution or within
five (5)
business days thereafter.

     9. ADDITIONAL REMEDIES. If Subordinated Creditor violates any of
the terms
of this Agreement, in addition to any remedies in law, equity or
otherwise,
Senior Lenders may restrain such violation in any court of law and
may interpose
this Agreement as a defense in any action by Subordinated Creditor.

    10. SUBORDINATED CREDITOR'S WAIVERS.

     a. All of the Senior Indebtedness shall be deemed to have been
made or
incurred in reliance upon this Agreement. Subordinated Creditor
expressly waives
all notice of the acceptance by Senior Lenders of the subordination
and other
provisions of this Agreement and agrees that no Senior Lender has
made any
warranties or representations with respect to the legality, validity,
enforceability, collectibility or perfection of the Senior
Indebtedness or any
liens or security interests held in connection therewith.

     b. Subordinated Creditor agrees that each Senior Lender shall be
entitled
to manage and supervise its loans in accordance with applicable law
and its
usual practices, modified from time to time as it deems appropriate
under the
circumstances, without regard to the existence of any rights that
Subordinated
Creditor may now or hereafter have in or to any assets. No Senior
Lender shall
have any liability to Subordinated Creditor as a result of any and
all lawful
actions which such Senior Lender takes or omits to take (including,
without
limitation, actions with respect to the creation, perfection or
continuation of
its liens or security interest, actions with respect to the
occurrence of any
default or event of default, actions with respect to the foreclosure
upon, sale,
release or failure to realize upon, any of its collateral, and
actions with
respect to the collection of any claim for all or any part of the
Senior
Indebtedness from any account debtor or any other party), regardless
of whether
any such actions or omissions may affect such Senior Lender's rights
to
deficiency or Subordinated Creditor's rights of subrogation or
reimbursement.

     c. Each Senior Lender may, from time to time, enter into
agreements and
settlements with Borrower as it may determine, including, without
limitation,
any substitution of collateral, any release of any lien or security
interest and
any release of Borrower. Subordinated Creditor waives any and all
rights it may
have to require any Senior Lender to marshall assets.


                                      5
<PAGE>


     11. WAIVERS. No waiver of any provision hereof shall be deemed
to be made
by Administrative Agent or Subordinated Creditor hereunder unless it
is in
writing signed by the waiving party. Each such waiver shall be a
waiver only
with respect to the specific instance involved and shall in no way
impair the
rights of the waiving party or the obligations of the other party to
the waiving
party in any other respect at any other time.

     12. INFORMATION CONCERNING FINANCIAL CONDITION. Subordinated
Creditor
hereby assumes responsibility for keeping itself informed of the
financial
condition of Borrower and each Affiliate Guarantor and of all other
circumstances bearing upon the risk of nonpayment of the Senior
Indebtedness,
and agrees that no Senior Lender shall have any duty to advise it of
information
known to any Senior Lender regarding such condition or any such
circumstances.
In the event any Senior Lender, in its sole discretion, undertakes,
at any time
or from time to time, to provide any such information to Subordinated
Creditor,
such Senior Lender shall be under no obligation (i) to provide any
such
information to Subordinated Creditor on any subsequent occasion, (ii)
to
undertake any investigation not a part of its regular business
routine, or (iii)
to disclose any information which, pursuant to its commercial finance
practices,
such Senior Lender wishes to maintain confidential.

    13. THIRD PARTY BENEFICIARIES.

     a. This Agreement is solely for the benefit of Senior Lenders,
Subordinated
Creditor and their respective successors and assigns, and neither
Borrower nor
any Affiliate Guarantor or any other persons or entities are intended
to be
third party beneficiaries hereunder or to have any right, benefit,
priority or
interest under, or because of the existence of, or to have any right
to enforce,
this Agreement. Senior Lenders and Subordinated Creditor shall have
the right to
modify or terminate this Agreement at any time without notice to or
approval of
Borrower or any Affiliate Guarantor or any other person or persons.

     b. Nothing in this Agreement is intended to or shall impair, as
between
Borrower, its creditors other than Senior Lenders, and Subordinated
Creditor,
the obligation of Borrower, which is absolute and unconditional, to
pay to
Subordinated Creditor the principal of and interest on any
Subordinated
Instrument and all of the Subordinated Indebtedness as and when the
same shall
become due and payable in accordance with their terms, or affect the
relative
rights of Subordinated Creditor and creditors of Borrower other than
Senior
Lenders.

     c. Notwithstanding any of the foregoing, if any third party
satisfies the
Senior Indebtedness owing to any Senior Lender, such Senior Lender
may assign
its rights and remedies hereunder to such third party, and such third
party
shall be deemed to be a Senior Lender for all purposes of this
Agreement. If a
determination is made in favor of any third party, including, without
limitation, a trustee in bankruptcy, that such Senior Lender's liens
or security
interests are invalid, avoidable or unperfected, the subordination
set forth in
Section 1 hereinabove shall be deemed null and void, but only to the
extent of
such invalidity, avoidability and imperfection.


                                      6
<PAGE>


     14. NOTICES. For the purposes of this Agreement, written notices
shall be
sent by U.S. first class mail, postage prepaid; or by U.S. certified
mail,
return receipt requested, postage prepaid; or by personal delivery;
or by
facsimile confirmed by the recipient; and addressed to the notified
party at its
address set forth below its signature line, or such other address
specified by
the party with like notice. Notices shall be deemed received on the
earlier of
(i) the day of actual receipt or (ii) ten (10) business days after
deposit in
the U.S. mail, if sent by first class mail; upon the date set forth
in the
return receipt, if by certified mail; on the day of confirmation of
delivery by
the recipient, if by facsimile; or on the day of transmittal by
personal
delivery.

     15. EFFECTIVENESS. This Agreement shall continue in effect until
all Senior
Indebtedness has been fully paid and satisfied and all commitments of
Senior
Lenders in regard thereto have been terminated.

     16. CONSENT TO JURISDICTION; ADDITIONAL WAIVERS. SUBORDINATED
CREDITOR AND
SENIOR LENDERS EACH CONSENTS TO THE JURISDICTION OF ANY STATE OR
FEDERAL COURT
LOCATED WITHIN ATLANTA, GEORGIA. SUBORDINATED CREDITOR WAIVES
PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SERVICE OF
PROCESS BE MADE
IN THE MANNER SET FORTH IN SECTION 14 OF THIS AGREEMENT. SUBORDINATED
CREDITOR
AND SENIOR LENDERS EACH WAIVES, TO THE FULLEST EXTENT EACH MAY
EFFECTIVELY DO
SO, ANY DEFENSE OR OBJECTION BASED UPON FORUM NON CONVENIENS AND ANY
DEFENSE OR
OBJECTION TO VENUE OF ANY ACTION INSTITUTED WITHIN ATLANTA, GEORGIA.
EACH OF THE
PARTIES HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION TO
ENFORCE OR
DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS AGREEMENT.

     17. GOVERNING LAW. THIS AGREEMENT HAS BEEN DELIVERED AND
ACCEPTED AT AND
SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF GEORGIA, AND SHALL
BE
INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED, IN
ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS)
OF THE STATE OF GEORGIA.

     18. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and shall
inure to the benefit of the parties' respective successors and
assigns, subject
to the provisions hereof.

     19. INTEGRATED AGREEMENT. This Agreement sets forth the entire
understanding of the parties with respect to the within matters and
may not be
modified or amended except upon a writing signed by all parties.

     20. AUTHORITY. Each of the signatories hereto certifies that
such party has
all necessary authority to execute this Agreement.

     21. HEADINGS. The paragraph headings used in this Agreement are
for
convenience only and shall not affect the interpretation of any of
the
provisions hereof.

     22. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each one of which where so executed shall be deemed to
be an
original, and all of which taken together shall constitute one and
the same
agreement. Any signatures delivered by a party by facsimile
transmission or by
e-mail transmission of an adobe file format document (also known as a
PDF file)
shall be deemed an original signature hereto.


                                      7
<PAGE>


                                                 "Subordinated
Creditor"

                                                 TEFRON USA, INC.


                                                 By: /s/ Yosef
Shiran
                                                 -------------------
-
                                                 Name: Yosef Shiran
                                                 Title: Chief
Financial Officer

                                                 By: /s/ Asaf
Alperovitz
                                                 -------------------
----
                                                 Name: Asaf
Alperovitz
                                                 Title: Senior Vice
President

                                                 Address for
Notices:

                                                 Tefron USA, Inc.
                                                 Attention: Yosef
Shiran
                                                 Industrial Center
                                                 Teradyon, P.O. Box
1365,
                                                 Misgav 20179,
Israel
                                                 Telecopier: (972)
4-990-0054
<PAGE>


All of the foregoing is consented
and agreed to as of the date first
set forth above:

"Borrower"

ALBAHEALTH, LLC                            SUNTRUST BANK, AS
ADMINISTRATIVE AGENT


By: /s/ A. William Ott                     By: /s/ J. Christopher
Deisley
- ------------------------------             -------------------------
-----
Name: A. William Ott                       Name: J. Christopher
Deisley
Title: President                           Title: Senior Vice
President

Address for Notices                        Address for Notices

AlbaHealth, L.L.C.                         SunTrust Bank
425 North Gateway Avenue                   25 Park Place, 23rd Floor
Rockwood, TN 37854                         Atlanta, Georgia 30303
Attention: Chief Financial Officer         Attention: J. Christopher
Deisley
Telecopier: 865-354-1541                   Telecopier: 404 532-0417

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.8
<SEQUENCE>6
<FILENAME>exhibit_4-8.txt
<TEXT>



EXHIBIT 4.8

THIS NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATE TO
THE SENIOR
INDEBTEDNESS (AS DEFINED IN THE SUBORDINATION AGREEMENT DESCRIBED
BELOW) IN THE
MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN SUBORDINATION
AGREEMENT DATED
AS OF APRIL __, 2006 AMONG ALBAHEALTH, LLC, TEFRON USA, INC. AND
SUNTRUST BANK,
AS ADMINISTRATIVE AGENT; AND THE HOLDER OF THIS UNSECURED
SUBORDINATED
PROMISSORY NOTE, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE
SUBORDINATION
PROVISIONS OF THE SUBORDINATION AGREEMENT.

                       UNSECURED SUBORDINATED PROMISSORY NOTE
U.S. $3,000,000.00
APRIL 26, 2006
(Principal Amount)
(Date of Issue)

     FOR VALUABLE CONSIDERATION RECEIVED, AlbaHealth, LLC, a Delaware
limited
liability company (the "Company"), hereby promises to pay to Tefron
USA, Inc., a
Delaware corporation ("Seller"), the principal amount of Three
Million and
00/100 Dollars ($3,000,000.00), together with interest (calculated on
the basis
of actual days elapsed and a 360 calendar day year) on the unpaid
principal
balance hereof, from the Date of Issue and until this Unsecured
Subordinated
Promissory Note ("Note") is paid in full, at a rate equal to the rate
determined
in accordance with paragraph 2 (the "Interest Rate").

1.   MATURITY DATE. The principal balance represented by this Note,
together
     with all accrued and unpaid interest due hereunder, shall be due
and
     payable, in full, to Seller on or before August 31, 2009 (the
"Maturity
     Date").

2.   INTEREST RATE. Interest will accrue on the outstanding principal
balance at
     an interest rate per annum equal to the LIBOR in effect on the
first day of
     the FIXED RATE TERM plus a margin of 3.00% (the "Margin"). Such
rate is set
     on the first day of each Fixed Rate Term based upon the then
applicable
     LIBOR, plus the Margin, and is fixed for the duration of each
Fixed Rate
     Term. "LIBOR" means, for each Fixed Rate Term, an annual rate
equal to the
     rate for the applicable Fixed Rate Term appearing on the display
designated
     as Page 3750 on the Dow Jones Markets Service (or such other
page on that
     service or such other service designated by the British Banker's
     Association for the display of such Association's Interest
Settlement Rates
     for Dollar deposits) as of 11:00 a.m. (London, England time) on
the day
     that is two business days prior to the first day of the relevant
Fixed Rate
     Term or if such page 3750 is unavailable for any reason at such
time, the
     rate which appears on the Reuters Screen ISDA Page as of such
date and such
     time; provided, however, that if the relevant foregoing sources
are
     unavailable for the relevant Fixed Rate Term, the LIBOR shall be
determined
     from such financial reporting service or other information as
shall be
     mutually acceptable to the Company and the Seller. "Fixed Rate
Term" means
     a period commencing on a Business Day and continuing for three
(3) months,
     during which the outstanding principal balance of this Note
bears interest
     determined in relation to LIBOR. The first Fixed Rate Term shall
commence
     on the Date of Issue.


<PAGE>


     At the end of the first Fixed Rate Term, and at the end of each
subsequent
     Fixed Rate Term until final maturity of this Note, another Fixed
Rate Term
     of the same length shall commence, and the interest rate shall
be adjusted
     to reflect the LIBOR in effect on the first day of the new Fixed
Rate Term
     plus the Margin. If any Fixed Rate Term would end on a day which
is not
     followed by a Business Day, then such Fixed Rate Term shall be
extended to
     the next day which is followed by a Business Day. "Business Day"
means any
     day except a Saturday, Sunday or any other day on which
commercial banks in
     Georgia are authorized or required by law to close.

     If the Company shall default in the payment of principal of or
interest,
     then the outstanding principal amount and, to the extent
permitted by
     applicable law, any interest payments thereon not paid when due,
shall
     thereafter bear interest at the Default Rate. Interest at the
Default Rate
     shall be payable upon demand and shall accrue from the initial
date of such
     default until it is cured or waived. The "Default Rate" shall
mean the
     interest calculated in accordance with the first two paragraphs
of this
     section 2 plus an additional margin of 2.00%.

     Notwithstanding any other provision of this Note, interest under
this Note
     shall not exceed the maximum amount permitted by law. If any
amount is paid
     under this note as interest in excess of such maximum rate, then
the amount
     so paid will not constitute interest but will constitute a
prepayment on
     account of the principal amount of this Note.
3.    PAYMENT. Accrued interest on this Note shall be due and payable
in
      consecutive quarterly installments commencing on July 5, 2006,
and
     continuing on the fifth (5th) day of each October, January,
April and July
     thereafter until this Note is paid in full, by deposit to such
account as
     Seller may have last designated by written notice to the
Company. All
     payments made after 1:00 p.m., Georgia time, shall be deemed to
have been
     received on the next Business Day. The principal balance under
this Note
     shall due and payable on the Maturity Date.

4.   TERMINATION. On or prior to the Maturity Date, upon final,
irrevocable and
     indefeasible payment, in whole or in aggregate installments, of
the full
     amount due and owing under this Note, this Note will terminate
and be of no
     further force and effect.

5.   UNSECURED NOTE. Seller acknowledges and agrees that the
indebtedness
     represented by this Note is unsecured.


                                       2
<PAGE>


6.   MEMBERSHIP INTEREST REDEMPTION AGREEMENT. This Note is issued
pursuant to
     the terms of that certain Membership Interest Redemption
Agreement dated
     April __, 2006, by and between the Company and Seller and is
subject to the
     terms thereof.

7.   SUBORDINATED NOTE. ALL INDEBTEDNESS EVIDENCED BY THIS NOTE IS
SUBORDINATED
     TO CERTAIN OTHER INDEBTEDNESS PURSUANT TO, AND TO THE EXTENT
PROVIDED IN,
     AND IS OTHERWISE SUBJECT TO THE TERMS OF, THAT CERTAIN
SUBORDINATION
     AGREEMENT AMONG THE COMPANY, SELLER AND SUNTRUST BANK, AS
ADMINISTRATIVE
     AGENT (THE "SUBORDINATION AGREEMENT"). The indebtedness
evidenced by this
     Note shall not be subordinated to any indebtedness other than
Senior
     Indebtedness as defined in the Subordination Agreement.

8.   RIGHT TO PREPAY BY COMPANY. At any time prior to the Maturity
Date, the
     Company may, in its sole discretion, prepay this Note, in whole
or in part
     without premium or penalty, at a price equal to one hundred
percent (100%)
     of the principal amount of the Note, plus accrued interest on a
daily basis
     to the date of prepayment.

9.   COMPANY COVENANTS. (a) The Company hereby covenants and agrees
that in the
     event the Company achieves a trailing 12-month EBITDA of at
least (i)
     $4,800,000 for any fiscal quarter ending during 2006, (ii)
$5,200,000 for
     any fiscal quarter ending during 2007; or (iii) $5,500,000 for
any fiscal
     quarter ending during 2008, the Company will use its reasonable
best
     efforts to negotiate an increase in its revolving credit
availability with
     SunTrust Bank, the Company's primary lender, or its successor
(hereinafter,
     the "Bank"), for the purpose of prepaying the principal balance
of this
     Note; provided, however, that the Company shall not be required
to accept
     any revolving credit increase to the extent that the Bank would
increase
     the interest rate applicable to the Company's revolving credit
availability
     or subject the Company to terms and conditions that are
materially
     disadvantageous from the terms and conditions in the revolving
credit
     agreement in effect immediately prior to the proposed increase.

