Tefron Ltd. — Annual Report 2007

Mar 31, 2008

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2008 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

[_] 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, 2007

[_] 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)

Asaf Alperovitz Chief Financial Officer Industrial Center Teradyon, P.O. Box 1365, Misgav 20179, Israel Tel: 972-4-990-0000

-------------------------------------------------------------------------------(Name, Telephone, E-mail and/or Facsimile number and Address of Registrant's Contact Person)

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

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

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

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:

21,202,986 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.

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.

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.

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 basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP [X]

INTERNATIONAL FINANCING REPORTING STANDARDS AS ISSUED BY THE INTERNATIONAL ACCOUNTING STANDARDS BOARD [_]

OTHER [_]

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

ITEM 17 [] ITEM 18 []

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).

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 4 ITEM 4. INFORMATION ON THE COMPANY 15 A. History and Development of the Company 15 B. Business Overview 16 C. Organizational Structure 25 D. Property, Plants and Equipment 26 ITEM 4A UNRESOLVED STAFF COMMENTS 27 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 28 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 41 A. Directors and Senior Management 41 B. Compensation 44 C. Board Practices 45 D. Employees 48 E. Share Ownership 49 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 53 A. Major Shareholders 53 B. Related Party Transactions 54 C Interests of Experts and Counsel 56 ITEM 8. FINANCIAL INFORMATION 56 ITEM 9. THE OFFER AND LISTING 57 A. Offer and Listing Details 57 B. Plan of Distribution 58 C. Markets 58 D. Selling Shareholders 58 E. Dilution 58 F. Expenses of the Issue 59 ITEM 10. ADDITIONAL INFORMATION 59 A. Share Capital 59 B. Memorandum and Articles of Association 59 C. Material Contracts 61 D. Exchange Controls 68 E. Taxation 68 F. Dividends and Payment Agents 73 G. Statements by Experts 73 H. Documents on Display 73 I. Subsidiary Information 73 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 73 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 75

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PART II 75 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 75 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 75 ITEM 15. CONTROLS AND PROCEDURES 75 ITEM 16. [RESERVED] 76 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 76 ITEM 16B. CODE OF ETHICS 76 ITEM 16C. ACCOUNTANTS' FEES AND SERVICES 77 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 77 ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 77 PART III 78 ITEM 17. FINANCIAL STATEMENTS 78 ITEM 18. FINANCIAL STATEMENTS 78 ITEM 19. EXHIBITS 79 iv

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 3.846 to $1.00, the representative rate of exchange published by the Bank of Israel, the Israeli central bank, for December 31, 2007. The representative exchange rate between the NIS and the dollar as published by the Bank of Israel for March 17, 2008 was NIS 3.426 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 fluctuation in inflation and currency rates;

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);

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

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

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

o the fluctuating costs of raw materials;

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

• our failure to generate sufficient cash from our operations to pay our debt; and

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

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

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

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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, 2006 and 2007 and for each of the three years ended December 31, 2005, 2006 and 2007 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, 2003, 2004, and 2005 and for each of the years ended December 31, 2003 and December 31, 2004 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.

FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------2003 2004 2005 2006 2007 ------------ ------------ ------------ ------------ -----------U.S. dollars in thousands (except per share data) STATEMENT OF INCOME DATA: Sales $ 124,800 $ 148,620 $ 171,336 $ 188,104 $ 158,614 Cost of sales 113,622 136,424 141,621 145,144 139,147 Gross profit 11,178 12,196 29,715 42,960 19,467 Selling, and marketing expenses 9,285 11,309 8,984 11,573 12,443 General and administrative expenses 5,017 5,603 4,595 5,504 5,272 Operating income (loss) (3,124) (4,716) 16,136 25,883 1,752 Financing expenses, net 4,019 3,888 3,189 1,912 1,289 Income (loss) before taxes on income (7,143) (8,604) 12,947 23,971 463 Taxes on income (tax benefit) (616) 83 4,297 5,711 (20) Equity in earnings of affiliated companies (183) - - - - Pre-acquisition earnings of subsidiary since April 1, 2003 through May 5, 2003 (85) - - - - Income (loss) from continuing operations (6,795) (8,687) 8,650 18,260 483 Income (loss) from discontinued operations 2,342 1,822 (5,357) 120 - ------------ ------------ ------------ ------------ -----------Net income (loss) $ (4,453) $ (6,865) $ 3,293 $ 18,380 $ 483 Basic and diluted net earnings (losses) per share from continuing operations: Basic net earnings (losses) per share (0.55) (0.56) 0.49 0.90 0.02 ============ ============ ============ ============ ============ Diluted net earnings (losses) per share (0.55) (0.56) 0.47 0.88 0.02 ------------ ------------ ------------ ------------ -----------Basic and diluted net earnings (loss) per share from discontinued operations: Basic net earnings (losses) per share 0.19 0.12 (0.30) 0.01 - ------------ ------------ ------------ ------------ -----------Diluted net earnings (losses) per share 0.19 0.12 (0.29) 0.01 - ------------ ------------ ------------ ------------ -----------Basic and diluted net earnings (loss) per share: Basic net earnings (losses) per share (0.36) (0.44) 0.19 0.91 0.02 ------------ ------------ ------------ ------------ -----------Diluted net earnings (losses) per share (0.36) (0.44) 0.18 0.89 0.02 ------------ ------------ ------------ ------------ -----------Weighted average number of shares used for computing basic earnings (losses) per share 12,412,166 15,603,904 17,719,275 20,210,722 21,188,161 ------------ ------------ ------------ ------------ -----------Weighted average number of shares used for computing diluted earnings (losses) per share 12,412,166 15,603,904 18,542,618 20,754,566 21,630,124 ============ ============ ============ ============ ============

AT DECEMBER 31, --------------------------------------------------------------------------2003 2004 2005 2006* 2007 --------- --------- --------- --------- --------(in thousands) Cash and cash equivalents $ 3,784 $ 2,462 $ 7,652 $ 3,966 $ 2,384 Working capital (deficit) (14,944) (8,524) 7,296 35,270 37,826 Total assets 201,591 191,531 186,514 164,656 162,492 Total debt(1) 84,224 66,507 56,621 25,270 19,322 Shareholders' equity 36,655 46,744 54,685 82,230 88,536 Share Capital 5,575 6,582 6,810 7,411 7,518 Additional paid in capital 62,810 79,243 83,069 101,684 106,530

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

• In 2006, dividends declared per share amounted to $0.4851. No dividends were declared in the years 2003 - 2005 and 2007.

3B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

3C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable.

3D. RISK FACTORS

WE DEPEND ON A SMALL NUMBER OF PRINCIPAL CUSTOMERS WHO HAVE IN THE PAST BOUGHT OUR PRODUCTS IN LARGE VOLUMES. WE CANNOT ASSURE THAT THESE CUSTOMERS OR ANY OTHER CUSTOMER WILL CONTINUE TO BUY OUR PRODUCTS IN THE SAME VOLUMES OR ON THE SAME TERMS.

Our sales to Victoria's Secret accounted for approximately 40.3% of our total sales in 2005, 38.6% of our total sales in 2006 and 39.1% of our total sales in 2007. Our sales to Nike accounted for approximately 25.8% of our total sales in 2005, 28.8% of our total sales in 2006 and 23.6% of our total sales in 2007. Our sales to Target, J.C. Penney, Swimwear Anywhere and The Gap accounted in the aggregate for approximately 19.1% of our total sales in 2005, 21.4% of our total sales in 2006 and 20.7% of our total sales in 2007. 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, J.C. Penney, Swimwear Anywhere and The Gap 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 Alba Health, 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 62.7% of our sales in 2007, and our six largest customers accounted for approximately 83.5% of our sales in 2007. 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 or slowdown in the general economy. A downturn or a slowdown in the general economy, or in the U.S. economy in particular, 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 also 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 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, and we expect this will have a negative effect on our sales of Cut & Sew products. In particular, our largest intimate apparel customer has informed us that it intends to gradually transfer its sourcing of an old Cut & Sew cotton program to India beginning in the second half of 2008. 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.

OUR EXPANSION INTO NEW PRODUCT LINES WITH COMPLICATED PRODUCTS AND DIFFERENT RAW MATERIALS, FACING SHORTER PRODUCTION RUNS, REDUCED OUR OPERATING EFFICIENCY DURING 2007, 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. Our efforts to fulfill our costumers' needs, including by providing innovative products, and the requirements of our customers to manufacture new, complicated products with different raw materials in shorter production runs, led to a reduction in our operating efficiency in 2007. Our continued efforts to develop and present new product lines and to make the required adjustments to changes in market trends may result in additional reductions in operating efficiency and profits in the future. As a result of our reductions in operating efficiency, we may also be unable to meet our customers' delivery deadline requirements, which may adversely affect our relationships with our customers and also increase our costs due to the additional freight charges and penalties that we may be required to pay.

OUR BUSINESS MAY BE IMPACTED BY INFLATION AND U.S. DOLLAR, NIS AND EURO EXCHANGE RATE FLUCTUATIONS AS WELL AS THE EXCHANGE RATES OF THE OTHER CURRENCIES IN COUNTRIES IN WHICH WE OPERATE.

Exchange rate fluctuations between the U.S. dollar and the NIS and between the Euro and the U.S. dollar, and inflation in Israel, may negatively affect our earnings. A substantial majority of our revenues and a substantial portion of our expenses are denominated in U.S. dollars and a portion of our revenues is denominated in Euros. However, a significant portion of the expenses associated with our Israeli operations, including personnel and facilities-related expenses, are incurred in NIS. A significant portion of our expenses are also incurred in countries in the Far East, mainly China and India; these expenses are denominated in U.S. dollars but may be adjusted in accordance with the exchange rate of the local currency to the U.S. dollar. Consequently, we are exposed to the risk of appreciation of the NIS and other currencies vis-a-vis the U.S. dollar. This appreciation would cause, and in 2007 did cause, an increase in our expenses as recorded in our U.S. dollar denominated financial reports even though the expenses denominated in local currencies will remain unchanged.

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Due to the appreciation of the NIS vis-a-vis the dollar in 2007, we incurred gross expenses of approximately $1.0 million in 2007. This amount does not take into account hedging transactions performed by the Company during 2007, which diminished the adverse effect of the appreciation of the NIS in relation to the dollar. This appreciation may continue in 2008. Since December 31, 2007, the U.S. dollar has continued its devaluation vis-a-vis the NIS. As of March 17, 2008, the representative exchange rate between the NIS and the U.S. dollar as published by the Bank of Israel was NIS 3.426 to $1, as opposed to NIS 3.846 to $1 as of December 31, 2007.

In addition, inflation in Israel and all other off-shore locations in which we operate 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, 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."

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

Approximately 90% of our sales in 2005, 77% of our sales in 2006 and 84% of our sales in 2007 were made to customers in North America, and approximately 18% of our sales during 2006 and 11% of our sales during 2007 were made to customers in Europe. We also had initial sales to Asia constituting approximately 2% of our sales in 2006 and in 2007. We intend to continue to expand our sales to customers in the United States and Europe. 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, China, India and Cambodia. For these purposes, products of ours are situated in these countries, and equipment and machinery of ours are situated in Jordan. 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;

o strikes and general economic problems; and

o costs associated with deliveries, including thefts, delays and losses of products in transit, which are not totally covered by insurance policies.

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."

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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 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 production activities, mainly dyeing, cutting and sewing, finishing and accompanied operations and logistics operations, out of Israel to benefit from lower labor costs.

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 and Asia in general. We cannot assure that the political, economic or social situation in these countries or in the Middle East and Asia 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, India, Jordan or any newer locations outside of Israel will be cost-efficient or successful.

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

In recent years, we have invested significant efforts to develop and expand our new product lines, in particular active-wear products, to diversify our product line and our client base. Active-wear products that we manufacture are made in bigger sizes than intimate apparel, both because our active-wear products are intended for both men and women, and because our active-wear products involve the manufacture of more tops. As a result, we have purchased and may need to purchase additional knitting machines and other equipment adapted to manufacture new products. In addition, the manufacture of active-wear products at times requires equipment with new technologies. We may also have to purchase machinery to support the shorter production runs for our products. 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. For instance, during the third quarter of 2006, our revenues and results of operations 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.

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WE ARE SUBJECT TO FLUCTUATING COSTS OF RAW MATERIALS.

We use cotton yarn, 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 2007, the cost of synthetic fibers increased due to rising energy costs, and there may be a similar increase in the future. In addition, cotton price levels are currently very high due to high demand and shortage of commodity. 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. We also depend on subcontractors for full vertical manufacturing services of our swimwear products, and we are increasingly dependent on subcontractors' services for all of our Cut & Sew products. 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 OR 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 3,710 and in Jordan is approximately JD 110. Pursuant to existing legislation in Israel, the minimum wage is to be increased effective as of July 1, 2008, to NIS 3,850. In addition, a special committee was scheduled to submit by July 1, 2007 recommendations to further increase the minimum wage, although we are not aware that any recommendations were in fact submitted. An increase in the minimum wage would increase our labor costs, and unless we can obtain alternative labor in lower cost markets, this increase could adversely affect our operating results.

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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 operating activities was approximately $27.8 million and $3.0 million in 2006 and 2007, 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 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.

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."

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

As of December 31, 2007, we had approximately $19.3 million of long term loans outstanding (including current maturities of $5.9 million). Our debt obligations could have important consequences. For example, they could:

• 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;

• place us at a competitive disadvantage compared to our competitors that have less debt;

• make us more vulnerable to economic and industry downturns and reduce our flexibility in responding to changing business and economic conditions;

• limit our ability to pursue business opportunities; and

• 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. For example, a ten percent change on our floating interest rate long-term loans outstanding at December 31, 2007 would have an annual impact of approximately $0.1 million on our interest cost. See "Item 5. Operating and Financial Review and Prospects - 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.

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 NIS 140 million that are submitted in any year) and up to 20% of eligible capital expenditures (for projects exceeding investments of NIS 140 million 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.

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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:

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

• varying levels of market acceptance of our products;

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

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

• 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 AND/OR THE TEL-AVIV 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, 2008, our market capitalization was $76.1 million, and as of December 31, 2007, we had shareholders' equity of $88.5 million.

In the event we fail to meet any current or revised listing criteria of the NYSE or 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, 2008, 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, 2008 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 34.45% holder in Norfet. As a result, the corporate actions of Tefron may be significantly influenced by Mr. Shamir. Furthermore, as of March 15, 2008, Ishay Davidi, another director, 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.

We are party to consulting and management services agreements with Norfet, pursuant to which it agreed to provide consultancy and management services to Tefron. See "Item 7. Major Shareholders and Related Party Transactions," and Note 16 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 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, there are currently 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. 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. Further, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region. 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.

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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."

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.

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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 Industrial 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 Waldensian, Inc. (Tefron USA), a manufacturer of seamless apparel and healthcare products. 2001 Initial significant shifting of sewing production to Jordan.

• 2002 Reorganization of Tefron USA, 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 AlbaHealth for consideration of approximately $13 million, consisting of approximately $10 million paid in cash and a $3 million by an unsecured subordinated promissory note payable in August 2009. 2006 Launch of a joint Center of Excellence with Nike, located at Nike's world headquarters in Beaverton, Oregon.

