-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: [email protected] Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/g09FlfthMa9LxeWKtlhsR6+5cmgSBNl6CGl+RSj25blVFodmea8TD5xLKTROfG nusJV8/aK2lrR0OEgWL+0A== 0001178913-07-000631.txt : 20070329 0001178913-07-000631.hdr.sgml : 20070329 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 20-F 1 zk73517.txt

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

[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

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

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________ TO ________

[_] 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:

(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

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]

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	79ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
80
		iii

	PART II

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

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);

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 forwardlooking events discussed in this annual report might not occur.

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. 2002 2003

2004 2005 2006

---------- -------- -- ---------- ---------- ---------- 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 ========== ========== ========== ========== ========== 3 AT DECEMBER 31, --------------------------------------- -------------------------

		2002	2003	2004
2005	2006*	---------	---------	---------
---------	---------			(in thousands)

$7,652	Cash and cash equivalents$3,966	$5,376	$3,784	$2,462
7,296	Working capital (deficit)35,270	(6,600)	(14,944)	(8,524)
Total assets186,514	164,656	196,411	201,591	191,531
Total debt(1)56,621	25,270	81,122	84,224	66,507
54,685	Shareholders' equity82,230	40,108	36,655	46,744
Share Capital6,810	7,411	5,575	5,575	6,582
83,069

Additional paid in capital 101,684 | 62,810 | 62,810 | 79,243 || and | - ------------------ (1) Bank debt consists of total bank debt, other loans received capital lease obligations. | | | | | dividends | * In 2006, dividends declared per share amounted to $0.4851. No 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 | | | | 3D. | RISK FACTORS | | | | | IN THE | WE DEPEND ON A SMALL NUMBER OF PRINCIPAL CUSTOMERS WHO HAVE | | | | 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.

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:

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.

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 activewear products are intended for both men and women, and because our activewear 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.

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

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 facilitiesrelated 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."

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.

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.

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.

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.

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.

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).

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

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.

AlbaHealth.

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.

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 singlemachine 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.

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-ofthe-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), microfiber 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."

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 stateof-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.

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.

$ 72.6 38.6%

The following table outlines the dollar amount and percentage of total sales to our customers: CUSTOMER 2004 2005 2006 ---------------- ---------------- ----------------- (Dollars in millions) Victoria's Secret (1) $ 70.4 47.4% $ 69.0 40.3%

Nike $ 12.4 8.3% $ 44.1 25.8% $ 54.2 28.8%

Target	$ 24.9	16.7%	$ 18.5	10.8%
$ 18.910.0%The Gap/Banana Republic$7.94.2%	$ 11.5	7.7%	$9.2	5.4%
Others$ 34.518.4%	$ 29.4	19.9%	$ 30.5	17.7%
Total$188.1100%

$148.6 | 100.0% | $171.3 | 100% |(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."

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.

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.

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.

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.

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>

FACILITY IN ISRAELFUNCTION	APPROX.SQUAREFOOTAGE	NUMBER OF	LEASEEMPLOYEES EXPIRATION (1)
- -------------------------	-------	-------	----
----------------------------
Petach Tikva	2,500	6	2008
Management officesSegev:Central Factory -Tefron (2)(3)Development, Knitting	83,000	195	2012

packaging, storage and

administrative functions
Segev: Central Factory -Hi-Tex 1(2)(3)Development, Knitting,	143,000	306	2011
sewing, packaging, storage
and administrative functionsSegev: Central Factory -Hi-Tex 2(2)(3)Knitting, packaging and	178,000	381	2012
storage
Holon - Macro CenterDesign, development, Sewing	12,000	73	2009
and administrative functions
YarkaSewing and packaging	23,000	381	2012
Netanya: Dyeing FactoryDyeing and finishing	68,000	35	2009
Segev: Delivery WarehouseWarehouse for finished	45,000	16	2007
productsFACILITY IN JORDANIrbid (5)Sewing and packaging factory

147,000 | 670 | 2008(4) || (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.