     The Company agrees that until payment of this Note in full, it
shall
     deliver to Seller financial statements and other information in
the form
     and at the times that is provided by the Company to either the
Bank or to
     any other holder of common units of the Company.

          (b) Until final, irrevocable and indefeasible payment of
this Note in
     full, the Company will not (and will cause its subsidiaries not
to) make
     any "Restricted Payments". "Restricted Payment" means (i) the
declaration
     or payment, or agreement to declare to pay, directly or
indirectly, of any
     dividend or other distribution, including any return of capital
or
     distribution of cash or other assets to the Company's equity
holders on
     account of their holding of Company securities, and (ii) any
payment on
     account of, or setting apart assets for a sinking or other
analogous fund
     for, the purchase, redemption, retirement, defeasance or other
acquisition
     of, any shares of Company securities (including any options,
warrants, or
     other rights to purchase such securities, whether now or
hereafter
     outstanding). Notwithstanding the foregoing, "Restricted
Payments" shall
     not include (x) distributions to the holders of Company
securities on a
     quarterly basis to enable them to pay income taxes payable in
cash in such
     fiscal year, which are payable on account of their holdings of
Company
     securities, provided that such payments in the aggregate for any
fiscal
     year shall not exceed 42.5% of the Company's taxable income for
the
     relevant tax year; (y) Restricted Payments made by any Company
subsidiary
     to the Company; and (z) payments described in this Note.


                                       3
<PAGE>


          (c) The Company will not, and will not permit any of its
subsidiaries
     to, sell, lease or otherwise transfer any property or assets to,
or
     purchase, lease or otherwise acquire any property or assets
from, or
     otherwise engage in any other transactions with, any of its
affiliates
     (which includes any person or entity that directly, or
indirectly through
     one or more intermediaries, controls, is controlled by, or is
under common
     control with, the Company), except (i) in the ordinary course of
business
     consistent with past practice at prices and on terms and
conditions not
     less favorable to the Company or such subsidiary than could be
obtained on
     an arm's-length basis from unrelated third parties, and (ii) any
payment
     permitted by subsection (b) of this Section 9.

10. EVENTS OF DEFAULT. Each of the following events shall be an
Event of
     Default ("Event of Default") for purposes of this Note:

     a.    PAYMENT OF INTEREST. The Company defaults in the due and
punctual
           payment of any installment of interest under this Note;

     b.    PAYMENT OF PRINCIPAL. The Company defaults in the due and
punctual
          payment of the principal amount of this Note on the
Maturity Date;

     c.   NOTE TERMS. The Company defaults in the due and punctual
performance
            or observance of any material terms contained in this Note,
and such
            default continues for a period of ten (10) consecutive days
after
            written notice thereof to the Company by Seller;

     d.   INSOLVENCY MATTERS. The Company makes an assignment for the
benefit of
          creditors or admits in writing its inability to pay its
debts as they
          become due, or files a voluntary petition in bankruptcy, or
is
          adjudicated a "debtor" under the U.S. federal bankruptcy
law or other
          similar federal or state law or insolvent, or files any
petition or
          answer seeking for itself any reorganization, arrangement,
          composition, readjustment, liquidation, dissolution or
similar relief
          under any present or future statute, law or regulation, or
files any
          answer admitting the material allegations of a petition
filed against
          the Company for any such relief, or a trustee, receiver or
liquidator
          shall be appointed for the Company or all or any
substantial part of
          the properties of the Company, or if any petition for
bankruptcy,
          reorganization or arrangement under federal bankruptcy law,
or any
          similar federal or state law, shall be filed by or against,
consented
          to, or acquiesced in by the Company, or if any proceeding
for the
          dissolution or liquidation of the Company shall be
instituted;
          provided, that if such appointment, petition or proceeding
was
          involuntary and not consented to by the Company, the same
shall become
          an Event of Default upon the same not being discharged,
stayed or
          dismissed within sixty (60) days; or


                                        4
<PAGE>


     e.     ASSIGNMENT. The Company's obligations under this Note shall
be
            assigned to a third party. For purposes of this paragraph
d., an
            "assignment" shall not be deemed to occur upon the sale or
merger of
            the Company to or with any party, which does not result in
a "Change
            in Control" of the Company. "Change in Control" shall mean
(a) the
            failure of Encompass Group, L.L.C., a Delaware limited
liability
          company ("Encompass") (i) at any time during which the
president of
          the Company is not a member of the board of directors or
other
          managing body of the Company, to have and exercise voting
power for
          the election of at least a majority of the board of
directors or other
          managing body of the Company or (ii) at any time during
which the
          president of the Company is a member of the board of
directors or
          other managing body of the Company, to have and exercise
voting power
          for the election of at least two members of the board of
directors or
          other managing body of the Company (provided that this
clause (ii)
          shall only apply so long as the board of directors or other
managing
          body of the Company consists of five or fewer members); or
(b) the
          failure of Encompass at any time to directly own
beneficially and of
          record on a fully diluted basis 51% of the outstanding
equity
          interests (including limited liability company interests
and warrants,
          rights or options to purchase any equity interests)
(collectively,
          "Capital Stock") of the Company; or (c) the failure of the
Company at
          any time to own beneficially and of record on a fully
diluted basis
          100% of the outstanding Capital Stock of each of its
subsidiaries,
          free and clear of all liens other than liens created under
the
          security documents entered into by the Company and the
Bank.
          Notwithstanding anything else in this Section, the pledge
by Encompass
          of its membership interests, whether now owned or hereafter
acquired,
          to Wachovia Bank, National Association, as agent, and its
successors
          and assigns (hereinafter, "Wachovia Bank") shall not
constitute a
          Change in Control.

11. REMEDIES ON DEFAULT; ACCELERATION. Upon the occurrence of an
Event of
     Default as described under Sections 10.a., 10.c. and 10.e.
hereof, Seller
     shall have the right to declare the principal amount hereof and
all accrued
     but unpaid interest thereon to be immediately due and payable
upon written
     notice from Seller to the Company.
     Upon the occurrence of an Event of Default as described under
Sections
     10.b., Seller shall have the option to either (a) declare the
principal
     amount hereof and all accrued but unpaid interest thereon to be
immediately
     due and payable upon written notice from Seller to the Company,
or (b)
     convert the principal balance of this Note into Common Units of
the
     Company, which are free and clear of any restriction, lien or
encumbrance
     of any kind, at a rate equal $274.20 per Common Unit, subject to
adjustment
     for dividends, distributions, reclassifications, or similar
events
     affecting the Company's Common Units (which adjustments are
intended to put
     Seller in the same position with regard to its percentage
ownership of the
     issued and outstanding equity of the Company as it would have
been had the
     relevant event not occurred) (the "Conversion Price"). The
number of Common
     Units to be issued upon such conversion shall be equal to the
quotient
     obtained by dividing (i) the entire principal amount of this
Note plus
     accrued interest by (ii) the Conversion Price.


                                      5
<PAGE>


     Upon the occurrence of an Event of Default as described under
Section
     10.d., the principal amount and all accrued but unpaid interest
thereon
     will automatically become and be immediately due and payable
without any
     declaration or other act on behalf of Seller.

12. NOTICES. All notices required under the terms of this Note shall
be in
     writing and either delivered personally or sent by United States
first
     class mail. If sent by mail, notice shall be deemed given when
deposited in
     the United States mail, properly addressed and with postage
prepaid. Unless
     changed by subsequent written notice, the following address
shall be used:

    If to the Company:                 AlbaHealth, LLC
                                       ATTN: Bill Ott
                                       425 North Gateway Avenue
                                       Rockwood, TN 37854
                                       Facsimile: 865-354-1541
       with a copy to:                   Timothy M. Barnett, Esq.
                                         Winthrop & Weinstine, P.A.
                                         225 South Sixth Street, Suite
3500
                                         Minneapolis, MN 55402
                                         Facsimile: (612) 604-6853

       If to Seller:                     Tefron USA, Inc.
                                         ATTN: Yosef Shiran
                                         Industrial Center
                                         Teradyon, P.O. Box 1365,
                                         Misgav 20179, Israel
                                         Facsimile: (972) 4-990-0054

     with a copy to:                     Gross, Kleinhendler, Hodak,
Halevy,
                                         Greenberg & Co.
                                         ATTN: Richard Mann, Adv.
                                         One Azrieli Center
                                         Tel Aviv 67021, Israel
                                         Facsimile: (972) 3-607-4411

13. MODIFICATION AND WAIVER. No purported amendment, modification or
waiver of
     any provision hereof shall be binding unless set forth in a
written
     document signed by the Company and Seller (in the case of
amendments or
     modifications) or by the party to be charged thereby (in the
case of
     waivers). No waiver shall be effective except in a written
instrument
     signed by the party against whom enforcement of any such waiver
is sought.
     Any waiver shall be limited to the provision hereof in the
circumstances or
     events specifically made subject thereto, and shall not be
deemed a waiver
     of any other term hereof or of the same circumstance or event
upon any
     reoccurrence thereof.

14.    TIME IS OF THE ESSENCE WITH RESPECT TO THIS NOTE.


                                        6
<PAGE>


15. ASSIGNMENT. Seller shall not have the right to assign, sell,
transfer,
     delegate, or otherwise dispose of, whether voluntarily or
involuntarily,
     any right or obligation under this Note without the prior
written consent
     of the Company. Neither this Note nor any interest therein may
be assigned
     by the Company without Seller's written consent; provided,
however, that an
     assignment shall not be deemed to occur upon the sale or merger
of the
     Company to or with any party, which does not result in a "Change
in
     Control" (as defined above) of the Company. Any purported
assignment,
     transfer, or delegation in violation of this Section 14 shall be
null and
     void. Subject to the foregoing limits on assignment and
delegation, and the
     limits set forth in Section 10.d., this Note shall be binding
upon and
     shall inure to the benefit of the parties and their respective
successors
     and assigns.

16. WAIVER OF DEMAND, PRESENTMENT AND NOTICE OF DISHONOR. The
undersigned and
     each endorser or guarantor, together with their respective
successors and
     assigns, hereof hereby waives demand, notice of demand,
presentment,
     protest, notice of protest and notice of dishonor.

17. GOVERNING LAW AND VENUE. This Note shall be construed and
interpreted
     pursuant to and in accordance with the laws of the State of
Georgia. Any
     dispute arising out of or relating to this Note or the alleged
breach of
     it, or otherwise related to the transactions contemplated
hereby, will be
     discussed between the disputing parties in a good faith effort
to arrive at
     a mutual settlement of any such controversy. If, notwithstanding
such
     discussions, such dispute cannot be resolved, any action at law,
suit in
     equity or judicial proceeding arising directly, indirectly or
otherwise in
     connection with, out of, related to or from this Note or any
provision
     hereof shall be venued only in the courts of the State of
Georgia. Seller
     and the Company hereby consent to the personal jurisdiction of
these courts
     and waive any objection that such venue is inconvenient or
improper. Seller
     and the Company hereby waive personal service of the summons,
complaint and
     other process issued in any such action or suit and agrees that
service of
     such summons, complaints and other process may be made by
registered or
     certified mail addressed to such party at the address set forth
in Section
     12 hereof and that service shall be deemed completed upon the
earlier of
     such party's actual receipt thereof or 10 days after deposit in
the United
     States or Israeli mail, as the case may be, proper postage
prepaid.
18. WAIVER OF JURY TRIAL. THE PARTIES, HAVING BEEN REPRESENTED BY
COUNSEL EACH
     KNOWLINGLY AND VOLUNTARILY WAIVE ANY RIGHT TO A TRIAL BY JURY IN
ANY ACTION
     OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE OR
ANY
     RELATED AGREEMENT OR UNDER ANY AMENDMENT WHICH MAY IN THE FUTURE
BE
     DELIVERED IN CONNECTION WITH THIS NOTE AND AGREES THAT ANY SUCH
ACTION OR
     PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.


                                      7
<PAGE>


     IN WITNESS WHEREOF, this Unsecured Subordinated Promissory Note
has been
executed and delivered effective as of the date first set forth
above.


                                                    ALBAHEALTH, LLC


                                                    By: /s/ A.
William Ott
                                                    ----------------
------
                                                    Its: PRESIDENT

Agreed and accepted this 26th day of April, 2006.

TEFRON USA, INC.

By: /s/ Yosef Shiran
- --------------------
YOSEF SHIRAN
ITS CHIEF EXECUTIVE OFFICER

By: /s/ Asaf Alperovitz
- -----------------------
Asaf Alperovitz
Its Chief Executive Officer


                                      8



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.15
<SEQUENCE>7
<FILENAME>exhibit_4-15.txt
<TEXT>
EXHIBIT 4.15

                      [UNOFFICIAL TRANSLATION]

                              AGREEMENT

               Drawn up and signed in 5(th) day of July , 2006

BETWEEN:       MACPELL INDUSTRIES LTD.
               Public company no. 52 - 003752 - 4
               of 28 Hida Street, Bnei Brak
               (hereinafter: the "LESSOR")

AND:           TEFRON LTD.
               Public company no. 52 - 004340- 7
               of 94 Em Hamoshavot Street, Petach Tikva
               (hereinafter: the "LESSEE")
               And HI-TEX, founded by Tefron Ltd.
               Private company no. 51 - 248981 - 6
               of 94 Em Hamoshavot Street, Petach Tikva
               (hereinafter: "HI-TEX")

WHEREAS:       The Lessee is leasing from the Lessor an
industrial
               structure of approximately 7,710 sq.m. in the
Teradion
               Industrial Zone (hereinafter: the "HEADQUARTER
BUILDING"),
               pursuant to an agreement dated August 16, 1995,
and pursuant
               to the Appendix of Changes to this agreement of
May 2001,
               between the Lessee and New Net Assets (1994) Ltd.
               (hereinafter: "NEW NET") which was merged into
the Lessor,
               as approved in the merger certificate of the
Registrar of
               Companies dated February 15, 2006 (hereinafter:
the
               "AGREEMENT OF 1995"), pursuant to which the lease
term ends
               in 2006;


<PAGE>


AND WHEREAS:   The Lessee is leasing from the Lessor an
industrial
               structure of approximately 6,040 sq.m., out of a
structure
               in an area of approximately 6,580 sq.m., which is
situated
               near to the Headquarter Building, in the Teradion
Industrial
               Zone (hereinafter: the "FINISHED PRODUCTS
BUILDING"),
               pursuant to an agreement dated December 10, 1999,
and
                    pursuant to the Appendix of Changes to this
agreement of May
                    2001, between the Lessee and New Net
(hereinafter: the
                    "AGREEMENT OF 1999"), pursuant to which the lease
term ends
                    on July 31, 2012;

AND WHEREAS:        HI-TEX, which is a wholly owned subsidiary of the
Lessee, is
                    leasing from the Lessor two additional structures
which are
                    situated near to the Headquarter Building, one
(hereinafter:
                    "HI-TEX BUILDING 1") pursuant to an agreement
dated August
                    12, 1997, as amended from time to time between
the Lessee
                    and New Net, when the rights and obligations of
the Lessee
                    pursuant thereto were assigned to HI-TEX
(hereinafter: the
                    "AGREEMENT OF 1997") and the other, (hereinafter:
"HI-TEX
                    BUILDING 2") pursuant to an agreement dated
December 21,
                    1998, as amended from time to time between HI-TEX
and New
                    Net (hereinafter: the "AGREEMENT OF 1998").