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CAPITAL EXPENDITURES

Our capital expenditures for fixed assets (net of grants from the Government of the State of Israel) were $6.4 million, $3.5 million and $4.5 million for the years ended December 31, 2007, 2006 and 2005, respectively. The 2007 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 also 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 2008 will be approximately between $5 million to $7 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 the scope of our sales, 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, J.C. Penney, lululemon athletica, , Patagonia, Reebok, Swimwear Anywhere, El Corte Englese and other well known American and European 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 tops, T-shirts, daywear, nightwear, bodysuits, swimwear, beach-wear, active-wear, shape 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 advanced development and design skills and manufacturing process and improve the design and quality of our products. The Hi-Tex manufacturing process involves the utilization of a single machine that transforms yarn directly into a nearly complete garment, replacing the knitting, cutting, and significant sewing functions which, in traditional manufacturing, are performed sequentially on separate machines at separate workstations. Following this single-machine operation, all the Hi-Tex manufacturing process requires to complete the garment is dyeing and a reduced amount of sewing and finishing. Our Hi-Tex manufacturing process enables us to produce a substantially wider range of fabrics, styles and product lines, resulting in a consistently high level of comfort, quality and durability. Our fabric engineering, product design and the comfort of our products provide us with an opportunity to expand our sales of active-wear products.

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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 The Gap in 1993, with Nike and J.C. Penney in 2000 and with Swimwear Anywhere in 2003. In 2000, we also began our relationship with Target, which was an existing customer of Tefron USA, Inc., or Tefron USA. These customers accounted for approximately 88.8% and 83.5% of our total sales in 2006 and in 2007, 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 advanced design skills enable us to provide our costumer with leading-fashion swimwear. Our product line includes knitted briefs, bras, tank tops, boxers, leggings, crop tops, T-shirts, daywear, nightwear, bodysuits, swimwear, beach-wear, active-wear, shape 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 15c. of the Notes to the Consolidated Financial Statements.

MANUFACTURING AND PRODUCTION

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

We manufacture products principally to fill firm orders and, therefore, maintain limited inventory of finished goods. Customers typically send projected product requirements to us between three and six 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.

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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 & 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 that is delivered to our customers. Our quality assurance and quality control personnel work with our subcontractors to maximize product quality standards. We are gradually expanding our manufacturing sources in the Far-East for our Cut & Sew products, supervised by our personnel, including with regard to 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-spandex and cotton-viscose), micro-fiber nylons and blends of micro-fiber nylon with spandex, elastic, polyester and other innovative natural materials. 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 or customers' firm commitments, although we have a policy of maintaining a minimum level of those raw materials that are in repeated demand. From time to time, when market conditions are favorable, we have entered into contracts with various suppliers of basic yarns for delivery over a period of three to six months. The costs of our raw materials are subject to fluctuations. See "Item 3. Key Information - 3D. Risk Factors - We are subject to fluctuating costs of raw materials."

• KNITTING (ONLY CUT & SEW) - The knitting needs of our Cut & Sew Division are provided by 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 120 automatic knitting machines, which have capacity to produce approximately 300 tons of fabric per month (depending on the type of fabric). During 2007, we produced approximately 85 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.

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

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

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

HI-TEX MANUFACTURING PROCESS

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

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, 2007, we had a total of 765 fully equipped Santoni Knitting machines at the Hi-Tex facilities in Israel. We also have 36 fully equipped Santoni Knitting machines at Tefron USA in Valdese, North Carolina, which are currently not operated, but may be transferred to other manufacturing facilities at our discretion.

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.

We also believe that our high market-understanding, and our development and operation skills will assist us in operating subcontracted manufacturing in the Far-East.

SALES AND MARKETING

Our marketing strategy focuses on selling quality products to large U.S. and European 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. Approximately 78% of our sales in 2007 were derived from the worldwide sale of our products to our four largest apparel customers, Victoria's Secret, Nike, Target, and J. C. Penney. In 2007, we continued our close cooperation with our largest active-wear customer, Nike, and strengthened our business relationship with lululemon athletica, maintained our business relationships with other active-wear customers, such as Patagonia and Reebok and began working with other active-wear customers. In the swimwear area, we strengthened our business relationship with our largest swimwear customers, Swimwear Anywhere, Target and Abercombie and Fitch, while we maintained our business relationships with other swimwear customers and developed business relationships with new customers in the USA and Europe.

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

CUSTOMER 2005 2006 2007 ----------------- ----------------- ----------------(Dollars in millions) Victoria's Secret (1) $ 69.0 40.3% $ 72.6 38.6% $ 62.1 39.1% Nike $ 44.1 25.8% $ 54.2 28.8% $ 37.4 23.6% Target $ 18.5 10.8% $ 18.9 10.0% $ 18.2 11.4% J. C. Penney $ 5.5 3.2% $ 5.3 2.8% $ 6.2 3.9% Others $ 34.2 19.9% $ 34.5 19.8% $ 34.7 22.0% Total $171.3 100% $188.1 100% $158.6 100%

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

We established our relationship with our largest customer, Victoria's Secret, in 1991. Currently, we manufacture underwear, nightwear, loungewear, bodysuits, active wear 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.

J.C. Penney was a customer of Alba prior to our acquisition of Alba. Currently, we supply them with intimate apparel and active wear for women.We began our working relationship with The Gap in 1993. Currently, we supply The Gap with underwear and sleepwear.

We began our working relationship with lululemon athletica in 2006. Currently, we supply lululemon athletica, mainly with underwear and active-wear for men and women.

The volume of products ordered by customers is 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 2007 ranged from $31.6 million to $74.1 million, as compared to a range of $49.4 million to $63.3 million during 2006. 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 2007 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.

On April 1, 2005, an amendment to the Investment Law came into effect. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a Privileged Enterprise (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. The period of tax benefits for a new Privileged Enterprise commences in the "Year of Commencement." This year is the later of (1) the year in which taxable income is first generated by a company, or (2) a year selected by the company for commencement, on the condition that the company meets certain provisions provided by the Investment Law (Year of Election). The amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime applies to new investment programs only.

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 (the "Encouragement of Industry Law"), 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 believe that 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 relating to 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.

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. In addition, some of our competitors currently manufacture their products using Santoni knitting machines. 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. Further, 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. These favorable terms enable us to maintain the core of our knowledge-based operation in Israel, while competing on the basis of price.

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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. 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. Further, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region. 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.

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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 the USA, Israel, Europe, Jordan. China, India and Cambodia are 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 incorporated under the laws of Israel, (iii) Tefron USA, Inc., a company incorporated 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.

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4D. PROPERTY, PLANTS AND EQUIPMENT

ISRAEL

As of December 31, 2007, we maintained manufacturing and administrative facilities at the following sites in Israel and Jordan:

APPROX. SQUARE NUMBER OF LEASE FACILITY IN ISRAEL FOOTAGE EMPLOYEES EXPIRATION (1) FUNCTION ------------------ ------- --------- -------------- -------Petach Tikva 1,900 4 2008 Management offices, partly sublease Segev: Central Factory - Tefron (2) 83,000 123 2012 Development, Knitting packaging, storage and administrative functions Segev: Central Factory - Hi-Tex 1 (2) 143,000 376 2011 Development, Knitting, sewing, packaging, storage and administrative functions Segev: Central Factory - Hi-Tex 2 (2) 178,000 309 2012 Knitting, packaging and storage Holon - Macro Center 12,000 81 2009 Design, development, Sewing and administrative functions Yarka 23,000 310 2012 Sewing and packaging Netanya: Dyeing Factory 68,000 24 2009 Dyeing and finishing FACILITY IN JORDAN Irbid (4) 207,000 828 2008(3) Sewing and packaging factory and logistic and some other manufacturing processes

• (1) Including any renewal options.

• (2) Not including an additional option for a 12-15 year lease exercisable every three years on 90 days' prior advance notice.

• (3) The agreement is renewable annually at our option.

• (4) Includes free land lease of 97,000 square feet.

For a description of our plans regarding our facilities, see Note 6 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, ENGLAND AND CHINA

As of December 31, 2007, Tefron USA, Tefron UK and Macro maintained manufacturing and administrative facilities at the following sites in the United States, England and China:

APPROX. NUMBER OF FACILITY IN UNITED STATES, ENGLAND AND CHINA SQUARE FOOTAGE PERSONNEL FUNCTION -------------------------------------------- -------------- --------- -------Valdese, NC - Warehouse 163,610 18 Warehouse (Consumer Products) and distribution Valdese, NC 52,644 - Partly subleased New York City - Offices 1,500 2 Sales Offices and Showroom Portland, OR- Offices 2,029 6 Sales Offices and Showroom London, England - Offices 350 2 Sales Office Dong Guang, China - Office 6,000 5 Sourcing and development

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

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

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not Applicable.

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 and European retailers and designer labels. Our product line includes knitted briefs, bras, tank tops, boxers, leggings, crop tops, T-shirts, daywear, nightwear, bodysuits, swimwear, beach-wear, active-wear, shape wear and accessories.

We have two divisions: Seamless (also called Hi-Tex) and Cut & Sew. Our Seamless Division, which manufactures intimate apparel and active-wear products, generated approximately 51.4% of our revenues during 2007. Our Cut & Sew Division, which manufactures intimate apparel, active-wear and swimwear products, generated approximately 48.6% of our revenues during 2007.

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 765 fully equipped Santoni knitting machines as of December 31, 2007.

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.

2007 DEVELOPMENTS

Despite our transformation in recent years from an intimate apparel company with one anchor customer to a more diversified active-wear, swimwear and intimate apparel company, our sales decreased in 2007 principally due to the decrease in sales to our largest active-wear customer and our largest intimate apparel customer, which together accounted for approximately 62.7% of our sales in 2007. We continue our efforts to broaden our costumer base and expect to add new costumers during 2008. At the same time, our profits were adversely impacted by a number of factors, including our lower revenue and manufacturing levels, the significant devaluation of the U.S. dollar versus the NIS in 2007, and the factors described below.

In our Hi-Tex Division, the learning curve required for the manufacture of new and technologically advanced products, which have been ordered in short production runs for a larger number of apparel categories, increased our costs and decreased our operating efficiency. We are working to overcome the manufacturing challenges in our Hi-Tex Division. At the same time, the lower proportion of our more profitable Hi-Tex Products in the sales mix to Nike during the second half of the year reduced our operating profits. We are looking to increase our proportion of our more advanced Hi-Tex products to Nike in the coming year. 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.

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The cost structure of our 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 Central America. This competition, mainly for the sale of intimate apparel products, has caused an erosion of our prices in 2007, particularly for our Cut & Sew older collections. We are endeavoring to move additional portions of our Cut & Sew manufacturing process in the near future from Israel to Jordan, the Far East 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.

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 when all other revenue recognition criteria are met. 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 or customers' firm commitments, although we have a policy of maintaining a minimum level of those raw materials that are in repeated demand. From time to time, when market conditions are favorable, we have entered into contracts with various suppliers of basic cotton for delivery over a period of three to six months.

CRITICAL 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 Revenue recognition;

o Inventory valuation;

o Property, plant and equipment; and

o Income taxes and valuation allowance.

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.

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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

On January 1, 2007, we adopted Financial Accounting Standards Board Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes," which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement of Financial Accounting Standards No 109, "Accounting for Income Taxes.", or SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. Prior to January 1, 2007, we estimated our uncertain income tax obligations in accordance with SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109) and SFAS No. 5 "Accounting for Contingencies" ("SFAS No. 5").

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 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.

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RESULTS OF OPERATIONS

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

YEAR ENDED DECEMBER 31, 2005 2006 2007 ----- ----- ----Sales 100% 100% 100% Cost of sales 82.7 77.2 87.7 ----- ----- ----Gross profit 17.3 22.8 12.3 Selling and marketing, general and administrative expenses 7.9 9.0 11.2 ----- ----- ----Operating income 9.4 13.8 1.1 Financial expenses, net 1.9 1.1 0.8 ----- ----- ----Income before taxes on income 7.5 12.7 0.3 Taxes on income 2.5 3.0 0.0 ----- ----- ----Income from continuing operation 5.0 9.7 0.3 Income (loss) from discontinued operation (3.1) 0.1 0.0 ----- ----- ----Net income 1.9 9.8 0.3 ===== ===== =====

YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006

SALES

CONSOLIDATED. Sales for the year ended December 31, 2007 were $158.6 million, a 15.7% decrease compared to sales of $188.1 million for the year ended December 31, 2006. Our sales of intimate apparel decreased 10.9% from $100.9 million in 2006 to $89.9 million in 2007, our sales of active-wear products decreased 29.2% from $59.4 million in 2006 to $42.0 million in 2007 and our sales of swimwear decreased 4.0% from $27.8 million in 2006 to $26.7 million in 2007. Below is a table that describes our 2006 and 2007 sales of intimate apparel, active-wear and swimwear products:

------------------------------------------------------------------------2006 2007 ---------------------------------- ---------------------------------(Dollars in thousands) CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL -------- -------- -------- -------- -------- -------Intimate Apparel $ 53,148 $ 47,742 $100,890 $ 37,114 $ 52,763 $ 89,877 Active-wear 4,995 54,411 59,406 13,216 28,831 42,047 Swimwear 27,808 -- 27,808 26,690 -- 26,690 TOTAL 85,951 102,153 188,104 77,020 81,594 158,614

SEAMLESS. Sales for the year ended December 31, 2007 for this segment were $81.6 million, a 20.1% decrease compared to sales of $102.2 million for the year ended December 31, 2006. This decrease in sales was due to a decrease of 47.0% of our sales of active wear products from $54.4 million in 2006 to $28.8 million in 2007 due to a decrease in sales to our major active wear customer, which was partially offset by an increase of 10.5% in our sales of intimate apparel from $47.7 million in 2006 to $52.8 million in 2007, which was principally due to increase in our sales to our largest intimate apparel customers.

CUT & SEW. Sales for the year ended December 31, 2007 for this segment were $77.0 million, a 10.4% decrease compared to sales of $86.0 million for the year ended December 31, 2006. This decrease in sales was mainly due to a decrease of 30.2% in our sales of intimate apparel from $53.1 million in 2006 to $37.1 million in 2007. This decrease was due to a reduction in sales to our major intimate apparel customer and to pricing pressure in older intimate apparel collections of our intimate apparel product line, and was partially offset by an increase of 164.6% in our sales of active wear from $5.0 million in 2006 to $13.2 million in 2007 due to an increase in our sales to Nike for their 'new generation' of the Pro Core category.

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 decreased by 4.1% to $139.1 million in 2007 as compared to $145.1 million in 2006 due to a decrease in our sales volume. As a percentage of sales, cost of sales increased to 87.7% in 2007 as compared to 77.2% in 2006. This increase was primarily due to the lower sales and manufacturing levels in 2007. In addition, this was due to the significant devaluation of the U.S. dollar versus the NIS, the previously identified pricing pressure in older Cut & Sew collections of our intimate apparel product line, and increased manufacturing complexities in our Hi-Tex Division associated with the introduction of new and complex products, and short production runs.

SELLING AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling and marketing, 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 and marketing, general and administrative expenses increased by 3.7% to $17.7 million in 2007 as compared to $17.1 million in 2006. This increase was primarily due to an increase in export freight charges as a result of different shipping terms with some of our customers obligating us to deliver our goods to the customers' site and an increase in air freight charges due to late shipments. In addition, this was due to the significant devaluation of the U.S dollar versus the NIS. As a percentage of sales, selling and marketing, general and administrative expenses increased from 9.1% in 2006 to 11.2% in 2007.