UNITED STATES AND EUROPE

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


FACILITY IN UNITED STATES	APPROX.	NUMBER OF
AND EUROPE	SQUARE FOOTAGE	PERSONNEL
FUNCTION
- ------------------------	-------	----
--------------------------

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

| | 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 wellmaintained, 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.

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 activewear 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.

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:

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
--	----

		YEAR ENDED
DECEMBER 31,		2004	2005
2006		-----	-----
-----

Sales100%	100%	100.0%
Cost of sales77.2		91.8	82.7

----- ----- ----- 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 ===== ===== ===== 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:

SALES

	2005
--	------

				----------------------------------------
	----------------------------------------			(Dollars in
thousands)
		CUT & SEW	SEAMLESS	TOTAL
CUT & SEW	SEAMLESS	TOTAL


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

| | | || | | | | 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.

2006

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.

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: SALES --------------------------------------------- ------------------------------------------- 2004 2005 ---------------------------------------- ---------------------------------------- (Dollars in thousands) CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL 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 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.

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.

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: CONTRACTUAL OBLIGATIONS(1) (2) TOTAL 2007 2008 2009 - 2010 - 2012 ----- ----- ----- ----- -----

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 36 OTHER COMMERCIAL COMMITMENTS TOTAL AMOUNTS AVAILABLE 2006(4) - ---------------------------- ----------------------- ------- Lines of Credit $21.1 $0 Guarantees/Letters of Credit $ 11 $9 TOTAL COMMERCIAL COMMITMENTS $31.2 $9 (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 nonmargin 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."

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.

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.

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,PERIOD END	AVERAGE RATE	HIGH	LOW
- -----------------------	------------	----	-----
--------		(NIS PER $1.00)
20024.74	4.74	4.99	4.44

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.

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."

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.

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.

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."

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.

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.

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 noncompetition 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.

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.

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."

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.

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. % OF ORDINARY NUMBER OF SHARES NAME ORDINARY SHARES OUTSTANDING**

---- --------- ------ ------------- 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% - ------------------- * 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."

(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.

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.

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. NAME NUMBER OF SHARES OWNED PERCENT OF ORDINARY SHARES * - ---- ---------------------- ------ ---------------------- 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% * 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."

(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

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.

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.

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.

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 quarter3.84		$	5.35	$
Second quarter4.93		$	5.93	$
Third quarter4.96		$	7.04	$
Fourth quarter6.20		$	8.75	$
	2006
First quarter8.30		$	11.53	$
Second quarter10.25		$	13.05	$
Third quarter11.00		$	13.00	$
Fourth quarter9.85		$	12.12	$
	2007
First quarter (through March 15, 2007)9.13		$	10.95	$

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:

	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 quarter28.65		NIS 40.71	NIS
	2006
First quarter37.33		NIS 48.61	NIS
Second quarter45.86		NIS 57.80	NIS
Third quarter47.34		NIS 54.15	NIS
Fourth quarter43.33		NIS 50.16	NIS
	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.

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.

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.

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.

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 nonpayment 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.

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.

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:

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.

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).

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.

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.

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.

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

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 windingup 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 passthrough

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.

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.

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 longterm capital gains. All taxpayers are subject to certain limitations on the deduction of capital losses.

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.

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.

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.

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.

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.

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 remeasurement 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.

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.

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.

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:

From our main web page, first click on the "meet tefron" bar on the left.
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.

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 nonaudit 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.

<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

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).

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).

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,

Oxley Act of	as adopted pursuant to Section 906 of the Sarbanes
	2002.
14.(a).1Ernst &	Consent of Kost, Forer Gabbay & Kasierer, a member of
	Young Global.
14.(a).2	Consent of McGladrey & Pullen, LLP.