AND WHEREAS:        The parties have agreed to the amendment of the
Agreement of
                    1995, the Agreement of 1997, the Agreement of
1998 and the
                    Agreement of 1999, in the manner set forth below;

THE FOLLOWING HAS THEREFORE BEEN DECLARED, STIPULATED AND AGREED
BETWEEN THE
PARTIES:

1.   The Preamble to this Agreement forms an integral part hereof.

2.   On August 10, 2006 (hereinafter: the "Date of Vacation of the
Finished
     Products Building") the lease term of the Finished Products
Building shall
     end, and on the said date, the Lessee shall vacate the Finished
Products
     Building and shall return it to the Lessor. Notwithstanding the
foregoing
     in section 3 below, until the Date of Vacation of the Finished
Products
     Building, all of the provisions of the Agreement of 1999 shall
apply
     between the parties in connection with the rental of the
Finished Products
     Building until the Date of Vacation of the Finished Products
Building,
     including the provisions relating to the manner of the return of
the
     Finished Products Building to the Lessor, all subject to a
change in the
     Date of Vacation of the Finished Products Building, as stated
above and
     subject to the following changes only:


<PAGE>


     a.   Notwithstanding that stated in the Agreement of 1999, in
respect of
          the period from April 16, 2006 to the Date of Vacation of
the Finished
          Products Building, the rent in respect of the Finished
Products
          Building shall be in the amount, in New Israel Shekels,
which is equal
          to 2.7 US dollars per sq.m., according to the
representative rate of
          exchange of the dollar that is known on the date of
payment. For the
          avoidance of doubt, and notwithstanding that stated in
section 7.1 of
          the Agreement of 1999, the said rent is fixed and is not
linked. In
          addition, the rent in respect of the period until the Date
of Vacation
          of the Finished Products Building shall be paid in full by
the Lessee
          to the Lessor not later than at the expiration of 30 days
from the
          date of the taking of effect of this Agreement, as stated
in section
          11 below.

     b.   Without derogating from the other undertakings of the
Lessee pursuant
          to the Agreement of 1999, and pursuant to any law, and in
light of the
          fact that HI-TEX is leasing the HI-TEX Building 2, which is
near to
          the Finished Products Building and which is connected to
the Finished
          Products Building, it is hereby stressed and clarified that
the Lessee
          and HI-TEX shall take all the reasonable measures as
required so that
          from the Date of Vacation of the Finished Products
Building, there
          shall be no disturbance (by act or omission) on the part of
the Lessee
          or HI-TEX, or any entity on their behalf, to the use by the
Lessor or
          any entity on its behalf (including a new tenant) of the
Finished
          Products Building (and of the parking spaces adjacent
thereto) and in
          connection therewith, the Lessee and HI-TEX undertake,
jointly and
          severally, without derogating from the generality of the
foregoing,
          the following:


<PAGE>


           (1)   Until the connection in an independent manner of the
Finished
               Products Building to the electricity grid of the
Israel Electric
               Corporation (which, if and when it is implemented,
shall be
               implemented by the Lessor or the entity to which the
Lessor shall
               lease the Finished Products Building) - to continue to
enable the
               full supply of electricity to the Finished Products
Building
               through the infrastructure and electrical systems
which are
               situated in the HI-TEX Building 2 (in the same manner
in which
               the electricity is supplied to the Finished Products
Building as
               at the date of the signing of this Agreement),
provided that the
               Lessee and HI-TEX shall not be responsible for the
quality of the
               electricity which is supplied, for failures in the
supply
               thereof, for any reason which does not derive from
gross
               negligence of any of them, for the infrastructure and
electrical
               systems which are situated in the Finished Products
Building, for
               the infrastructure and electrical systems which are
situated in
               the HI-TEX Building 2, and for the infrastructure and
electrical
               systems which conduct the electricity from the HI-TEX
Building 2
               to the Finished Products Building (all provided that
the level of
               the handling of the infrastructure and the systems
which are in
               the HI-TEX Building 2 and which are being used for the
purpose of
               the transfer of the electricity to the Finished
Products
               Building, shall be similar to the level of the
handling of the
               infrastructure and the systems which are in the HI-TEX
Building 2
               and which are being used by the Lessee and HI-TEX).
For the
               avoidance of doubt, it is hereby clarified that the
payments in
                 respect of the consumption of the electricity shall
apply to the
                 Lessor (or any entity on its behalf, such as a new
tenant),
                 commencing from the Date of Vacation of the Finished
Products
                 Building, and for this purpose, the Lessor shall
procure the
                 installation of a separate electricity meter for the
Finished
                 Products Building (the installation of the said meter
shall be at
                 the Lessor's expense; the Lessee and HI-TEX shall
cooperate with
                 the Lessor in connection with the installation of the
said meter,
                 including in all matters pertaining to the application
to the
                 Israel Electric Corporation, provided that the Lessee
and HI-TEX
               shall not bear any payment in respect of the
installation of the
               said meter). In the event that the Lessor or the
entity which
               leased the Finished Products Building from the Lessor
shall not
               pay the electricity bill in respect of the consumption
in the
               Finished Products Building, the Lessee shall be
entitled to
               offset the amount that was not paid from the rent due
to the
               Lessor.


<PAGE>


          (2)    To prevent any disturbance (on behalf of the Lessee,
HI-TEX, or
                 any entity on their behalf, including service
providers,
                 suppliers, contractors and other third parties which
come into
                 contact with the Lessee or with HI-TEX) to the access
of the
                 Lessor (or any entity on its behalf) or of any third
party
                 (including a new tenant or any entity on its behalf)
to the
                 loading and unloading area of the Finished Products
Building and
                 to any other area of the Finished Products Building,
and to take
                 all the reasonable measures as required (at the
expense of the
                 Lessee and HI-TEX) in order to remove any such
disturbance.

     c.   Without derogating from the other undertakings of the
Lessor pursuant
            to the Agreement of 1999 and pursuant to any law, it is
hereby
            emphasized and clarified that the Lessor (whether itself or
through
          corporations in its control) shall take all the reasonable
measures as
          required so as not to impair the use by the Lessee, HI-TEX
or any
          entity on their behalf of the Headquarter Building and of
the nearby
          structures which the Lessee and HI-TEX are leasing from the
Lessor
          (including the loading and unloading area and any other
area of the
          said structures and the parking spaces adjacent thereto),
without any
          disturbance (by act or omission) on the part of the Lessor
or
          corporations in its control. The Lessor undertakes that in
any lease
          agreement or grant of right of use with regard to the
Finished
          Products Building, it shall include a section in which the
lessee or
          recipient of the right undertakes not to disturb (by act or
omission)
          the use by the Lessee, HI-TEX or any entity on their
behalf, of the
          nearby building, of the Headquarter Building and of any
other nearby
          building which is being leased or shall be leased to the
Lessee or to
          HI-TEX by the Lessor (including the loading and unloading
area and any
          other area of the said structures and the parking spaces
adjacent
          thereto).


<PAGE>


     d.     The parties declare that they are aware that pursuant to
approval
            received by the Lessor from the Investment Center, the
Lessor is
          required to continue to lease the Finished Products
Building to the
          Lessee until August 31, 2007 (in this sub-section -
hereinafter: the
          "Date of the Expiration of the Undertaking"). The parties
shall apply,
          jointly, to the Investment Center and they shall use their
best
          endeavors to receive the approval of the Investment Center
for the
          termination of the lease of the Finished Products Building
on the Date
          of the Vacation of the Finished Products Building, in
consideration of
           the Lessor's undertaking to lease the Headquarter Building
to the
           Lessee until the Date of the Expiration of the Undertaking.

     e.    The Lessor shall bear the cost of the Lessee's relocation
from the
           Finished Products Building to another structure, against
invoices
          which shall be presented by the Lessee to the Lessor in
respect of the
          costs of the said relocation, which is estimated in a total
amount of
          approximately 85,000 dollars.

3.   The Lessee shall continue to lease the Headquarter Building, in
such manner
     that until April 15, 2006, all of the provisions of the
Agreement of 1995
     in respect of the rental of the Headquarter Building shall
continue to
     apply, and in the period commencing from April 16, 2006
(hereinafter: the
     "Effective Date for Changes") until July 31, 2012 (hereinafter:
the
     "Updated Date for the Termination of the Lease of the
Headquarter
     Building"), the Agreement of 1999 shall apply, including all the
provisions
     thereof, to the rental of the Headquarter Building, subject to
that stated
     in this Agreement (all of the changes which are set forth below
are solely
     in respect of the period after the Effective Date for Changes):

     a.   The "Leased Premises" or the "Structure" - insofar as
mentioned in the
          Agreement of 1999 shall be the "Leased Premises" as
construed in the
          Agreement of 1995.

     b.    The base rent (as defined in section 7.1 of the Agreement
of 1999)
          with regard to the 6,040 sq.m. of the Headquarter Building,
in respect
          of the period commencing on the Effective Date for Changes
and ending
          on the Updated Date for the Termination of the Lease of the
          Headquarter Building, shall be as set forth in the
Agreement of 1999.
          As of April 16, 2006, taking into consideration the
amendment stated
          in section 6 below, the rent pursuant to the Agreement of
1999 is 4.62
          dollars per sq.m.


<PAGE>


     c.    The base rent (as defined in section 7.1 of the Agreement
of 1999)
          with regard to the additional 1,670 sq.m. of the
Headquarter Building
          (which constitute the difference in area between the
Headquarter
          Building and the area of the Finished Products Building) in
respect of
          the period commencing on the Effective Date for Changes and
ending on
          the Updated Date for the Termination of the Lease of the
Headquarter
          Building, shall be in the monthly amount of 2.7 US dollars
per sq.m.
          This rent shall be paid every three months in advance, by
bank
          transfer, as the Lessor shall instruct the Lessee. With
regard to this
          rent only (but not with regard to the rent specified in
sub-section
          (b) above), the rent adjustment, in real terms, which is
specified in
          the last sentence of section 7.1 of the Agreement of 1999
shall not
          apply, in respect of the period commencing on the Effective
Date for
          Changes and ending on the Updated Date for the Termination
of the
          Lease of the Headquarter Building.

     d.   For the avoidance of doubt, it is hereby clarified that the
Agreement
          of 1995 shall not apply to the Headquarter Building,
commencing on the
          Effective Date for Changes.

     e.   All of the securities that were provided pursuant to the
Agreement of
          1999 shall also be used to secure the undertakings of the
Lessee with
          regard to the Headquarter Building as stated in this
section, pursuant
          to the original terms according to which they were given in
the
          Agreement of 1999 (in addition to the fact that they shall
continue to
          be used to secure the undertakings of the Lessee with
regard to the
          Finished Products Building, including pursuant to section 2
above).

4.   Notwithstanding that stated in the first paragraph of section
7.1 in the
     Agreement of 1998, in effect commencing from April 16, 2006, the
base rent
     pursuant to the said agreement, taking into consideration the
amendment
     stated in section 6 below, shall be in the amount of 5.51 US
dollars per
     sq.m. per month (instead of 4.65 dollars as set forth in the
     above-mentioned paragraph in the Agreement of 1998), which
reflects a
     discount of 4%, after the addition of all the linkages and
adjustments that
     were made by this date.


<PAGE>


5.   In the sixth paragraph of section 7.1 in the Agreement of 1997,
in the
     Agreement of 1998 and in the Agreement of 1999 (rent adjustment
     mechanisms), the figure of 5% shall be replaced by 3% (three
percent). It
     is clarified that this amendment shall apply to the adjustments
which shall
     be made commencing from April 16, 2006, and shall not affect
previous
     adjustments to the rent which have already been made or which
were due to
     be made (pursuant to the terms of the relevant agreements) by
April 16,
     2006. For the avoidance of doubt, it is hereby clarified that
all of the
     provisions of the Agreement of 1997 and all of the provisions of
the
     Agreement of 1998 shall continue to apply between the parties,
subject to
     the changes in this Agreement only.

6.

     a.   The fifth paragraph of section 7.1 in the Agreement of
1997, in the
          Agreement of 1998 and in the Agreement of 1999 (the
paragraph
          regarding the linkage mechanisms of the rent, which
commences with the
          words "The base rent shall be linked" and ends with the
words "as
          compared with the base index") shall be replaced with the
text set
          forth below, in effect in respect of the period commencing
on April 1,
          2006, only:

         "The base rent shall be linked so that each of the payments
of the
          rent which is due from the Lessee to the Lessor shall be
linked to the
          American index, in such a manner that if the last index
published
          prior to the date of the actual remittance of any payment
          (hereinafter: the "New Index") shall be higher than the
index known on
          April 16, 2006 (the index in respect of the month of March
2006, i.e.
          199.8) (hereinafter: the "Base Index"), then the Lessee
shall be
          required to make the payment which shall be increased by
the rate at
          which the New Index has increased as compared with the Base
Index."

     b.   In the third paragraph of section 7.1 in the Agreement of
1997, in the
          Agreement of 1998 and in the Agreement of 1999, the
definition of the
          term "the Israeli index" shall be omitted, and the
definition of the
          term "dollar" shall be replaced with the following
definition: "US
          Dollar. And it is clarified that the rent pursuant to this
section
          shall be paid in Dollars and not in New Israel Shekels."


<PAGE>


     c.   It is clarified that the Base Rent pursuant to the
Agreement of 1997,
          as of April 16, 2006, taking into consideration that stated
above, is
          5.52 dollars per sq.m.

7.    This Agreement amends the provisions of the Agreement of 1995,
the
     Agreement of 1997, the Agreement of 1998 and the Agreement of
1999, and in
     any event of an inconsistency between any of the above-mentioned
previous
     agreements and this Agreement, the provisions of this Agreement
shall
     prevail.

8.   Upon their signing of this Agreement, the Lessee and HI-TEX give
notice
     that they have no claim and/or demand and/or lawsuit and/or
right of any
     kind or nature (hereinafter: "Claim") against the Lessor and/or
New Net
     and/or the officers thereof and/or the directors thereof and/or
the
     employees thereof and/or the shareholders thereof and/or the
     representatives thereof and/or the insurers thereof and/or
anything in
     connection therewith, in all matters pertaining to the making,
manners of
     approval and validity of the lease agreements which are the
subject of this
     Agreement, or any one of them, and insofar as they have or had
(or any of
     them has or had) a Claim, then they hereby retract and waive the
Claim in a
     final and absolute manner.

     Upon its signing of this Agreement, the Lessor gives notice that
it has no
     claim and/or demand and/or lawsuit and/or right of any kind or
nature
     (hereinafter: "Claim") against the Lessee and/or HI-TEX and/or
the officers
     thereof and/or the directors thereof and/or the employees
thereof and/or
     the shareholders thereof and/or the representatives thereof
and/or the
     insurers thereof and/or anything in connection therewith, in all
matters
     pertaining to the making, manners of approval and validity of
the lease
     agreements which are the subject of this Agreement, or any one
of them, and
     insofar as it has or had (or New Net, which is stepping into the
shoes
     thereof, has or had) a Claim, then it hereby retracts and waives
the Claim
     in a final and absolute manner.

     In addition to the foregoing, the Lessee and HI-TEX declare that
as of the
     date of the signing of this Agreement, they are not aware of any
Claim or
     demand against the Lessor and/or New Net in connection with the
contents
     and the manner of implementation of the lease agreements which
are the
     subject of this Agreement, or any one of them.


<PAGE>


9.   The Lessee hereby declares that this Agreement is subject to the
approval
     of the Audit Committee, the Board of Directors and the General
Meeting of
     the Lessee. The Lessee hereby declares to the Lessor that its
engagement in
     this Agreement has been approved by the Audit Committee and the
Board of
     Directors of the Lessee, and that pursuant to any law and
pursuant to the
     documents of incorporation and the resolutions of the Lessee,
its
     engagement in this Agreement does not require the approval of
other organs
     of the Lessee, with the exception of the General Meeting, and
that there is
     no legal or other impediment to its engagement in this Agreement
and to the
     implementation of all of its undertakings pursuant hereto,
subject to the
     receipt of the approval of the General Meeting of the Lessee.
HI-TEX hereby
     declares that its engagement in this Agreement has been approved
by its
     Board of Directors and General Meeting, and that pursuant to any
law and
     pursuant to the documents of incorporation and the resolutions
of HI-TEX,
     its engagement in this Agreement does not require the approval
of other
     organs of HI-TEX, and that there is no legal or other impediment
to its
     engagement in this Agreement and to the implementation of all of
its
     undertakings pursuant hereto, subject to the receipt of the
approval of the
     General Meeting of the Lessee.

10. The Lessor hereby declares to the Lessee that its engagement in
this
     Agreement has been approved by its Audit Committee and Board of
Directors,
     and that pursuant to any law and pursuant to the documents of
incorporation
     and the resolutions of the Lessor, its engagement in this
Agreement does
     not require the approval of other organs of the Lessor, and that
there is
     no legal or other impediment to its engagement in this Agreement
and to the
     implementation of all of its undertakings pursuant hereto,
subject to the
     receipt of the approval of the General Meeting of the Lessor.

11.   This Agreement shall take effect upon receipt of the later of
the
     following: (a) the approval of the General Meeting of the Lessee
as stated
     in section 9 above; (b) the approval of the General Meeting of
the Lessor
     as stated in section 10 above; and (c) the approval of the
Investment
     Center as stated in section 2(d). Should any of the approvals
stated in
     paragraphs (a) or (b) above not be received within 90 days from
the date of
     the signing of this Agreement, this Agreement shall be VOID AB
INITIO.
     Should the approval stated in paragraph (c) above not be
received within 90
     days from the date of the signing of this Agreement, the parties
shall
     conduct BONA FIDE negotiations in order to identify an
alternative, agreed
     solution in connection with the terms of the said paragraph (c).
Should
     such an agreed solution not be reached within 60 days, this
Agreement shall
     be VOID AB INITIO.