OPERATING INCOME

CONSOLIDATED. Operating income for the year ended December 31, 2007 was $1.8 million (1.1% of sales), compared to operating income of $25.9 million (13.8% of sales) for the year ended December 31, 2006. This decrease in operating income was due to the decrease in the gross profit and the increase of the selling and marketing, general and administrative expenses, as discussed above.

SEAMLESS. Operating loss for the year ended December 31, 2007 for this segment was $0.5 million, compared to operating income of $16.4 million (16.0% of sales) for the year ended December 31, 2006. This decrease was due to the lower revenues and manufacturing levels, manufacturing complexities associated with the introduction of new and complex products, short production runs and the costs associated with delays in delivery and the significant devaluation of the U.S dollar versus the NIS, as discussed above.

CUT & SEW. Operating income for the year ended December 31, 2007 for this segment was $2.3 million (2.9% of sales), compared to operating income of $9.5 million (11.1% of sales) for the year ended December 31, 2006. The decrease resulted mainly from previously identified pricing pressure in older collections of our intimate apparel product line, lower revenues and manufacturing levels and from the significant devaluation of the U.S. dollar versus the NIS, as discussed above.

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FINANCIAL EXPENSES, NET

Financial expenses, net decreased to $1.3 million in 2007 as compared to $1.9 million in 2006. This decrease was mainly due to a reduction of our net bank debt as a result of a positive cash flow. This decrease was partly offset by currency exchange losses resulting from the weakening of the U.S dollar as compared to the NIS.

INCOME TAXES

Tax benefit for 2007 was $20,000 as compared to tax expense of $5.7 million for 2006. The main reason for this decrease was the decrease in our pretax profit which was $0.5 million for 2007 compared to $24.0 million for 2006.

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 2006 ---------------------------------- ---------------------------------(Dollars in thousands) CUT & SEW SEAMLESS TOTAL CUT & SEW SEAMLESS TOTAL -------- -------- -------- -------- -------- -------AIntimate Apparel $ 37,564 $ 64,061 $101,625 $ 53,148 $ 47,742 $100,890 ctive-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.

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 AND MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling and marketing, 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 and marketing, 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 and marketing, 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.

LIQUIDITY AND CAPITAL RESOURCES

2007 SOURCES AND USES OF CASH

During 2007, we generated $3.0 million in cash from operating activities compared to $27.8 million during 2006. In addition, we received:

o proceeds of $4.3 million from the exercise of tradable options issued in the secondary offering of our securities on the Tel Aviv Stock Exchange, and

o Proceeds of $17.2 million from sale of marketable securities and proceeds of $13.0 million from repayments of bank deposits.

This cash flow was used to repay a net amount of $5.9 million in bank debt, invest $5.4 million, net, in property, plant and equipment, invest $19.0 million in marketable securities, and together with other cash flow activities, decrease our cash and cash equivalents, deposits and marketable securities balance by $3.7 million from $20.1 million at December 31, 2006 to $16.4 million at December 31, 2007.

Cash provided by operating activities is net income (loss) adjusted for certain non-cash items and changes in assets and liabilities. For 2007, cash provided by operating activities was $3.0 million, compared to $27.8 million in 2006, while our net income decreased in 2007 to $0.5 million compared to net income of $18.4 million in 2006. During 2007, the majority of our decrease in our cash flow provided by operating activities as compared to 2006 was mainly due to the decrease in our net income (excluding 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, 2007:

CONTRACTUAL OBLIGATIONS(1)(2) TOTAL 2008 2009 2010 2011 2012+ ----------------------------- ----- ---- ---- ---- ---- ----Long-Term Bank Debt $19.3 $ 5.9 $ 5.5 $ 2.8 $ 2.8 $ 2.3 Operating Lease Obligations $11.5 $ 3.1 $ 2.8 $ 2.6 $ 2.6 $ 0.4 Severance Pay (3) $ 2.6 -- -- -- -- -- Other Long-Term Obligations (4) -- -- -- -- -- -- TOTAL CONTRACTUAL CASH OBLIGATIONS $33.4

OTHER COMMERCIAL COMMITMENTS TOTAL AMOUNTS AVAILABLE 2007(5)

---------------------------- ----------------------- ------Lines of Credit $22.2 $ 0 Guarantees/Letters of Credit $ 11 $ 6.5 TOTAL COMMERCIAL COMMITMENTS $33.2 $ 6.5

(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, 2008, the three-month LIBOR was 4.83%.

(3) Severance pay relates to accrued severance obligations to our Israeli employees as required under Israeli labor law.

(4) This table does not include deferred tax liabilities, net, of $11.8 million. We do not know in what year this long-term obligation will be payable.

(5) These credit lines facilities are revolving on a yearly basis.

LOAN FACILITIES

At December 31, 2007, outstanding borrowings from banks, comprised of long term debt, totaled $19.3 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 five 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 $6.0 million, which until recently was payable in eight quarterly installments commencing March 15, 2008 through December 15, 2009. During March 2008, we converted these loans into new loans received from our Israeli banks and, as a result, the loans are payable in seventeen quarterly installments commencing June 30, 2008 through June 29, 2012.

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

The bank loan agreements contain various covenants which require, among other things, that we maintain certain financial ratios related to shareholders' equity and operating results. In addition, the terms prohibit us and Tefron USA from incurring certain additional indebtedness, limit certain investments, advances or loans and restrict substantial asset sales, cash dividends and other payments to shareholders of us and of Tefron USA. These covenants and restrictions could hinder us in operations and growth. As of December 31, 2007 and 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.

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.

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We currently believe that our cash flow from ongoing operations and our available cash on hand and bank credit will be sufficient to finance all of our ongoing costs and our planned investments in our business through at least the end of 2008.

We are looking to further expand our relationship with Nike and lululemon athletica, continue to increase our sales of swimwear products, and expand our Cut & Sew sales from the Far East. We expect increased active-wear sales in the first half of 2008, driving a growth in our overall sales. This is primarily due to increased orders from Nike for their 'new generation' products from both our Cut & Sew and Hi-Tex divisions, as well as growth in sales to lululemon. We also expect a strong increase in first quarter sales of swimwear. Additionally, we intend to broaden our base of customers and scope of products while entering into new categories and increase the visibility of our Engineered for Performance EFP(TM) technology.

However, we expect to continue to be affected by operational difficulties in our Hi-Tex Division in the early part of 2008, and continue to be adversely impacted by the devaluation of the U.S. dollar. In our Cut & Sew Division, we have been informed by Victoria's Secret that they intend to gradually transfer their sourcing of an old Cut & Sew cotton program to India beginning the second half of 2008. We do not expect this to have a material impact on our 2008 intimate apparel revenues and profitability. 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 complicated products and different raw materials reduced our operating efficiency during 2007 and 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."

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 $4.9 million in 2005, $5.5 million in 2006 and $6.6 million in 2007 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 remain unchanged. A portion of our NIS denominated expenses is linked to changes in the CPI, a portion is linked to increases in NIS payments under collective bargaining agreements and a portion is unlinked.

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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 proceeds 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, 2006 and 2007, the rate of inflation was 1.2%, (0.1)% and 3.4%, while the NIS appreciated versus the U.S dollar by 1.6 %, 8.2% and 9.0%, respectively, and this negatively affected our profitability.

Due to the appreciation of the NIS vis-a-vis the dollar, we incurred gross expenses of approximately $1.0 million in 2007. This amount does not take into account hedging transactions performed by the Company during 2007, which diminished the adverse effect of the appreciation of the NIS in relation to the dollar. This appreciation may continue in 2008.

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. Since December 31, 2007, the U.S. dollar has continued its devaluation vis-a-vis the NIS. As of March 17, 2008, the representative exchange rate between the NIS and the U.S. dollar as published by the Bank of Israel was NIS 3.426 to $1, as opposed to NIS 3.846 to $1 as of December 31, 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 significant 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 29% in 2007. The rate is scheduled to decline to 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 10%- 25% (based on the percentage of foreign investment in the Company) 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.

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

GOVERNMENT PROGRAMS

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

EXCHANGE RATES

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

YEAR ENDED DECEMBER 31, AVERAGE RATE HIGH LOW PERIOD END ----------------------- ------------ ---- ----- ---------(NIS PER $1.00) 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 2007 4.11 4.34 3.83 3.85

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 2007 through March 2008.

MONTH AVERAGE RATE HIGH LOW PERIOD END ----------------------- ------------ ---- ----- ---------(NIS PER $1.00) October 2007 4.01 4.05 3.97 3.97 November 2007 3.92 3.97 3.83 3.83 December 2007 3.90 4.01 3.83 3.85 January 2008 3.76 3.86 3.63 3.63 February 2008 3.61 3.66 3.58 3.64 March (through March 17, 2008) 3.55 3.66 3.40 3.43

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On March 17, 2008, the representative rate of exchange between the NIS and the U.S. dollar was NIS 3.43 per $1.00, as published by the Bank of Israel. Changes in the exchange rate between the NIS and the U.S. dollar could materially affect our financial results.

TREND INFORMATION. We expect increased active-wear sales in the first half of 2008, driving growth in our overall sales. We are also looking for a strong increase in first quarter sales of swimwear. However, we expect to continue to be affected by operational difficulties in our Hi-Tex Division in the early part of 2008, and continue to be adversely impacted by the devaluation of the U.S. dollar. For more information, see " - Outlook."

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."

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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, 2008.

NAME AGE POSITION ---- --- -------Yacov Gelbard 60 Chairman of the Board Yosef Shiran 46 Chief Executive Officer and Director Ishay Davidi 46 Director Yarom Oren 38 Director Micha Korman 53 Director Meir Shamir 57 Director Shirit Kasher 40 Director Avi Zigelman 51 Director Eli Admoni 68 External Director Yacov Elinav (1) 63 External Director. Asaf Alperovitz 38 Chief Financial Officer Itamar Harchol 49 Chief Technology Officer Anat Barkan 41 Manager of Human Resources Amit Eshet 46 Supply Chain Manager David Gerbi 58 Hi-Tex Division Manager Ilan Gilboa 41 Cut & Sew Division Manager Ronny Grundland 54 Swimwear Division Manager Michal Baumwald Oron 35 Company Secretary and Legal Counsel Alon Shadmi 46 Marketing operations ANd innovation manager

---

(1) Subject to the approval of the shareholders on April 9, 2008. At a shareholders meeting scheduled for that day, the shareholders will be asked to ratify the reappointment of Mr. Elinav as External Director for a second three years term, effective from July 15, 2007 and until July 14, 2010. See Form 6-K filed with the Securities and Exchange Commission on March 13, 2007.

YACOV GELBARD began serving as the Company's active Chairman of the Board of Directors on January 1, 2008. Mr. Gelbard served as President and CEO of Bezeq Ltd. from 2005 to 2007, as President and CEO of Pelephone Communications Ltd. from 2001 to 2005, as Chairman of the "Hamashbir Fashion Warehouse" Ltd in 2001, as President and CEO of XXL (Electronic Commerce) Ltd. from 1999 to 2001, as President and CEO of Blue Square - Israel Ltd. from 1993 to 1999, and as VP of Finance of Blue Square - Israel Ltd. from 1983 to 1993. Mr. Gelbard holds a BA degree Economy and Accounting, Tel - Aviv University, and he is a Certified Public Accountant.

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. Since 2007, Mr. Shiran has served as the chairman of the Textile Manufacturers Association of Israel.

ISHAY DAVIDI has served as a director of the Company since June 2005 and served as Chairman of the Board of Directors from November 2005 through December 2007. Mr. Davidi is the Founder and CEO of each of FIMI IV 2007 Ltd, FIMI Opportunity 2005 Ltd, FIMI 2001 Ltd and First Israel Mezzanine Investors Ltd., the managing general partners of the partnerships constituting the FIMI Private Equity Funds. Mr. Davidi also serves as a director at Retalix Ltd. (TASE, Nasdaq), Scope Metals Group Ltd. (TASE), Orlite Industries (1959) Ltd., MDT Micro Diamond Technologies Ltd, Orian S.M. Ltd. (TASE), Merhav-Ceramic and Building Materials Center Ltd. (TASE), Gamatronic Electronic Industries, Ltd. (TASE) and Bagir Group Ltd. Mr. Davidi holds a B.Sc in Industrial and Management Engineering from Tel Aviv University and an MBA from Bar Ilan University.

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YAROM OREN is Senior Partner at FIMI 2005 Ltd. and FIMI 2001 Ltd.. Mr. Oren also serves as a director of Caesarea Creation Ltd., a textile manufacturer, Bagir Group, a suits manufacturer, Scope Metals Ltd, a metal service provider and Ginegar Plastic Products Ltd., a plastic cover films manufacturer. Yarom Oren holds a B.Sc in Industrial Engineering from Tel-Aviv University and an MBA from WBS England.

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 and was admitted to practice law in Israel in 2007.

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.

SHIRIT KASHER was elected as a director of the Company on March 31, 2004 and has been the head of Corporate & Structured Finance at Brack Capital Holding Ltd since April 2006. 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 Systems Ltd., Mizrahi Tefahot Bank Ltd., Fox Vizel Ltd.,King Ltd., Bram Industries Ltd., Ilex Medical Ltd., P.M.S Group Ltd., Gindi Investments 1 Ltd., Clal Biotechnology Industries Ltd., Simha Urieli and Sons Ltd., Milomor Trade & Communication Ltd., Arpal Aluminum Systems Ltd., Sialo Technology Israel Ltd., Crew Technology (1977) 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. 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 studies from University of Manitoba, Canada.

YACOV ELINAV has served as an External Director of Tefron since July 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 Mutual Funds Ltd and is a director of Middle East Tube Ltd., New Kopel Ltd, DS Institutionals Ltd, Sapians Ltd., B.G.I Ltd., Polar Communication Ltd. R.H. Technologies and is an external director of Office Textile Ltd. Mr. Elinav formerly served as a director of other prominent Israeli companies.

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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.

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 Manager of Human Resources. Prior to joining Tefron, Ms. Barkan served as manager of Human Resources 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 Kulicke & Soffa'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 co-general manger of Macpell Industries, Ltd. 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 honors from Sharei-Mishpat College.

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MICHAL BAUMWALD ORON joined Tefron in 2003 and has served as the company secretary and general 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.

ALON SHADMI joined Tefron in 2003 and has served as Marketing Operations and Innovation Manager since 2007 after serving as Business Unit Director and as the Head of Development. Prior to joining Tefron, Mr. Shadmi served as Site Manager of Amdocs Inc from 2001 to 2003, as VP Operation in Ginegar Plastic Products Ltd from 1996 to 2001, and in managerial positions in Seker Planning and Management from 1993 to 1996 and in Gadot Petrochemical Industries from 1991 to 1993. Mr. Shadmi holds MBAMasters Degree (Marketing) from the Technion Institute, Haifa since 1997 and B.Sc. Industrial and Management Engineering with honors, from the Technion Institute, Haifa since 1991.