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006

U.S. DOLLARS IN THOUSANDS

INDEX

PAGE

972-3-6232525

---- ---------- 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 [ERNST & YOUNG LOGO] o KOST FORER GABBAY & KASIERER o Phone:

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.

KASIERER Young Global

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

F - 2

TEFRON LTD. AND ITS

SUBSIDIARIES

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

DECEMBER 31,

NOTE 2005 2006 ---- --------- --------- 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

TEFRON LTD. AND ITS SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA DECEMBER 31, --------------------- NOTE 2005 2006 ---- --------- --------- 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

TEFRON LTD. AND ITS

SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA YEAR ENDED DECEMBER 31, ----------------------------------------- NOTE 2004 2005 2006 ---- ----------- ----------- ----------- 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 =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. F - 5 TEFRON LTD. AND ITS

SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

CUMULATIVE

					ADDITIONAL	DEFERRED
OTHER		TOTAL
		ORDINARY DEFERRED			PAID-IN	STOCK-BASED
	COMPREHENSIVE ACCUMULATED	COMPREHENSIVE TREASURYSHARES		SHARES	CAPITAL	COMPENSATION
GAIN	DEFICIT	INCOME		SHARES	TOTAL
		-------- --------				---------- ------------
	------------- -----------	------------- --------			--------



	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 -------- -------- ---------- ------------ ------------- ----------- -------- -------- F - 6 TEFRON LTD. AND ITS SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.) - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA) CUMULATIVE ADDITIONAL DEFERRED OTHER TOTAL ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE TREASURY SHARES CAPITAL COMPENSATION GAIN DEFICIT INCOME SHARES TOTAL -------- ---------- ------------ - ------------ ----------- ------------- -------- -------- 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 ======== ========== ============ ============= =========== ======== ======== The accompanying notes are an integral part of the financial statements. F - 7 TEFRON LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS 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 
 --
------ -------- --------

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

The accompanying notes are an integral part of the financial statements. F - 9 TEFRON LTD. AND ITS SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS YEAR ENDED DECEMBER 31, -- ---------------------------- 2004 2005 2006 -- ------ -------- -------- (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 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. F - 10 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

SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------- ------------- U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA NOTE 1: - GENERAL (CONT.) FOR THE YEAR ENDED PERIOD DECEMBER 31, ENDED -------------------- APRIL 26,

TEFRON LTD. AND ITS

2004 2005 2006 -------- -------- --------- 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 ======== ======== ========= DECEMBER 31, --------------------- 2005 2006 -------- ---------

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 $ - ======== ========= F - 12 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

SUBSIDIARIES

TEFRON LTD. AND ITS

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 shortterm 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".
classification of its	Management determines the appropriate
	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 beenidentified.

F - 14

SUBSIDIARIES

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: % -------- 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 F - 15 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

SUBSIDIARIES

TEFRON LTD. AND ITS

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

SUBSIDIARIES

TEFRON LTD. AND ITS

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:

YEAR ENDED DECEMBER 31,

2004 2005

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 stockbased 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 ========== =========

F - 18

SUBSIDIARIES

TEFRON LTD. AND ITS

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

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 stockbased 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 ---- ---- ----

4.8%	Risk-free interest rate	2%	4.4%
	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 shortterm maturities of such instruments. Values of long-term loans approximate their fair values due to the variable interest rates of these loans.

F - 20

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

r. Derivatives and hedging:

Company will be fulfilled.

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

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-likelythan-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:

conform to

Certain prior year amounts were reclassified to current year financial statement presentation.