<PAGE>


12. The parties agree that the courts in the Tel Aviv District shall
have the
     exclusive jurisdiction in all of the disputes between them
arising from the
     implementation, breach or interpretation of this contract.
      IN WITNESS WHEREOF THE PARTIES HERETO HAVE HEREUNTO SET THEIR
HANDS:


    /s/ Yos Shiran                              /s/ Shmuel Nir
    -------------------                         ---------------
    /s/ Asaf Alperovitz                         /s/ Eli Azrieli
    -------------------                         ---------------
          LESSEE                                     LESSOR

    /s/ Yos Shiran
    -------------------
    /s/ Asaf Alperovitz
    -------------------
         HI-TEX


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.16
<SEQUENCE>8
<FILENAME>exhibit_4-16.txt
<TEXT>



EXHIBIT 4.16

                          LANGSHA TEFRON SEAMLESS CO. LTD

                             JOINT VENTURE AGREEMENT


                             TEFRON Ltd. (Israel)
                      LANGSHA Knitting Co., Ltd. (China)
               ITOCHU TEXTILE MATERIALS (ASIA) Ltd. (Hong Kong)

<PAGE>


                             JOINT VENTURE AGREEMENT

     THIS JOINT VENTURE AGREEMENT (this "AGREEMENT") is entered as of
May 8,
2006 in __________ by and between TEFRON LTD., a company duly
established and
registered under the laws of the State of Israel with its principal
place of
business at Industrial Center Teradyon, Misgav, 20179, Israel
("TEFRON");
LANGSHA KNITTING CO., LTD., a company duly incorporated established
and
registered under the laws of the People's Republic of China with its
principal
place of business at 308 Jinfa Road, Yiwu City, Zhejiang (economic
development
zone), PRC ("LANGSHA") and ITOCHU TEXTILE MATERIALS (ASIA) LTD., a
company duly
incorporated established and registered under the laws of Hong Kong
with its
principal place of business at Suites 2304-6, The Gateway, Tower 2,
25-27,
Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong ("ITM");

(TEFRON, LANGSHA and ITM shall hereinafter be collectively referred
to as the
"PARTIES" and individually as a "PARTY").

PREAMBLE

WHEREAS,   TEFRON is a leading manufacturer of seamless apparel; and

WHEREAS, LANGSHA is one of the leading companies in the Chinese
Textile Cut &
          Sew industry, having outstanding experience and strong
brand name
          recognition in the PRC; and

WHEREAS, ITM is a company with strong financial capabilities, which
operates in
          the textile industry; and

WHEREAS,   The Parties wish to form together a joint venture company
for the
          purpose of designing, developing, manufacturing, marketing
and selling
          seamless apparel in the PRC and in Asia;

NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth
herein the Parties hereto agree and undertake as follows:

1.   INTERPRETATIONS AND DEFINITIONS

     1.1   In this Agreement, a reference to an Article, unless the
context
          otherwise requires, is a reference to an article of this
Agreement.


                                       2
<PAGE>


     1.2 The preamble to this Agreement and the Schedules attached
hereto form
          an integral part hereof.

     1.3 The captions of the Articles in this Agreement are intended
solely for
          convenience, and will have no meaning or significance in
the
          interpretation of this Agreement.

     1.4 The following terms as used in this Agreement shall have
the meanings
          set forth below:
            1.4.1 "AFFILIATE" shall mean a corporation, partnership,
joint
                venture, trust or other entity or person directly or
indirectly
                controlling or controlled by a Party or individual or
entity or
                under direct or indirect common control with a Party,
individual
               or entity. For the purpose of this definition,
"CONTROL" means
               direct or indirect ownership or control of more than
fifty
               percent (50%) of the voting rights of a company or
more than
               fifty percent (50%) of the ownership interest
representing the
               right to make the decisions for a partnership, joint
venture or
               unincorporated association, as the case may be.

            1.4.2 "ANNUAL PRODUCTION VOLUME" shall have the meaning set
out in
                Article 3.2.2.

          1.4.3 "ANNUAL PROFITABILITY FORECAST" shall have the
meaning set out
               in Article 3.2.2

            1.4.4 "BOARD" or "BOARD OF DIRECTORS" shall mean the board
of
                directors of the Company.

            1.4.5. "BUSINESS SCOPE" shall have the meaning set out in
Article
                3.1.2 of this Agreement.

          1.4.6 "CHAIRMAN" shall mean the chairman of the Board of
Directors of
               the Company.

          1.4.7 "COMPANY" shall have the meaning set out in Article
2.2 of this
               Agreement.

          1.4.8 "COMPANY'S OBJECTIVES" shall have the meaning set out
in Article
               3.1.1 of this Agreement.


                                        3
<PAGE>


          1.4.9 "CONFIDENTIAL INFORMATION" shall mean non-public or
proprietary
               data or information (including business plans and
financial data)
               whether disclosed orally or in writing, which pertains
to
               non-public or proprietary data or information of
TEFRON or any
              Affiliate thereof and its respective businesses and
activities,
               including without limitation any commercial,
financial, business,
               professional and technical information, including
information
               regarding TEFRON's or its Affiliates' operations,
plans,
               activities, policies and procedures, specifications,
designs,
               know how, trade secrets and marketing, all whether or
not marked
               confidential or relating to seamless apparel.

          1.4.10 "DIRECTOR" shall mean a member of the Board of
Directors.

          1.4.11 "ESCROW AGENT" shall mean an escrow agent to be
chosen from
               among the Chinese branch of one of the top four
international
               accounting firms (KPMG, Delloite & Touche,
PriceWaterhouseCoopers
               and Ernst & Young) subject to the mutual written
consent of the
               Parties and prior to any investment pursuant to
Article 4.2.

          1.4.12 "ESTABLISHMENT DATE" shall have the meaning set out
in Article
               2.5 of this Agreement.

         1.4.13 "EVENT(S) OF DISSOLUTION" shall have the meaning set
out in
              Article 16.1 of this Agreement.

          1.4.14 "EVENT(S) OF FORCE MAJEURE" shall mean any one or
more events
               or circumstances beyond the control of a Party, which
cannot be
               prevented by reasonable precautions taken by such
Party, having a
               material adverse effect on a Party's ability to
perform its
               obligation under this Agreement. An Event of Force
Majeure shall
               include: earthquake, typhoon, war, or enactment or
revision of
               laws and ordinances, or any other reason beyond the
control of
               any of the Parties which affects that Party's ability
to perform
               its obligations hereunder all provided that: (I) such
a Party is
               acting in good faith and without fault in causing such
events,
               (II) such Event of Force Majeure is the sole reason
for the
               nonperformance of such Party's obligations hereunder
and (III)
                 that the non-performing Party(s) has notified the
other Party(s)
                 of such Event of Force Majeure within 7 days from its
beginning
                 or consummation.

          1.4.15 "EXAMINATION AND APPROVAL AUTHORITY" means the
Ministry of
               Commerce of the PRC and/or its authorized department
who shall
               examine and approve the establishment of the Company.

          1.4.16 "GAAP" means the Generally Accepted Accounting
Principles
               adopted by the Financial Accounting Standards Board in
the U.S.A.


                                        4
<PAGE>


          1.4.17 "INTERESTS" shall mean the entire interests of a
Party in the
               total registered capital of the Company, representing
such
               Party's percentage of ownership in the Company at any
particular
               time.

            1.4.18 "MACHINES" shall have the meaning set out in Article
4.2.1 of
                 this Agreement.

            1.4.19 "MANAGEMENT TEAM" shall have the meaning set out in
Article
                 9.1.1 of this Agreement.

          1.4.20 "OPERATING EXPENSES" shall mean all costs and
expenses of
               maintaining the operations of the Company including,
without
               limitation, bookkeeping, reporting, taxes, fees and
other
               governmental charges levied against the Company, fees
for outside
               services (including, without limitation, audit,
outside counsels
               and accountants), insurance, litigation and travel
expenses.

          1.4.21 "PERMITTED TRANSFER" shall mean any transfer of
Interests in
               the Company from a Party to its Affiliates and any
transfer among
               such Affiliates themselves.

          1.4.23 "PRC" means the People's Republic of China,
excluding Hong Kong
               Special Administration Region, Taiwan and Macau
Special
                 Administration Region.

             1.4.24 "RAW MATERIALS" shall mean un-knitted and in a raw
form
                 materials such as yarns, accessories and packaging
materials.

          1.4.25 "REGISTERED CAPITAL" shall have the meaning as
defined in
               Article 18 of the IMPLEMENTATION RULE OF THE SINO-
FOREIGN EQUITY
               JOINT VENTURE LAW OF THE PEOPLE'S REPUBLIC OF CHINA.

          1.4.26 "REGISTRATION AUTHORITY" shall mean the State
Administration
               for Industry and Commerce or its authorized department
with which
               the Company shall be registered.

             1.4.27 "RMB" shall mean the lawful currency of the PRC.

             1.4.28 "TERM" shall have the meaning set out in Article 15
of this
                 Agreement.

          1.4.29 "TOTAL INVESTMENT AMOUNT" shall have the meaning as
defined in
               Article 17 of the IMPLEMENTATION RULE OF THE SINO-
FOREIGN EQUITY
               JOINT VENTURE LAW OF THE PEOPLE'S REPUBLIC OF CHINA.


                                          5
<PAGE>


             1.4.30 "TRANSFER" shall mean to sell, assign, transfer,
pledge,
                 encumber or otherwise dispose of the Interests in the
registered
                 capital of the Company or any portion thereof or right
therein.

             1.4.31 "VICE CHAIRMAN" shall mean the vice chairman of the
Board of
                 Directors of the Company.

2.     ESTABLISHMENT OF A JOINT VENTURE COMPANY

       2.1   PARTIES TO THE COMPANY

             The Parties to this Agreement shall be as follows:

          TEFRON LTD., a company duly established and registered
under the laws
          of the State of Israel with its principal place of business
at
          Industrial Center Teradyon, Misgav, 20179, Israel.

             Legal Representative: Name: Yos Shiran
                                   Position: Chief Executive Officer
                                Nationality: Israeli


          LANGSHA KNITTING CO., LTD, a company duly incorporated
established and
          registered under the laws of the People's Republic of China
with its
          principal place of business at 308 Jinfa Road, Yiwu City,
Zhejiang
          (economic development zone), PRC.

           Legal Representative: Name: _________
                                 Position: _________
                                 Nationality: _________

          ITOCHU TEXTILE MATERIALS (ASIA) LTD. a company duly
incorporated
          established and registered under the laws of Hong Kong with
its
          principal place of business at Suites 2304-6, The Gateway,
Tower 2,
          25-27, Canton Road, Tsim Sha Tsui, Kowloon, Hong Kong.

           Legal Representative: Name: _________
                                 Position: _________
                                 Nationality: _________


                                          6
<PAGE>


    2.2    ESTABLISHMENT OF THE COMPANY

          The Parties agree to establish a joint venture company in
Yiwu City,
          Zhejiang Province, People's Republic of China, in
accordance with the
          Chinese-Foreign Equity Joint Venture Enterprise Laws of the
People's
          Republic of China (the: "COMPANY").

    2.3    NAME AND LEGAL ADDRESS OF THE COMPANY

          2.2.1 The name of the Company shall be "LANGSHA TEFRON
SEAMLESS CO.
               LTD" in English and ____________ in Chinese.

           2.2.2 The registered address of the Company shall be 308
Economic
               Development Zone, Yiwu City, Zhejiang Province,
People's Republic
               of China.

    2.4    LIMITED LIABILITY COMPANY

          2.4.1 The Company is a limited liability company. The
liability of
               each of the Parties for the debts and losses of the
Company shall
                 be limited to such Party's obligation to make its
respective
                 contribution to the registered capital of the Company,
as
                 provided in Article 4.1., and therefore, it is hereby
expressly
                 acknowledged and agreed by the Parties that no Party
is
                 responsible or liable for any additional funding with
respect to
                 the Company. Any creditors of the Company shall have
recourse
                 only to the assets of the Company and may not seek
repayment from
                 either Party.

          2.4.2 No Party is an agent of the other Parties and no
Party has any
               power to bind the other Parties or to assume or to
create any
               obligation of responsibility, express or implied, on
behalf of
               the other Parties or in the other Parties names. This
Agreement
               shall not be construed as creating any form of legal
relationship
               between the Parties with the effect that an act or
failure to act
               by one Party would impose liability upon the other
Party(s).

      2.5   THE ESTABLISHMENT DATE

            The Establishment of the Company shall mean the date on
which the
            Company's business license is issued by the Registration
Authority
            (the: "ESTABLISHMENT DATE").


                                           7
<PAGE>


3.    PURPOSES, SCOPE AND SCALE OF PRODUCTION AND BUSINESS

      3.1   THE OBJECTIVES OF THE COMPANY AND ITS PURPOSES

            3.1.1 The purpose of the Company shall be to design,
develop,
                 manufacture, market and sell seamless apparel for the
purpose of
                 becoming a leading company in the Asian seamless
apparel market
                 (the: "COMPANY'S OBJECTIVES"). The Company shall use
its
                 financial means, technological know-how, extensive
production
                 capacity, the extensive experience of LANGSHA and ITM
in the
                Asian markets and their leading brand name in order to
achieve
                the Company's Objectives, as provided hereinabove.

            3.1.2 The business scope of the Company ("BUSINESS SCOPE")
shall be
                designing, developing, manufacturing, marketing and
selling
                seamless apparel.

          3.1.3 The Company shall be entitled to expand or modify the
               aforementioned Company's Business Scope provided
however that
               such expansion or modification was confirmed by the
Board in a
               unanimous vote and subject to receiving all necessary
permits.

      3.2   SCOPE AND SCALE OF PRODUCTION

            3.2.1 LANGSHA has submitted a three-year detailed business
plan to
                TEFRON and ITM. Once such business plan is agreed upon
and
                approved by TEFRON and ITM and executed by TEERON, ITM
and
               LANGHSA, it will be legally binding upon all the
Parties and the
               Company (the: "BUSINESS PLAN"). Such Business Plan
shall be
               attached to this Agreement as SCHEDULE 3.2.1.

          3.2.2 The Business Plan shall establish an annual target in
production
               volume, as provided in SCHEDULE 3.2.2(A) hereto (the:
"ANNUAL
               PRODUCTION VOLUME") and an annual profitability
forecast as
               provided in SCHEDULE 3.2.2(B) (the: "ANNUAL
PROFITABILITY
               FORECAST"). Unless the Parties mutually agree
otherwise in
               writing, the Parties shall make their best efforts so
that the
               Company will meet the Annual Production Volume and the
Annual
               Profitability Forecast, provided, however that if the
Company did
               not meet the Annual Production Volume or the Annual
Profitability
               Forecast in spite of the fact that all Parties made
their genuine
               best efforts, then , no Party shall be held liable.


                                        8
<PAGE>


4.    THE REGISTERED CAPITAL OF THE COMPANY
       4.1   REGISTERED CAPITAL AND TOTAL INVESTMENT

          The Total Investment Amount of the Company shall be
US$8,000,000
          (eight million US dollars), and the Registered Capital of
the Company
          shall be US$4,008,016 (four million eight thousand and
sixteen US
          dollars).

       4.2   INVESTMENTS IN THE REGISTERED CAPITAL

             The Parties shall invest in the registered capital of the
Company a
          total amount of US$4,008,016 (four million eight thousand
and sixteen
          US dollars) (the: "REGISTERED CAPITAL"), as follows:

          4.2.1 TEFRON shall contribute to the Company's registered
capital 144
               (one hundred and forty four) machines (the:
"MACHINES") as
               provided in SCHEDULE 4.2.1 hereto. The Parties, after
a thorough
               examination and independent evaluation, have agreed
that the
               Machines shall be invested in the Company at a value
of
               US$2,008,016 (two million eight thousand and sixteen
US dollars),
               all in consideration for 50.1% of the Company's
registered
               capital. TEFRON shall be entitled to provide the
Machines in
               separate shipments, provided however that all the
Machines are
               delivered to the Company within 6 (six) months after
the
               Establishment Date. Violation of the abovementioned
obligations
               to provide the Machines shall be deemed material
breach of this
               Agreement.

                 Any benefits, awards bonuses or tax returns of any
kind
                 whatsoever, which will be granted or offered by any
governmental
                 authority of any entity whatsoever in connection with
the
               Machines (including without limitation any VAT
returns) shall be
               provided to the Company and shall be used for the
benefit of the
               Company. For the avoidance of any doubt it is hereby
clarified
               that such benefits, awards, bonuses or tax returns
shall not be
               provided directly to the Parties themselves and that
any benefit
                related directly or indirectly to the Machines shall
be the
                property of the Company.