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, 2007 was approximately $2.2 million, of which $90,500 was paid to Directors in their capacities as Directors. Negligible 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 $70,000 in management fees paid to New York Delights, a company wholly owned by Arie Wolfson, a former director and former chairman of the Company's Board of Directors. We have no service contract with any of our directors that provide for benefits upon termination of their employment as directors.

In 2007, the Company did not grant options under the Share Option Plan.

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. In 2006, Tefron shareholders 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. In 2007, Tefron shareholders approved an increase of Mr. Shiran's monthly compensation starting from January 1, 2007 to $35,000 plus VAT.

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, 2008, all 815,000 of Mr. Shiran's options had vested (in addition to the 150,000 options already exercised). 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. In 2007, Tefron shareholders 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.

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.

AGREEMENT WITH ARIE WOLFSON

Under the terms of our consulting and management services agreement with Mr. Arie Wolfson, a former Director of the Company, and with a company controlled by him, referred to herein as the Consulting Agreement, we paid 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 replaced payments made until 2002 to Macpell in the amount of $20,000 per month. In addition, the Consulting 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 subsequently exercised by Mr. Wolfson, 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, at a general meeting of shareholders of the Company, the shareholders approved an amendment to the Consulting Agreement which provided 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 continued to provide consulting services to the Company, the annual amounts payable pursuant to the Consulting Agreement would be reduced from $253,800 to $120,000 per annum, each plus VAT. See "Item 10. Additional Information - 10C. Material Contracts - FIMI Agreements".

Mr. Wolfson resigned as a director of the Company in April 2007, and his management services agreement was terminated on July 2007.

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 Director is currently Eli Admoni. A shareholder meeting to approve a second three-year term for Mr. Yacov Elinav, effective from July 15, 2007 and until July 14, 2010, has been scheduled for April 9, 2008.

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.

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CORPORATE GOVERNANCE

The Company includes on its web site a statement containing a general description of the significant ways in which the Company's corporate governance practices differ from those required of U.S. domestic companies under NYSE standards. This statement can be accessed on the Company's web site at www.tefron.com (see "Investor Relations" and then "Company Information").

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, Balance Sheet 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 and Korman. The members of the Compensation Committee are Messrs. Davidi, Admoni and Shiran. The Compensation Committee resolves the terms of employment and benefits of the Company's officers. The Balance Sheet Committee performs a close review of the financial statements of the Company and its members are Ms. Kasher and Messrs. Zigelman, Korman and Admoni. 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 and Admoni. See "Item 10. Additional Information -10B. Memorandum and Articles of Association - Board of Directors."

6D. EMPLOYEES

At December 31, 2007, we employed 1,227 employees in Israel of whom 797 were salaried employees and 430 were hourly wage employees. At December 31, 2007, we employed 26 employees in the United States through our subsidiary, Tefron USA, of whom 17 were salaried employees and 9 were hourly wage employees. At December 31, 2007, El-masira employed 828 employees in Jordan all of whom were salaried employees, and our subsidiary, Tefron UK, had one employee in the U.K. and one subcontractor and Macro had 5 employees in China.

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, Tefron USA, 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 whom 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, Tefron USA, 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 whom were salaried employees

To increase the motivation of the workforce, many factory employees are eligible for bonuses based upon their performance level, discipline and quality manufacturing. 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, Tefron UK's or Macro's Chinese employees are covered by a collective bargaining agreement.

6E. SHARE OWNERSHIP

As of March 15, 2008, 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 21,202,986 (excluding 997,400 shares held by our wholly owned subsidiary) Ordinary Shares outstanding as of March 15, 2008. 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, 2008. 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.

NUMBER OF % OF ORDINARY SHARES NAME ORDINARY SHARES OUTSTANDING** ---- --------------- ------------Yacov Gelbard --- --Ishay Davidi 4,632,767 (1) 21.84% Meir Shamir 4,613,085 (2) 21.76% Yosef Shiran 815,000 (3) 3.84% Micha Korman * * Avi Zieglman --- --Shirit Kasher --- --Yacov Elinav (1) --- --Eli Admoni --- --Yarom Oren --- --Asaf Alperovitz * * Itamar Harchol * --Anat Barkan --- --David Gerbi * * Ronny Grundland --- --Ilan Gilboa * * Alon Shadmi * * Michal Baumwald Oron * *

Directors and senior managers as a group (10 persons) 5,735,899 (4) 27.05%

---

(1) At a shareholders meeting scheduled for that day, the shareholders will be asked to ratify the reappointment of Mr. Elinav as External Director for a second three years term, effective from July 15, 2007 and until July 14, 2010. See Form 6-K filed with the Securities and Exchange Commission on March 13, 2007.

• 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) Consists of (i) 4,613,085 Ordinary Shares held by Norfet, which Mr. Ishay 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; and (ii) 19,682 Ordinary Shares held by FIMI, which Mr. Ishay Davidi may be deemed to beneficially own in accordance with the relationships described in clause (i).

(2) 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, 2008.

(3) Consists of 815,000 Ordinary Shares subject to options exercisable at prices that are between $3.569 and $3.765 per share (which expire between 2011 and 2012).

(4) Consists of 4,613,085 Ordinary Shares held by Norfet, which Mr. Ishay 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% interest in Mivtah-Shamir, which held an approximately 34.45% interest in Norfet as of March 15, 2008. Further, includes 19,682 Ordinary Shares held by FIMI which Mr. Ishay 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 includes also 1,103,132 options (exercisable within 60 days) to purchase 1,103,132 Ordinary Shares. The exercise prices of these options range from 3.5 to 11.275 per share. These options will expire between 2009 and 2016.

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, 2008, options to purchase 1,879,636 of such Ordinary Shares had been granted to our senior managers, directors and employees, of which 544,620 options had been granted to our senior managers and directors as a group. These numbers do not include options that were cancelled or expired. 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 2007, 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 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.

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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, 2008. The information in this table is based on 21,202,986 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, 2008. 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) 21.76%

Wellington Management Company, LLP 75 State Street, Boston, MA 2,985,900 14.08%

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

(1) Norfet L.P is an Israeli partnership. As of March 15, 2008, 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., approximately3.45% 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. In addition, pursuant to Rule 13d-5, (i) Mr. Ishay Davidi, a director 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.

Norfet's percentage ownership in the Ordinary Shares has decreased from approximately 28.8% in 2004 to approximately 21.8% as of March 15, 2008 due to Norfet's sales of Ordinary Shares in the public markets and the issuance by the Company of additional Ordinary Shares.

At March 15, 2008, there were 17 holders of Ordinary Shares of record registered with a United States mailing address, including banks, brokers and nominees. These holders of record represented approximately87.6% 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, 2008, Norfet owned 4,613,085 Ordinary Shares, which represented approximately 21.76% 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.

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. On April 19, 2007, Macpell sold all of its Tefron shares, and accordingly, the shareholders agreement between Macpell, Norfet and Arwol was terminated.

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.

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RELATIONSHIPS AND TRANSACTIONS WITH MACPELL

On April 19, 2007, Macpell sold all of its Ordinary Shares. Macpell is principally 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 were controlled by Arie Wolfson, one of our former directors; 25.68% of Macpell were 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.

AGREEMENT WITH ARIE WOLFSON

Until July 30, 2007, we were party to a consulting and management services agreement with Mr. Arie Wolfson, a former Director of the Company. See "Item 6. Directors, Senior Management and Employees - 6B. Compensation". Mr. Wolfson resigned as a director of the Company in April 2007.

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.

Additionally, under the terms of a retirement agreement we executed with Mr. Sigi Rabinowicz on January 10, 2005, we paid Mr. Rabinowicz during most of 2005 certain monthly payments, employee benefits such as vacation, educational fund, sick leave, and management and disability insurance contributions, and we provided a vehicle to him. During 2007 we paid Mr. Rabinowicz in accordance with the retirement agreement $162,500. The retirement agreement also included clauses of non competition that ended on September 2007.

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, an 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 lease was extended until 2012, and 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.

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

Under the original agreements, the monthly rent was increased by 5% every 2-3 years. Under the agreement approved by our shareholders on August 10, 2006, the rent for all facilities is to be increased by 3% every 2-3 years (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. On July 2006, we entered into an 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.

In June 2007, Macpell assigned all its rights and obligations under these agreements to a third party.

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 $2 million plus non-specified bodily damages, due to damages allegedly incurred by him as a result of his imprisonment in Egypt. The Company believes 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 in 2007, we did not declare any dividends. 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.

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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 ---- --2003 $ 4.80 $ 3.10 2004 $ 6.30 $ 3.50 2005 $ 8.75 $ 3.84 2006 $13.05 $ 8.30 2007 $10.95 $ 4.05 As reported on the NYSE, the quarterly high and low sales prices for our Ordinary Shares for the last two years were as follows: 2006 HIGH LOW ---- ---- --First quarter $11.53 $ 8.30 Second quarter $13.05 $10.25 Third quarter $13.00 $11.00 Fourth quarter $12.12 $ 9.85 2007 ---First quarter $10.95 $ 9.13 Second quarter $10.33 $ 9.00 Third quarter $ 9.1 $ 6.09 Fourth quarter $ 7.01 $ 4.05 2008 ---First quarter (through March 15, 2008) $ 5.65 $ 3.59 As reported on the NYSE, the monthly high and low sales prices for our Ordinary Shares for the last six months were as follows: 2007 HIGH LOW ---- ---- --October $ 7.01 $ 6.11 November $ 6.47 $ 4.96 December $ 5.15 $ 4.05 2008 ---January $ 5.65 $ 4.84 February $ 5.43 $ 4.71 March (through March 15, 2008) $ 4.56 $ 3.59

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 2007 NIS 46.33 NIS 16.56

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

2006 HIGH LOW ---- ---- --First quarter NIS 48.61 NIS 37.33 Second quarter NIS 57.80 NIS 45.86 Third quarter NIS 54.15 NIS 47.34 Fourth quarter NIS 50.16 NIS 43.33 2007 ---First quarter NIS 46.33 NIS 38.03 Second quarter NIS 41.69 NIS 36.87 Third quarter NIS 38.77 NIS 25.26 Fourth quarter NIS 29.00 NIS 16.56 2008 ----

First quarter (through March 15, 2008) NIS 20.50 NIS 12.50

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

2007 HIGH LOW ---- ---- --October NIS 29.00 NIS 24.92 November NIS 26.55 NIS 19.22 December NIS 20.61 NIS 16.56 2008 ---January NIS 20.42 NIS 18.55 February NIS 20.50 NIS 17.08 March (through March 15, 2008) NIS 16.63 NIS 12.50

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, 2008, 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.

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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, the Board of Directors 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 have 49,995,500 Ordinary Shares issued, 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.

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.

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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

MEMBERSHIP INTEREST REDEMPTION AGREEMENT

The sale of our ownership interests in AlbaHealth LLC 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.

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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. During 2007, AlbaHealth breached certain non-payment covenants under its Senior Credit Facility, but the lender under the Facility delivered a waiver with respect to these breaches.

FIMI AGREEMENTS

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

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

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

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".

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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. After thoroughly reviewing the facts related to the sale of shares by Norfet during the three years following the closing of the Tefron Agreement, we have concluded that we are not entitled to an adjustment payment from Norfet under the terms described above.

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.

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 was 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.

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In connection with the execution of the Share Purchase Agreement, in March 2004, with Leber Partners, L.P., which purchased approximately 1.07 million Ordinary Shares of Tefron, 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. The other shareholders have the right to request registration if holders of at least 25% of the aggregate number of Ordinary Shares subject to the agreement at such time request 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 Macpell, Arwol and Norfet (collectively, 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.

Leber Partners, the Investor, Arwol and Macpell exercised their rights under the Registration Rights Agreement, and asked for the registration of all their shares by the Company. Accordingly, 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 Leber Partners, the Investor, Arwol and Macpell.

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.

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 "6B. Compensation"), 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.

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).

On April 9, 2007, Macpell sold our shares owned by it in open market transactions. Accordingly, Macpell and Arwol ceased to be a holder of more than 5% of the voting power of us on April 19, 2007, and Arwol and Macpell no longer have any rights or obligations under the terms of the agreements of the parties.

OUR CREDIT AGREEMENTS

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

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

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

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

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

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

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

o incurring additional indebtedness, other than certain permitted indebtedness;

o creating liens other than certain permitted encumbrances;

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.

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Pursuant to the amendment of our Credit Agreement, the repayment schedule of the loans will be spread over the period from 2008-2012.

10D. EXCHANGE CONTROLS

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

10E. TAXATION

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

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

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

o a citizen or resident of the United States;

o a corporation (or another entity taxable as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States or any political subdivision thereof; o an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

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

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

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

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

1. CAPITAL GAINS

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

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 passive income 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 "Significant Shareholder" (I.E., a person who holds, directly or indirectly, alone or together with others, 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%. "Together with another" is defined as together with a relative and together with an entity that is not a relative, with which cooperation exists in the regular course of business according to a material agreement in respect of a corporate entity, directly or indirectly. Furthermore, until the determination of the directives and conditions for the deduction of real interest expenses under Section 101 A(A)(9) of the Israeli Tax Ordinance, an individual who claims real interest and linkage differential expenses with respect to securities will owe tax at a rate of 25% on real capital gains from the sale of such securities. The real capital gain derived by a 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 (29% in 2007). The Income Tax Law (Inflationary Adjustments), 1985 will be abolished from the tax year 2008, subject to transitional provisions.

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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 48% in 2007) and the regular corporate tax rate for corporations (29% in 2007) 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 2007 - 29% 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 of an Israeli company publicly traded on a recognized stock exchange 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, and (ii) the seller doesn't have a permanent establishment in Israel to which the derived capital gain is attributed. 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.

U.S. resident purchasers who are unable to benefit from the U.S.-Israel Tax Treaty may wish to utilize a recently introduced special exemption on capital gains arising from the sale of shares in an Israeli company (including companies which are deemed an Israeli resident corporation for tax purposes) between July 1, 2005 and December 31, 2008. In order for this exemption to apply, the following conditions must be met:

• (a) an application is to be submitted to the Israeli Tax Authority at the same time as the reporting of the sale and capital gain;

• (b) the capital gain does not derive from a permanent establishment of the seller in Israel;

• (c) the seller is an individual and has been a resident of a country with which Israel has a tax treaty (e.g., the U.S.) during the ten continuous years prior to the acquisition or is an entity where at least 75% of the means of control of the entity are ultimately held, directly or indirectly, by individual shareholders who are residents of a country with which Israel has a tax treaty (e.g., the U.S.) during the ten continuous years prior to the acquisition. Unless it can be proved otherwise, where the entity is listed on a non-Israel stock exchange, this condition is deemed to be met automatically in respect of "non-material" shareholders. "Material" is defined as a 10% or more holding, directly or indirectly, of any means of control, together with related parties;

• (d) the shares were not purchased from a "related party" (as defined in the Israeli Tax Ordinance) and Chapter E-2 of the Israeli Tax Ordinance did not apply to such purchase of shares;

• (e) the sale was reported to the tax authority in the country of the seller's residence; and

• (f) within 30 days of the acquisition, the transaction was disclosed in full to the Israeli Tax Authority.

Shareholders who wish to benefit from this additional exemption would therefore be advised to approach the Israeli Tax Authority within 30 days of the purchase of shares in the Company.