F - 22

SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

TEFRON LTD. AND ITS

------------------------------------------------------------------- ------------- 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: DECEMBER 31, 2006 -- --------------------------------------------------------------- GROSS UNREALIZED ACCRETION MARKET COST GAINS OF DISCOUNT VALUE -- ---------- -------------- --------------- --------------- Available for sale: Debt securities 4,952 3 20 4,975 ============ ============== =============== =============== 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 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 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 WEIGHTED AVERAGE INTEREST RATE --------------- ------ DECEMBER 31, DECEMBER 31, --------------- ------ --------------------- 2005 2006 2005 2006 --------- --- ------ --------- --------- % --------------- ------

Short-term bank credit 6.5 - $ 14,713 $ - ========= ========= As for collateral, see Note 10. NOTE 8: - OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES DECEMBER 31 --------------------- 2005 2006 --------- --------- 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 ========= ========= NOTE 9: - LONG-TERM LOANS a. Composition: WEIGHTED AVERAGE INTEREST RATE --------------- ------ DECEMBER 31, DECEMBER 31, --------------- ------ ---------------------

2005 2006 2005 2006 --------- --- ------ --------- --------- % --------------- ------ 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 ========= ========= F - 25 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 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 noncancelable 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,

d. Legal proceedings:

respectively.

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

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

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

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: 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 ---------- -------- --- ------- -------- ---------- -------- 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 ========== ======== ========== ======== ========== ======== The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2006: 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

---------- --------- ---------------- -------- -- --------- --------- ---------- --------- $ $ $ ---------- -------- -- ---------- 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 ========= ================ ========== ========= ========= ========== ========= F - 30 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 YEAR ENDED DECEMBER 31, ----- ----------------------------- 2004 2005 2006 ----- ---- ---------- --------- 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 ========= ========== ========= F - 31 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: YEAR ENDED DECEMBER 31, ----- ----------------------------- 2004 2005 2006 ----- ---- ---------- --------- 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

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

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

SUBSIDIARIES

TEFRON LTD. AND ITS

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 provided on income attributable to the Company's Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.

been

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

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:

DECEMBER 31,

YEAR ENDED -----------------

-------------				2004	2005
2006				--------	------
----------

422$	3,583	Current taxes	$	572	$
		Deferred taxes		(853)
3,666	2,128	Taxes in respect of prior years		364
209	-
----------				--------	------
4,297$	5,711		$	83	$
				========
========	========
		Domestic	$	(476)	$
4,190$	5,603	Foreign		559
107	108			--------	------
----------

$ 83 $ 4,297 $ 5,711 ======== ======== ======== F - 34 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: YEAR ENDED DECEMBER 31, ----- ----------------------------- 2004 2005 2006 ----- ---- ---------- --------- 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 ========= ========== ========= F - 35 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: DECEMBER 31, ---------------------- 2005 2006 --------- --------- 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) ========= ========= (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 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"): YEAR ENDED DECEMBER 31, --- ------------------------------------------- 2004 2005 2006 --- ---------- ------------- ------------- 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 ============= ============= =============

F - 37

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 tomanagement's assessment. Management evaluates
performance	based upon operating income (loss) before interest
and income	taxes.
b.	Reportable segments:

ENDED DECEMBER 31, 2006		YEAR
--------------------------		------------
		CUT & SEW -ISRAEL
SEAMLESS	CONSOLIDATED	-----------
---------	------------

$ 102,153$	Sales to unaffiliated customers188,104	$85,951
=========	============	===========
$16,366$	Operating income25,883	$9,517
=========		===========

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 ============ F - 38 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.) YEAR ENDED DECEMBER 31, 2005 ---- ---------------------------------- CUT & SEW - ISRAEL SEAMLESS CONSOLIDATED ---- ------- ---------- ------------

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 ============ YEAR ENDED DECEMBER 31, 2004 ---- ---------------------------------- CUT & SEW - ISRAEL SEAMLESS CONSOLIDATED ---- ------- ---------- ------------ 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 =========== ========== ============ c. The Company's sales by geographic area are as follows: YEAR ENDED DECEMBER 31, ---- ---------------------------------- 2004 2005 2006 ---- ------- ---------- ------------ 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 =========== ========== ============

F - 39

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: YEAR ENDED DECEMBER 31, ---- ---------------------------------- 2004 2005 2006 ---- ------- ---------- ------------ % ---- ---------------------------------- 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 =========== ========== ============ 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: YEAR ENDED DECEMBER 31, ---- ---------------------------------- 2004 2005 2006 ---- ------- ---------- ------------ 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 =========== ========== ============ F - 40 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):

YEAR ENDED DECEMBER 31, ---- ---------------------------------- 2004 2005 2006 ---- ------- ---------- ------------ 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) =========== ========== ============ (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 [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

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.