                Any failure or delay in the delivery of any of the
shipments of
                the Machines arising from an Event of Force Majeare
shall not be
                deemed as a breach of this Agreement by TEFRON and
shall not
                expose TEFRON to any claims or demands whatsoever.


                                        9
<PAGE>


            4.2.2 No later than 2 months after the Establishment Date,
LANGSHA
                shall contribute to the Company's registered capital
the amount
                of US$1,600,000 (one million and six hundred thousand
US dollars)
                in cash and eight (8) machines as provided in SCHEDULE
4.1.2, all
                in consideration for 39.9% of the Company's registered
capital.
                Violation of the abovementioned obligations shall be
deemed
                material breach of this Agreement.

            4.2.3 No later than 2 months after the Establishment Date,
ITM shall
                contribute to the Company's registered capital the
amount of
                US$400,801 (four-hundred thousand and eight hundred
one US
                dollars) in cash in consideration for 10% of the
Company's
                registered capital. Violation of the abovementioned
obligations
                shall be deemed material breach of this Agreement.

          4.2.4 After each contribution is effected by the Parties in
accordance
               with Article 4.2, an accounting firm certified and
registered in
               the PRC and designated by the Board, shall be retained
to verify
               such contributions respectively and then issue the
capital
               verification report regarding such contribution.

                The Company shall issue the investment certificate to
each Party
                setting forth the amount of the Party's contribution
immediately
                after the receipt of capital verification report
issued by the
                accounting firm as stated in Article 4.2. The
investment
               certificates shall be in the form as required by
relative Chinese
               laws and shall be signed by the Chairman and Vice
Chairman and be
               affixed with the chop of the Company confirming that
the
               contributions of the Parties are in accordance with
this
               Agreement.

     4.3    TRANSFER OF INTERESTS IN THE REGISTERED CAPITAL OF THE
COMPANY

          4.3.1 Except for a Permitted Transfer, if at any time
during the Term,
               a Party (the "OFFEROR") wishes to Transfer any part or
all of its
               Interests in the registered capital of the Company
(the "OFFERED
               EQUITY INTERESTS") to another entity or group of
entities (the:
               "OTHER ENTITY"), shall first submit a written offer
(the "SALE
               NOTICE") to each Party (each an "OFFEREE") offering
them to
               purchase the Offered Equity Interests on the terms and
               conditions, including without limitation the price at
which the
               Offeror would be willing to Transfer the Offered
Equity Interests
               to the Other Entity.

            4.3.2 Each Offeree shall have the right, exercisable upon
written
                 notice delivered to the Offeror and the Company (the
"ACCEPTANCE
                 NOTICE") within 45 days from the date of the Sale
Notice (the
                 "OFFER PERIOD"), to purchase the whole (and not less
than the
                 whole) of the Offered Equity Interests at the price
and on the
                 other terms and conditions stated in the Sale Notice.


                                        10
<PAGE>


            4.3.3 If an Offeree submits the Acceptance Notice within
the Offer
                 Period, then the Offeror shall, within 90 (ninety)
days following
                 its delivery of the Acceptance Notice (the: "CLOSING
PERIOD"),
                 shall sell such portion of Offered Equity Interests to
such
                 Offeree at a price and on other terms and conditions
stated in
                 the Sale Notice.
          4.3.4 If the acceptance by the accepting Offerees, in the
aggregate,
               are in respect of all of, or more than, the Offered
Equity
               Interests, then the accepting Offerees shall acquire
the Offered
               Equity Interests, on the terms aforementioned, in
proportion to
               their respective Interests in the Company at such time
that the
               Sale Notice is given, provided however that the
transfer is
               approved by the Registration Authority.

          4.3.5 If the Offeree(s) fail to deliver the Acceptance
Notice within
               the Offer Period, the Offeror shall be deemed to have
consented
               to the Transfer of the Offered Equity Interests by the
Offeror to
               the Other Entity. If the Offeree(s) consent, or deemed
to have
               consented to the Transfer, the Transferor shall be
free during
               the period of 90 ninety days following the expiration
of the
               Offer Period to Transfer such Offered Equity Interests
not
               purchased by the Offeree(s) to the Other Entity on
terms and
               conditions no more favorable to the Other Entity than
those set
               forth in the Sale Notice without again complying with
the
               procedures set forth in this Article 4.3 hereof. The
Transfer
               will become effective and binding only after the Other
Entity has
               acceded to all the agreements in force ruling the
relationship
               between the Parties and provided that the purchase
price shall be
               paid and the Transfer shall be consummated within such
90-day
               period. The Parties shall act in good faith, take all
the
               necessary actions, submit all the necessary filings
and fully
               cooperate in order to give force and effect to such
Transfer.

                If the Transfer is not consummated within such 90-day
period, the
                Offeror shall not be permitted to Transfer the Offered
Equity
                Interests or any part thereof to any third party
without again
                complying with the procedures set forth in this
Article 4.3
                hereof.
                                        11
<PAGE>


            4.3.6 Notwithstanding the aforesaid, it is agreed that in
the event
                the Offered Equity Interests represents the Offeror's
entire
                Interests in the registered capital of the Company, so
that after
                the sale of such Offered Equity Interest the Offeror
will have no
                more Interests in the Company, then the Offeree(s)
will be
                entitled to introduce an alternative purchaser for
such Offered
                Equity Interests, provided that such an alternative
purchaser is
                acceptable to the other Offeree and approved by simple
majority
                of the Board of Directors. Such an alternative Offeree
shall be
                deemed as an Offeree and therefore shall be subject to
the
                provisions of this Article 4.3 hereof.

            4.3.7 PERMITTED TRANSFER

                Notwithstanding the forgoing provisions, the Parties
hereby agree
                and commit to the following:

                Each Party is hereby allowed to transfer its Interests
in the
                Company to its Affiliates ("PERMITTED TRANSFER"). The
other
                Parties hereby consent to such Permitted Transfer and
its
                directors of the Board of Directors shall be deemed to
have
                consented unanimously to such Permitted Transfer. It
shall be
               further deemed that all of the Parties and all
directors of the
               Board have unanimously consented to such Permitted
Transfer (or
               if a separate Board resolution of the Company is
required by PRC
               law to approve the Permitted Transfer, each Party
shall cause the
               directors it appointed to the Board to vote in favour
of the
               Permitted Transfer). In case any other Party or the
Company fails
               to produce necessary supporting documents for such
transfer for
               purpose of change of registration at the Examination
and Approval
               Authority, the Offeror shall be entitled to apply to
the
                 Examination and Approval Authority for change of
shareholder by
                 presentation of this provision.

          4.3.8 When one Party assigns all or part of its equity
interest in the
               Company, such Party shall return to the Company its
investment
               certificate issued by the Company. If part of the
equity interest
               is assigned, after such Party returns its investment
certificate
               to the Company, a new investment certificate shall be
issued by
               the Company to such Party identifying its capital
contribution
               after the equity transfer.

            4.3.9 Notwithstanding the assignment of the equity interest
in the
                 Company pursuant to this Article 4, the Parties agree
that
                 assignment of the equity interest in the Company will
not relieve
                 them of their confidentiality obligations under
Article 7.


                                         12
<PAGE>


            4.3.10 COMPULSORY TRANSFER

                 In the following circumstances, the other Parties
shall be
               entitled to force such Party falling in below
situations to sell
               its Interests in the Company to them or other
purchasers they
               respectively selected and approved by the Board of
Directors of
               the Company in proportion to their share equity at
that time:

                 4.3.10.1 A material breach of this Agreement has
occurred and
                     such breach is not cured by the breaching Party
within 30
                     (thirty) days after receipt of written notice of
the breach
                     from the non-breaching Party, provided however
that the
                     non-breaching Party does not wish to dissolve and
liquidate
                     the Company.

                 4.3.10.2 Any Party becomes bankrupt, or is the subject
of
                     proceedings for liquidation or dissolution, or
ceases to
                    carry on business or becomes unable to pay its
debts as they
                    come due, provided however that the other Parties
do not
                    wish to dissolve and liquidate the Company.

5.   RESPONSIBILITIES OF THE PARTIES

     TEFRON, LANGSHA and ITM shall be respectively responsible for
the following
     matters:

     5.1   RESPONSIBILITIES OF TEFRON

           Among its responsibilities under this Agreement, TEFRON
shall:

          5.1.1 make its respective contribution to the registered
capital of
               the Company according to the terms and conditions of
Article 4.2
               above.

          5.1.2 participate and cooperate in the design and
development of new
               products.

           5.1.3 provide the Company with managerial consultation.

          5.1.4 assist the Company in installation, testing and
operation of the
               equipment, which was provided to the Company by TEFRON
pursuant
               to Article 4.2 above.

     5.2   RESPONSIBILITIES OF LANGSHA

           Among its responsibilities under this Agreement, LANGSHA
shall:


                                         13
<PAGE>


          5.2.1 make its respective contribution to the registered
capital of
               the Company according to the terms and conditions of
Article 4.2
               above.

          5.2.2 to the extent requested by TEFRON and/or ITM and for
as long as
               such request remains in full force and effect,
properly handle
               the matters relating to the establishment of the
Company, in
               accordance with the relevant laws and regulations of
the PRC,
               such as the applications for approvals, registration
and business
                license and other formalities relating to the relevant
Chinese
                governmental authorities.

          5.2.3 assist the Company in selling and marketing its
products in
               domestic markets, i.e. in the PRC and in Asia for the
purpose of
               achieving its Annual Production Volume and Annual
Profitability
               Forecast and enhance the overall image and position of
the
               Company in local markets.

            5.2.4 make its best efforts in assisting the Company to
obtain
                favorable local regulatory and financial support along
with
                incentives and tax preferential treatment.

          5.2.5 assist the foreign personnel or representatives of
TEFRON and
               ITM in obtaining all necessary PRC entry visas, travel
documents
               and work permits; and

            5.2.6 upon the occurrence of an Event of Dissolution,
assist in
                assuring the prompt dissolution and liquidation of the
Company
                pursuant to the terms hereof and the repatriation of
any funds
                and/or other contributions (including the Machines)
invested in
                the Company and any and all profits accrued thereon
out of the
                PRC.

            5.2.7 handle customs clearance for importing equipment, raw
materials
                and machinery imported by the Company and arranging
the
                transportation to the Company's factory premises.

          5.2.8 assist the Company in obtaining preferred rights of
land use for
               its operations from the Land Resources Administrative
Bureau (all
               in good terms for the Company), as well as assisting
the Company
               in negotiating the design and construction of
buildings and
               facilities required by the Company.


                                        14
<PAGE>


            5.2.9 arrange necessary provision of water, electricity,
                 telecommunications and all other required
installations.

          5.2.10 assist the Company in locating suitable local
workers and other
               staff needed by the Company, all in reasonable and
profitable
               terms to the Company.

          5.2.11 perform professional maintenance activities and
adjustment of
               equipment, at a reasonable low costs to the Company.

      5.3   RESPONSIBILITIES OF ITM

            Among its responsibilities under this Agreement, ITM shall:

          5.3.1 make the payment of its contribution to the
registered capital
               of the Company according to the terms and conditions
of Article
               4.2 above.

          5.3.2 assist the Company in selling and marketing its
products in Asia
               for the purpose of achieving its Annual Production
Volume and
               Annual Profitability Forecast, as further provided in
SCHEDULES
               3.2.2 A AND 3.2.2 (B) and enhance the overall image
and position
               of the Company in Asia.

            5.3.3 provide information on market trends in raw materials
and
                 products, and consulting on technology.

          5.3.4 assist the Company in Import-export procedures, and
cooperate in
               product distribution.

          5.3.5 continuously use its contacts and acquaintance with
the Chinese
               and Asian market in order to enhance the Company's
business and
               protect the Company's rights in the PRC and in Asia.

      5.4 Notwithstanding the above agreements on the allocation of
          responsibilities, all fees and costs in relation to the
establishment
          of the JV (other than the professional fee each Party pay
to their
          respective advisor for the negotiation of the JV Contract
and Articles
          of Association of the Company) shall be borne by the
Company. The
          Company shall reimburse each Party for such expenses upon
receipt of
          the supporting documents, which is in compliance with
accounting rules
          of the PRC.
                                          15
<PAGE>


     5.5   FINANCING

          Notwithstanding the terms and conditions hereof, the
Parties agree
          that the Company shall, in principle, be responsible for
obtaining its
          own financing from third party lenders to operate its
business, fund
          capital expenditures and maintain working capital. If the
Company
          cannot obtain such funds, then, upon the adoption of the
resolution of
          the Board in simple majority, LANGSHA shall assist the
Company to
          obtain such financing, and/or shall make loans to the
Company, on a
          non-recourse basis to TEFRON and ITM.

           Further agreement between the Company and LANGSHA shall be
reached
          with regard to the above issue after the establishment of
the Company.

6.   PRODUCT EXPORT AND MARKETING, TRADEMARKS AND NON- COMPETITION

     6.1   PRODUCT EXPORT AND MARKETING

          The Company shall market its own products under its own
responsibility
          and judgment within the People's Republic of China and
Asia.

     6.2   SALE OF PRODUCTS

           Notwithstanding anything to the contrary, the Parties agree
that the
          products manufactured or produced by the Company shall, if
exported to
          the Japanese market, be sold and/or exported through ITM to
the
          Japanese market where ITM has the exclusive right to
purchase from the
          Company and to sell the products during the Term in Japan.
In
          obtaining the exclusive distribution right mentioned above
in the
          Japanese market, ITM shall submit business target for the
sell of
          products of the Company in Japan to the Company which is
subject to
          the simple majority approval of the BOD of the Company.
Failure to
          meet the approved business target by ITM will enable the
Company to
          appoint another distributor for the distribution of
products of the
          Company in the Japanese market.

          Further agreement between the Company and ITM shall be
reached with
          regard to the above issue after the establishment of the
Company.

      6.3   TRADEMARKS

          6.3.1 The Company's products will be marketed under the
name "LANGSHA
               TEFRON SEAMLESS" in English and _________ in Chinese
(the:
               "Company's Trademarks"). The Company's Trademarks
shall be
               registered in the name of the Company in accordance
with the
               Trademark Law of the PRC.


                                       16
<PAGE>


                After the termination of the Company for any reason,
the
               trademark "LANGSHA TEFRON SEAMLESS" or any other
trademarks owned
               by the Company shall be transferred to TEFRON free of
charge.

          6.3.2 For the avoidance of any doubt it is hereby agreed
that with the
               exception of the Company's Trademarks, as specifically
provided
               above, the Company shall not be entitled to
manufacture, market
               and/or sell products under the name "TEFRON" in any
variation
               whatsoever which will remain the property of TEFRON
and therefore
               will be registered in the name of TEFRON Ltd. in
accordance with
               the Trademark Law of the PRC.

               LANGSHA, ITM or the Company shall not at any time
during the Term
               of this Agreement nor at any time thereafter reserve
or register
               or cause the registration or reservation of any
business or
               company name similar to or incorporating the words
TEFRON or any
               Chinese characters for these words or reserve or
register or
               cause the registration or reservation of any
trademarks similar
               to or incorporating the words TEFRON in the People's
Republic of
                 China or elsewhere.

               Violation of the above obligation shall be deemed
material breach
               of this Agreement and the defaulting party shall pay
damage at
               the amount of [USD Five Million] to TEFRON within
forty-five days
               upon receipt of TEFRON's written notice for the
breach.

                 LANGSHA shall provide TEFRON with all the necessary
assistance
                 required for the successful registration of its
trademarks.
                 TEFRON can sign a separate agreement regarding on it
with TEFRON
                 when it deems necessary.

    6.4     NON-COMPETITION

            6.4.1 It is hereby agreed that during the Term LANGSHA's
and ITM's
                 direct and indirect seamless activities shall be
carried out
               fully and exclusively by the Company, with the
exception only of
               the following activities, provided however that such
limitations
               will apply to ITM only and not its affiliates:

                 6.4.1.1 ITM's existing sale activity of Raw Materials
as further
                     provided in SCHEDULE 6.4.1.1



                                        17
<PAGE>


               6.4.1.2 Langsha's existing sale activity of the
seamless intimate
                    apparel products listed in SCHEDULE 6.4.1.2
hereto to its
                    customers listed in SCHEDULE 6.4.2 hereto.