In accordance with the Income Tax Regulations (Deduction from Proceeds, from Payment or from Capital Gain from Sale of Securities or from a Future Transaction), 2002, or Deduction Regulations, the payer to an individual seller of consideration for sale of securities will withhold tax at source at the rate of 20% from the real capital gain subject to tax. The payer to a corporate entity of consideration for sale of securities will withhold tax at source at the rate of 25% from the real capital gain. Such payment to a foreign resident will be exempt from withholding tax at source, as stated, subject to fulfillment of certain conditions stated in the Deduction Regulations.

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.

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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 currently 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 "Significant 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 "Significant Shareholder" (as defined above)); those rates are subject to a reduced tax rate under an applicable double tax treaty. Thus, under the Treaty, 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 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 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.

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3. PASSIVE FOREIGN INVESTMENT COMPANY RULES

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

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

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

In some circumstances, a U.S. Holder may avoid certain of the unfavorable consequences of the PFIC rules by making a QEF election in respect of Tefron. A QEF election effectively would require an electing U.S. Holder to include in income currently its pro rata share of the ordinary earnings and net capital gain of Tefron. However, a U.S. Holder cannot elect QEF status with respect to Tefron unless Tefron complies with certain reporting requirements and there can be no assurance that Tefron will provide such information.

A U.S. Holder that holds "marketable" stock in a PFIC may also avoid certain unfavorable consequences of the PFIC rules by, instead of making a QEF election, electing to mark the PFIC stock to market at the close of each taxable year. Tefron expects that the Ordinary Shares will be "marketable" for this purpose. A U.S. Holder that makes the mark-to-market election will be required to include in income each year as ordinary income an amount equal to the excess, if any, of the fair market value of the stock at the close of the year over the U.S. Holder's adjusted tax basis in the stock. If, at the close of the year, the U.S. Holder's adjusted tax basis exceeds the fair market value of the stock, then the U.S. Holder may deduct any such excess from ordinary income, but only to the extent of net mark-to-market gains previously included in income. Any gain from the actual sale of the PFIC stock will be treated as ordinary income, and any loss will be treated as ordinary loss to the extent of net mark-to-market gains previously included in income.

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.

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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, 2007, our liabilities denominated in foreign currencies in the amount of $30.2 million represented 40.8% of our total liabilities of $74.0 million. At December 31, 2007, our assets denominated in foreign currencies in the amount of $15.7 million represented 9.7% of our total assets of $162.5 million. In 2007, the average amount of our net liabilities denominated in NIS was approximately $13 million. Based on such amount, a depreciation of the dollar in relation to NIS in the amount of 10% would cause us to incur annual expenses in the amount of approximately $1.3 million. Due to the appreciation of the NIS vis-a-vis the dollar in 2007, we incurred gross expenses of approximately $1.0 million in 2007. This amount does not take into account hedging transactions performed by the Company during 2007, which diminished the adverse effect of the appreciation of the NIS in relation to the dollar. This appreciation may continue in 2008.

Additionally, a portion of our sales is denominated in Euros. The dollar value of these sales increases when the dollar depreciates against the Euro. We may from time to time utilize derivative financial instruments to manage risk exposure to fluctuations in foreign exchange rates. Accordingly, in 2007, forward exchange contracts were 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.

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

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

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

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

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

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

In addition to forwards, we use the "cylinder strategy" (purchasing puts options on the U.S. dollar, usually together with writing call options on the U.S. dollar at a higher exchange rate). In order to reduce costs we also use "knock-in" strategies.

As of December 31, 2007, there were no gains or losses recognized in earnings for hedge ineffectiveness. As of December 31, 2007, we had outstanding forward contracts and put options in the amount of $38.0 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, 2007 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, 2007, $19.3 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 $0.1 million. In 2008, we entered into an improved financing arrangement with our bank creditors. The annual interest rate was reduced to three-month LIBOR plus 1.0%. Additionally, we converted loans at the principal amount of $6.0 million held at U.S banks into new loans received from our Israeli banks with longer repayment terms.

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 15. 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 report 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 is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors

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

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Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our management has concluded based on its assessment, that our internal control over financial reporting was effective as of December 31, 2007 based on these criteria.

(c) Kost, Forer Gabbay & Kasierer in Israel, a member of Ernst & Young Global, which has audited the financial statements included in this Annual Report on Form 20-F, has issued an attestation report on management's assessment of the Company's internal control over financial reporting; their report is included in Item 18.

(d) 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, 2007 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 Micha Korman is an "audit committee financial expert" as defined in Item 16A of Form 20-F. Mr. Korman is an "independent" director in accordance with applicable NYSE and SEC regulations.

16B. CODE OF ETHICS

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

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

2. Next, click on "code of business ethics" on the bottom.

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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 to Tefron in 2007 and 2006.

US$ 2007 US$ 2006 -------- -------Audit Fees $233,000 $103,858 Audit-related Fees $ 12,000 -- Tax Fees $ 42,000 $ 63,522 All Other Fees -- $ 32,005 TOTAL $287,000 $199,385

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.

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

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

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

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

During 2007, 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.

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-43, 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 Reports of Independent Registered Public Accounting Firm F-2 - F-3 Consolidated Balance Sheets F-4 - F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Changes in Shareholders' Equity F-7 - F-9 Consolidated Statements of Cash Flows F-10 - F-12 Notes to the Consolidated Financial Statements F-13 - F-43 Report of Independent Auditors for Alba Health LLC 2005 and 2004 Financial Statements F-44

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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 (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006) 1.3. Amendment to Amended and Restated Articles of Association. 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). 4.1 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). 4.2 Letter, dated March 28, 2007, from General Counsel of Company to Mr. Yosef Shiran re: amendments to Management and Services Agreement (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). 4.3 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). 4.4 Membership Interest Redemption Agreement, dated April 26, 2006, by and between AlbaHealth, LLC and Tefron USA, Inc. (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). 4.5 Subordination Agreement, dated April 26, 2006, by Tefron USA, Inc. in favor of Suntrust Bank, in its capacity as administrative agent for the lenders from time to time party to the Senior Credit Agreement (incorporated by reference to Exhibit 4.7 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). 4.6 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. (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006) 4.7 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). 4.8 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). 4.9 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). 4.10 Agreement, dated as of July 5, 2006, between Macpell Industries Ltd. and the Company regarding the lease of properties (incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). 4.11 Joint Venture Agreement, dated as of May 8, 2006, by and between the Company, Langsha Knitting Co. Ltd. and Itochu Textile Materials (Asia) Ltd. (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006). 8.1 List of subsidiaries of the Company (incorporated by reference to Exhibit 8.1 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006).

• 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.

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

U.S. DOLLARS IN THOUSANDS

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2007

U.S. DOLLARS IN THOUSANDS

INDEX

PAGE --------------REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2 - F-3 CONSOLIDATED BALANCE SHEETS F-4 - F-5 CONSOLIDATED STATEMENTS OF INCOME F-6 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY F-7 - F-9 CONSOLIDATED STATEMENTS OF CASH FLOWS F-10 - F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-13 - F-43 REPORT OF INDEPENDENT AUDITORS FOR ALBA HEALTH LLC. TO 2005 AND 2004 FINANCIAL STATEMENTS F-44

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF

We have audited the accompanying consolidated balance sheets of Tefron Ltd. ("the Company") and its subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of Income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 27, 2006, whose revenues constitute 16.7% of total consolidated revenues for the year ended December 31, 2005. 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. 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, 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, 2006 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States.

As discussed in Notes 2p and 2o to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R), "Shared-Based Payment" and the provisions of Statement of Financial Accounting Standard Interpretation No. 48 "Accounting for Uncertainty In Income Taxes" , effective January 1, 2006 and 2007, respectively.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company and subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 26, 2008 expressed an unqualified opinion thereon Haifa, Israel KOST FORER GABBAY & KASIERER March 26, 2008 A Member of Ernst & Young Global

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited Tefron Ltd.'s (the "Company") and its subsidiaries internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Tefron Ltd. and subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2007 and our report dated March 26, 2008 expressed an unqualified opinion thereon.

Haifa, Israel KOST FORER GABBAY & KASIERER March 26, 2008 A Member of Ernst & Young Global

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

U.S. DOLLARS IN THOUSANDS

DECEMBER 31, ----------------------NOTE 2007 2006 -------- -------- -------ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,384 $ 3,966 Short term deposits 7,063 10,089 Marketable securities 3 5,668 4,975 Trade receivables (net of allowances for doubtful debts of $ 183 and $ 172 at December 31, 2006 and 2007, respectively) 29,033 30,655 Other accounts receivable and prepaid expenses 4 5,404 4,166 Inventories 5 32,577 28,912 -------- -------TOTAL current assets 82,129 82,763 -------- -------LONG TERM INVESTMENTS: Bank deposit - 1,029 Marketable securities 3 1,284 - Severance pay fund 1,288 778 Subordinate note 1c 3,000 3,000 -------- -------TOTAL long term investments 5,572 4,807 -------- -------PROPERTY, PLANT AND EQUIPMENT, NET 6 74,791 77,086 -------- -------TOTAL assets $162,492 $164,656 ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

F - 4

CONSOLIDATED BALANCE SHEETS

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U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

DECEMBER 31, -------------------------NOTE 2007 2006 --------- --------- --------LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term bank loans 8 $ 5,948 $ 5,948 Trade payables 29,720 31,143 Other accounts payable and accrued expenses 7 8,635 10,402 --------- --------TOTAL current liabilities 44,303 47,493 --------- --------LONG-TERM LIABILITIES: Long-term loans from banks (net of current maturities) 8 13,374 19,322 Deferred taxes liabilities 12 12,397 12,313 Accrued severance pay 3,882 3,298 --------- --------TOTAL long-term liabilities 29,653 34,933 --------- --------LIENS, CONTINGENCIES AND COMMITMENTS 9 SHAREHOLDERS' EQUITY: 10 Share capital - Ordinary shares of NIS 1 par value - Authorized: 49,995,500 shares; Issued: 21,747,568 and 22,200,386 shares at December 31, 2006 and 2007, respectively; Outstanding: 20,750,168 and 21,202,986 shares at December 31, 2006 and 2007, respectively 7,518 7,411 Additional paid-in capital 106,530 101,684 Cumulative other comprehensive income 368 55 Accumulated deficit (18,472) (19,512) Less - 997,400 Ordinary shares in treasury, at cost (7,408) (7,408) --------- --------TOTAL shareholders' equity 88,536 82,230 --------- --------TOTAL liabilities and shareholders' equity $ 162,492 $ 164,656 ========= ========= March 26, 2008 ------------------------ -------------------------- --------------------------- -------------------------Date of approval of the Jacob Gelbard Yosef Shiran Asaf Alperovitz financial statements Chairman CEO and Director CFO THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

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U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

YEAR ENDED DECEMBER 31, --------------------------------------------------NOTE 2007 2006 2005 ---------- ------------ ------------ -----------Sales $ 158,614 $ 188,104 $ 171,336 Cost of sales 11a 139,147 145,144 141,621 ------------ ------------ -----------Gross profit 19,467 42,960 29,715 Selling and marketing expenses 12,443 11,573 8,984 General and administrative expenses 5,272 5,504 4,595 ------------ ------------ -----------Operating income 1,752 25,883 16,136 Financial expenses, net 11b 1,289 1,912 3,189 ------------ ------------ -----------Income before taxes on income 463 23,971 12,947 Taxes (tax benefit) on income 13e (20) 5,711 4,297 ------------ ------------ -----------Net Income from continuing operations 483 18,260 8,650 Net Income (loss) from discontinued operations - 120 (5,357) ------------ ------------ -----------Net income $ 483 $ 18,380 $ 3,293 ============ ============ ============ Basic and diluted net earnings per share from continuing operations: Basic net earnings per share $ 0.02 $ 0.90 $ 0.49 ============ ============ ============ Diluted net earnings per share $ 0.02 $ 0.88 $ 0.47 ============ ============ ============ Basic and diluted net earnings (losses) per share from discontinued operations: Basic net earnings (losses) per share $ - $ 0.01 $ (0.30) ============ ============ ============ Diluted net earnings (losses) per share $ - $ 0.01 $ (0.29) ============ ============ ============ Basic and diluted net earnings per share: Basic net earnings per share $ 0.02 $ 0.91 $ 0.19 ============ ============ ============ Diluted net earnings per share $ 0.02 $ 0.89 $ 0.18 ============ ============ ============ Weighted average number of shares used for computing basic earnings per share 21,188,161 20,210,722 17,719,275 ============ ============ ============ Weighted average number of shares used for computing diluted earnings per share 21,630,124 20,754,566 18,542,618 ============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

F - 6

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

------------------------------------------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

CUMULATIVE ADDITIONAL DEFERRED OTHER TOTAL TREASURY ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME COST TOTAL -------- -------- -------- -------- -------- ---------- -------- -------Balance as of January 1, 2005 $ 6,582 $ 79,243 $ (486) $ - $(31,188) $ (7,408) $ 46,743 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 derivatives - - - 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 -------- -------- -------- -------- -------- -------- --------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

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

CUMULATIVE ADDITIONAL DEFERRED OTHER TOTAL TREASURY ORDINARY PAID-IN STOCK-BASED COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT SHARES CAPITAL COMPENSATION INCOME DEFICIT INCOME COST 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 and directors 195 3,430 - - - - 3,625 Exercise of tradable options issued at the secondary offering (see note 10b) 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 derivatives - - - (307) - $ (307) - (307) Unrealized gain on hedging derivatives - - - 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 CONSOLIDATED FINANCIAL STATEMENTS.