Yosef Shiran	By: /s/
	------------
--------Executive Officer	Yosef ShiranChief
Alperovitz	By: /s/ Asaf------------
-----------	Asaf
Alperovitz
Financial Officer	Chief
March 29, 2007

EXHIBIT INDEX

1.1.by	Memorandum of Association of the Company (incorporated
Statement	reference to Exhibit 3.1 to the Company's Registration
	on Form F-1 (No. 333-7538) filed on August 29, 1997).
1.2.Company.	Amended and Restated Articles of Association of the
2.1.1999, among	Form of Credit Agreement, dated as of December 13,
York and Bank	AWS Acquisition Corp., Israel Discount Bank of New
	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).
2.2Ltd. to	Letter, dated March 2, 2004, from Israel Discount Bank
requirements under the	the Company regarding shareholders' equity
	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).
2.3Company	Letter, dated March 2, 2004, from Bank Hapoalim to the
Credit	regarding shareholders' equity requirements under the

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).

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

2.9 Loan Agreement, dated as of December 31, 2004, between Bank

Hapoalim and Hi-Tex Founded by Tefron Ltd (incorporated by reference to Exhibit 2.13 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). 2.10 Loan Agreement, dated as of December 25, 2004, between Israel Discount Bank and the Company (incorporated by reference to Exhibit 2.14 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). 2.11 Loan Agreement, dated as of December 31, 2004, between Bank Hapoalim and the Company (incorporated by reference to Exhibit 2.15 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2004). 2.12 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). 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. EX-1.2 2 exhibit_1-2.txt

EXHIBIT 1.2

TEFRON LTD.

A COMPANY LIMITED BY SHARES

PRELIMINARY

1. CANCELLED

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.

"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.

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 onethousandth (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) 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 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.

INCREASE OF AUTHORIZED SHARE CAPITAL

Ordinary B

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.

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.

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).

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.

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.

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.

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.

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.

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 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.

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

b) Any person becoming entitled to a share in consequence of the death of any shareholder, upon producing evidence of the grant of

provisions of Article 21(b) have been effectively invoked.

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.

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.

member, or

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

the non-receipt of notice sent to such member, shall not invalidate the proceedings at such meeting.

PROCEEDINGS AT GENERAL MEETINGS

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.

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.

The Chairman, if any, of the Board of Directors, shall preside

27. CHAIRMAN

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 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.

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.

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.

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.

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

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).

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.

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.

cause the

BOARD OF DIRECTORS

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, 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.

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.

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 reelected 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.

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.

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.

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.

(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.

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.

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.

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.

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.

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

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.

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

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).

BRANCH REGISTERS

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.

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.

RIGHTS OF SIGNATURE, STAMP, AND SEAL

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.

EX-4.4 3 exhibit_4-4.txt

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.

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.

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

EX-4.6 4 exhibit_4-6.txt

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:

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.
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: 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.

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.

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").

(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

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

"SunTrust Letter").

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;

the

(the

(ii) Four (4) counterpart originals of the Amendment 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;

(viii) The Subordination Agreement; and

(ix) The SunTrust Letter executed by SunTrust Bank.

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.
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.
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.

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.