                 Without derogating from the aforesaid, during the Term
and for 7
                 (seven) years thereafter (the RESTRICTED PERIOD FOR
BUSINESS),
                 LANGSHA and ITM shall not be involved, directly or
indirectly in
                 any activity, which is competitive with the Company's
Business
                 Scope and TEFRON shall act in accordance with its
obligations in
               the Letter of Undertaking, a copy of which its
attached hereto as
               SCHEDULE 6.4.1.
          6.4.2 Throughout the Term and for 5 years after the
expiration of the
               Term or the termination of this Agreement (the
RESTRICTED PERIOD
               FOR CONTACT) for any reason whatsoever: (I) LANGSHA
shall not
               solicit approach, directly or indirectly, any of
TEFRON's
               customers listed in SCHEDULE 6.4.2A, as updated from
time to
               time, nor sell or offer to sale or manufacture,
directly or
               indirectly, any goods or services for any of the
abovementioned
               TEFRON's customers, without prior written approval of
TEFRON,
               except for Raw Materials and seamed socks and hosiery
that
               LANGSHA already sells to the customers listed in
SCHEDULE 6.4.2.B
               AND as specifically indicated therein; and (II) ITM
shall not
               solicit approach, directly or indirectly, any of
TEFRON's
               customers listed in SCHEDULE 6.4.2A, as updated from
time to
               time, nor sell or offer to sale or manufacture,
directly or
               indirectly, any seamless products for any of the
abovementioned
               TEFRON's customers, without prior written approval of
TEFRON,
               provided however that such limitations will apply to
ITM only and
               not to its Affiliates; and (III) TEFRON shall not
approach,
               directly or indirectly, any of LANGSHA's customers
listed in
               SCHEDULE 6.4.2B and ITM's customers listed in SCHEDULE
6.4.2C ,
               as updated from time to time, nor sell or offer to
sale or
               manufacture, directly or indirectly, any goods or
services
               (except for Raw Materials and apparel that TEFRON
already sells
               to the customers listed in SCHEDULE 6.4.2A) for any of
the
               abovementioned LANGSHA's customers and ITM's
customers, without
               prior written approval of LANGSHA and/or ITM.

         6.4.3 Articles 6.4.1 and Article 6.4.2 above shall survive
the
               termination of this Agreement as well as the
dissolution and/or
               liquidation and/or termination of the Company.

         6.4.4 Violation of the above-mentioned obligation shall be
deemed
              material breach of this Agreement.
                                       18
<PAGE>


7.   CONFIDENTIALITY

     7.1   LANGSHA and ITM hereby undertake towards TEFRON as follows:

           7.1.1 to strictly maintain the confidentiality of, and not
to
               disclose, any and all Confidential Information
received by them.

          7.1.2 to use the Confidential Information or any part
thereof only for
               the purposes of this Agreement and for no other
purpose
               whatsoever.

          7.1.3 to procure that the Company will permit access to the
               Confidential Information only to those employees,
Directors,
               officers, advisers or agents to whom disclosure is
necessary for
               the Company to fulfill its purposes and objectives
hereunder and
               who shall sign a written undertaking in form
satisfactory to
               TEFRON to keep the Confidential Information in strict
confidence
               and to use the same only for the purposes of this
Agreement. For
               the removal of any doubt, the execution by an officer
or employee
               on such undertaking shall not derogate from LANGSHA
and ITM
               obligations to maintain the Confidential Information
in full
               confidence and procure that the Company or its
employees do not
               reveal such Confidential Information to any third
parties.

     7.2 Nothing herein contained shall be interpreted as: (I)
requiring the
          disclosure of any Confidential Information; (II) granting
of any
          express or implied license or other right under any patent,
copyright,
          right to trade secretes or any other intellectual property
right or
          other right of TEFRON relating to the Confidential
Information; (III)
          restricting, limiting or preventing TEFRON from disclosing
to third
          parties or otherwise dealing with the Confidential
Information and its
          technology as it deems fit.
     7.3   Immediately upon the termination of this Agreement for any
reason
          whatsoever, the Parties and the Company will immediately
cease all use
          of the Confidential Information, and will promptly return
to TEFRON
          all forms of Confidential Information and any and all
copies or
          derivatives thereof (including notes or other write-ups
thereof made
          by the Company). The obligations of the Parties and the
Company
          regarding non-disclosure and confidentiality pursuant to
this Article
          7 will remain in full force indefinitely.

     7.4 Violation of the above clause shall constitute material
breach of this
          Article and the defaulting party shall pay damage at the
amount of
          [USD Six Million] to the non-defaulting party.


                                       19
<PAGE>


8.   BOARD OF DIRECTORS

     8.1   FORMATION AND ESTABLISHMENT OF THE BOARD

           The Board shall be established on the Establishment Date.
Unless
          otherwise agreed by the Parties, the first meeting of the
Board shall
          be held within thirty (30) days after the Establishment
Date.

     8.2   COMPOSITION OF THE BOARD

          8.2.1 The Board of Directors shall consist of 5 (five)
Directors, of
               which 3 (three) Directors shall be appointed by
TEFRON, 1 (one)
               Director shall be appointed by LANGSHA and 1 (one)
Director shall
               be appointed by ITM.

          8.2.2 The Chairman of the Board, who shall also be the
Company's legal
               representative, shall be appointed by TEFRON and the
Vice
               Chairman of the Board shall be appointed by LANGSHA.

          8.2.3 As the legal representative of the Company, the
Chairman of the
               Board shall have the authority to execute and deliver,
on behalf
               of the Company, all agreements, contracts and other
documents
                 binding upon the Company, except as otherwise provided
in this
                 Agreement. If the Chairman is unable or unavailable to
perform
               his/her duties, the Board shall designate and
authorize another
               Director to perform such duties. Neither the Chairman,
nor such
               Director designated and authorized by the Board shall
be
               empowered to act on behalf of the Company beyond the
scope of the
               express authorization of the Board.

          8.2.4 Each Director shall be entitled to one (1) vote.
Neither the
               Chairman of the Board nor the Vice Chairman of the
Board shall be
               entitled to an additional or casting vote. While
serving in such
               position, all Directors shall owe a duty of loyalty to
the
               Company, shall act to the Company's benefit and best
interest and
               shall act in good faith in performing their duties and
               responsibilities.

       8.3   TERM OF APPOINTMENT

             8.3.1 Each individual serving in the capacity of Chairman,
Vice
                 Chairman or Director shall hold office for a term of 4
(four)
                 years and each shall be eligible for consecutive terms
of office
                 upon reappointment by the original appointing Party.
Any vacancy
                 created in the Board shall be filled by the Party,
which
                 originally appointed the absent Director causing the
vacancy.


                                         20
<PAGE>


             8.3.2 Any Party may at any time remove for any reason any
or all of
                 the individuals appointed by such Party as a Director
or
                 Directors and appoint in lieu thereof another
individual or
                 individuals to serve the remainder of the relevant
term(s). Any
                 Party removing or appointing a Director shall promptly
notify the
                 other Parties in writing of such removal and
appointment in
                 advance.
            8.3.4 The Parties shall cooperate to register any change in
the
                composition of the Board with the relevant authorities
in the
                PRC.

      8.4   AUTHORITY

            The Board of Directors shall monitor the CEO's performance
of duties
            and shall be the highest decision-making body responsible
for all
          important matters in the Company. Such primary matters
shall include,
          without limitation, the followings:

          8.4.1 Current, mid-term and long-term operational planning
(scheduling
               of production, planning for equipment, profitability,
financing,
               etc.) and the budget estimation and approval required
for these
               purposes.

          8.4.2 Quarterly business reports, approval of earnings
distribution
               proposals.

            8.4.3 Creating restrictions or limitations on borrowing
loans.

          8.4.4 Establishment and revision of major Company policies
and rules.

            8.4.5 System of major Company policies and rules.

            8.4.6 Transfer of major assets.

          8.4.7 Entering, altering and renewal of factory rental
contracts.

            8.4.8 Distribution of profit.

          8.4.9 Create any mortgage or charge on any part of the
undertaking
               property or assets of the Company or any subsidiary of
the
               Company.


                                        21
<PAGE>


          8.4.10 Enter into any contract or arrangement with any
shareholder or
               Director or any person who is a connected person or
Affiliated
               Company of a shareholder or Director or enter into any
contract
                or arrangement in which any such person or Affiliated
Company is
                interested, whether directly or indirectly.

            8.4.11 All other matters, which could have a significant
impact on
                Company operations.

    8.5     MEETING OF THE BOARD; QUORUM

            8.5.1 The Board of Directors shall convene a minimum of
four (4)
                meetings a year. The meetings shall be called and
presided over
                by the Chairman of the Board. If the Chairman is
unable,
                unavailable or fails to call or preside over a
meeting, the
                meeting thereof shall be called and presided over by
the Vice
                Chairman. If the Vice Chairman is unable, unavailable
or fails to
                call or preside over a meeting, the meeting shall be
called and
                presided over by a Director jointly recommended by
half or more
                than half of the Directors. Each meeting shall be
called by at
                least 15 (fifteen) working days prior notice. Such
notice must
                specify the time and the place of a meeting as well as
the issues
                to be discussed. The notice shall be given to all the
members of
                the Board. The Chairman of the Board shall call an
interim
               meeting based on a request made by at least two
Directors. If the
               Chairman is unwilling, unable or unavailable to
perform his/her
               duties, the Board shall designate and authorize
another Director
               to perform such duties.

            8.5.2 The attendance of not less than two thirds of the
Directors
                either in person or by proxy will constitute a quorum.

          8.5.3 Each Director shall be entitled to appoint an
alternate Director
               to participate and vote in any Board meeting in his
stead. The
               alternate Director shall provide a written pro-forma
attestation
               issued by the Company certifying its right to serve as
an
               alternate Director.

          8.5.4 A synopsis in English of the proceedings and
resolutions passed
                 in meetings and a Chinese translation thereof shall be
recorded
                 in the meeting minutes, which Directors present shall
sign and
                 seal, and which shall be archived by the Company.


                                         22
<PAGE>


       8.6   VOTING AND ADOPTION OF BOARD RESOLUTIONS

             8.6.1 Decisions of the Board shall be adopted by a majority
vote,
                 provided that a quorum is present. Notwithstanding the
aforesaid,
                 in the following matters, the approval of all of the
Board
                 members shall be required:

                 8.6.1.1 Amendments to the Articles of Association of
the Company.

                 8.6.1.2 Termination or dissolution of the Company,
provided that
                      upon the occurrence of any Event of Dissolution,
such
                      consent shall be deemed granted by all Parties
hereto.

                 8.6.1.3 Increase or decrease in the registered capital
of the
                      Company.

                 8.6.1.4 Any merger or division of the Company.

             8.6.2. If all Directors are in agreement, decisions may be
taken in
                 writing by circulating documents containing the items
in question
                 to each of the Directors, rather than by convening and
conducting
                 a Board of Director meeting. The Board of Directors
may conduct
                 meetings by any means of telecommunications, including
video or
                 telephone conference, provided that all of the
Directors
                 participating may hear each other simultaneously.

             8.6.3 If upon any resolution there is a deadlock, another
Board
                 meeting shall be held within 30 days following the
previous Board
               meeting. In the event that the subsequent Board
meeting can not
               reach any resolution, then the matter shall then be
referred to
               the chief executive officers of the parties to the
Company. The
                 chief executive officers of the parties to the Company
will
                 discuss the matter in good faith in order to resolve
it.

9.     BUSINESS MANAGEMENT ORGANIZATION

       9.1   ESTABLISHMENT OF MANAGEMENT TEAM

          9.1.1 The Board shall establish a management team
("MANAGEMENT TEAM"),
               which shall be in charge of the day-to-day operations
and
               management of the Company. The Management Team shall
be consisted
               of one CEO, one CFO and department mangers.

          9.1.2 The CEO shall be nominated by a mutual decision among
TEFRON and
               LANGSHA and ITM shall be engaged and removed following
a decision
               of the Board.


                                          23
<PAGE>


             9.1.3 The CFO shall be recommended, appointed and removed
by TEFRON
                 following a decision of the Board. The CFO shall be in
charge of
                 the financial and account management of the Company
and shall be
                 accountable to the Board and CEO. Each of the
financial
                 statements shall require the approval and signature of
the CFO
                 and the CEO and the approval of the Board.

          9.1.4 All other employees, including projects managers,
shall be hired
               and their employment shall be terminated by the CEO of
the
               Company, subject to the relevant decisions adopted
from time to
               time by the Board.

       9.2   AUTHORITIES OF THE CEO

             The responsibilities of the CEO shall be to carry out the
decisions
          made by the Board and to organize and direct the daily
management of
          the Company in accordance with the provisions of this
Agreement. Such
          responsibilities of the CEO shall include, without
limitation:

             9.2.1 routine operation of the Company within the scope of
the
                operational plans as approved by the Board of
Directors.

          9.2.2 preparation of an annual business report, earnings
distribution
               proposals, current, mid-term and long-term operational
planning
               (scheduling of production, planning for equipment,
profitability,
               financing, etc.) and submission to the Board of
Directors

          9.2.3 signing on routine   business documents of the Company,
within the
               scope of the powers   granted by the Board of Directors
and the
               Chairman, acting as   the legal representative of the
Company as
               provided in Article   8.2.2.

            9.2.4 preparation of monthly reports on business operations
and
               monthly accounting statements, which shall be
delivered to each
               of Parties hereto.

            9.2.5 providing timely notifications to each of the Parties
hereto
                relating to any occurrence of events of significance.

          9.2.6 presenting for the approval of the Board the
organizational
               structure of Company including its proposed
appointments of
               department mangers as well as their remuneration.


                                        24
<PAGE>


          9.2.7 preparation of the annual budget of the Company for
the approval
               of the Board.

     9.3 The Management Team shall assist the CEO in its
abovementioned duties
          and will manage the tasks assigned to it by the CEO.

      9.4   The CEO may not hold managerial position at any other firm
or
          commercial organization in the PRC or abroad and shall not
participate
          in any way in competition of other economic organization
against the
          Company's activities.

11.   PURCHASE OF EQUIPMENT AND RAW MATERIAL

     The Company is authorized to determine whether it shall purchase
needed
     machinery and equipment, raw materials, fuel, accessories,
transport
     vehicles, and administrative supplies within the People's
Republic of China
     or from foreign sources. Notwithstanding the above it is hereby
agreed that
     raw materials for the Company shall be purchased through ITM,
provided
     however that such raw materials are timely supplied and offered
for sale in
     competitive market prices all in accordance with the Company's
best
     interest and needs and quality requirements.

12.   LABOR MANAGEMENT

     12.1 Policies on recruitment, hiring, dismissal, wages and
salaries,
          employment insurance, welfare, and worker incentive
programs will be
          established by the Board of Directors in conformity with
the Labor Law
          of People's Republic of China, the regulations on foreign
investment
          in the Jinhua City, Zhejiang Province labor management
board and other
          effective national and local labor regulations. The Company
will
          conclude individual labor contracts with workers and this
document
          will be submitted to the local labor management board.

     12.2 The Board of Directors will discuss and decide upon matters
relating
          to hiring of other top management except the CEO and CFO,
and
          compensation of the CEO, CFO and other top management,
social
          insurance, welfare and the standard of travel expense,

     12.3 The Company shall directly hire office staff and factory
workers
          through a contract system, while observing the relevant
laws and
          regulations of the People's Republic of China, and shall
compensate
          employees through a direct payment system, provided that
wages,
          allowances and bonuses for individual staff and workers
shall depend
          upon their ability, performance, experience and general
attitude.


                                      25
<PAGE>


     12.4 The CEO shall engage office staff and factory workers
directly while
          observing the hiring policies established by the Board of
Directors.
          Contracts for new hires shall contain a fixed probation
period, at the
          conclusion of which the CEO shall determine whether or not
to formally
          hire the employee. Upon the CEO's request LANGSHA shall
provide the
          CEO with all the assistance necessary for the purpose of
locating
          compatible factory workers and personnel.

     12.5 The Company's employees shall be entitled to establish the
labor union
          organization (hereunder referred to as "LABOR UNION") in
accordance
          with the LABOR UNION LAW OF THE PEOPLE'S REPUBLIC OF CHINA
and the
          ARTICLES OF ASSOCIATION OF THE LABOR UNION OF CHINA. Based
on the
          relevant PRC laws, the Company shall pay each month two
percent (2%)
          of the total amount of the wages to be received by its
staff and
          workers as the Labor Union fund

13.   TAXATION, FINANCIAL AFFAIRS AND FINANCIAL AUDITING

     13.1 Employees of the Company shall contribute individual income
taxes in
          conformity with the "Individual Income Tax Law of the
People's
          Republic of China." Staff members and employees of the
Company shall
          be responsible for paying their own individual income tax.
in
          accordance with the relevant Chinese laws and regulations.
After
          paying their taxes, the expatriate member of the Company
shall be
          entitled to remit their money abroad.