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)

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U.S. DOLLARS IN THOUSANDS

CUMULATIVE ADDITIONAL OTHER TOTAL TREASURY ORDINARY PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHARES, AT SHARES CAPITAL INCOME DEFICIT INCOME COST TOTAL -------- -------- -------- -------- -------- -------- -------Balance as of January 1, 2007 $ 7,411 $101,684 $ 55 $(19,512) $ (7,408) $ 82,230 Exercise of stock options related to employees and directors 5 87 - - - 92 Exercise of tradable options issued at the secondary offering (see note 10b) 102 4,188 4,290 Compensation related to options granted to employees - 571 - - - 571 Comprehensive income (loss): Realized gain on hedging derivatives - - (52) - $ (52) - (52) Realized gain on marketable securities - - (3) - (3) - (3) Unrealized gain on hedging derivatives, net of $ 165 tax - - 445 - 445 - 445 Unrealized loss on marketable securities - - (77) - (77) - (77) Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48) - - - 557 - - 557 Net income - - - 483 483 - 483 -------- -------- -------- -------- -------- -------- -------Total comprehensive income $ 796 ======== Balance as of December 31, 2007 $ 7,518 $106,530 $ 368(*) $(18,472) $ (7,408) $ 88,536 ======== ======== ======== ======== ======== ========

(*) Composed as follows: Accumulated Unrealized gain on hedging derivative, net of taxes 445 Accumulated Unrealized loss on marketable securities (77) -------$ 368

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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U.S. DOLLARS IN THOUSANDS

YEAR ENDED DECEMBER 31, --------------------------------------------2007 2006 2005 ----------- ----------- ----------CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 483 $ 18,380 $ 3,293 Adjustments to reconcile net income to net cash provided by operating activities: Loss (income) from discontinued operations - (120) 5,357 Depreciation of property, plant and equipment 8,567 8,719 9,686 Compensation related to options granted to employees 571 555 431 Increase (decrease) in severance pay, net 74 459 (588) Increase in deferred taxes, net 79 3,098 4,670 Accrual of interest on short and long-term deposits (613) (100) - Gain related to sale of marketable securities (134) (37) - Interest and amortization of premium and accretion of discount of marketable securities (189) (20) - Gain on sale of property, plant and equipment (651) (73) (409) Decrease (increase) in trade receivables, net 1,622 (4,677) (9,099) Decrease (increase) in other accounts receivable and prepaid expenses (919) (417) 884 Decrease (increase) in inventories (3,665) (2,530) 3,740 Increase (decrease) in trade payables (1,423) 3,278 793 Increase (decrease) in other accounts payable and accrued expenses (768) 748 (946) ----------- ----------- ----------Net cash provided by continuing operating activities 3,034 27,263 17,812 Net cash provided by discontinued operating activities - 507 2,999 ----------- ----------- ----------Net cash provided by operating activities 3,034 27,770 20,811 ----------- ----------- ----------CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (6,376) (4,688) (4,960) Investment grants received - 1,218 452 Proceeds from sale of property, plant and equipment 943 335 475 Dividend received from discontinued operations - 140 484 Proceeds from sale of subsidiary, net - 9,917 - Investment in marketable securities (18,974) (11,876) - Proceeds from sale of marketable securities 17,240 6,961 - Investment in short-term and long-term deposits (8,321) (11,018) - Proceeds from repayment of deposits 12,989 - - Proceeds from the Company's insurance policy for plant and machinery damage - - 619 Earn out payments related to acquisition of Macro Clothing (b) - - (261) ----------- ----------- ----------Net cash used in continuing investing activities (2,499) (9,011) (3,191) Net cash used in discontinued investing activities - (172) (779) ----------- ----------- ----------Net cash used in investing activities (2,499) (9,183) (3,970) ----------- ----------- -----------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

F - 10

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

YEAR ENDED DECEMBER 31, -----------------------------------2007 2006 2005 -------- -------- -------CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term bank loans $ (5,948) $(21,188) $ (6,038) Proceeds from long-term bank loans - 5,000 - Payments under capital lease - - (206) Decrease in short-term bank credit, net - (14,713) (3,642) Tax benefit from exercise of stock options related to employees and directors - 446 - Proceeds from exercise of stock options related to employees and directors 92 3,175 456 Exercise of tradable options issued at the secondary offering 4,290 972 - Proceeds from secondary offering of shares and options, net - 13,816 - Dividend paid to shareholders (551) (9,446) - -------- -------- -------Net cash used in continuing financing activities (2,117) (21,938) (9,430) Net cash used in discontinued financing activities - (544) (2,768) -------- -------- -------Net cash used in financing activities (2,117) (22,482) (12,198) -------- -------- -------Increase (decrease) in cash and cash equivalents (1,582) (3,895) 4,643 Decrease in cash and cash equivalents attributed to discontinued operations - 209 548 -------- -------- -------Increase (decrease) in cash and cash equivalents attributed to continuing operations (1,582) (3,686) 5,191 Cash and cash equivalents at beginning of year 3,966 7,652 2,461 -------- -------- -------Cash and cash equivalents at end of year $ 2,384 $ 3,966 $ 7,652 ======== ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.

F - 11

TEFRON LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

YEAR ENDED DECEMBER 31, ------------------------------------------------2007 2006 2005 ------------- ------------- ------------(a) CASH PAID DURING THE YEAR FOR: Interest $ 1,918 $ 2,504 $ 3,139 ============= ============= ============= Income taxes, net of refunds received $ 450 $ 996 $ 204 ============= ============= ============= (b) ACQUISITION OF MACRO CLOTHING: Accrued payments $ - $ - $ (261) ============= ============= ============= (c) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY: Purchase of property, plant and equipment by credit, net of investment grants receivable $ 109 $ 266 $ 1,418 ============= ============= ============= Unsecured subordinated promissory note as a partial consideration of the sale of Alba Health $ - $ 3,000 $ - ============= ============= ============= Net change in unrealized gain $ 313 $ 415 $ - ============= ============= ============= Cumulative impact of change in accounting for uncertainties in income tax (FIN 48) $ 557 $ - $ - ============= ============= ============= Exercise of options in exchange for a bank loan $ - $ 450 $ - ============= ============= ============= Dividend declared in 2006 $ - $ 551 $ - ============= ============= ============= 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 - 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

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 15). The Company's principal markets are the United States and Europe.

The Company's subsidiaries are Hi-Tex, founded by the Company ("Hi-Tex"), which commenced operations in 1997, Tefron USA, Inc., Tefron U.K, El-Masira Textile Company Ltd. in Jordan and Macro Clothing Ltd. ("Macro").

b. During 2005, 2006 and 2007, 76.9%, 77.4% and 74.1% from the revenues, respectively, were derived from the sales to the three major customers, all located in the United States. The Company's arrangements with its customers do not contain minimum purchase commitments 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 and financial position.

The Company is dependent on subcontractors who render services that are integral part of the Company's manufacturing process. If such subcontractors do not render the required services, the Company may experience delays or additional costs to satisfy its production requirements.

In particular, the Company dependent on a subcontractor who performs a major part of the dyeing and finishing of the Company's seamless manufacturing process and is also dependent on a subcontractor who renders vertical manufacturing services for the Company's swimwear product line

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 27, 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 bears 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. The interest has been paid fully on a quarterly basis. The Company is in a position that it is probable to receive the note in full. Since the closing date of the sale, Alba Health business has been treated as a discontinued operation in the Company's financial statements in the years ended December 31, 2005 and 2006. 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".

F - 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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U.S. DOLLARS IN THOUSANDS

NOTE 1:- GENERAL (CONT.)

c. Discontinued operations (cont.):

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 year ended December 31, 2005, and for the period ended April 27, 2006, have been reclassified in the accompanying statements of income and presented as discontinued operations. 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 Alba Health, which was accounted for as discontinued operations as follows:

FOR THE PERIOD FROM JANUARY 1, FOR THE YEAR 2006 THROUGH ENDED APRIL 27, DECEMBER 31, 2006 2005 -------- -------Sales $ 7,474 $ 34,249 Cost of sales 5,524 24,596 -------- -------Gross profit 1,950 9,653 Selling and marketing expenses 1,076 4,542 General and administrative expenses 338 1,308 Impairment and other expenses related to the put option exercise - 6,073 -------- -------Operating income (loss) 536 (2,270) Financial expenses, net 243 1,182 -------- -------Income (loss) before taxes on income 293 (3,452) Taxes on income 9 3,521 Minority interest in losses (earnings) of subsidiaries (164) 1,616 -------- -------Net income (loss) $ 120 $ (5,357) ======== ========

F - 14

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

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 U.S. generally accepted accounting principles requires management to make estimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based upon information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

F - 15

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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 in U.S. dollars. Thus, the functional and the reporting currency of the Company and its subsidiaries is the U.S. dollar.

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 income 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 original maturities of three months or less at acquisition.

f. Short-term deposits:

Short-term bank deposits have a maturity of more than three months but less than one year. The deposits are in U.S. dollars and in NIS, and bears an average interest of 4.85% and 4.61%, respectively. The short-term deposits are presented at cost, including accrued interest.

g. 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, finished products and raw materials - using the "moving average cost" method, based on standard costs which are adjusted to actual costs.

F - 16

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

h. Marketable securities

The Company accounts for its investments in marketable securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities".

Management determines the appropriate classification of its

investments in marketable debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. The Company classifies all of its securities as available for sale. Available for sale securities are carried at fair value, with the unrealized gains and losses reported in "accumulated other comprehensive income", a separate component of shareholders' equity. Realized gains and losses on sale of investments are included in the consolidated income statements. Interest and amortization of premium and accretion of discount on debt securities are recorded as financial expenses. Following SEC Staff Accounting Bulletin No. 59, management evaluates in each period whether declines in the market value of its securities are other than temporary. Where such declines are determined to be other than temporary, the related unrealized loss is recorded as a write-down included in financial expenses.

i. Long-term deposit:

A long-term bank deposit is a deposit with a maturity of more than one year. The long-term deposit is presented at cost, including accrued interest.

j. 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 test in 2005 resulted in an impairment of $ 5,683 to the goodwill related to Alba Health, a former subsidiary (see Note 1c). The Company does not have goodwill as of 2007.

F - 17

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

k. 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 - 33 (mainly 5%) Furniture and office equipment 6 - 25 (mainly 6%) Motor vehicles 15

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.

l. Impairment of long-lived assets

The Company's long-lived assets 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. As of the years 2005, 2006 and 2007, no impairment was identified.

m. 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 $ 1,221, $ 1,505 and $ 1,375 for the years ended December 31, 2005, 2006 and 2007, respectively.

F - 18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

n. 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.

o. 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.

Deferred tax liabilities and assets are classified as current or non current based on the classification of the related asset or liability for financial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" (FIN 48). FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. After adoption of FIN 48, the Company accrues interest and penalties related to unrecognized tax benefits to its provision for income tax.

As a result of the adopting of FIN 48, an amount of $ 557 was charged to accumulated deficit as of January 1, 2007.

p. Accounting for stock-based compensation

On 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. SFAS 123R requires companies 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.

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

p. Accounting for stock-based compensation (cont.):

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 year ended December 31, 2005, 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 adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard starting the first day of the Company's fiscal year 2006. Under that transition method, compensation cost recognized in the years ended December 31, 2006 and 2007, includes: (a) compensation cost for all stock-based payments 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 No. 123, and (b) compensation cost for all stock-based payments granted or modified subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. The Company selected the Black-Scholes option pricing model as the most appropriate fair value method for its stock-options awards.

The Company recognizes compensation expenses for the value of its awards granted subsequent to January 1, 2006 based on the straight line method over the requisite service period of each of the awards, net of estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures. Forfeitures were previously accounted for as they occurred, but have been estimated with the adoption of SFAS No. 123(R) for those awards not yet vested

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 in the year ended December 31, 2006 would have been classified as an operating cash flow if the Company had not adopted SFAS No. 123(R).

F - 20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

p. Accounting for stock-based compensation (cont.):

The following table sets forth the total stock-based compensation expense resulting from stock options included in the consolidated statements of operation:

YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 2007 2006 ---- ---Cost of sales $ - $ 75 Selling and marketing expenses 60 48 General and administrative expenses 511 432 ---- ---Total stock-based compensation expense $571 $555 ==== ====

In the year ended December 31, 2007, no stock options were granted, but the CEO options were modified (See Note 10c). 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, 2005 and 2006:

2006 2005 ------- -----Risk-free interest rate 4.8% 4.4% Expected dividend yield 0% 0% Expected volatility 37% 37% Expected lives (years) 4 3.5

The Company's computation of expected volatility for the years ended December 31, 2006 and 2005 was based on its historical market-based volatility. The computation of expected life was based on historical exercise patterns. The interest rate for periods within the contractual life of the award was based on the U.S. Treasury yield curve in effect at the time of grant.

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

p. Accounting for stock-based compensation (cont.):

The following table illustrates the pro forma effect on 2005 net income and earnings 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, --------2005 --------Net income from continuing operations, as reported $ 8,650 Add: Stock-based compensation expense included in the determination of net income as reported 431 Deduct: Stock-based compensation expense related to employee stock options (888) --------Pro forma net income, including the effect of stock-based compensation expense from continuing operations $ 8,193 Loss from discontinued operations, net of taxes $ (5,357) --------Pro forma net income, including effect of stock-based compensation expense $ 2,836 ========= Basic and diluted net earnings per share, as reported: From continuing operations: Basic net earnings per share $ 0.49 ========= Diluted net earnings per share $ 0.47 ========= From discontinued operations: Basic net losses per share $ (0.30) ========= Diluted net losses per share $ (0.29) ========= From total operations: Basic net earnings per share $ 0.19 ========= Diluted net earnings per share $ 0.18 ========= Basic and diluted net earnings (losses) per share, including the effect of stock-based compensation expenses: From continuing operations: Basic net earnings per share $ 0.46 ========= Diluted net earnings per share $ 0.44 ========= From discontinued operations: Basic net losses per share $ (0.30) ========= Diluted net losses per share $ (0.29) ========= From total operations: Basic net earnings per share $ 0.16 ========= Diluted net earnings per share $ 0.15 =========

F - 22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

• q. Fair value of financial instruments: The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

1. The carrying amount of cash and cash equivalents, bank deposits, trade receivables and trade payables approximates their fair values due to the short-term maturities of these instruments.

2. The fair value of marketable securities with quoted market prices is based on quoted market prices. 3. For marketable securities without current market price, fair values are estimated using values obtained from the Company's asset manager. To estimate the value of these investments the asset manager employs various models that take into consideration such factors, among others, as the credit rating of the issuer, effective maturity of the security, yields on comparably rated publicly traded securities, availability of insurance , risk-free yield curves and type of collateral. The actual value at which such securities could actually be sold or settled with a willing buyer or seller may differ from such estimated fair values depending on a number of factors including, but not limited to, current and future economic conditions, the quantity sold or settled, the presence of an active market and the availability of a willing buyer or seller.

3. The carrying amount of the subordinate note approximates its fair value due to the interest this note bears.

• r. 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".

• s. 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.

The Company's marketable securities consist of investment in U.S. corporate debts securities and Israeli government securities. The Company's investment policy, approved by the Investment Committee, limits the amount the Company may invest in any one type of investment or issuer, thereby reducing credit risk concentrations.

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 (income) for the years ended December 31, 2005, 2006 and 2007, were $ 181, $ (6) and $ 37, respectively.

F - 23

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

t. Derivatives and hedging:

The Company accounts for derivatives and hedging based on Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. If the derivative meets 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 2005, 2006 and 2007, there were no gains or losses recognized in earnings for hedge ineffectiveness.

The Company entered into forward transactions and use the "cylinder strategy" (purchasing puts options on the U.S. dollar, usually together with writing call options on the U.S. dollar at a higher exchange rate) in order to hedge the variability of anticipated expenses and balances denominated in new Israeli shekels ("NIS") and 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, 2006 and 2007 were $ (145), $ 1,765 and $ 1,404 respectively.

As of December 31, 2007, unrealized gains on hedging derivative instruments amounted to $ 445. This unrealized gain is included in accumulated other comprehensive income.

u. Comprehensive Income:

The Company accounts for comprehensive income in accordance with SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income generally represents all changes in stockholders' equity during the period except those resulting from investments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income relates to gain and loss on hedging derivative instruments and unrealized gains and losses on available for sale securities.

v. Impact of recently issued accounting standards:

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008. The FASB issued a FASB Staff Position (FSP) to defer the effective date of SFAS No. 157 for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not believe the adoption of SFAS No. 157 will have material impact on its consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

• v. Impact of recently issued accounting standards:

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. The provisions of SFAS No. 159 are effective for the Company beginning January 1, 2008. The Company does not believe the adoption of SFAS No. 159 will have an impact on its consolidated financial statements. In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited. The Company is currently assessing the potential impact that the adoption of SFAS 141 could have on its financial statements. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51". SFAS No. 160 establishes accounting and reporting standards that require that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent's equity; the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; and changes in a parent's ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS 160 could have on its financial statements.