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 ShiranIndustrial CenterTeradyon, P.O. Box 1365,Misgav 20179, IsraelTelephone: (972)4-990-
0803	Facsimile: (972) 4-990-
0054
With a copy to:	Dewey Ballantime LLPATTN: Morton A. Pierce,
Esq.	1301 Avenue of the
Americas	New York, NY 10019
Telephone:_______________
6333	Facsimile: (212) 259-
and to:Hodak, Halevy,	Gross, Kleinhendler,
	Greenberg & Co.ATTN:Richard Mann,
Adv.	One Azrieli CenterTel Aviv, 67021 IsraelTelephone: (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.]

[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

EXHIBIT A

FORM OF SUBORDINATED PROMISSORY NOTE

[See attached]

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:

All references in the Agreement to "Alba" shall now read "Tefron".
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.
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:

parties hereto agree to extend the Agreement in writing.

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.
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.]

[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

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 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.]

[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:__________________________

EXHIBIT D

FORM OF SUBORDINATION AGREEMENT

[See attached]

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

FORM OF SUNTRUST LETTER

[See attached]

EX-4.7 5 exhibit_4-7.txt

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:

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).

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) "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.

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.

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.

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.

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.

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.
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.

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.

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.
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.

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.
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.
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.

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.

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.
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.
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.
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.
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.
AUTHORITY. Each of the signatories hereto certifies that such party has

all necessary authority to execute this Agreement.

HEADINGS. The paragraph headings used in this Agreement are for convenience only and shall not affect the interpretation of any of the provisions hereof.
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.

"Subordinated

TEFRON USA, INC.

Creditor"

Shiran

Financial Officer

Alperovitz

President

Notices:

Shiran

1365,

Israel

4-990-0054

By: /s/ Yosef ------------------- Name: Yosef Shiran Title: Chief By: /s/ Asaf -------------------

Name: Asaf

Title: Senior Vice

Address for

Tefron USA, Inc. Attention: Yosef

Industrial Center Teradyon, P.O. Box

Misgav 20179,

Telecopier: (972)

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

EX-4.8 6 exhibit_4-8.txt

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.

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.

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 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.

(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

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 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.

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 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.

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.

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

EX-4.15 7 exhibit_4-15.txt

[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;

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:

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:

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:

(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.

(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).

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.

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.

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."

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. 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.

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

EX-4.16 8 exhibit_4-16.txt

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)

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 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.

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.

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.

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.

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 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").

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.

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 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.

be the

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.

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.

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.

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.

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:

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.

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.

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.

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.

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

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.

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.

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
(four)	Chairman or Director shall hold office for a term of 4
	years and each shall be eligible for consecutive terms
of office
Any vacancy	upon reappointment by the original appointing Party.
	created in the Board shall be filled by the Party,
which
	originally appointed the absent Director causing the
vacancy.

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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 nonbreaching 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.

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.

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.

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

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.

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.

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.

LANGUAGE

This agreement shall be executed in three languages: English, Chinese and Japanese. All language versions shall be equally valid.

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;

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;

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.

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.

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 ShiranTEFRON Ltd.Industrial CenterTeradyon, Misgav,20179, IsraelTel:_____________Fax: _____________
		36
Zisman & Co.	With a copy to:	Mr. Yaacov Yisraeli, Adv.Shiboleth, Yisraeli, Roberts,
		46 Montefiore StreetTel Aviv 65201, IsraelTel: + (972) 3-7103311Fax: + (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 ChinaTel:_____________Fax: _____________
	With a copy to:

Ltd.	If to ITM:	Mr./Mrs. ____________Itochu Textile Materials (Asia)
		Suites 2304-6,The Gateway Tower 2,25-27, Canton RoadTsim Sha Tsui, Kowloon,Hong Kong, JapanTel:_____________Fax: _____________
		37
	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.

THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK - SIGNATURE PAGE FOLLOWS

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

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;

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 EX-12.2 11 exhibit_12a-2.txt EXHIBIT 12.(A).2 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;

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;
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):

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:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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	------------
-----------Executive Officer	Yosef ShiranChief
Date:March 28, 2007
Alperovitz	/s/ Asaf------------
-----------	Asaf
Alperovitz	Chief
Financial Officer

EX-14.1 13 exhibit_14a-1.txt EXHIBIT 14.(A).1

EXHIBIT 14.(a).1

plan and

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:

Previously filed Registration Statement on Form S-8 (Nos. 333-111932 and 333-139021) pertaining to the employee stock option
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.

Kasierer

Global

Tel Aviv, Israel March 29, 2007

EX-14.2 14 exhibit_14a-2.txt EXHIBIT 14.(A).2

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

/s/ Kost Forer Gabbay & ------------------------- Kost Forer Gabbay & A Member of Ernst & Young -----END PRIVACY-ENHANCED MESSAGE-----

AI assistant

Tefron Ltd. — Annual Report 2006

7077_rns_2007-03-30_35809d80-d8c1-4bfc-be73-4ad463a11a93.pdf

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

(Title of Class)

FORWARD-LOOKING STATEMENTS

PART I

WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY.

WE FACE POTENTIAL COMPETITION BY OUR FORMER EMPLOYEES.

DISPOSITION OF INTEREST IN ALBAHEALTH LLC

CAPITAL EXPENDITURES

PRODUCTS

MANUFACTURING AND PRODUCTION

MANUFACTURING PROCESS

HI-TEX MANUFACTURING PROCESS

SALES AND MARKETING

INTELLECTUAL PROPERTY

SEASONALITY

CUSTOMERS

BACKLOG

ISRAELI INVESTMENT GRANTS AND TAX INCENTIVES

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

COMPETITION

POLITICAL CONDITIONS IN ISRAEL

ECONOMIC CONDITIONS IN ISRAEL

U.S. GOVERNMENT REGULATION

4C. ORGANIZATIONAL STRUCTURE

UNITED STATES AND EUROPE

OUR BUSINESS; DEVELOPMENTS

2006 DEVELOPMENTS

SIGNIFICANT ACCOUNTING POLICIES

INVENTORY VALUATION

PROPERTY, PLANT AND EQUIPMENT

OPERATING RESULTS

SALES

COST OF SALES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

OPERATING INCOME

FINANCIAL EXPENSES, NET

COST OF SALES

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

OPERATING INCOME

INCOME TAXES

LOAN FACILITIES

EQUITY FINANCINGS

OUTLOOK

DESIGN AND DEVELOPMENT OF PRODUCTS

EFFECTIVE CORPORATE TAX RATE

GOVERNMENT PROGRAMS

EXCHANGE RATES

MACPELL SHAREHOLDERS' AGREEMENT

MACPELL-ARWOL- NORFET AGREEMENT

6B. COMPENSATION

EMPLOYMENT AGREEMENTS

CHIEF EXECUTIVE OFFICER

AGREEMENT WITH ARIE WOLFSON

FORMER PRESIDENT

6C. BOARD PRACTICES

INDEPENDENT/EXTERNAL DIRECTORS

QUALIFICATIONS OF OTHER DIRECTORS

DUTIES OF DIRECTORS

COMMITTEES

6D. EMPLOYEES

6E. SHARE OWNERSHIP

GENERAL

ADMINISTRATION

VESTING PERIODS

7B. RELATED PARTY TRANSACTIONS

RELATIONSHIPS AND TRANSACTIONS WITH NORFET

55

AGREEMENTS AMONG NORFET, MACPELL AND ARWOL

MACPELL SHAREHOLDERS' AGREEMENT

AGREEMENT WITH ARIE WOLFSON

RELATIONSHIPS BETWEEN SIGI RABINOWICZ AND SUPPLIERS

LEASE ARRANGEMENT

DIVIDEND POLICY

ITEM 9 THE OFFER AND LISTING

10B. MEMORANDUM AND ARTICLES OF ASSOCIATION

BOARD OF DIRECTORS

Tefron Ltd. Annual Report 2006