     13.2 Pursuant to relevant China laws and regulations, the
Company shall
          accumulate savings in three areas, namely for reserve
funding,
          business development, and promotion of employee welfare.
Each year the
          Board of Directors shall determine the annual rate of
savings based
          upon Company performance, provided however that such rate
of savings
          shall be at the minimum amount as mandatory required by
law..

     13.3 The fiscal year of the Company shall be from January 1 to
December 31
          of each year. All vouchers, receipts, statistical
statements, reports
          and account books shall be written in both Chinese and
English.
     13.4 Monthly, quarterly and annual financial reports shall be
prepared in
          Chinese and in English and shall be submitted to the Board.
Financial
          statements shall include amounts in both RMB and US
dollars. The
          financial reports shall include Profit and loss statement,
balance
          sheet and cash flow statement. The financial and accounting
affairs of
          the Company shall be conducted in accordance with: (I) the
ENTERPRISE
          ACCOUNTING SYSTEM OF THE PRC, (II) this Agreement, and
(III) the GAAP.
          The Parties shall cause the Company to maintain its books
and records
          and to prepare financial statements. Furthermore, the
financial and
          accounting affairs of the Company shall be conducted in a
manner
          sufficient to satisfy the financial and tax reporting
requirements of
          each Party. To enable the Parties to satisfy such
requirements, the
          Company shall provide to the Parties copies of all such
documents as
          requested by the Parties and access to such materials.


                                      26
<PAGE>


     13.5 The Company shall engage an accountant registered in China,
agreed by
          all parties and familiar with the GAAP to conduct its
annual financial
          audit and examination and to provide a report, which would
be
          submitted to the CEO and the Board. In the event that
either Party
          considers it necessary, a foreign auditor may be engaged to
conduct a
          separate annual financial audit on such Party's account.

     13.6 Within the first two-month period of every fiscal year, the
CEO shall
          organize the preparation of a balance sheet and a profit
and loss
          statement with respect to the preceding year as well as an
earnings
          distribution proposal, and submit them to the Board for
approval after
          being examined and signed by the auditor. Quarterly
statements will be
          submitted up to 30 days after quarter end in the same
manner.

     13.7 All disbursements shall be signed by the CEO or his
authorized
          personnel. Any disbursements or the equivalent of over US$
5,000 shall
          also require the signature of the Chairman of the Board.

14.   FOREIGN CURRENCY CONTROL, BANK ACCOUNTS AND OPERATING EXPENSES

      14.1 All of the Company's foreign currency operations shall be
in
          compliance with China's foreign exchange laws and
regulations and all
          other related regulations. The Company shall remit the
profit due to
          TEFRON to a bank account designated by TEFRON in accordance
with the
          foreign exchange laws and regulations.

     14.2 The Company shall open foreign exchange deposit accounts
and RMB
          accounts as designated by the Board. All foreign exchange
receipts of
          the Company (including any loans from foreign banks, export
revenues
          etc.) shall be deposited in the Company's foreign exchange
account.
          All on-going foreign exchange disbursements (including
imports of raw
          material, transportation expenses, principal and interest
repayments
          for foreign bank loans, overseas traveling expenses, after
tax profits
          distributed to TEFRON, salaries of foreign staff etc.)
shall be paid
          through such foreign exchange account.

     14.3 Based on its business needs and upon the approval of the
local
          Administration of Foreign Exchange Control, the Company
shall be
          entitled to open foreign exchange deposit accounts in banks
outside of
          the PRC or in Hong Kong. The Company shall also be entitled
to borrow
          foreign exchange funds from banks abroad or in Hong Kong,
provided
          that the Company shall file such matters with the local
Administration
          of Foreign Exchange Control.


                                       27
<PAGE>


     14.4 RMB shall generally be used in transactions between the
Company and
          Chinese entitles, enterprises or individuals, unless
otherwise
          approved by the local Administration of Foreign Exchange
Control or
          were relevant government regulations permit the Company to
use foreign
          exchange in such transactions. Payments for all imported
products and
          salaries of foreign staff shall be paid in US dollars.

     14.5 The Parties agree that the Operating Expenses of the
Company, as
          approved by the Board, shall be borne by the Company. The
Parties
          agree to keep the Operating Expenses at the minimum
required in order
          to enable the Company to fulfill its Objectives. It is also
agreed
          that all costs and expenses associated with the
establishment of the
          Company including, without limitation any costs and
expenses relating
          to the transfer of the Machines to the Company shall be
borne by the
          Company.

15.    DURATION

     The duration of the Company shall be 50 (fifty) years commencing
on the
     Establishment Date (the: "TERM"). The Parties may agree in
writing, at any
     time, to extend the Term.

16.    DISSOLUTION

       16.1 EVENTS OF DISSOLUTION

          The Company shall be dissolved in accordance with and upon
expiration
          of the Term or any extension thereof. Without derogating
from the
          aforesaid and unless the Parties mutually agreed otherwise
in writing,
          this Agreement shall be terminated and the Company shall be
dissolved
          prior to the expiration of the Term and any extension
thereof in any
          of the following events ("EVENTS OF DISSOLUTION"):

            16.1.1 The Establishment Date does not occur within 6 (six)
months
                  after the date hereof, provided however that at least
one Party
                  wishes to stop the establishment process of the
Company;

            16.1.2 A material breach of this Agreement has occurred and
such
                  breach is not cured by the breaching Party within 30
(thirty)
                  days after receipt of written notice of the breach
from the
                  non-breaching Party, provided however that the non-
breaching
                  Party wishes to dissolve and liquidate the Company or
when any of
                 the Parties to this agreement is in default of its
obligations as
               stipulated by the Agreement, making continued
operation of the
               Company impossible.


                                        28
<PAGE>


          16.1.3 The Company becomes bankrupt, or is the subject of
proceedings
               for liquidation or dissolution, or ceases to carry on
business or
               becomes unable to pay its debts as they come due;

          16.1.4 Any Party becomes bankrupt, or is the subject of
proceedings
               for liquidation or dissolution, or ceases to carry on
business or
               becomes unable to pay its debts as they come due,
provided
               however that the other Parties wish to dissolve and
liquidate the
               Company;

          16.1.5 In the event that the failure in total   or partial
performance
               of this Agreement caused by any Event of   Force Majeure
continues
               for more than 90 (ninety) days, provided   however that
at least
               one Party (other than the non performing   Party) wishes
to
               dissolve and liquidate the Company;

           16.1.6 In the event that the Company's losses amount to 80%
(eighty
                 percent) or more of its Registered Capital, provided
however
                 that: (I) the Parties could not reach within 30 days a
mutual
                 agreement with respect to the additional financing of
the Company
                 and (II) at least one Party wishes to dissolve and
liquidate the
                 Company.

           Without derogating from the aforesaid, it is hereby agreed
that the
           Company shall be dissolved pursuant to a demand of TEFRON
provided
          however that any new law or regulation, or any   new
interpretation of
          existing law or regulation, is put into effect   which (I)
materially
          and adversely affects the profitability of the   Company
and/or TEFRON;
          (II) materially or severely limits or prevents   the
repatriation of any
          funds invested in the Company and all profits accrued
thereon out of
          the PRC. Upon TEFRON's decision any of the aforementioned
events shall
          be deemed as an Event of Dissolution.

    16.2 DISSOLUTION PROCEDURE

            16.2.1 Upon the occurrence of an Event of Dissolution and
following
                the delivery of a written request from one Party to
the others,
                the Parties shall act in good faith, take all the
necessary
                actions, submit all the necessary filings and fully
cooperate for
                the purpose of dissolving and liquidating the Company.


                                        29
<PAGE>


          16.2.2 The Chairman of the Board shall convene a Board
meeting within
               30 (thirty) of the occurrence of any Event of
Dissolution. The
               Directors of the Company shall attend the meeting in
person or by
               proxy. After the approval of the dissolution of the
Company by
               the Board and upon approval of the dissolution of the
Company by
               the relevant Chinese authorities, the dissolution and
liquidation
               of the Company shall be handled in accordance with
Article 17
               hereof.

    16.3 ESCROW

          Promptly after the execution hereof and prior to making any
          contribution or payment hereunder, each Party and all of
the Directors
          shall deposit a duly signed power of attorney with the
Escrow Agent
          enabling the other Party (the: "BENEFICIARY") to carry out,
on its
          behalf, all necessary actions and sign and submit all the
necessary
          documents for the dissolution and liquidation of the
Company (the:
          "POWER OF ATTORNEY"). The Escrow Agent shall deliver the
Power of
          Attorney to a Beneficiary, provided that such Beneficiary
has
          furnished the Escrow Agent with an arbitrational judgment,
pursuant to
          Article 24 below, ruling that the Company shall be
dissolved. For the
          avoidance of any doubt it is hereby clarified that the
abovementioned
          does not derogate from any right granted to the Parties
under any
          applicable law. For the avoidance of any doubt, in the
event that for
          any reason whatsoever any new person or entity is appointed
as
          Director of the Company, such Party appointing such new
Director shall
          procure that the new Director appointed by it will sign a
Power of
          Attorney in accordance with to this Article 16.3.

17.   LIQUIDATION AND TERMINATION

      17.1 LIQUIDATION

            Upon approval by the relevant Chinese Authority to dissolve
the
            Company, the Parties shall cause the Directors appointed by
them to
          adopt a resolution to liquidate the Company, formulate
liquidation
          procedures in accordance with applicable PRC laws and
regulations,
          establish a liquidation committee, and submit the Board's
proposals
          regarding liquidation to the government authority in charge
for
          approval or verification, if required.

      17.2 SALES OF ASSETS

            17.2.1 Upon liquidation of the Company by the Parties, all
assets of
                the Company shall be liquidated and sold, at market
prices (to
                the extent possible), first to either Party which
wishes to
                purchase the assets. If two or more Parties wish to
purchase the
                assets, they will be entitled to purchase the amount
of the
                assets in proportion to their respective then actual
Interests in
                the Company. If neither Party wishes to purchase the
assets, the
                Company may sell the assets to one or more third
parties. All
                such sales shall be conducted in a manner so as to
maximize the
                return to the Company.


                                         30
<PAGE>


          17.2.2 All assets shall be used to settle outstanding
liabilities and
               expenses, and any remaining balance shall be
distributed to each
               Party in proportion to their then respective fully
paid Interests
               in the Company.

          17.2.3 Notwithstanding anything to the contrary, it is
agreed that
               TEFRON shall have a right of first refusal to
repurchase the
               Machines, in whole or in part, by paying an amount
equal the
               higher between: (I) the price offered by any third
party(s),
               including the Parties hereto (other than TEFRON) or
(II) the
               proportionate original value of such machines
(calculated
               pursuant to Article 4.1.1 above) LESS depreciation
thereof, as
               determined in the Company's books.

      17.3 TERMINATION

          After the liquidation of the Company is completed and the
Company has
          been effectively dissolved, the Parties shall terminate
this Agreement
          by a written document executed by their duly authorized
          representatives or their beneficiaries.

18.   INSURANCE

     In conformity with the applicable laws and regulations of the
People's
     Republic of China, the Company shall obtain insurance coverage.
The
     insurance coverage shall be provided by insurers within the
People's
     Republic of China, provided however that the identity of such
insurer as
     well as the types, value and duration of insurance shall be
subject to the
     decision of the Board.

19.   AMENDMENTS

     Amendments or revisions to this Agreement must bear the
signatures of all
     the Parties hereto and shall be submitted to the relevant
examination
     authority. Such amendments and revisions shall become effective
upon their
     approval.


                                      31
<PAGE>


20.   BREACH OF CONTRACT
      20.1 Failure by one of the Parties to perform in accordance with
the
          stipulations of this Agreement or a serious breach of
contract leading
          to the Company's inability to continue to operate or to
fulfill its
          managerial objectives, or any of the above causes shall be
recognized
          as unilaterally terminating the Agreement, provided however
that a
          prior written notice of at least 30 days was given to the
breaching
          Party.

     20.2 Termination of this Agreement following a breach shall be
without
          prejudice to any rights or remedies accrued to either Party
prior to
          such termination. The non-breaching Parties shall be
entitled to seek
          recognition by the examination authority of termination of
the
          Agreement, pursuant to the provisions of this Agreement.

21.   FORCE MAJEURE

     21.1 If any Party is prevented from performing any of its
obligations under
          this Agreement due to an Event of Force Majeure, the time
for
          performance of such obligations under this Agreement shall
be extended
          by a period equal to the period of delay caused by such
Event of Force
          Majeure. A Party claiming inability to perform due to an
Event of
          Force Majeure shall take appropriate measures to minimize
or remove
          the effects of the Event of Force Majeure and, within the
shortest
          possible time, attempt to resume performance of the
obligation(s)
          affected by the Event of Force Majeure.

     21.2 The affected Party shall immediately notify the other Party
of the
          occurrence of any Event of Force Majeure and shall provide
available
          evidence thereof. Should the delay caused by any Event of
Force
          Majeure continue for more than 90 (ninety) days, either
Party may
          initiate the termination of this Agreement and the
dissolution of the
          Company pursuant to Article 17 hereof.

22.   APPLICABLE LAW

     22.1 The formation and the registration of the Company in China
and the
           operation of the Company in China shall be governed by the
relevant
          officially promulgated laws, regulations, measures and
rules of the
          PRC.

     22.2 The formation, validity, interpretation, execution,
amendment and
          termination of this Agreement shall be governed by the
published laws
          and regulations of PRC.


                                       32
<PAGE>


23.   SETTLEMENT OF DISPUTES

     23.1 Any dispute arising from, out of or in connection with this
Agreement
          shall be first settled through friendly consultations
between the
          Parties. Such consultations shall begin immediately after
one Party
          has delivered to the other Parties written request for such
          consultation. If within thirty (30) days following the date
on which
          such notice is given, the dispute was not settled through
          consultations, the dispute shall be conducted in Singapore
under the
          Arbitration Institute of Singapore International
Arbitration Center
          (the: "ARBITRATION INSTITUTE") in accordance with its
arbitration
          rules in effect on the date on which the application for
arbitration
          is submitted.

     23.2 One arbitrator shall be elected in mutual consent of the
Parties. In
          the event that the Parties do not reach mutual agreement
with respect
          to the identity of the arbitrator, such arbitrator shall be
chosen by
          the Arbitration Institute. The arbitration proceedings
shall be
          conducted for no more than 30 (thirty) days.

     23.3 The arbitral award shall be final and binding upon the
Parties, not
          subject to any appeal, and shall deal with the question of
costs of
          arbitration and all matters related thereto.

     23.4 Judgment upon the enforcement of award rendered by the
arbitration may
          be entered in any court having jurisdiction, or application
may be
          made to such court for a judicial recognition of the award
or any
            order of enforcement thereof.

     23.5 During the period when a dispute is being resolved, the
Parties shall
          in all other respects continue their implementation of this
Agreement.

24.   LANGUAGE

     This agreement shall be executed in three languages: English,
Chinese and
     Japanese. All language versions shall be equally valid.

25.   REPRESENTATIONS AND WARRANTIES OF THE PARTIES

      25.1 REPRESENTATIONS AND WARRANTIES OF TEFRON

            TEFRON hereby represents and warrants towards LANGSHA and
ITM as
            follows:

            25.1.1 it is a corporation duly formed and validly existing
under the
                 laws of the State of Israel and is in compliance with
all
                 conditions required to maintain its status as a
company under
                 these laws;


                                        33
<PAGE>


          25.1.2 it has delivered to LANGSHA and ITM, a copy of
certificate of
               incorporation evidencing its due formation;

      25.2 REPRESENTATIONS AND WARRANTIES OF LANGSHA

            LANGSHA hereby represents and warrants towards TEFRON and
ITM as
            follows:

          25.2.1 it is a company duly established and validly
existing under the
               laws of the PRC, and is in compliance with all
conditions
               required to maintain its status as a company under the
laws of
               the PRC.

          25.2.2 it has submitted to TEFRON and ITM a true and
complete copy of
               its current business license bearing a current annual
inspection
               seal from the relevant governmental authority in the
PRC;

          25.2.3 It is one of the leading companies in the Chinese
Textile Cut &
                Sew industry having an outstanding experience and
strong
                distribution network and brand name recognition in the
PRC as
                well as good access to domestic information and local
networks in
               the PRC. It well understands the Chinese business
environment; it
               is capable of helping the Company in meeting the
Annual
               Production Volume and the Annual Profitability
Forecast achieving
               large sales in the PRC. It is well acquainted with the
Chinese
               regulatory system and therefore is able to provide the
Company
               with favorable local regulatory and financial support
along with
               incentives and tax preferential treatment.