NOTE 3:- MARKETABLE SECURITIES

Marketable securities with contractual maturities of less than one year are as follows:

DECEMBER 31, ------------------------------------------------------------------------------2007 2006 ------------------------------------- ----------------------------------GROSS GROSS AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST LOSSES FAIR VALUE COST GAINS FAIR VALUE ------- ------- ------- ------- ------- ------U.S. corporate debts securities $ - $ - $ - $ 1,994 $ - $ 1,994 Israeli government securities 2,092 (2) 2,090 1,028 3 1,031 ------- ------- ------- ------- ------- ------$ 2,092 $ (2) $ 2,090 $ 3,022 $ 3 $ 3,025 ======= ======= ======= ======= ======= =======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 3:- MARKETABLE SECURITIES (CONT.)

Marketable securities with contractual maturities after one year are as follows:

DECEMBER 31, ------------------------------------------------------------------------------2007 2006 ------------------------------------- ----------------------------------GROSS GROSS AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST GAINS(LOSSES) FAIR VALUE COST GAINS FAIR VALUE ------- ------- ------- ------- ------- ------U.S. corporate debts securities $ 3,537 $ 41 $ 3,578 $ 950 $ - $ 950 Auction rate securities(*) 1,400 (116) 1,284 1,000 - 1,000 ------- ------- ------- ------- ------- ------$ 4,937 $ (75) $ 4,862 $ 1,950 $ - $ 1,950 ======= ======= ======= ======= ======= =======

The unrealized losses on the Company's investments in Israeli government securities are due primarily to interest rate fluctuations. As of December 31, 2007 no unrealized losses are outstanding over 12 month period. The unrealized losses on the Company's investments in Auction rate securities are due primarily to uncertainties in the capital markets regarding these securities since the Company has the ability and intent to hold these investments until a recovery of fair value, which may be until maturity. The Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2007.

(*) The effective maturity may differ from the contractual maturities, due to the periodical auction mechanism. The balance is comprised from two auction rate securities, which suffer from failed auctions since September 2007. For determining the effective maturity dates for these securities, the Company used its asset managers' valuation analysis. The analysis was made as to the projected source of capital that each of the issuers will be able to obtain in order to pay back its debt holders.

NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

DECEMBER 31, ------------------2007 2006 ------ -----Government authorities: $1,204 $ 996 Government participation in extraordinary expenses due to the war - 710 Deferred income taxes (see Note 13h) 464 459 Advances to suppliers 1,375 793 Prepaid expenses 742 484 Hedging derivatives 940 122 Other 679 602 ------ -----$5,404 $4,166 ====== ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 5:- INVENTORIES

DECEMBER 31, --------------------2007 2006 ------- ------Raw materials, accessories and packaging materials $12,108 $12,832 Work-in progress 14,137 10,632 Finished products 6,332 5,448 ------- ------$32,577 $28,912 ======= =======

In the years ended December 31, 2005, 2006 and 2007, the Company recorded inventory write-offs in the amount of $ 660, $ 815 and $ 1,260 respectively. These write-offs were recorded as cost of sales

NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET

Composition of assets grouped by major classifications, are as follows:

DECEMBER 31, -------------------------2007 2006 --------- --------Cost: Buildings $ 3,865 $ 3,566 Machinery and equipment 181,275 178,682 Installation and leasehold improvements 7,550 5,943 Motor vehicles 446 446 Furniture and office equipment 2,340 2,683 Investment grants (33,217) (33,217) --------- --------162,259 158,103 --------- --------Accumulated depreciation: Buildings 642 529 Machinery and equipment 104,002 95,528 Installation and leasehold improvements 4,251 4,071 Motor vehicles 423 407 Furniture and office equipment 1,382 1,624 Investment grants (23,232) (21,142) --------- --------87,468 81,017 --------- --------Depreciated cost $ 74,791 $ 77,086 ========= =========

(1) Depreciation expenses for the years ended December 31, 2005, 2006 and 2007 were $ 9,686, $ 8,719 and $ 8,567, respectively.

(2) As for liens, see Note 9.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

DECEMBER 31 --------------------2007 2006 ------- ------Employees and payroll accruals $ 3,608 $ 3,407 Accrued expenses 1,092 2,800 Equipment suppliers 1,171 1,062 Tax payable 2,280 3,133 Other 484 - ------- ------$ 8,635 $10,402 ======= =======

NOTE 8:- LONG-TERM LOANS

a. Composition:

WEIGHTED AVERAGE INTEREST RATE ------------------------DECEMBER 31, DECEMBER 31, ------------------------- -----------------------2007 2006 2007 2006 --------- --------- --------- --------% ------------------------Loans in U.S. dollars: Banks (variable interest LIBOR plus 1.2%-2.0%) 6.5 - 6.9 5.9 - 6.9 $19,322 $25,270 Less - current maturities: Loans from banks and others 5,948 5,948 ------- ------$13,374 $19,322 ======= ======= b. The loans as of December 31, 2007 mature as follows: (*) DECEMBER 31, 2008 (current maturities) $ 5,948 2009 5,544 2010 2,749 2011 2,749 2012 2,332 ------$19,322 =======

Upon the closing of the Share Purchase Agreement with the investor controlled by FIMI (see Note 10), 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, 2007, the Company met those covenant criteria.

During 2008, the Company entered into a better financing arrangement with its bank creditors, which was not anticipated as of December 31, 2007. The annual interest rate was reduced to three-month LIBOR plus 1.0%. Additionally, the company converted loans at the principal amount of $6.0 million held at its U.S banks with new loans received from its Israeli banks and payable in seventeen quarterly installments commencing June 30, 2008 through June 29, 2012.

• (*) In accordance with the new arrangement mentioned above with the banks, the annual installments of the loans would be $3,807, $4,159, $4,158, $ 4,158 and $3,040 in the years 2008, 2009, 2101, 2011 and 2012, respectively

• c. As for collateral, see Note 9.

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 9:- 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.

• c. The facilities of the Company and most of its Israeli subsidiaries are located in buildings leased for various periods ending between 2009 and 2024, including renewal options.

The aggregate minimum rental commitments under non-cancelable leases, based on the above agreements as of December 31, 2007, are as follows: 2008 $ 3,108 2009 2,772 2010 2,609 2011 2,611 2012 and thereafter 439 ------$11,539 =======

Rental expenses for the years ended December 31, 2005, 2006 and 2007, amounted to $ 3,345, $ 3,186 and $ 2,985, respectively.

d. Legal proceedings:

A former employee of the Company has filed lawsuits against the Company and three of its former or current officers, with the Israeli District Court and the Israeli Labor Law Court, seeking damages in the amount of approximately $ 2,000 plus non-specified bodily damages, 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 remit 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 - 29

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 10:- SHAREHOLDERS' EQUITY

a. 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").

The agreements included 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.

b. On December 27, 2005, Tefron published a prospectus in Israel in connection with a proposed underwritten secondary 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 were exercisable until January 9, 2007. 142,263 of these options were exercised in 2006 and 430,485 options were exercised during January 2007 for a total consideration of $972 and $4,290 in 2006 and 2007, respectively. As of December 31, 2007 all the options were either exercised or expired.

c. 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. The Share Option Plan expired in September, 2007.

F - 30

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

c. Stock options (cont.):

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 $ 303 and $ 142 in 2005 and 2006, 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.

The option agreement contains a provision providing for a reduction to the exercise price of the options in the event of a dividend distribution in amount equal to dividends paid per share. This provision applies to options which, at the time of the dividend distribution, could not 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 Company's Shareholders approved in the third quarter of 2007, an amendment to the Option Agreement so that the adjustment to the exercise price due to dividends would apply until October 22, 2008, to all 650,000 options, whether or not the options are exercisable at the time a dividend distribution is made, for dividends paid by the Company until October 22, 2008. This approval had retroactive effect from October 2006. As a result of this amendment, the Company recorded additional compensation expense in its financial statements of 2007 in the amount of $ 262,000.

On August 9, 2005, the Company granted to one of its officers 40,000 options, at an exercise price of $ 5.8 per share, to be vested over four years. The market price of the Company's shares on the date of grant was $ 6.23.

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 2005 and 2006 were $ 2.2 and $ 3.7, respectively. No options were granted during 2007.

As of December 31, 2007, 441,175 options were available for future grants under the aforementioned plan.

F - 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

• c. Stock options (cont.):

A summary of the Company's share option activity under the plan is as

YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------2007 2006 2005 ----------------------- ----------------------- -----------------------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 1,830,875 $ 5.24 2,477,054 $ 4.70 2,422,805 $ 4.48 Changes during the year: Granted - $ - 80,000 $ 10.13 210,000 $ 6.34 Forfeited or canceled (411,512) $ 5.03 (6,250) $ 3.50 (23,000) $ 4.16 Exercised (22,333) $ 4.28 (719,929) $ 3.93 (132,751) $ 3.72 ---------- ---------- ---------Options outstanding at end of year 1,397,030 $ 5.09 1,830,875 $ 5.24 2,477,054 $ 4.70 ========== ========== ========== ========== ========== ========== Options exercisable at the end of the year 1,232,030 $ 4.79 1,417,542 $ 5.02 1,911,388 $ 4.70 ========== ========== ========== ========== ========== ==========

The following table summarizes significant ranges of outstanding and exercisable options as of December 31, 2007:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------- --------------------------------WEIGHTEDAVERAGE WEIGHTED- WEIGHTEDREMAINING AVERAGE AVERAGE RANGE OF CONTRACTUAL EXERCISE AGGREGATE EXERCISE AGGREGATE EXERCISE NUMBER OF LIFE PRICE PER INTRINSIC NUMBER OF PRICE PER INTRINSIC PRICES OPTIONS (IN YEARS) SHARE VALUE OPTIONS SHARE VALUE ---------- --------- ---------- ---------- --------- --------- ---------- --------$ $ $ ---------- ---------- ---------3.50-4.31 999,530 4.85 3.69 $ 1,249 999,530 3.69 $ 1,249 5.34-5.37 110,000 7.56 5.34 - 35,000 5.34 - 7.14 60,000 7.83 7.14 - 30,000 7.14 - 8.13-8.52 128,500 1.34 8.25 - 98,500 8.25 - 11.27 40,000 8.33 11.27 - 10,000 11.27 - 15.00 59,000 2.46 15.00 - 59,000 15.00 - --------- --------- --------- --------1,397,030 4.91 5.09 $ 1,249 1,232,030 4.79 $ 1,249 ========= ========== ========== ========= ========= ========== =========

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 2007 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, 2007. This amount changes based on the fair market value of the Company's share. Total intrinsic value of options exercised is $ 116 for the year ended December 31, 2007. Total fair value of options vested is $ 576 for the year ended December 31, 2007.

As of December 31, 2007, $ 262 of total unrecognized compensation cost related to stock options is expected to be recognized over an approximate weighted-average period of 0.9 year.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 10:- SHAREHOLDERS' EQUITY (CONT.)

• d. 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 13d). The dividends were paid on September 14, 2006 and on December 14, 2006, respectively. The dividend distributed from income attributable to sources other than

NOTE 11:- SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS

• a. Cost of sales:

YEAR ENDED DECEMBER 31, -----------------------------------------2007 2006 2005 --------- --------- --------Materials $ 75,694 $ 76,031 $ 74,568 Salaries and related expenses 24,778 23,310 26,414 Subcontracting costs 16,254 18,785 11,337 Other production costs 18,866 17,971 17,730 Depreciation 7,944 7,934 8,751 Decrease (increase) in work-in progress and finished products (4,389) 1,113 2,821 --------- --------- --------$ 139,147 $ 145,144 $ 141,621 ========= ========= ========= b. Financial expenses, net: YEAR ENDED DECEMBER 31, ------------------------------------2007 2006 2005 ------- ------- ------Income: Interest income on bank deposits and others $(1,297) $ (837) $ - Exchange rate differences, net - - (1,057) Profit from forward exchange transactions (157) (365) - Gain related to sale of marketable securities (135) (37) - ------- ------- ------Total income (1,589) (1,239) (1,057) ------- ------- ------Expenses: Interest on long-term loans 1,574 2,245 2,777 Interest on short-term loans 183 42 533 Interest on tax assessment - - 300 Exchange rate differences, net 593 538 - Bank expenses and other, net 528 326 491 Loss from forward exchange transactions - - 145 ------- ------- ------Total expenses 2,878 3,151 4,246 ------- ------- ------Financial expenses, net $ 1,289 $ 1,912 $ 3,189 ======= ======= =======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 12:- DEFERRED TAX LIABILITIES

DECEMBER 31 --------------------2007 2006 ------- ------Deferred taxes (see note 13h) $12,247 $12,163 Tax liability 150 150 ------- ------$12,397 $12,313 ======= =======

NOTE 13:- TAXES ON INCOME

a. The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of Interpretation 48, the Company recognized approximately a $ 557 decrease in unrecognized tax benefits, which was accounted for as decrease to the January 1, 2007 balance of accumulated deficit.

In accordance with the Company's accounting policy, after adoption of FIN 48, interest expense and potential penalties related to income taxes are included in the tax expense line of the Company's condensed consolidated statements of operations.

As of December 31, 2007 and 2006 the Company had accrued interest liability related to uncertain tax positions in the amounts of $ 96 and $ 0, respectively, which is included within income tax accrual on the balance sheet.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various states in the U.S. and Israel jurisdiction. Tefron Ltd., Hi-Tex and Macro (the Israeli Companies) may be subject to examination by the Israel tax authorities for fiscal years 2001 through 2006. Tefron USA (the U.S. subsidiary) may be subject to examination by the U.S. Internal Revenue Service ("IRS"). El-Masira files income tax returns to the tax authorities in Jordan.

The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. The final tax outcome of our tax audits could be different from that which is reflected in the Company's income tax provisions and accruals. Such differences could have a material effect on the Company's income tax provision and net income in the period in which such determination is made.

b. 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 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in 2010 and thereafter - 25%.

c. 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 13:- TAXES ON INCOME (CONT.)

d. 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").

In accordance with the Law, the Company and certain subsidiaries in Israel received grants from the State of Israel in respect of investments in their plants. The conditions in the letters of approval extending the grants from the State of Israel primarily include the requirements that the investments be made according to the approved plan and that at least 30% of the investments be financed by outstanding share capital. In addition, income attributed to certain Programs is tax exempt for a period of two years and is subject to a reduced corporate tax rate of 10% - 25% for an additional period of five to eight years, based on the percentage of foreign investment in the Company.

The duration of tax benefits for each of the Programs is subject to limitations of the earlier of 12 years from commencement of investment, or 14 years from receipt of approval, as an "Approved Enterprise" under the Law.

Tax-exempt income attributable to the "Approved Enterprise" cannot be distributed to shareholders without subjecting the Company to taxes except upon complete liquidation of the Company. If such retained tax-exempt income is distributed in a manner other than upon the complete liquidation of the Company, it would be taxed at the reduced corporate tax rate applicable to such profits (between 10%-25%). The Company does not intend to distribute any amounts of its undistributed tax-exempt income as a dividend. The Company intends to reinvest its tax-exempt income and not to distribute such income as a dividend. No deferred income taxes have been provided on income attributable to the Company's Approved Enterprise programs as the undistributed tax exempt income is essentially permanent in duration.