    25.3 REPRESENTATIONS AND WARRANTIES OF ITM

            ITM hereby represents and warrants towards LANGSHA and
TEFRON as
            follows:

            25.3.1 It is a corporation duly formed and validly existing
under the
                laws of Hong Kong and is in compliance with all
conditions
                required to maintain its status as a company under
these laws;

          25.3.2 It has delivered to LANGSHA and TEFRON, a copy of
certificate
               of incorporation evidencing its due formation;


                                        34
<PAGE>


    25.4 MUTUAL REPRESENTATIONS AND WARRANTIES OF THE PARTIES

          Each Party hereby represents and warrants towards the other
Parties as
          follows:

          25.4.1 it has full power and authority to enter into this
Agreement,
               the transactions contemplated hereunder and to perform
its
               obligations hereunder. It has taken all appropriate
and necessary
               corporate actions to authorize its authorized
representative to
               execute and deliver this Agreement on its behalf.

          25.4.2 It has obtained all consents, approvals and
authorizations
               necessary for the valid execution and delivery of this
Agreement.

          25.4.3 Its execution, delivery and performance of this
Agreement will
               not violate any of its charter documents, any of its
other
               agreement or obligation, or currently effective law,
regulation
               or decree that may be applicable to any aspect of this
Agreement.

          25.4.4 Upon the approval of this Agreement by the relevant
PRC
               Examination and Approval authority, this Agreement
shall
               constitute a legal, valid and binding obligation of
such Party.

26.   MISCELLANEOUS

      26.1 SEVERABILITY

          If any one or more of the provisions contained in this
Agreement or
          any document executed in connection herewith shall be
invalid, illegal
          or unenforceable in any respect under any applicable law,
(I) the
          validity, legality and enforceability of the remaining
provisions
          contained herein or therein shall not in any way be
affected or
          impaired and shall remain in full force and effect; and
(II) the
          invalid, illegal or unenforceable provision shall be
replaced by a
          provision that is valid, legal and enforceable and that
comes closest
          to expressing the intention of such invalid, illegal or
unenforceable
          provision.

      26.2 ENTIRE AGREEMENT

          This Agreement including all annexes and exhibits hereto
constitutes
          the entire agreement among the Parties with respect to the
subject
          matters set forth herein and supersedes all previous oral
and written
          discussions, negotiations, notes, memoranda, documents,
agreements,
          contracts, and communications of the Parties in respect of
such
          subject matters.


                                      35
<PAGE>
       26.3 NO WAIVER

            Unless otherwise provided for, failure or delay on the part
of any
            Party to exercise any right, power or privilege under this
Agreement
          shall not operate as a waiver thereof, nor shall any single
or partial
          exercise of any right, power or privilege preclude further
exercise
          thereof or exercise of any other right, power or privilege.
Any waiver
          by a Party at any time of a breach of any term or provision
of this
          Agreement shall not be construed as a waiver by such Party
of any
          subsequent breach, its rights under such provision, or any
of its
          other rights hereunder.

       26.4 NOTICES

            Notices or other communications required to be given by any
Party or
            the Company pursuant to this Agreement shall be in writing.
Such
          notices or other communications may be delivered
personally, sent by
          registered airmail (postage prepaid), by a recognized
courier service
          or sent by facsimile transmission to the addresses of the
other Party
          or Parties set forth below. The dates on which such notices
shall be
          deemed to have been effectively given shall be determined
as follows:

          26.4.1 Notices given by personal delivery shall be deemed
effectively
               given on the date of personal delivery.

          26.4.2 Notices given by registered airmail (postage
prepaid) shall be
               deemed effectively given on the fifteenth (15th) day
after the
               date on which they were mailed (as indicated by the
postmark).

            26.4.3 Notices given by courier shall be deemed effectively
given on
                the third (3rd) day after they were sent by recognized
courier
                service.

            26.4.4 Notices given by facsimile transmission shall be
deemed
                effectively given on the first (1st) business day
following the
                date of transmission.
                 For the purpose of notices, the addresses of the
Parties are as
                 follows:

                 IF TO TEFRON:      Mr. Yos Shiran
                                    TEFRON Ltd.
                                    Industrial Center
                                    Teradyon, Misgav,
                                    20179, Israel
                                    Tel:_____________
                                    Fax: _____________


                                        36
<PAGE>


                 With a copy to:    Mr. Yaacov Yisraeli, Adv.
                                    Shiboleth, Yisraeli, Roberts,
Zisman & Co.
                                    46 Montefiore Street
                                    Tel Aviv 65201, Israel
                                    Tel: + (972) 3-7103311
                                    Fax: + (972) 3-7103322

                 IF TO LANGSHA:     Mr./Mrs. ____________
                                    LANGSHA Knitting Co., Ltd.
                                    308 Jinfa Road, Yiwu City,
                                    Zhejiang (economic development
zone)
                                    People's Republic of China
                                    Tel:_____________
                                    Fax: _____________

                 With a copy to:    _________________

                                    _________________

                                    _________________

                                    _________________

                 If to ITM:         Mr./Mrs. ____________
                                    Itochu Textile Materials (Asia)
Ltd.
                                    Suites 2304-6,
                                    The Gateway Tower 2,
                                    25-27, Canton Road
                                    Tsim Sha Tsui, Kowloon,
                                    Hong Kong, Japan
                                    Tel:_____________
                                    Fax: _____________


                                        37
<PAGE>


                 With a copy to:    _________________

                                    _________________
                                      _________________

                                      _________________

            Any Party may at any time change its address by notice in
writing
            delivered to the other Parties in accordance with the terms
hereof.

       26.5 ASSIGNMENT

          The terms, conditions and obligations of this Agreement
shall inure to
          the benefit of and be binding upon the Parties hereto and
their
          respective permitted successors and assigns. Without the
prior written
          consent of the other Party hereto, a Party may not assign
its rights,
          duties or obligations hereunder or any part thereof to any
other
          person or entity.

            Notwithstanding anything to the contrary, in light of the
fact that
            the tax planning of the transaction contemplated hereunder
has not
            been completed prior to the execution hereof, it is hereby
agreed
          that, TEFRON shall be entitled, at its sole discretion to
assign its
          rights hereunder, in whole or in part, to other legal
entity(s) or
          individual(s), provided however that such assignees agreed
to the
          terms, conditions, right and obligations hereunder.

       26.6 COUNTERPARTS

          This Agreement may be executed in any number of
counterparts, each of
          which shall be an original, but all of which together shall
constitute
          one and the same instrument.

       26.7 ARTICLES OF ASSOCIATION

            The articles of Association of the Company shall reflect
the
            provisions hereof and in any event of contradiction between
this
            Agreement and the Articles of Association, the provisions
of this
            Agreement shall prevail. The Articles of Association of the
Company
          shall be submitted to the Yiwu City, Zhejiang Bureau of
Foreign Trade
          & Economic Cooperation for approval.
                                      38
<PAGE>


 THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK - SIGNATURE
PAGE FOLLOWS




                                      39
<PAGE>


IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the
date set forth in the first paragraph hereof.

TEFRON CO., LTD. (ISRAEL)

By: /s/ Yosef Shiran
- --------------------
Name: YOSEF SHIRAN
Title: CHIEF EXECUTIVE OFFICER, TEFRON LTD.

/s/ Asaf Alperovitz
- -------------------
Name: ASAF ALPEROVITZ
Title: CHIEF FINANCIAL OFFICER, TEFRON LTD.


LANGSHA KNITTING CO., LTD. ZHEJIANG (CHINA)

By /s/ Weng Rongdi
- ------------------
Name: WENG RONGDI
Title: CHAIRMAN OF THE BOARD


ITOCHU TEXTILE MATERIALS (ASIA) LTD

By /s/ Yoichi Ikezoe
- --------------------
Name: YOICHI IKEZOE
Title: EXECUTIVE DIR



                                      40

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-8.1
<SEQUENCE>9
<FILENAME>exhibit_8-1.txt
<TEXT>



EXHIBIT 8.1

                            SUBSIDIARIES OF THE COMPANY



SUBSIDIARY                                                JURISDICTION
- ----------                                                -----------
-
Tefron USA, Inc                                           Delaware
Macro Clothing Ltd.                                       Israel
Hi-Tex Founded By Tefron Ltd.                             Israel
El-Masira Textile Company Ltd.                            Jordan
Tefron Holding Netherland B.V.                            Netherlands
Tefron UK, Limited                                        England



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.1
<SEQUENCE>10
<FILENAME>exhibit_12a-1.txt
<DESCRIPTION>EXHIBIT 12.(A).1
<TEXT>



EXHIBIT 12.(a).1

                   CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Yosef Shiran, certify that:

1.   I have reviewed this annual report on Form 20-F of Tefron Ltd.;

2.   Based on my knowledge, this report does not contain any untrue
statement of
     a material fact or omit to state a material fact necessary to
make the
     statements made, in light of the circumstances under which such
statements
     were made, not misleading with respect to the period covered by
this
     report;

3.   Based on my knowledge, the financial statements, and other
financial
     information included in this report, fairly present in all
material
     respects the financial condition, results of operations and cash
flows of
     the company as of, and for, the periods presented in this
report;
4.     The company's other certifying officer(s) and I are responsible
for
     establishing and maintaining disclosure controls and procedures
(as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f)
and
     15d-15(f)) for the company and have:

       a.   Designed such disclosure controls and procedures, or caused
such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating
to the
          company, including its consolidated subsidiaries, is made
known to us
          by others within those entities, particularly during the
period in
          which this report is being prepared;

     b.     Designed such internal control over financial reporting, or
caused
          such internal control over financial reporting to be
designed under
          our supervision, to provide reasonable assurance regarding
the
          reliability of financial reporting and the preparation of
financial
          statements for external purposes in accordance with
generally accepted
          accounting principles;

     c.   Evaluated the effectiveness of the company's disclosure
controls and
          procedures and presented in this report our conclusions
about the
          effectiveness of the disclosure controls and procedures, as
of the end
          of the period covered by this report based on such
evaluation; and

     d.   Disclosed in this report any change in the company's
internal control
          over financial reporting that occurred during the period
covered by
          the annual report that has materially affected, or is
reasonably
          likely to materially affect, the company's internal control
over
          financial reporting; and

5.   The company's other certifying officer(s) and I have disclosed,
based on
     our most recent evaluation of internal control over financial
reporting, to
     the company's auditors and the audit committee of company's
board of
     directors (or persons performing the equivalent function):
     a.   All significant deficiencies and material weaknesses in the
design or
          operation of internal control over financial reporting
which are
          reasonably likely to adversely affect the company's ability
to record,
          process, summarize and report financial data; and

     b.   Any fraud, whether or not material, that involves
management or other
          employees who have a significant role in the company's
internal
          control over financial reporting.


Date: March 28, 2007

/s/ Yosef Shiran
- ---------------------------
Yosef Shiran
Chief Executive Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12.2
<SEQUENCE>11
<FILENAME>exhibit_12a-2.txt
<DESCRIPTION>EXHIBIT 12.(A).2
<TEXT>



EXHIBIT 12.(a).2

                   CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Asaf Alperovitz, certify that:

1.   I have reviewed this annual report on Form 20-F of Tefron Ltd.;

2.   Based on my knowledge, this report does not contain any untrue
statement of
     a material fact or omit to state a material fact necessary to
make the
     statements made, in light of the circumstances under which such
statements
     were made, not misleading with respect to the period covered by
this
     report;

3.   Based on my knowledge, the financial statements, and other
financial
     information included in this report, fairly present in all
material
     respects the financial condition, results of operations and cash
flows of
     the company as of, and for, the periods presented in this
report;
4.     The company's other certifying officer(s) and I are responsible
for
     establishing and maintaining disclosure controls and procedures
(as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over
     financial reporting (as defined in Exchange Act Rules 13a-15(f)
and
     15d-15(f)) for the company and have:

       a.   Designed such disclosure controls and procedures, or caused
such
            disclosure controls and procedures to be designed under our
            supervision, to ensure that material information relating
to the
          company, including its consolidated subsidiaries, is made
known to us
          by others within those entities, particularly during the
period in
          which this report is being prepared;

     b.     Designed such internal control over financial reporting, or
caused
          such internal control over financial reporting to be
designed under
          our supervision, to provide reasonable assurance regarding
the
          reliability of financial reporting and the preparation of
financial
          statements for external purposes in accordance with
generally accepted
          accounting principles;

     c.   Evaluated the effectiveness of the company's disclosure
controls and
          procedures and presented in this report our conclusions
about the
          effectiveness of the disclosure controls and procedures, as
of the end
          of the period covered by this report based on such
evaluation; and

     d.   Disclosed in this report any change in the company's
internal control
          over financial reporting that occurred during the period
covered by
          the annual report that has materially affected, or is
reasonably
          likely to materially affect, the company's internal control
over
          financial reporting; and

5.   The company's other certifying officer(s) and I have disclosed,
based on
     our most recent evaluation of internal control over financial
reporting, to
     the company's auditors and the audit committee of company's
board of
     directors (or persons performing the equivalent function):
     a.   All significant deficiencies and material weaknesses in the
design or
          operation of internal control over financial reporting
which are
          reasonably likely to adversely affect the company's ability
to record,
          process, summarize and report financial data; and

     b.   Any fraud, whether or not material, that involves
management or other
          employees who have a significant role in the company's
internal
          control over financial reporting.


Date: March 28, 2007

/s/ Asaf Alperovitz
- -----------------------
Asaf Alperovitz
Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.1
<SEQUENCE>12
<FILENAME>exhibit_13a-1.txt
<DESCRIPTION>EXHIBIT 13.(A).1
<TEXT>



EXHIBIT 13.(a).1

                             CERTIFICATION PURSUANT TO
                              18 U.S.C. SECTION 1350,
                              AS ADOPTED PURSUANT TO
                   SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the Annual Report of Tefron Ltd. (the
"Company") on Form
20-F for the period ended December 31, 2006, as filed with the
Securities and
Exchange Commission on the date hereof (the "Report"), the
undersigned hereby
certify that to the best of our knowledge:

     1. The Report fully complies with the requirements of Section
13(a) or
15(d) of the Securities Exchange Act of 1934; and

     2. The information contained in the Report fairly presents, in
all material
respects, the financial condition and results of operations of the
Company.

Date:   March 28, 2007
                                                          /s/ Yosef
Shiran
                                                          ------------
-----------
                                                          Yosef Shiran
                                                          Chief
Executive Officer

Date:    March 28, 2007
                                                          /s/ Asaf
Alperovitz
                                                          ------------
-----------
                                                          Asaf
Alperovitz
                                                          Chief
Financial Officer



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-14.1
<SEQUENCE>13
<FILENAME>exhibit_14a-1.txt
<DESCRIPTION>EXHIBIT 14.(A).1
<TEXT>



EXHIBIT 14.(a).1

              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in this Annual Report
(Form 20-F)
Tefron Ltd. of our report dated March 28, 2007, with respect to the
consolidated
financial statements of Tefron Ltd., included in the 2006 Annual
Report to
Shareholders of Tefron Ltd.

We consent to the incorporation by reference in the following
Registration
Statements:

     1.   Previously filed Registration Statement on Form S-8 (Nos.
333-111932
          and 333-139021) pertaining to the employee stock option
plan and

     2.   Previously filed Registration Statement on Form F-3 (No.
333-128847)

of our report dated March 28, 2007, with respect to the consolidated
financial
statements of Tefron Ltd. included in this Annual Report (Form 20-F)
of Tefron.
                                             /s/ Kost Forer Gabbay &
Kasierer
                                             -------------------------
-------
                                             Kost Forer Gabbay &
Kasierer
                                             A Member of Ernst & Young
Global

Tel Aviv, Israel
March 29, 2007




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-14.2
<SEQUENCE>14
<FILENAME>exhibit_14a-2.txt
<DESCRIPTION>EXHIBIT 14.(A).2
<TEXT>



EXHIBIT 14.(a).2

              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We hereby consent to the inclusion of our report relating to our
examination of the financial statements of AlbaHealth LLC covering
the balance
sheets as of December 31, 2005 and 2004 and the related statements of
income,
members' equity and cash flows for the years ended December 31, 2005
and 2004,
appearing in the annual report of TEFRON LTD. (parent company) on
Form 20-F,
which is to be filed with U.S. Securities and Exchange Commission and
to the
incorporation by reference of such report into the Registration
Statement on
Form F-3 (Registration No. 333-128847) and the Registration
Statements on Form
S-8 (Nos. 333-111932 and 333-139021) of TEFRON LTD.


                                                   /s/ McGladrey &
Pullen, LLP
                                                   -------------------
--------
                                                   Charlotte, North
Carolina
                                                   March   27, 2007




</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----

				
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