The entitlement to the above benefits is conditional upon the Company's fulfilling the conditions stipulated by the Law, regulations published thereunder and the certificates of approval for the specific investments in approved enterprises.

Should the Company and its subsidiaries in Israel fail to meet such requirements in the future, income attributable to its "Approved Enterprise" programs could be subject to the statutory Israeli regular corporate tax rate and the Company could be required to refund a portion of the tax benefits already received, with respect to such programs. Income from sources other than the "Approved Enterprise" is subject to tax at regular Israeli corporate tax rate.

F - 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 13:- TAXES ON INCOME (CONT.)

d. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law") (cont.):

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.

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, 2007, the Company did not generate income subject to the provision of the new law.

e. Taxes on income (tax benefit) included in the statements of operations:

YEAR ENDED DECEMBER 31, -----------------------------------2007 2006 2005 ------- ------- ------Current taxes $ - $ 3,583 $ 422 Deferred taxes (86) 2,128 3,666 Taxes in respect of prior years 66 - 209 ------- ------- ------$ (20) $ 5,711 $ 4,297 ======= ======= ======= Domestic $ 10 $ 5,603 $ 4,190 Foreign (30) 108 107 ------- ------- ------$ (20) $ 5,711 $ 4,297 ======= ======= ======= F - 36

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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U.S. DOLLARS IN THOUSANDS

NOTE 13:- TAXES ON INCOME (CONT.)

f. 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, -----------------------------------------2007 2006 2005 -------- -------- -------Income before taxes, as reported in the consolidated statements of income $ 463 $ 23,971 $ 12,947 ======== ======== ======== Statutory tax rate 29% 31% 34% ======== ======== ======== Taxes calculated at the Israeli statutory tax rate $ 134 $ 7,431 $ 4,402 Decrease in taxes resulting from "Approved Enterprise" benefits - (1,581) (1,297) Deferred taxes on losses and temporary differences for which valuation allowance was provided - - 736 Nondeductible expenses 105 124 181 Taxes in respect of prior years (66) (125) 209 Other (193) (138) 66 -------- -------- -------Actual tax expenses $ (20) $ 5,711 $ 4,297 ======== ======== ========

• g. Income (loss) before taxes on income is comprised as follows:

YEAR ENDED DECEMBER 31, --------------------------------------2007 2006 2005 -------- -------- -------Israel $ 230 $ 24,243 $ 14,410 Foreign 233 (272) (1,463) -------- -------- -------Total $ 463 $ 23,971 $ 12,947 ======== ======== ======== F - 37

TEFRON LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 13:- TAXES ON INCOME (CONT.)

h. 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, -----------------------2007 2006 -------- -------Asset (liability) in respect of: Property, plant and equipment $(12,895) $(12,799) Allowances and provisions 743 887 Net operating loss carry-forward 369 208 Tefron USA deferred taxes 4,579 4,819 -------- -------Deferred tax liability before valuation allowance (7,204) (6,885) Valuation allowance (4,579) (4,819) -------- -------Net deferred tax liability $(11,783) $(11,704) ======== ======== Presented in balance sheet: Long-term liability $(12,247) $(12,163) Short-term assets 464 459 -------- -------Net deferred tax liability $(11,783) $(11,704) ======== ======== Domestic $(11,783) $(11,704) Foreign - - -------- -------Net deferred tax $(11,783) $(11,704) ======== ========

(1) The deferred taxes are computed based on enacted tax rates expected to apply at the time of reversal (average rate of 25.7 %).

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized.

The Israeli subsidiaries have available carryfoward tax loss of $369 to offset against future tax profits.

The subsidiary in the U.S. has provided valuation allowances in respect of deferred tax assets resulting from net operating loss carry-forwards. The net change in the valuation allowance was $(240).

i. Final tax assessments:

The Company and Hi-Tex, one of the Company's Israeli subsidiaries, received final tax assessments through 2001.

F - 38

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 14:- 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, ---------------------------------------------------------2007 2006 2005 --------------- --------------- -------------Income from continuing operations $ 483 $ 18,260 $ 8,650 =============== =============== ============== Income (loss) from discontinued operations - 120 (5,357) --------------- --------------- -------------Net income $ 483 $ 18,380 $ 3,293 =============== =============== ============== Weighted average Ordinary shares outstanding - Basic EPS $ 21,188,161 $ 20,210,722 $ 17,719,275 Dilutive effect: Employee and directors stock options 441,963 543,844 823,343 --------------- --------------- -------------Weighted average Ordinary shares outstanding - Diluted EPS 21,630,124 20,754,566 18,542,618 =============== =============== ============== Basic and diluted net earnings per share from continuing operations: Basic net earnings per share $ 0.02 $ 0.90 $ 0.49 =============== =============== ============== Diluted net earnings per share $ 0.02 $ 0.88 $ 0.47 =============== =============== ============== Basic and diluted net earnings (losses) per share from discontinued operations: Basic net earnings (losses) per share $ - $ 0.01 $ (0.30) =============== =============== ============== Diluted net earnings (losses) per share $ - $ 0.01 $ (0.29) =============== =============== ============== Basic and diluted net earnings per share: Basic net earnings per share $ 0.02 $ 0.91 $ 0.19 =============== =============== ============== Diluted net earnings per share $ 0.02 $ 0.89 $ 0.18 =============== =============== ==============

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, was 169,000 and 227,500 for the year ended December 31, 2006 and 2007, respectively.

F - 39

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 15:- SEGMENT REPORTING

a. General information:

The Company has two production lines: knitted apparel ("Cut & Sew") and seamless apparel ("Seamless"). Unlike the Cut & 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 & Sew process, mainly performed in Israel and Jordan 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 and marketing, general and administrative expenses are allocated according to management's assessment. Management evaluates performance based upon operating income (loss) before interest and income taxes.

b. Reportable segments:

YEAR ENDED DECEMBER 31, 2007 -----------------------------------------CUT & SEW SEAMLESS CONSOLIDATED ---------- ----------- ------Sales to unaffiliated customers $ 77,020 $ 81,594 $158,614 ========== =========== ======== Operating income (loss) $ 2,269 $ (517) $ 1,752 ========== =========== Financial expenses, net 1,289 -------Income before taxes on income $ 463 ======== Depreciation and amortization $ 1,848 $ 6,719 $ 8,567 ========== =========== ======== Identifiable and total assets at December 31, 2007 $ 43,470 $ 92,931 $136,401 ========== =========== Corporate assets 26,091 -------Total assets $162,492 ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 15:- SEGMENT REPORTING (CONT.)

b. Reportable segments (cont.):

YEAR ENDED DECEMBER 31, 2006 ---------------------------------------------CUT & SEW SEAMLESS CONSOLIDATED ----------- ----------- ----------Sales to unaffiliated customers $ 85,951 $ 102,153 $ 188,104 =========== =========== =========== Operating income $ 9,517 $ 16,366 $ 25,883 =========== =========== Financial expenses, net 1,912 ----------Income before taxes on income $ 23,971 =========== Depreciation and amortization $ 2,170 $ 6,549 $ 8,719 =========== =========== =========== Identifiable and total assets at December 31, 2006 $ 33,986 $ 102,667 $ 136,653 =========== =========== Assets attributed to discontinued operations - Corporate assets 28,003 ----------Total assets $ 164,656 =========== YEAR ENDED DECEMBER 31, 2005 ------------------------------------------CUT & SEW 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 ========

F - 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------U.S. DOLLARS IN THOUSANDS

NOTE 15:- SEGMENT REPORTING (CONT.)

c. The Company's sales by geographic area are as follows:

YEAR ENDED DECEMBER 31, -------------------------------------2007 2006 2005 -------- -------- -------North America $132,521 $145,205 $153,984 Europe 18,314 34,050 11,074 Israel 4,374 4,906 3,865 Other 3,405 3,943 2,413 -------- -------- -------$158,614 $188,104 $171,336 ======== ======== ======== d. Sales to major customers: YEAR ENDED DECEMBER 31, -------------------------2007 2006 2005 ---- ---- ---% -------------------------A 39.1 38.6 40.3 B 23.6 28.8 25.8 C 11.4 10.0 10.8 ---- ---- ---74.1 77.4 76.9 ==== ==== ====

As of December 31, 2006 and 2007, major customer's balances were $ 18,575 and $ 17,103, respectively.

e. The Company's long-lived assets by geographic area are as follows:

DECEMBER 31, --------------------2007 2006 ------- ------Israel $67,037 $70,337 North America 4,797 5,310 Other countries 2,957 1,439 ------- ------$74,791 $77,086 ======= =======

f. Revenues are generated by the following product lines:

YEAR ENDED DECEMBER 31, -------------------------------------2007 2006 2005 -------- -------- -------Intimate apparel $ 89,877 $100,890 $101,625 Active wear 42,047 59,406 51,961 Swimwear 26,690 27,808 17,750 -------- -------- -------$158,614 $188,104 $171,336 ======== ======== ========

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

U.S. DOLLARS IN THOUSANDS

NOTE 16:- RELATED PARTIES

Transactions with related parties (shareholders and companies controlled by shareholders):

YEAR ENDED DECEMBER 31, -----------------------------------2007 2006 2005 ------- ------- ------Sales to related parties (1) $ - $ 12 $ 24 ======= ======= ======= Cost of sales (2) (3) $(1,198) $(2,574) $(2,832) ======= ======= ======= Selling and marketing, general and administrative expenses (2) $ (190) $ (240) $ (387) ======= ======= =======

(1) Related parties trade receivables in 2006 and 2007 were $ 10 and $ 3, respectively.

(2) Related parties trade payables in 2006 and 2007 were $ 43 and $ 43, respectively.

(3) Including primarily rental payments to a company controlled by shareholders until April 17, 2007.

F - 43

[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

SIGNATURES

The Company hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

TEFRON LTD.

By: /s/ Yosef Shiran ----------------------Yosef Shiran Chief Executive Officer By: /s/ Asaf Alperovitz ----------------------Asaf Alperovitz Chief Financial Officer

March 27, 2008

EXHIBIT INDEX 1.1. Memorandum of Association of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form F-1 (No. 333-7538) filed on August 29, 1997). 1.2. Amended and Restated Articles of Association of the Company (incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006) 1.3. Amendment to Amended and Restated Articles of Association. 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).

==> picture [44 x 6] intentionally omitted <==

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

4.1 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).

==> picture [44 x 5] intentionally omitted <==

4.2 Letter, dated March 28, 2007, from General Counsel of Company to Mr. Yosef Shiran re: amendments to Management and Services Agreement (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 20-F for the fiscal year ended

==> picture [44 x 5] intentionally omitted <==

4.3 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

4.4 Membership Interest Redemption Agreement, dated April 26, 2006,

by and between AlbaHealth, LLC and Tefron USA, Inc. (incorporated by reference to Exhibit 4.6 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006).

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

4.6 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. (incorporated by reference to Exhibit 4.8 to the Company's Annual Report on Form 20-F for the fiscal

4.7 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).

4.8 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).

• 4.9 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,

• 4.10 Agreement, dated as of July 5, 2006, between Macpell Industries Ltd. and the Company regarding the lease of properties (incorporated by reference to Exhibit 4.15 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006).

• 4.11 Joint Venture Agreement, dated as of May 8, 2006, by and between the Company, Langsha Knitting Co. Ltd. and Itochu Textile Materials (Asia) Ltd. (incorporated by reference to Exhibit 4.16 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006)

• 8.1 List of subsidiaries of the Company. (incorporated by reference to Exhibit 8.1 to the Company's Annual Report on Form 20-F for the fiscal year ended December 31, 2006)

• 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.

EXHIBIT 1.3

AMENDMENT TO AMENDED AND RESTATED ARTICLE OF ASSOCIATION

New Article 67 shell read as follows:

INDEMNITY AND INSURANCE

1. INDEMNITY AND INSURANCE

a) Subject to the provisions of the Companies Law, the Company may enter into a contract for the insurance of the Liability, in whole or i 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 or omission performed by him in his capacity as an Office Holder of the Company.

b) The Company may indemnify an Office Holder to the fullest extent permitted by law. Without derogating from the aforesaid, the Company may indemnify retroactively or prospectively an Office Holder against: (i) a financial liability he incurs or is 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 incurred 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 or in a criminal charge in which he was convicted for an offense that does not require the proof of criminal intent, all in respect of an act performed in his capacity as an Office Holder of the Company, and (iii) reasonable litigation expenses, including attorneys' fees, incurred by such Office Holder, due to an investigation or proceeding conducted against him by an authority authorized to conduct such investigation or proceeding, and which was ended without filing an indictment against him and without the imposition of a financial liability as a substitute for a criminal proceeding, or that was ended without filing an indictment against him but for which he was subject to a financial liability as a substitute for a criminal proceeding relating to an offense which does not require criminal intent, within the meaning of the relevant terms in the Companies Law; and (iv) liabilities, obligations and expenses in respect of which the Company may be legally permitted to indemnify under the Companies Law. c) A prospective undertaking to indemnify an Office Holder for liabilities under article 67(b)(i), shall be restricted to events that in the opinion of the Board of Directors are foreseen in light of the actual Company's activities at the time that the commitment is made ("DETERMINING EVENTS") and shall be limited to an amount or criteria that the Board of Directors deems reasonable, in view of the circumstances. The undertaking to indemnify shall specify such events, sum or criteria. Such indemnification may include any other liability or event permitted by any applicable law.

The aggregate indemnification amount paid under Article 67(b)(1) shall not exceed an amount equal to the sum of (i) all the insurance proceeds for the Determining Events received by the Company from time to time within the scope of any directors' and officers' liability insurance and (ii) an amount equal to 25% (twenty five percent) of the shareholders' equity of the Company as set forth in the Company's most recent consolidated financial statements prior to the date of the actual payment of the indemnification by the Company.

• d) 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.

• e) 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.

• f) 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.

I, Yosef Shiran, certify that:

1. I have reviewed this Annual Report on Form 20-F of Tefron Ltd.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4. The company's other certifying officer 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

1. The company's other certifying officer 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 information; 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 27, 2008

By: /s/ Yosef Shiran -------------------Yosef Shiran Chief Executive Officer

I, Asaf Alperovitz, certify that:

1. I have reviewed this annual report on Form 20-F of Tefron Ltd.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4. The company's other certifying officer 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

1. The company's other certifying officer 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 information; 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 27, 2008

By: /s/ Asaf Alperovitz ----------------------Asaf Alperovitz Chief Financial Officer

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, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify that to the best of our knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: March 27, 2008

/s/ YOSEF SHIRAN

---------------Yosef Shiran Chief Executive Officer

Date: March 27, 2008

/s/ ASAF ALPEROVITZ

------------------Asaf Alperovitz Chief Financial Officer

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-139021 and 333-111932) and Form F-3 (No. 333-128847) of our reports dated March 26, 2008, with respect to the consolidated financial statements of Tefron Ltd. and the effectiveness of internal control over financial reporting of Tefron Ltd. included in this Annual Report (Form 20-F) for the year ended December 31, 2007.

/s/ Kost, Forer, Gabbay & Kasierer ---------------------------------Haifa, Israel KOST, FORER, GABBAY and KASIERER March 26, 2008 A member of Ernst & Young Global

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the inclusion by reference 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, 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 (No. 333-139021 and 333-111932) of TEFRON LTD.